distribution trends and market conduct - kpmg...of insurers’ activities in our view, the key to...

24th Annual Insurance Issues ConferenceMonday, November 30, 2015

Distribution Trends and

Market Conduct Review

© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.

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Market Conduct in a rapidly changing world

Technology is changing rapidly and the impacts are being felt across many aspects of insurers’ activities

In our view, the key to success will be the organization’s agility to respond to change.

Distribution and marketing

Pricing and risk selection

Product design Claims handling in a social

media world


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UK regulatory response: Big Data

In November 2015, the FCA published a Call for Inputs on Big Data in retail general insurance

Help the FCA form a balanced view of the impact of Big Data in relation to:

1. Does the use of Big Data affect consumer outcomes?

2. Does the use of Big Data foster or constrain competition?

3. Does the FCA’s regulatory framework affect developments in Big Data in retail GI?

Areas for ConsiderationObjective

■ Could big data and micro segmentation result in some customers no longer being able to buy insurance?

■ Could Big Data result in more differential pricing based on risk exposure?

■ Use of Big Data in areas like telematics may result in better outcomes for certain consumers

■ Customers who are less happy about using the internet and social media may lose out


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UK regulatory response: regulatory sandbox

In November 2015, the FCA published its plans to implement a regulatory sandbox to promote competition by supporting disruptive innovation

A ‘safe space’ in which businesses can:

■ Test innovative products, services and business models

■ Deliver mechanisms without immediately incurring normal regulatory consequences

What is it? Potential Benefits

■ Reduced time to market at potentially lower cost

■ Better access to finance

■ More innovative products reaching the market

■ Allowing FCA to work with innovators to ensure appropriate consumer safeguards are built into new products and services

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Distribution Trends


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Distribution trends centre around digital & data

These two themes are pervasive, even in the distribution of insurance products

Don’t forget: not all predictions come true!

Understanding the customer

Reaching out to a new generation of customers

Machines are taking over!

Brokers are going digital


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Understanding the customer

Map behaviors across channels

Mapping customer behavior with carriers and brokers…

… creates a deeper understanding of the whole customer

Profile

PrioritiesNeeds

Preferences

Expectations

Goals

Understanding goes beyond just knowing your customer –it’s about truly understanding their needs and preferences


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Acting on that customer understanding

The industry can tailor its approach and offering to individual customers, by…

Segmenting the customer base Educating the customer Collaborating with

distribution channels

■ Creating a 360 degree view of the customer

■ Focussing on individuals not risks

■ Layering in growth and profitability

■ Creating opportunities to educate customers on products, risks, benefits…

■ Providing guidance if not advice, in real time

■ Working with brokers to get the full benefit of customer intelligence

■ Creating value for all parties, even the customer!


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All generations point to the insurance professional as the most valuable source of information

There are lessons to be learned in reaching a

new generation of customers

Insurance needs to be sold through multiple channels to reach the consumer where they are

Source: LIMRA, 2015

■ While 65% of Canadian consumers seek information on insurance products online, only 25% view the Internet as the MOST valuable source of information

■ Only 12% of Canadians bought in the online channel, but it is still being limited by availability (as compared to 21% in the U.S.); those who buy online seek convenience and simplicity, ahead of lower prices

33%27%

20%

38%

24%

15%

44%

24%

8%

FinancialProfessional

Internet Friends, Family, Co-workers

Gen Y Gen X Baby Boomers

Newer generations of customers are shifting channel preferences when looking for insurance products

The online channel is increasingly viewed as part of a mix, rather than in isolation

Single Most Valuable Information Source


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The machines are taking over!

Insurers are increasingly using data to guide their customers

Self-service models

Predictive modelling

Simplified products

Robo-advising

■ Artificial Intelligence driven advice

■ Digital wealth models now prevalent – Canada & U.S.

■ Low cost products meeting specific needs

■ Making insurance easier to comprehend – articulating the value

■ Anticipate needs

■ “Next Best Offer”

■ Feed scenario planning

■ Automating underwriting – such as “top-ups” & other simple products

■ DIY – using scenario planning to determine needs


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Brokers are going digital

Most brokers realize that their customers come in many shapes and sizes, so are adapting their offering to specific segments

Brokers are looking to differentiate through advice and a deeper understanding of the customer

• Driver safety• Risk• Fuel usage• Vehicle location• Vehicle repair

IBRI offers a commercial telematics solution geared towards fleet managers. The solution consists of tools and dashboards to help manage:

Gore Mutual and eight brokers partnered to launch a customizable online product targeting home-based business owners looking for specific types of insurance.

