global insurance trends analysis 1h 2017 -...
TRANSCRIPT
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Global insurance trends analysis 1H 2017
Upside potential, sideways risks
October 2017
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Page 2 Global insurance trends analysis 1H 2017Page 2 Global insurance trends analysis 1H 2017
Uptick in global growth and rebound in employment levels, if
sustained, will have favorable implications for the sector.
As central banks turn cautious, bond yield improvements are
likely to slowdown in near term, implying limited investment yield
upside for insurers.
External influencers: mixed macroeconomic signals
Supported by a strong bull run, global insurance stocks continued
to rise as several large insurers saw improved investment and
underwriting results.
Pick up in long-term buy recommendations for UK and EU insurers
reflect improved analyst expectations.
Natural catastrophe (NatCat) losses: Active hurricane season is
expected to halt the relatively benign period of losses and limit
further pricing weakness that has persisted after 2012.
Sector trends: hurricanes to set course
Addressing the evolving nature of risk through innovation is a key
imperative for insurers.
Blockchain has now progressed beyond pilot stage, with early
adopters looking to gain significant advantages.
EY has taken a strong lead in helping insurers create a blockchain-
based new-age information infrastructure.
Tech disruption: blockchain rising; EY takes lead
Insurers need to proactively initiate implementation plans to
effectively address the changes introduced by the new accounting
regulations (including IFRS17 Insurance Contracts).
General Data Protection Regulation (May 2018): With more than
half of the two year post-adoption grace period now over,
insurers will have to act fast to address the impending challenges.
Regulatory landscape: insurers prepare for impact
Key highlights
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Page 3 Global insurance trends analysis 1H 2017Page 3 Global insurance trends analysis 1H 2017
Uptick in global growth and rebound in employment levels, if
sustained, will have favorable implications for the sector.
As central banks turn cautious, bond yield improvements are
likely to slowdown in near term, implying limited investment yield
upside for insurers.
External influencers: mixed macroeconomic signals Sector trends: hurricanes to set course
Tech disruption: blockchain rising; EY takes lead Regulatory landscape: insurers prepare for impact
Key highlights
-
Page 4 Global insurance trends analysis 1H 2017
Uptick in global growth and rebound in employment levels, if sustained, will have favorable implications for the sector.
1) US$ basis, constant pricesSource: Oxford Economics
2.8%
1.9%
2.9%
1.1%
6.9%
2.2%2.3%1.7% 1.5%
1.0%
6.7%
1.8%
2.8%
1.6% 1.8%
0.9%
5.8%
1.9%
World EU USA Japan China UK
FY15 FY16 Forecast (Avg. 2017 -2022)
Recent rebound of global growth has been driven by improving
prospects in the US and China (mainland), a gradual rise in
employment levels and a recovery in the commodity markets
(during last three out of four quarters).
US GDP grew at its fastest pace since 1Q15 (3.0% in 2Q17
and 1.2% in 1Q17) driven by rising employment, accelerating
wage growth and improved business investments.
The EU is forecasted to post its highest growth (FY17e: 2.1%)
since the financial crisis, driven by a rising manufacturing
output and reducing unemployment levels.
Japan too expanded faster than expected in 2Q17, as
investment and household consumption scenario improved.
However, UKs economy slowed in 1H17 as rising inflation
affected household spending power, which along with Brexit-
related risks may impact growth in 2017-2018. The UK was
also among the few markets which saw a fall in employment.Change in GDP growth (y/y): 2Q17 vs. 4Q16
+0.30pp +0.25pp +0.23pp +0.10pp -0.25pp
Unemployment levels fell across several key markets.
0%
2%
4%
6%
8%
10%
12% US EU China UK Japan
+0.26pp
GDP growth1: global growth rebound continued
Improved economic growth scenario and more engaged labor
market will have a major impact on the overall income levels
both at commercial and personal levels.
While, a gradual rise in demand for insurance can be
expected, multiple threats remain in the form of risks from
Brexit, rising debt levels for several key economies (e.g., US,
Greece, Italy and Spain), possible reversal of the extended
bull run seen in global equity markets since 2009 (third
longest ever) and potential escalation of tension in East Asia.
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Page 5 Global insurance trends analysis 1H 2017
As central banks turn cautious, bond yield improvements are likely to slowdown in the near term, implying limited investment yield upside for insurers.
August 2014 August 2016 August 2017
Duration (yrs.) 1 5 10 30 1 5 10 30 1 5 10 30
Switzerland
Eurozone
Germany
Japan
France
UK
US
China (mainland)
Negative
0% - 1%
> 1%
Source: Oxford Economics
While bond yields had seen an upward trajectory until early
2017, most major markets have displayed limited inclination
toward any strong monetary policy change in coming months.
US Federal Reserve provided no further guidance on more
interest rate hikes, as Trump administrations pressure to
keep rates low might prevent another hike. Analysts were
expecting at least one more rate rise in 2017.
