From bushfires, hailstorms, COVID-19 and recent floods, the insurance sector is managing challenges on many fronts not least of all the regulatory headwinds the sector is facing into. Now more than ever an efficient and effective way to mitigate risk is needed.
The challenges of the past year have put pressure on all sectors, but for insurance, they are adding to an already complex landscape. The sector’s challenges all come with associated risks, often interconnected, demanding that boards and executive leadership need to continually assess if and where risk management sits on their agenda.
A quick review of some of the current complexities, particularly in the areas of general, life and health insurance, demonstrates the challenges at hand and ahead. This article considers these challenges, managing multiple interconnected complexities, the opportunity for insurers and questions for you to consider.
| If you'd like to talk about an efficient and effective way to mitigate risks facing your business, please contact us. |
Challenges for insurers
| COVID-19 |
While the extent of impacts on insurers is not yet clear in Australia, recent court cases in the UK show that COVID-19 may bring risk exposure in both general insurance (particularly related to business interruption insurance). Also history would suggest that larger volume of claims may arise in periods of higher unemployment along with potential mental health consequences arising from the pandemic.
Travel insurance has already been significantly impacted as well as landlord’s insurance. Concerns over product governance have been highlighted, such as instances where PDS’s did not refer to the most current versions of legislation in the context of business interruption exclusions.
At the same, during the early stages of the pandemic health insurers experienced positive claims due to deferrals of elective surgery and related procedures. However, these claims are returning to normal levels as restrictions have eased across the country.
Interestingly, the KPMG COVID-19 Survey Call to Action for the Australian insurance sector (PDF 2.12MB) highlighted that customers placed Car and Home & Contents insurance as essential services by policyholders, resulting in growth across this category, in contrast to Life Insurance and Income Protection policies seen as discretionary spend during the pandemic.
As the global vaccine roll-out progresses insurers will need to keep reviewing products and services to align with policy holders and consumer expectations.
| Compliance and risk requirements |
Regulation, prudential oversight, enforcement action and voluntary industry codes have been steadily building since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).
These all have a significant impact across the front, middle and back offices, and also increase further the risk of non-compliance and reputational damage. Examples of new/ongoing compliance requirements across the sector include:
- Design and distribution obligations (DDOs), which are ongoing, but mean that every insurance product must have a defined target market, and the product can only be sold to that market.
- CPS 231 and CPS 234 (the second phase), which relate to complying with information security and cyber security regulations.
- Financial Accountability Regime (FAR), the update to the Banking Executive Accountability Regime (BEAR), which means insurance leaders will soon be held personally accountable for decisions that impact customers and stakeholders.
- For life insurers prudential regulatory expectations continue to increase, particularly in delivering sustainable Income Protection products and profits as well as the Australian Securities and Investments Commission (ASIC) focus on delivering value through DDO – creating a dual tension.
| Cost pressures |
The insurance sector has faced significant cost and profitability pressures. Life insurance is particularly challenged where IP and Total and Permanent Disability (TPD) claims experience has been very poor. Legacy product design has created major challenges in balancing profitability and the best interest of the customer.
Further challenges arise for those insurers that have been required to hold additional capital in response to specific concerns raised by Australian Prudential Regulatory Authority (APRA). A number of life insurers are currently subject to such requirements pending a satisfactory response to the IP and TPD profitability challenges noted above and other insurers have been required to hold additional capital due to entity specific issues.
General insurers are facing pressures in relation to natural hazard costs, as seen with the recent flooding events on the East Coast and Bushfires in 2019/20. Increased claims costs associated with natural hazards are putting pressure on reinsurance costs and the bottom line.
Health insurers are not immune with the cost of claims and ancillary cover trending upward as reflected in recent prices increases across the sector.
| Customer acquisition and retention |
COVID-19 has seen a mix of increased loyalty from customers particularly as insurers have provided reliefs across premiums as well as delaying premium increases. However, in some cases, customers are questioning the value of insurance, particularly in health, life insurance and in the millennial customer segment.
