Second Annual Canadian Insurance Industry Risks & Opportunities Survey

Transcription

1 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Results 2015 kpmg.ca/insurance

2 Welcome to our second annual survey on the risks and opportunities for the Canadian insurance sector. We are pleased to present our perspective and build on the trends we identified last year. Our survey analysis reflects over 170 responses from insurers, reinsurers, brokers and other service providers. 27% of our respondents identify themselves as members of Executive Management. A further 16% identify themselves as external Board Members.

3 3 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Context: what a difference a year makes Our initial survey in late 2013 came at the end of a year of costly natural catastrophes and significant accounting and regulatory uncertainty. We compare and contrast the two years below, providing our perspective of the overall impact to the industry has largely been a benign year for Canadian insurers although the prospect of an increase in interest rates is now more distant and cyber security risks are now front of mind. Key observations The P&C sector paid out some $3.2bn in losses from natural catastrophes, the most expensive year on record No natural catastrophes of consequence to deal with Ontario automobile insurance was subject to 15% rate reduction while uncertainty remained about anti-fraud legislation Bill 15 has passed into legislation while work remains, progress has been made and rate reductions are being managed Insurers were stepping into the unknown, developing their first ORSA (Own Risk & Solvency Assessment) The first step on the ORSA journey has been completed, results submitted and the fear of the unknown conquered IFRS 4 Phase 2 weighed heavily on Life insurers, concerned at the interest rates to discount policy liabilities Implementation of IFRS4 Phase 2 has seen further delay and the IASB have found some accommodations to reflect some Life insurers concerns Prospects for an increase in US and Canadian interest rates had begun to stir Interest rates suffered a further surprise reduction early in 2015 although longer-term optimism driven by US economic performance remains Source: KPMG in Canada s Second Annual Canadian Insurance Industry Risks & Opportunities Survey (2015) Cyber security hits the front page, and while cyber liability presents opportunities for some P&C insurers, the threat level to all remains high and rising

4 4 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Top 10 opportunities for 2015 Life insurance companies RANK P&C insurance companies 62% Improvement of operational processes and technology 01 Improvement of operational processes and technology 66% 61% Improved understanding of risk and capital (better use of capital and management of risk) 02 Customer data analytics to improve underwriting, pricing and marketing 59% 36% Cost reduction initiatives 03 Improved understanding of risk and capital (better use of capital and management of risk) 55% 34% Customer data analytics 04 Customer self service technology to improve customer satisfaction and improve costs 40% 33% Treating customers fairly initiatives to reduce market conduct risks and strengthen customer loyalty 05 Technology to charge for risk better (e.g. telematics) 34% 33% Actuarial and finance transformation 06 Investment in organic growth (new products, pricing strategies, geographic expansion) 33% 30% Demographic changes 07 Mergers & acquisitions to improve market position and economies of scale 31% 28% Consumer preferences shifting to newer distribution channels 08 Consumer preferences shifting to new distribution channels 29% 28% Mergers & acquisitions to improve market position and economies of scale 09 Treating customers fairly initiatives to reduce market conduct risks and strengthen customer loyalty 25% 26% Changed consumer needs/ expectations 10 Cost reduction initiatives 22% Source: KPMG in Canada s Second Annual Canadian Insurance Industry Risks & Opportunities Survey (2015)