The European Central Bank re-emphasized that interest rate
hikes remain a distant possibility although it is expected to
announce a tapering of its QE Program in October 2018.
Bank of England is expected to maintain its neutral policy
stance but the case for a rate hike could build later this year
or in 2018 if growth and inflation expectations rise.
Despite increasing expectations of a revival in inflation, global
inflation remains low. While global growth has picked up in the
recent past, inflationary pressures are yet to materialize.
2.8%
0.0% 0.1%
0.8%
1.4%
0.1%
3.0%
0.2%
1.3%
-0.1%
2.0%
0.6%
2.9%
1.7%1.9%
1.1%
2.4%
2.0%
World EU US Japan China UK
FY15 FY16 Forecast (Average 2017 - 2022)
Inflation (avg. consumer prices): potential revival expected
Bond yields higher than 2016s record lows, stagnant in recent months.
Sharp bond yield revival from all-time lows seen late last year,
had raised hopes for insurers of a revival of investment
income that would have allowed favorable returns for
customers on assured return products.
However, bond yield gains have been inconsistent in recent
months owing to policy uncertainty, particularly in the US,
where hopes of further rate hikes by the Fed have been
curtailed by pressure from the Trump administration.
Persistent improvements will only be possible if the global
economic growth and inflation pick up.
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Page 6 Global insurance trends analysis 1H 2017Page 6 Global insurance trends analysis 1H 2017
External influencers: mixed macroeconomic signals Sector trends: hurricanes to set course
Tech disruption: blockchain rising; EY takes lead Regulatory landscape: insurers prepare for impact
Supported by a strong bull run, global insurance stocks continued
to rise as several large insurers saw improved investment and
underwriting results.
Pick up in long-term buy recommendations for UK and EU insurers
reflect improved analyst expectations.
Natural catastrophe (NatCat) losses: Active hurricane season is
expected to halt the relatively benign period of losses and limit
further pricing weakness that has persisted after 2012.
Key highlights
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Page 7 Global insurance trends analysis 1H 2017
Supported by a strong bull run, global insurance stocks continued to rise, as several large insurers saw improved investment and underwriting results.
16%
23%
14%
23%
8%
28%
9%
16%
5 year CAGR(1H 2017 vs. 1H 2012)
YoY(1H 2017 vs. 1H 2016)
S&P 500 Insurance Stoxx Europe 600 Insurance
SNL Asia-Pacific Insurance S&P Global 1200
Global insurance stock price returns1 US life insurance stocks outperformed on a year over year (YoY) basis, led by tax reform expectations and financial deregulation
by the new US Government while P&C insurers underperformed
the benchmark indices on underwriting concerns.
The US P&C industry recorded a US$5.1b underwriting loss
in 1H17 led by losses posted by key insurers.
UK insurance stocks outperformed in 2Q17, as most insurers
saw analyst upgrades and positive EPS revisions for FY17, with
most large players outperforming analyst estimates, primarily
on the back of improved investment results.
European insurers witnessed positive earnings per share (EPS)
revisions on the back of favorable underwriting performance.
Listed Chinese (mainland) life insurers rallied in 2Q17 after the
Chinese (mainland) Government indicated relaxing norms to
allow commercial pension funds to invest in equity markets.
This action also comes on the back of a crackdown by CIRC2,
mainland Chinas regulator, on dubious, high-return life
insurance policies being offered by large unlisted players.
1) The top chart is not directly comparable with bottom charts as indices used have different constituents (Life: FTSE China A 600 Sec/Life Insurance; Stoxx Europe TMI Life Insurance; FTSE UK 350 Sec/Life Insurance; DJ US Life Insurance Index. Non-Life: Custom P&C Insurance Index for China (mainland); Stoxx Europe TMI Nonlife Insurance; FTSE UK 350 Sec/Nonlife Insurance; DJ US P&C Insurance)2) China Insurance Regulatory Commission
While analyst expectations remained strong, the returns for
several insurers particularly in the US and the major global
reinsurers may see a correction as a highly active hurricane
season in the Atlantic is expected to lead to high losses in
selected geographies. In addition, with chances of interest
rate hikes gradually reducing insurers investment income
gains may see only a limited upside.
37.3%
29.9%
25.1%
46.2%
US
UK
Europe
China
16.1%
18.1%
23.3%
20.2%
US
UK
Europe
China
Segment stock price returns (YoY as on 30 Jun 2017) 1
Life
Non-life
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Page 8 Global insurance trends analysis 1H 2017
Improved long-term buy recommendations for UK and EU insurers reflect analyst expectations of a less adverse Brexit deal than anticipated earlier.
Analyst estimates for FY17 turned very bullish, as analysts
made upward revisions to both revenue and net income
forecasts post the announcement of 2Q17 results.
Both spread margins and investment income were impacted
by sustained weakness in interest rates although they were
more than offset by equity market gains.