Insurance is often perceived as expensive and a nice to have where there is a lot of competition for a share of customer wallet.
The insurance sector, like other financial services sectors, is very competitive and that has had its own challenges relating to trust. In this context, customer loyalty can be hard to secure. Failing to do this is a growth and sustainability challenge.
| Digital acceleration |
Since the start of the pandemic the adoption of digital solutions and technology has accelerated across the sector. KPMG’s consumer survey (PDF 2.12MB) found that customers under 40 years prefer using digital channels and most under-40s believe that connecting through digital leads to better quality engagement, while only 29 percent of over-65s agree.
The new post-COVID-19 reality will keep driving a renewed focus on digital first and value-based propositions presenting greater opportunities for Insurtechs.
Some of the main areas for digital transformation include customer acquisition, policy renewals, claims management and automation to deliver cost efficiencies. However, from a risk perspective, Insurtech organisations may not have the regulatory maturity required and could introduce risk to an incumbent organisation.
Insurers investing in Insurtech at an early stage are also exposed to investment risk if the investment doesn’t pay off.
| Mergers and acquisitions (M&A) |
The sector is experiencing a heightened level of M&A activity following international interest, business restructuring as a result of COVID-19 cost pressures, as well as divestments after the Royal Commission. This is adding pressure to insurers to deliver efficient separation and integration programs while managing the range of new regulatory requirements and challenges.
Managing multiple interconnected complexities
| It is likely that a number of these challenges will be impacting an insurer at once. |
It is likely that a number of these challenges will be impacting an insurer at once. For example, an organisation could be managing an M&A, while preparing to implement FAR and all within a resource and cost-constrained environment.
The adoption of the new insurance financial reporting requirements under IFRS17 Insurance Contracts presents some challenges for the sector, particularly life insurers where the impacts are expected to be most significant. Securing the necessary resources, particularly across the actuarial front, is proving challenging.
Meanwhile, it is also likely that different divisions and functions will be managing similar challenges, but separately. There is a need to take a strategically aligned approach rather than valuable resources managing the same issues without effective engagement and coordination.
A more effective approach is one that is holistic, leverages better practice risk management and enables a whole of firm approach. Outcomes include, improved processes and efficiency, and is supported by the right risk technology.
Powered Risk can help advance today’s risk and compliance functions, so that an organisation can confidently direct its primary focus onto core business and reduce its time worrying about risks.
KPMG’s Powered Risk is designed to achieve this, as it brings together an operating model across processes, automated risk controls, and data and analytics insights to help achieve an enhanced standard of risk management at an accelerated rate. Our team combines a deep understanding of the insurance sector, risk landscape, risk management and technology which all combine to make risk transformation as seamless as possible.
Opportunities for insurers
Managing today’s challenges and the associated risks requires a clear prioritisation of risk from the board and executive leadership, as well as from the business. If risk is managed well, insurers have a better chance of delivering on their core strategy – and support delivery of competitive, reliable insurance products and services to the customer. With satisfied customers, there is potential to build trust and grow sustainably.
Questions to ask
| For boards, C-Suite and senior management in insurance looking at how to better navigate the risk landscape, here are some questions to get on track. |
- Does your board have a clearly defined and communicated risk appetite that is representative of the current environment and pipeline of regulatory and market change?
- Do you have full visibility over the pipeline of new regulatory compliance and industry codes? Also, how will responding to this vast array of regulation impact your current workforce structure?
- Do you have a framework of processes and controls in place to manage compliance requirements and associated obligations?
- Are you leveraging automation and data and analytics to help manage costs?
- Is every step in your process across the front, middle and back office aligned around what is best for the customer?
Powered Risk for insurers
Find out more about how Powered Risk can make a tangible difference to risk management in insurance organisations.
| If you'd like to talk about Risk transformation or how you can mitigate risks facing your business, please contact us. |