5 5 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Opportunities Both Life and P&C insurers see improvement in operational processes and technology as their #1 opportunity for Overall, the Top 5 opportunities identified by the P&C industry are consistent with last year (with some reordering of priorities), whereas Life respondents now prioritize opportunities to strengthen customer loyalty and reduce market conduct risks through treating customers fairly initiatives, in place of greater use of self-service technology. Looking at the Top 10 opportunities, Life sector respondents identify one further new opportunity for 2015 actuarial and finance transformation, displacing opportunities from organic growth, such as new products, pricing strategies or geographical expansion. P&C respondents prioritize cost reduction initiatives over technology to prevent and detect claims fraud. Let s drill down a little further into the Top 3 priorities. 01 Improvement in business processes and technology let s make 2015 the year we become fitter and not fatter This year, business process and technology improvement is the #1 opportunity for both the Life and the P&C insurance industries; this reflects a significant increase of focus for the P&C sector. What continues to surprise us is the relative disparity in the focus on cost reduction initiatives between the Life and the P&C sectors, which is ranked at #3 by Life respondents and only #10 by P&C respondents. How to explain this anomaly? The Canadian Life insurance industry is facing up to the realities of a prolonged low interest rate environment and, in our view, is looking to improve business processes and technology as a means of reducing costs as well as embracing a more digital world to enhance customer experience. 95% of respondents stated that their organization was either implementing or actively developing cost reduction initiatives and 83% were actively implementing or developing business process and technology improvement projects. Our analysis of the results of 12 large P&C insurers shows that over the 7 years from 2007 to 2013 general expenses and commissions have risen faster than the growth in premium volumes, resulting in an expense ratio of 26.57% in 2013 as compared with 25.72% in 2007, ignoring premium taxes. This is despite our estimate that on average they are investing some 3.5% - 4% of net premiums each year in IT infrastructure, collectively likely to amount to over $1bn in So it appears that investment is being made with limited efficiency gains. Indeed, 38% of our P&C respondents identified the cost and risks of IT investments as a significant risk to their business, just outside our Top 5 risks. In our view, the challenge for the P&C industry is to harness technology to deliver both business improvements and greater efficiency or as we like to think of it, to become fitter rather than fatter.

6 Refining customers interactions across multiple touch-points and multiple channels remains a significant opportunity for insurers.

7 7 Second Annual Canadian Insurance Industry Risks & Opportunities Survey 02 Customer data analytics do you know what you don t know? Unsurprisingly customer data analytics is at the forefront of the list of opportunities for both the P&C sector (#2) and for Life insurers (#4). In our experience, while other industries, such as telecommunication companies have focused on using digital to enhance customer experience, insurers have largely focused on their core competencies of risk and pricing. Our recent global research, Transforming Insurance, tells us that the challenges insurers face are intensely practical, with 35% finding legacy systems to be the biggest single barrier to greater use of data and analytics. In our view, optimization of the customer journey, refining customers interactions across multiple touch-points and multiple channels remains a significant opportunity for insurers. We believe more informed interactions with customers, custom-fitted to their needs and preferences, hold significant opportunities to increase customer satisfaction, improve retention and drive cost savings as well as providing greater crossselling and up-selling opportunities. While the insurance industry has lived and worked with data since its origins, the potential data analytics journey for many in the insurance industry is really just beginning and so digital opportunities and benefits remain to be grasped and realized. 03 ORSA you ve done it once, now how did you do and can you do it better? In this year s survey the understanding of risk and capital retains its prominence in the opportunities available to the industry for the second straight year. Last year the imminent production of the inaugural ORSA focused our respondents minds that better use of capital and management of risk represented a significant opportunity. One year on, the ORSA first edition has been released and its authors are standing back admiring the gleaming shine and wondering how they compare to their competitors and what the reaction of their regulator will be. Having been involved in the ORSA process of over 30 insurers, in our view ORSA sharpened the focus of discussions on risk and capital at executive and Board levels, despite some initial reservations. The fact that the industry believes it remains an opportunity speaks to how far these have come over the past 12 to 24 months. Looking forward we see companies wanting to understand how they stand in comparison with their peers, what leading practices are emerging and to optimize their use of capital as they shape their 2015 ORSA agenda.

8 8 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Top 10 risks for 2015 Life insurance companies RANK P&C insurance companies 84% Low interest rates 01 Regulatory and compliance burden 69% 76% Regulatory and compliance burden 02 Low interest rates 52% 55% Accounting and actuarial changes 03 Cyber security risks 47% 50% Increased regulatory capital requirements 04 Catastrophic loss events 46% 44% Cyber security risks 05 Climate change affecting claims costs 44% 40% Costs and risks of IT investments 06 Costs and risks of IT investments 38% 39% Finance and actuarial model risks 07 Increased regulatory capital requirements 38% 31% Global economic downturn 08 Accounting and actuarial changes 36% 27% Consumer preferences that shift to newer distribution channels 09 Regulation of insurance pricing 35% 26% Changed consumer needs/ expectations 10 Competitors with better data analytics capability 31% Source: KPMG in Canada s Second Annual Canadian Insurance Industry Risks & Opportunities Survey (2015)