Insurers in two of four key regions, primarily in the UK,
outperformed consensus estimates in 1H17, with most large
players witnessing large scale upgrades as they were led by
strong investment returns and improved underwriting results.
European insurers also outperformed in 2Q17, as two of the
top five global insurers saw analyst upgrades and EPS
revisions for FY17.
3.1%
-4.1%
16.1%
2.8%
-6.9%
Estimated
Actual
1) FY17 estimates for growth forecast are as on September 2017
3.7
3.5
3.8
3.6
3.4
3.1
3.4
3.7
Jan-15 Jan-16 Jan-17 May-17 Aug-17
North America
Asia-Pacific
Europe
United Kingdom
Hold
Global insurance (all lines) avg. analysts consensus growth forecast 2017
Mean of analyst recommendations (1: Strong sell, 3: Hold, 5: Strong buy)
3
4
4.2%
7.0%
4.0%2.2%
10.1%
Revenue1 Net income1
FY15 FY16 FY17 FY15 FY16 FY17
Buy
1 1
Hike in FY17 estimates between June 2017 and September 2017: +3pp Hike in FY17 estimates
between June 2017 and September 2017: +2.5pp
Some of the key risks that may hurt premium and earnings
growth going forward include:
Large NatCat losses from the ongoing active Atlantic
hurricane season in North and Central America (including
Hurricanes Harvey and Irma).
Gradual but persistent softening of non-life commercial
line rates over the last 16 quarters.
Increased regulatory restrictions, such as MiFID 2, which
may hit margins in a notable way.
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Page 9 Global insurance trends analysis 1H 2017
73 50 42 36 54 22
219 208
135 128
210
53
2012 2013 2014 2015 2016 1H17
Total economic losses
Insured losses
NatCat losses: active hurricane season is expected to halt the relatively benign period of losses and limit further pricing weakness.
19.0
5.59.1
17.5
2.2 2.2
Americas EMEA APAC
10 year 1H average 1H 2017
During 1H17, global CAT insured losses were estimated to be
~US$22b, nearly 35% below the 10-year average of US$34b.
~80% of insured losses were sustained in North America, led
by significant severe weather outbreaks across the US.
During the first six months of 2017, the US has already
experienced the highest number of catastrophe events (even
before Hurricane Harvey) since 1980, which resulted in the
highest insured loss total for the period since 2011.
Other major insured loss events included Cyclone Debbie that
prompted significant flooding in eastern Australia (US$1.2b)
and Windstorm Zeus in France (US$340m).
Insured losses in EMEA and Asia-Pacific remained subdued, each
accounting for around one-tenth of the insured losses.
This was despite large flood related losses in mainland China
(US$6.4b) and Peru (US$3.2b). However, insured losses are
expected to be minimal given the extremely low insurance
penetration in these countries.
Half-yearly insured catastrophe losses by region (US$b)
Average Atlantic hurricane activity forecasts for 2017 now adverse.
Average economic losses (2000-15): US$178b
Average insured losses (2000-15): US$50b
67% 76%69%
72%
74%
**%Proportion of uninsured losses
58%
Global NatCat total and insured loss estimates (US$b)
Month of Forecast
No. of Storms
No. of Hurricanes
Major Hurricanes
Atlantic hurricane activity forecast for 2017
Apr-17 11 4 2
Aug-17 17 (+6) 7 (+3) 3 (+1)
Historical average (1981 2010) 12 6 3
Source: Aon Benfield
Going forward, the low loss scenario will strongly change as
insured losses (initial est. US$45b-US$80b) from
Hurricanes Harvey and Irma (North and Central America),
both being major hurricanes, will start being registered.
While Harvey made a landfall as a Category 3 hurricane
(first in 12 years) in southern Texas, which houses major oil
refining and pipeline infrastructure, Irma proved
catastrophic for multiple locations in Florida. Owing to
aggressive storm activity, researchers have sharply
upgraded 2017 hurricane forecasts.
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Page 10 Global insurance trends analysis 1H 2017
Reinsurance landscape: reinsurance capital continued to grow in 1H17 with record levels of catastrophe bond issuance seen in 2Q; persistent fall in RoE1
428 461490 511 493 514 516
2844
50 64 8281 89
455505
540575 565 595
605
2011 2012 2013 2014 2015 2016 1H17
Alternative capital
Traditional capital
CAGR: 6%
Global reinsurance market capital (US$b)
4.4%
11.5%10.7%
11.3%10.1%
8.4% 8.4%
2011 2012 2013 2014 2015 2016 1H17
Global reinsurance return on equity
Full year FY17 RoE may fall further owing to losses from recent hurricanes
2Q alternative capital got a huge boost on account of record CAT bond issuance
While reinsurance capital continued to grow, traditional capital
growth remained negligible as demand for alternative capital
remained strong.