Commercial General Liability

Coverage

Home Office Content

Coverage

Legal Expense Insurance


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Some projected trends have simply not come to pass

Over the years we have looked to other jurisdictions or adjacent sectors for guidance in terms of the future, but many of these predictions have not come to pass

The rise of the aggregator

The dominance of the banks in insurance

The disappearance of the broker

The rise of online selling

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Market Conduct Review


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The changing focus on Market Conduct: how

times have changed?

■ Life co’s - no. 5 of top 10 opportunities

■ P&C insurers – no. 9 of top 10 opportunities

Source: Second Annual Canadian Insurance Industry Risks & Opportunities Survey - 2015

■ Life co’s - no. 2 of top 10 risks

■ P&C insurers – no. 1 of top 10 risks

“Treating customers fairly” initiatives to reduce market conduct risks and

strengthen customer loyalty

Regulatory and compliance burden

Survey Response Selection Ranking


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What is Conduct Risk?

There is no authoritative definition of Conduct Risk

Conduct of Business Risk "can be described as the risk tocustomers, insurers, the insurance sector or the insurancemarket that arises from insurers and/or intermediariesconducting their business in a way that does not ensure fairtreatment of customers”

IAIS 2015

This definition includes the risks to which insurers, the insurance sector or the insurance market may be exposed as a result of their poor business conduct, as well as the risks to which such conduct exposes their

customers


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Why is Conduct Risk important for insurers?

If Conduct Risk is not managed effectively it could result in the following:

Firms have a poor reputation

Products are sold to customers they were not intended for

Customers do not understand products in the market

Customers do not get a fair deal

Regulators have to use more intrusive powers to intervene

Customers face barriers to complaining or making claims

Customers are generally discontented with the

financial services industry

Conduct Risk


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Illustrative areas of Conduct Risk for insurers

Insurers

“Not understanding the elements of Conduct Risk

and mitigating the risks with a robust Control Risk Management System, can

put the insurer at great risk of conduct failures”

Source: Financial Conduct Authority

1. Business model

2. Product design and governance

3. Claims management

4. Business structure – use of third party service providers

5. Conduct Management Information (MI)

6. Culture/trust

7. Sales incentives

8. Renewal pricing

9. Companion products/add-ons

10.Conflicts of interest


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■ Product designed to competitive advantage rather than identified customer interests and needs or investment strategy and strengths

■ Products designed to address commercial opportunities rather than identified customer interest or needs

■ Input rather than outcomes focused

■ Limited (if any) consumer testing for understanding of features and risks as well as how the fund might best be used, particularly for more complex / innovative strategies

■ Variable approaches to stress testing (pre and post launch)

■ Variable quality and quantity of management information from distributors to evidence that products are being sold in line with the identified target market

■ Reliance on distributor regulator status to demonstrate financial capability and sophistication

■ Disconnect between product approval and channel used

■ Limited identification and articulation of ‘target market’ and how the product meets their needs

■ Appropriate balance between commercial and customer interests

■ Product development research focused onfeedback from distributors rather than end investors

Conduct Risk in action: common issues in

product governance

Unclear approval process against risk appetite

ProductDesign

ProductTesting

ProductMonitoring

Market Identification


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2015 - 2016 FCA risk outlook

Technology may outstrip firms’ investment, consumer capabilities and regulatory response.

FCA’s forward-looking areas of focus include:

Poor culture and control continues to threaten market integrity, including conflicts of interest

Large back-books may lead firms to act against their existing customers’ best interests.

Pensions, retirement income products and distribution methods may deliver poor consumer outcomes.


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2015 - 2016 FCA risk outlook

Sector Market study / thematic work carried over from 2014/15

New market study / thematic work for 2015/16

■ Inducements and conflicts of interest

■ Emerging distribution models (non-advised sales)

General Insurance and Protection

Retail Investments

■ Role of Appointed Representatives in the distribution of general insurance products

■ How insurance firms use Big Data

■ General insurance add-ons (consultation on remedies)

■ Commercial claims for SME customers

■ Controls and effectiveness of distribution chains where authority is delegated

■ Due diligence of financial advisors

■ Contracts for different products


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European Insurance and Occupational Pensions

Authority (“EIOPA”)

Speech of Katja Wurtz, Head of Cross-Sectorial and Consumer Protection Unit, The future of European market conduct regulation, 12 March 2015

■ Spoke about the potential impacts of the growing digitalisation of financial services on how insurance products are sold.