9 9 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Risks Same old, same old or not? The Top 3 risks identified in our first survey maintained their positions at the forefront of respondents concerns, with the addition of cyber security risks for P&C insurers replacing the risk of catastrophic loss events, and the threat of low interest rates receiving greater prominence. Although, as is traditional, an issue of greater concern to Life insurers and wealth managers, low interest rates remain a significant and growing risk for our respondents. Life insurers, in particular, continue to be extremely concerned about low interest rates with fully 84% of respondents identifying interest rates as a significant risk, up from 74% last year. Notwithstanding that, there was general agreement, in 2013 the outlook for interest rates was for an increase in In practice, interest rates declined over the course of the year. The black cloud on the horizon when our respondents completed our survey in the fall of 2014 turned out to be a reflection in a global sea of oil. This materialized in January 2015 when the Bank of Canada took markets by surprise cutting its benchmark interest rate by 25 basis points to 0.75% as plunging oil prices started to take their toll on the economy. We weren t the only ones who didn t see that one coming. Cyber security: you read it here first Well, maybe not quite - but last year we did say that we were surprised that cyber security did not resonate as strongly as we thought it might have, with the Life industry ranking it at #7 and the P&C insurers not ranking it in their top 10 risks. This year cyber security is undoubtedly resonating, ranked at #3 for P&C insurers and #5 by Life insurers. Minds have been focused by several attacks over the last year where hackers were able to access personal information, credit card details and even photographs, many involving highly recognizable brand names. It is clear that cyber security now presents a very significant risk to all sectors. Its potential to destroy reputations is of particular concern to insurers given that trust is the foundation of our industry. With hackers able to penetrate any weakness in defense it seems that no one is immune, and so the focus has switched from planning for if to planning for when. On the flip side, the P&C insurance industry is embracing the opportunity that cyber security presents, offering specific insurance coverage and associated risk mitigation activities in the event of breach, to assist their commercial customers in managing risk. Time will tell whether this is a profitable new market.

10 Interest rates that were forecast to increase from historical lows seem set to remain lower for longer.

11 11 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Market conduct: an emerging risk and opportunity This year the risk that we call out as the dog that has not barked as loud as we expected is that of market conduct risk (although we note that it has been identified as a potential opportunity by some). In both the UK and the US, consumer protection is a hot topic and one that is becoming even hotter. Both the UK Financial Conduct Authority (FCA) and the US Consumer Financial Protection Bureau (CFPB) are aggressively pushing the market conduct agenda, imposing significant fines for violations. A review of practice in these markets suggests the principle of caveat emptor is quickly evaporating as a defense for financial institutions and the focus in these markets is now clearly on ensuring appropriate consumer outcomes, and demonstrating that this is the case. Provincial regulators across the country have market conduct risks coming into focus on their radar. While there is widespread belief among Canadian regulators and the insurance industry that we do not conduct business in the same manner as the UK and the US and thus Canada does not face the same market conduct issues, we believe that insurers in Canada would be well advised to pay close attention to this issue in the coming year.

12 12 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Summary of changes P&C changes for 2015 The schematics below highlight the changes in opportunities and risks from 2014 to These highlight in light blue wholly new opportunities and risks for 2015 those which weren t on the radar screen for 2014 and in grey those risks and opportunities that have receded and no longer make our respondents Top 10. In the middle we show the next 3 biggest changes. Looking at these together we see a marked increase in our respondents confidence for 2015 consumer preferences for newer distribution channels now appears as an opportunity for 2015 rather than a risk in 2014, and the threat of consolidation leading to dominant competitors has receded. We are also seeing greater familiarity with new technologies (or possibly greater world-weariness with the promises they hold), with the technology to charge for risk better, such as telematics, receding in almost equally as an opportunity and as a threat. We attribute the decline in the opportunity to use technology to prevent and detect claims fraud to the significance of Ontario Auto for many of our respondents and the recognition that despite significant efforts this will take continued significant action to make the market more sustainable. Sadly the decline in the risk of low interest rates is mis-placed or possibly we are all becoming more familiar with operating in a world of low interest rates. Last year we expressed some surprise that cyber-security risks did not feature more highly, and after a year when security breaches were frequently front page news, cybersecurity risks were the highest new entrant to your Top 10. This year our surprise is in the decline in both opportunities and risks associated with treating customers fairly initiatives we see market conduct as a growing area of significance for regulators around the world which is unlikely to bypass Canada. Changes in risks Increased regulatory capital requirements Cyber security risks 2014 risks no longer ranked in the Top 10 in 2015 Next 3 greatest movements from 2014 to % -16% -8% New risks in 2015 Consumer preferences for newer distribution channels Consolidation resulting in dominant competitors Technology to charge for risk better e.g. telematics Treating customers fairly initiatives Low interest rates Changes in opportunities 2014 opportunities no longer ranked in the Top 10 in 2015 Next 3 greatest movements from 2014 to 2015 Improvement in operational processes & technology +10% Consumer preferences for newer distribution channels -15% -11% New opportunity in 2015 Technology to prevent and detect claims fraud Technology to charge for risk better e.g. telematics Treating customers fairly initiatives Source: KPMG in Canada s Second Annual Canadian Insurance Industry Risks & Opportunities Survey (2015)