Within alternative capital, CAT bond issuance, which had not seen notable growth in recent years, saw a strong rebound
with 2Q17 being a record quarter. CAT bonds worth US$8.5b were issued during 1H17 as demand from capital market
investors and public entities grew. For e.g., the Mexican Government recently launched a pandemic CAT bond.
RoE for reinsurers continued to fall, as excess capital supply
implied weakening margins.
Relatively benign loss activity in the first six months (more
than a third less than the 10-year average) added to the pricing pressure.
It did not help that investment yield maintained its downward
journey, having fallen to 2.7% in 1Q vs. ~3.5% in 2011.
2017 RoE may sharply fall on account of losses from Hurricanes Irma and Harvey.
Abnormally low RoE as 2011 was the highest loss year ever
1) Return on equitySource: Aon Benfield
Potential losses from Hurricane Harvey and Irma are expected
to change the narrative that we have seen in recent years,
which includes downward pricing pressure, huge surplus
capital and favorable combined ratios for reinsurers.
While the short-term impact may be severe, high magnitude
of losses have the potential to reverse the weak pricing
environment across several lines and increase the demand of
both reinsurance capital and reinsurers expertise in product
design and pricing for both traditional and emerging risks.
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Page 11 Global insurance trends analysis 1H 2017
Insurance M&A trends: signs of recovery seen in global insurance M&A space after relatively stronger deal market in 2017 vs. a slow 2016.
133 150 174 146 128 118
126 108158
160126 121
131 122
164141
100
154121
168
114
119
544501
664
561
473
239
2012 2013 2014 2015 2016 2017
4Q
3Q
2Q
1Q
Deal volume remained largely stable in 2Q17 vs. 2Q16,
however, the value of deal activity increased significantly vs. the
same period in 2016, driven mainly by three large US$1b+
deals.
The return of the US$1b+ deals points to improved confidence
in global insurance M&A, and is in sharp contrast to 2Q16 where
deals with size greater than US$1b had all but disappeared.
Key drivers of M&A in insurance include:
Ongoing insurers strategies to enter profitable lines of
businesses, such as specialty.
Achieving cost efficiencies and improving margins by gaining
economies of scale.
Global insurance M&A deal value (US$b)
4 815 20
3 88
10
1722
49
1314
14
58
10
23 7
18
10
29
4940
64
110
46
17
2012 2013 2014 2015 2016 2017
4Q
3Q
2Q
1Q
Global insurance M&A deal volume (number of transactions)
Looking ahead, we expect the insurance M&A market to
remain active in Q3 2017 against a backdrop of an improving global macroeconomic environment and easing regulatory
uncertainty (e.g., the proposed DoL fiduciary rule extension).
Insurers focus on profitability through inorganic top-line growth and expense rationalization, coupled with technology-
driven investments will continue to drive M&A in the sector.
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Page 12 Global insurance trends analysis 1H 2017Page 12 Global insurance trends analysis 1H 2017
External influencers: mixed macroeconomic signals Sector trends: hurricanes to set course
Tech disruption: blockchain rising; EY takes lead Regulatory landscape: insurers prepare for impact
Addressing the evolving nature of risk through innovation is a key
imperative for insurers.
Blockchain has now progressed beyond pilot stage, with early
adopters looking to gain significant advantages.
EY has taken a strong lead in helping insurers create a blockchain
based new-age information infrastructure.
Key highlights
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Page 13 Global insurance trends analysis 1H 2017
Addressing the evolving nature of risk through innovation is a key imperative for insurers.
Change in
nature of risk
in existing lines
of businesses
Line between commercial and personal will blur in an
increasingly automated and sharing economy.
Key example will be the shift of motor insurance from
being a predominantly personal to a mainly commercial
line as autonomous cars and ride sharing gain
prominence.
Evolving their approach to the very nature of risk will be critical for insurers
because margin pressures on most of the existing lines of businesses continue
to worsen on account of excess capital availability, homogenization of risk and
lack of growth in demand in the advanced markets.
It will be important for insurers to identify the right markets, target relevant
customer profiles, address new risks created by technology and even change
their role from being a post-loss cover provider to preventer of loss.
New risks from
cyber, IoT and
AI
We are already witnessing cyber insurance emerging as
a key lever to manage rising cyber risk (annual global
premiums already > US$3b).
Also expected are new liability classes from a much
higher use of artificial intelligence and greater adoption
of IoT systems.
Ways in which nature and form of risk is expected to evolve.
Shift from
covering to
preventing risk
Insurers are gradually shifting toward offering products
which include not just coverage but also services which
reduce claims by monitoring changes.
Greater adoption and improvements in sensor
technology can drive insurers toward business focused
on prevention of risk rather than covering risk.