■ Issues raised:

– Does digitalisation lead to better consumer decision making, and therefore lessen the need for consumer protection regulation?

– Blurring of the boundaries between advice and self-service

– Amount of responsibility placed on the consumer


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EIOPA, Report on Good Practices on Comparison Websites, 30 January 2014:

■ In some Member States, the initial overview identified the following issues relating to comparison websites:

– Consumers tend to over-rely on the price of products

– Misleading information may be provided to consumers

– Comparison websites may not necessarily be suitable for certain types of insurance products

EIOPA Opinion on sales via the Internet of insurance and pension products, 28 January 2015

European Insurance and Occupational Pensions

Authority (“EIOPA”)


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Recent regulatory initiatives - Canada

Market Conduct Risk:

■ Autorité des marchés financiers (AMF), Internet Insurance Offerings in Quebec: Presentation of Consultation Findings and Orientations, 2 April 2015

– Includes 11 recommendations to insurance providers

■ AMF, Sound Commercial Practices Guideline, June 2013

■ Canadian Council of Insurance Regulators (“CCIR”)

– MoU - operationalization

– Framework for Cooperative Market Conduct Supervision in Canada


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Which approach to Conduct Risk suits me best?

There is not a ‘one-size-fits-all’ approach to addressing Conduct Risk.

Important considerations to bear in mind…

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Controls

Top-down / bottom-up

Principles

Values Broad-based

Other considerations

Overlaps with regulatory

risk

Broader than TCF

Responsibility of lines of defense

Risk appetite, quantification

and articulation

Overlap with Op Risk


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Your Conduct Risk journey

Example Activities

Conduct Risk Stage

Firm Strategy

Conduct Risk

Appetite

Conduct Risk

Framework

Conduct Risk

Register

Process & Controls Mapping

Risk / Controls

Assurance

Policies

Governance Framework

Risk Monitoring

MI & Reporting

• Establish firm Conduct Risk strategy (including definition) and clearly articulate this in a Conduct Risk Strategy document

• Develop Conduct Risk Appetite in line with conduct risk strategy and firm Risk Appetite Statement

• Update RAS

• Identify how Conduct Risk impacts the business

• Develop & document Conduct Risk Framework

• Identify processes and controls

• Map to key risks identified

• Validate risk assessment methodology and scoring

• Establish success factors and metrics against which to measure process and success

• Establish controls and assurance processes (including monitoring)

• Identify Conduct Risks in risk universe

• Risk impact assessment & scoring

• Establish policies

• Determine governance structures


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Lloyd’s minimum standards – July 2014

CR 5: Assessing Product Risk

CR 5.1

The assessment of the Product Risk of a Product shall be made having careful regard to –

■ Customer Risk;

■ Product Complexity;

■ Sales Risk and having particular regard to how the Product will be sold;

■ Service Risk; and

■ any other relevant factors or criteria set by the managing agent’s board…

CR 5.2

■ The assessment of the Customer Risk of a Product shall be made having careful regard to the financial sophistication and expertise of the Lloyd’s Customer to whom it is intended the Product will be sold.


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Lloyd’s minimum standards – July 2014

CR 6: Product Design – General

CR 6.2

A managing agent must give careful consideration, in that context, to –

■ preparing appropriate Product Documentation;

■ determining how the product should be sold and, if appropriate, identifying suitable Distributors; and

■ determining what Product Service will be required and how this will be provided.

CR 6.3

When establishing or agreeing Sale Incentives for Distributors a managing agent must seek to ensure that they will not incentivise the Distributor to sell the Product to Lloyd’s Customers for whom they were not designed or will not meet their needs and expectations.


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Leading edge conduct MI


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Thank you!

ROBERT LEWISPartner, Financial Services Audit416 777 3929 [email protected]

LOUIS RÉGIMBALInsurance Leader, Quebec514 985 1259 [email protected]

ELIZABETH MURPHYPartner416 777 8279 [email protected]

© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7868

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

distribution trends and market conduct - kpmg...of insurers’ activities in our view, the key to...

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