13 13 Second Annual Canadian Insurance Industry Risks & Opportunities Survey Life changes for 2015 In contrast we see growing concerns in our Life respondents outlook for 2015 with growing threats of a global economic downturn and the risk of continued low interest rates, and a decline in opportunities arising from customer self-service technology, further investment in inorganic growth and customer data analytics. Reflecting this uncertain outlook, as many of our respondents see changing consumer needs and expectations as a threat as an opportunity. Against this more uncertain backdrop the growing focus on treating customers fairly initiatives offers an opportunity to retain and win new customers in a more challenging world. Growing risks from finance and actuarial model risk and the opportunity of finance and risk transformation reflect a sector focused on operational efficiency and living with low interest rates for longer. Against this less optimistic outlook, accounting and regulatory concerns have abated over the year as the IASB has offered some relief, particularly in the identification of long term interest rates, and as the first ORSA has been developed and submitted. Changes in risks Low interest rates Changed consumer needs/ expectations Global economic downturn Finance and actuarial model risks 2014 risks no longer ranked in the Top 10 in 2015 Next 3 greatest movements from 2014 to % -21% -10% New risks in 2015 Cost reduction pressures increasing operational risk Demographic changes Competition with better customer technology Accounting and actuarial change Regulatory and compliance burden Changes in opportunities Treating customers fairly initiatives Actuarial and finance transformation 2014 opportunities no longer ranked in the Top 10 in 2015 Next 3 greatest movements from 2014 to % -9% -8% New opportunities in 2015 Customer self-service technology Investment in organic growth Customer data analytics Demographic changes Customer preferences for newer distribution channels Source: KPMG in Canada s Second Annual Canadian Insurance Industry Risks & Opportunities Survey (2015)

14 14 Second Annual Canadian Insurance Industry Risks & Opportunities Survey In conclusion Last year we summed up by hoping for a less volatile outlook for interest rates and the weather. Our wish was granted with respect to the weather. However, while interest rates were less volatile, they have certainly been unpredictable with the Bank of Canada taking markets by surprise by cutting interest rates in January as a precaution against a heavier toll on the economy. Our lesson? It would seem that we need to be a little more specific in what we wish for! The start of 2015 saw a further steep decline in the price of oil (and our dollar) with as yet unspecified consequences for the economy. Governments at all levels are grappling with revenue projections based on forecasts of economic growth that assume a significantly higher oil price than appears to be the case in the short to medium term. What does this mean for the insurance industry? Interest rates that were forecast to increase from historical lows seem set to remain lower for longer as an oil price stuck in the basement raises the prospect (or possibly spectre) of lower inflation. The impact on economic growth may play out in reduced business confidence and potentially lower income, whether through lower premiums or income based on lower assets under management. Faced with these prospects, arguably it becomes even more important that insurers grasp opportunities to ensure they thrive for the long term. Once again, thank you for your participation in our Second Annual Insurance Risks & Opportunities Survey. We look forward to whatever 2015 will bring and to once again hosting the insurance industry at KPMG s 24th Annual Insurance Conference on November

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16 Contact us Neil Parkinson Partner, National Insurance Sector Leader T: E: Mary Trussell Partner, Insurance Audit and Advisory Services T: E: Louis Régimbal Partner, Advisory Services T: E: kpmg.ca/insurance The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative ( KPMG International ).