Number of lines of business for which one of the worlds top two reinsurers is already offering risk management solutions
7
Size of motor insurance market in its current form which is likely to be disrupted by 2030 with the prevalence of self-driving cars
US$700b
Estimated count of IoT devices globally by 2018 Malfunction or privacy issues can lead to significant liability payouts
22b
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Page 14 Global insurance trends analysis 1H 2017
Cyber insurance remains the most prominent emerging risk, as growing digitization is raising stakes from cyber risk significantly.
Biggest trends unfolding in the cyber insurance space
Regulations raising adoption: Implementation of data protection regulations (mainly General Data Protection Regulation [GDPR] in the EU) are pushing firms to
enhance their cyber resilience, for which cyber insurance will play a key role.
Small to mid sized firms also showing strong interest: With the latest spurt of ransomware attacks adversely affecting small to medium sized firms, these firms
are gradually realizing the importance of preventing liability and business discontinuity from data breaches and other associated indirect costs.
Bundling of allied services: Insurers are increasingly offering pre-emptive and responsive solutions in addition to cyber cover including 24x7 access to a network
of cyber experts, cyber security risk assessment, training and compliance tools and real-time access to latest developments.
Increased risk appetite driving marginal correction in cyber insurance pricing: Cyber insurance rates in the US which constitute more than four-fifths of the
worlds cyber insurance market decreased marginally for a second consecutive quarter in 2Q. This was mainly due to increased capacity from growth in risk
appetite by incumbents (both insurers and reinsurers) and entrance of new insurers into this product area.
Cyber threat can be of catastrophic proportions.
Losses from a major cyber attack can easily be comparable to
those from a major catastrophic event as:
Most processes are being digitized and a large part of data architecture is moving to cloud
Businesses are highly underinsured for major breaches
Regulatory pressures to effectively protect customer data and privacy have heightened
To achieve a greater cyber adoption and to support a sustained growth, some of the key
challenges which this relatively nascent market will have to address include:
Confidence in cyber coverage being provided: across cyber insurance products,
significant variations exist in terms of applicable sub-limits and deductibles, types of
losses covered, as well as the time basis for claim eligibility. These lead to a concern
about whether claims will be paid in case of a cyber incident.
Data availability for quantifying exposures: lack of willingness to disclose breaches
fearing reputational hit and absence of market wide comprehensive data imply low
confidence among cyber insurance providers, leading to higher cost of cyber cover.
Limited policy support: so far, very few markets have taken concrete steps to
proactively address the economic and social implications of the cyber threat landscape.
This consequently affects the demand creation in the market.
70mThe amount a major telecom firm could have been fined under GDPR - instead of the 400,000 fine it paid for its data breach last year
53bAverage estimated losses in a scenario where cloud services are disrupted on account of a major cyber attack (estimated by a major global reinsurer)
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Page 15 Global insurance trends analysis 1H 2017
Blockchain has now progressed beyond experimentation, with early adopters looking to gain significant advantages. EY too has taken a strong lead
Experiments with blockchain have continued.
Both incumbents and insurance focused start-ups continue
to experiment with blockchain.
Multinational smart contracts: A large US-based insurer
has partnered with the worlds largest IT services
provider to create the first multinational smart
contract based insurance policy using blockchain.
Blockchain for broking space: Blockchain tech firm,
Bitfury Group, has allied with a US based broker and
adviser to use blockchain tech in broking market.
Insurance for IoT: Recently, Singapore witnessed the
launch of a demo app showcasing a Peer-to-Peer (P2P)
digital insurance blockchain protocol for IoT devices.
This signals creation of a fully Decentralized
Autonomous Organization (DAO) marketplace for smart
contracts based consumer insurance.
Multiple insurance prototypes in works: At a recent
insurance blockchain hackathon organized by Travelers
(via Simply Business), several new blockchain based
insurance solutions were introduced (e.g., automated
claims payouts based on weather APIs1 and loT tools;
insuring Initial Coin Offering investors against cyber
attacks; improving reinsurance market efficiency).
Some have already hit the ground running!
Indias second largest private general insurer launched a blockchain based
product for overseas travel policies, which allows customers to receive their
claims instantly without actually filing for an overseas flight delay.
Insurance for blockchain based ecosystems: Two Japanese bitcoin
exchanges recently launched insurance products to cover losses tied to
failed transactions.
A Berkshire Hathaway-owned reinsurer has partnered with a London-based
vendor to develop a blockchain platform for life and health insurance clients
For blockchain deployment, insurers are expected to focus initially on areas such
as payments, claims processing, administration and back office operations (vs.
underwriting, pricing). Through blockchain, insurers are looking forward to:
Offering low cost insurance products catering to potentially high demand
segments such as flight delay and cancellation, flooding, crop and event
weather disruption
Disintermediating middlemen (e.g., brokers)
Recording real-time premium payments and receipts across shared networks
Providing regulators with controlled policy views to demonstrate compliance
Improving claims adjudication through a robust validation engine
-
Page 16 Global insurance trends analysis 1H 2017
as it launched the worlds first real-time blockchain platform for marine insurance in tie-up with Guardtime and other industry leaders.
The business issue which EY set out to solve using blockchain
Which partners have EY aligned with and what roles do they play?
What capabilities will the platform offer?
EY has launched Tesseract, an integrated blockchain based mobility platform which
facilitates fractional vehicle ownership, shared use and seamless multimodal transport.
It will help lay the groundwork for managing autonomous vehicle fleets and can also
have huge implications in the future motor insurance landscape.
EY is leading a consortium of 13 Indian insurers to use blockchain based tech to create
a central policyholder repository and streamline policy admin and registration.
How EY is working toward moving blockchain from concept to reality
Most lines of businesses face gaps in coverage and
both underpayment and overpayment of claims,
primarily due to the following:
Insurance value chains currently involve
complex paperwork, poorly integrated manual
processes and high level of duplication that
lead to lack of transparency, compliance and
accurate exposure management.
Asset information is incomplete, out of date or
unreliable at every point in the process. Data is
not standardized, tough to share and can't be
accessed securely.
Following a successful 20-week proof of concept,
EY is building a working blockchain platform that
connects every major stakeholder in the marine
insurance value chain, with the following
organizations:
Guardtime: the worlds largest blockchain firm,
will build the platform.
Microsoft: will host it on its cloud platform.
Maersk, the worlds largest shipping company,
is providing first hand account of unique
challenges faced in marine ecosystem.
ACORD1: international industry data standards
body, will enable wider global adoption.
XL Catlin, MS Amlin and Willis Towers Watson
will bring sharp insurance business expertise.
This platform addresses structural issues related
to the insurance value chain while connecting
clients, brokers, insurers and third parties to
distributed common ledgers that capture data
about identities, risks and exposures. Its
capabilities include:
Creation and maintenance of asset data from
multiple parties
Linkage of data to policy contracts
Pricing or business process change based on
information received
Linking client assets, transactions, payments
Capture and validation of up-to-date first
notification of loss data
Such a blockchain platform can be applied to any
commercial line with high-value assets.
Other major blockchain initiatives by EY
For further perspective on how EY is working toward a
better-working insurance world by moving blockchain
from concept to reality, please visit:
EY - Blockchain-enabled platforms are changing marine for the better
1) Association for Cooperative Operations Research and Development
http://www.ey.com/gl/en/industries/financial-services/insurance/ey-blockchain-marine
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Page 17 Global insurance trends analysis 1H 2017Page 17 Global insurance trends analysis 1H 2017
Key highlights
External influencers: mixed macroeconomic signals Sector trends: hurricanes to set course
Tech disruption: blockchain rising; EY takes lead Regulatory landscape: insurers prepare for impact
Insurers need to proactively initiate implementation plans to
effectively address the changes introduced by the new accounting
regulations (including IFRS17 Insurance Contracts).
General Data Protection Regulation (May 2018): With more than
half of the two year post-adoption grace period now over,
insurers will have to act fast to address the impending challenges.
-
Page 18 Global insurance trends analysis 1H 2017
Regulations (1/2): enhancing financial stability in the sector continues to be the underlying driver for regulatory developments.
Canada: E-21 Operational Risk Management guideline fully implemented in June 2017. Will provide consolidated guidance for operational risk management across all Federally Regulated Financial Institutions (FRFI).
Following IFRS17 release earlier this year, the IASB aims to establish a Transition Resource Group (TRG) to provide support on implementation-related questions.
Recent progress in the development of the Global Insurance Capital Standard (ICS) of the Financial Stability Board (FSB) and International Association of Insurance
Supervisors (IAIS) included extended field testing for Internationally Active Insurance Groups (IAIG) in July 2017 and the fourth round of annual field testing being conducted on the ICS (from May to September 2017) and ongoing consultation on proposed revision to a number of IAIS Insurance Core Principles (ICP).
US: Major provisions of the Dodd-Frank Act, including decision-making process of the Financial Stability Oversight Council (FSOC) are being reviewed.
Brazil: Insurers to implement ERM framework aligned with Solvency II and operational losses database by the end of 2017.
Mexico: Post implementation of new solvency regime, Mexican ORSA reports to include results of the Dynamic Solvency Test.
Australia: Consultation on life claims data collection launched in May 2017, as part of an industry review of life insurance claims handling and reporting.
European Union:
European Insurance and Occupational Pensions Authority (EIOPA)invited consultation on first set of advice to the European Commission which it aims to finalize by October 2017 - on specific items in the Solvency II Delegated Regulation (July-Aug).
Infrastructure investments: EIOPAs proposal to extend infrastructure asset class to include firms which carry out infrastructure activities (or infrastructure corporates) was enforced in June 2017.
Mainland China and Hong Kong: Final ALM standards for life and non-life insurers are expected to be released later in 2017 (consultations happened during May-Jun). In Hong Kong, new regulator Insurance Authority (IA) began operations in June.
Japan: Draft of new standard mortality table (effective Apr 2018) proposed by the Institute of Actuaries of Japan (IAJ) expected to reduce life premiums.
While a lot of countries have now implemented new regional
or local capital standards, industry focus has now shifted to
ironing out potential open issues.
Simultaneously, it now appears that the world is inching
closer to a global insurance capital standard. If implemented
effectively, such a standard will promote comparability,
transparency and trust. At the same time, it may lead to
significant adjustments to companies structures, strategies
and footprints.
South Africa: New law (Financial Sector Regulation) enacted in August 2017 to pave way for enactment of Insurance Bill, giving effect to the new solvency regime (SAM).
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1) Only insurers which meet the criteria for deferral
Regulations (2/2): insurers need to proactively initiate implementation plans to effectively address the changes introduced by the new accounting regulations.
In July 2014, the IASB issued the IFRS9 Financial Instruments standard and more recently, in May 2017, the IFRS17 Insurance Contracts standard was also released.
The new reporting standards (IFRS17 and IFRS9) aim to improve the comparability and transparency of accounting practices, while promoting better alignment between finance, risk and actuarial functions through enhanced disclosure of valuation, performance and risk information, and the adoption of principles-based
accounting frameworks.
What lies ahead
Early adoption in some geographies: While IFRS17 will become effective in 2021, certain local regulators (e.g., Taiwan, Thailand) may require early adoption
through regulatory overlay requirements.
Possible deferment of IFRS9 for insurers: IFRS9 will be effective in 2018. However, a recent IASB amendment gives insurers the option - subject to certain
terms and conditions - to defer implementation of IFRS9 until 2021 (i.e., along with IFRS17). Insurers qualified for the deferral approach need to fulfil IFRS9
disclosures from 1 January 2018.
Other accounting changes: In addition to the IFRS9 and IFRS17 standards, insurers will need to adapt to a wave of other accounting changes over the next five
years, including IFRS15 Revenue from Contracts with Customers - effective 1 January 2018 - and IFRS16 Leases - effective 1 January 2019.
Given the scale and scope of IFRS17, insurers must start formally assessing
the potential impacts and mobilize their resources accordingly. This will
require a well-planned program and a clear organizational view of the end
state.
These accounting changes (IFRSs 17, 9, 15, 16) present new challenges
and opportunities for asset allocation, asset-liability management (ALM),
performance measurement and business management. Insurers must look
to educate stakeholders on expected impacts and communicate execution
plans to manage expectations.
Timeline of changes
2014 2015 2016 2017 2018 2019 2020 2021
IFRS17 implementation window
Final IFRS17 standard(May 2017)
Final IFRS9 standard (July 2014)
IFRS9 to be enforced for insurance dominated firms1
IFRS17 to be enforced (January 2021)
IFRS17 to be enforcedpre-emptively in select markets
IFRS9 to be enforced for non-insurance dominated firms
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Special focus
Understanding GDPRs impact on insurance
The impacts of GDPR compliance will be seen across all areas of the insurers operations. Failure to comply could result in significant fines and reputational damage.
Cheryl Martin
EY Global Insurance Cyber Leader
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Page 21 Global insurance trends analysis 1H 2017
GDPR (May 2018) will substantially redefine ways in which customer information is currently being managed which, in turn,
Enhanced data subject rights
The GDPR will create multiple new rights for individuals (and strengthen some existing rights under Data Protection Act or DPA) including, the right to:
Be informed about how personal data is being utilized.
Be forgotten where personal data is no longer necessary in relation to the original purpose or when individual withdraws consent.
Data portability: Controllers must provide personal data to data subject and transfer to another controller if subject so requests.
Rights around automated decision making and profiling: to check risk of a potentially damaging decision taken without human intervention.
GDPR comes with an extended jurisdiction and applies to all companies processing personal data of EU-based subjects, regardless of companys location.
GDPR imposes restrictions on personal data transfer outside the EU, to non-EU countries or international organizations, so that the level of protection of individuals covered by the GDPR is not undermined.
Organizations in breach of GDPR can be fined in two ways:
4% of annual turnover (minimum 20m) e.g., for unlawful international transfers, or inability to respond to Data Subject Access requests.
2% of annual turnover (minimum 10m) e.g., for a failure to report breaches within 72 hours.
The most serious infringements will include not having sufficient customer consent to process data or violating the core of Privacy by Design concepts
Comprehensive extra-territorial applicability
Significantly high penalties
Biggest changes which will impact insurance sector
Enhanced accountability
Organizations must prove they are accountable by:
Adopting privacy by design i.e., designing data protection into development of business processes and new systems.
Establishing a culture of monitoring, reviewing and assessing data processing procedures.
Undertaking Privacy Impact Assessments when conducting risky or large scale processing of personal data and embedding privacy by default.
Data protection officer (DPO) appointments
DPOs must be appointed if an organization conducts large scale systematic monitoring or processes large amounts of sensitive personal data.
Breach notifications
Organizations must notify authorities of data breaches without undue delay or within 72 hours, unless the breach is unlikely to be a risk to individuals. If there is a high risk to individuals, those individuals must be informed as well.
GDPR is a welcome change which will give greater power to individuals and
will harmonize laws across all EU member states which, in turn, will make the
complex data protection landscape easier to navigate for multinational
organizations, including insurers.
However, insurers need to take strong and timely measures to make certain
that they are ready to comply when GDPR comes into force next year.
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Page 22 Global insurance trends analysis 1H 2017
will have a significant impact on the way insurers operate across most elements of the customer value chain.
Extra-territorial applicability (to affect these cases)
Outsourcing and data transfer to non-EU states
Non-EU firm underwrites risks for EU firm
Marketing outsourced to non-EU states and involves personal data transfer
Selling into EU states to EU data subjects
Servicing outsourced to non-EU states
Claims outsourced to non-EU states and travel claims in non-EU states
Complaintsoutsourced to non-EU states
Data processing Product literature to be aligned as per target customer segment
Review of data collected for profiling and marketing purposes needed
Marketing materials to clarify privacy and can not be misleading
Staff competence to be driven for handling regulation awarenessand data inquiries
Servicing scripts to handle inquiries about data usage to be reworked
Training for claimshandlers in data subject privacy and protection
Training for staff and establishing systems to effectively address concerns
Privacy by design and default
Factoring in data protection may lead to possible delay in product launch.
Restricted access to data for processing and storage of data
Restrictions on data which can be used for marketing procedures (e.g., profiling)
Limited access to data and strong rationale needed for data retention
Right to be forgotten
Clear customer consent required may limit size of the reference data pool
Clear consent for marketing and training for staff
Reworked sales scripts requestingconsent
Focused training and systems for addressing requests
Data Protection Officer
DPO to monitor each value chain element for GDPR compliance, leading to an additional layer of compliance in all processes
Product development
Marketing
Underwriting and pricing
Servicing Complaints
Sales Claims
Impact of GDPR changes across the insurance value chain
Biggest impact for insurers will be around the following areas:
Managing data transfer between EU and non-EU states and organizations
Seeking and justifying collection, storage, access and retention of data held in variety of means in multiple locations and often held/provided by third parties
Restructuring of process designs and improving data usage explicability
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Page 23 Global insurance trends analysis 1H 2017
With more than half of the two-year post-adoption grace period for GDPR now over, insurers will have to act fast to address the impending challenges.
Biggest challenges faced by all insurance companies
Data the use of profiling within marketing activities
Establishing linkage between the GDPR programs and business as usual activities
Accounting for right to be forgotten while managing other non-GDPR regulatory obligations
Managing communications and creating a culture of data protection
Setting program scope for GDPR and limiting scope creep
Setting a clear vision and defining compliance for the organization
Identifying home for Data Protection and new DPO role within organization
Setting budget and resource allocation to GDPR programmes
Nature of business specific challenges
Life/ Pensions: Presence of range of legacy contract engines and supporting systems lead to absence of a comprehensive single customer view. These systems can be hard to change and are likely to have low quality of data.
General and specialty: Sourcing pricing data is expected to become tougher. For example, use of telematics to price policies will become more limited, particularly as customers become aware of the type of personal data held. Similarly the use of IoT (including wearables) will be limited by the level of consent received from customers.
Brokers: Customers are being encouraged to shop around will seek historic information and may question data quality. Data from various means will need to be in a consolidated form to address transfer and other requests.
Preventing data breaches even as most insurers and brokers are still going through initial digitization
Staying alert to extended territorial impact for Insurers with offshore data processing/set-ups
GDPR will forcefully drive insurance players to assume greater accountability
and attain privacy maturity by providing privacy to customers, both by design
and default. Key imperatives for insurers in this new landscape will include:
Driving new revenue sources by using data obtained with customer assent
Proactively preventing data breaches and subsequently avoiding
associated remediation costs, loss of customers and market share
Using privacy as a competitive differentiator in a data driven world
Building trusting relationships with stakeholders to drive retention and
viewing data protection as a moral responsibility toward customers
Fulfilling stakeholder expectations in view of increasing public awareness
Source: EY Data Privacy and Protection Survey 2016
One-fourth of the biggest privacy breaches were due to lack of staff awareness on privacy related controls
Nine out of 10 companies see employees and insiders as one of the most likely sources of a privacy data breach
at a time when companies remain under-prepared.
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Please refer to your advisors for specific advice.
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Shaun Crawford
EY Global Insurance Leader
Luca Russignan
EY Global Insurance Knowledge Leader
Nilabh Kumar
EY Global Insurance Analyst
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