Fitter not Fatter

Canada’s economic stability in early 2015 is proving to be anything but boring – from the value of the dollar to volatile oil prices. Despite a relatively calm, albeit recently snowy, start to the winter weather season, these economic factors will undoubtedly help to make for an interesting year in property and casualty insurance.

KPMG’s second annual Insurance Risks and Opportunities Survey for the Canadian insurance sector reflects key themes of the upcoming year for p&c insurers, revealing a cost challenge for the sector and a significant new risk surrounding cyber security. (The survey analysis reflects about 100 responses from p&c insurers, reinsurers, brokers and other service providers. A total of 27% of respondents identified themselves as members of executive management and a further 16% reported being external board members).

The single biggest opportunity identified for 2015 is the improvement of operational processes and technology, up from the third-ranked opportunity in 2014. In all, 86% of the 94 respondents surveyed indicate their organization is either actively implementing or developing business process and technology improvement projects. However, cost reduction initiatives were ranked lowest of the opportunity-specific priorities.

How to explain this anomaly?

IMPROVING OPERATIONAL TECHNOLOGY

From 2007 to 2013, general expenses and commissions of large p&c insurers rose faster than the growth in premium volumes, resulting in an expense ratio of 26.57% in 2013 compared with 25.72% in 2007 (excluding premium taxes).

With an estimated 3.5% to 4% of net premiums collectively invested each year in IT infrastructure, it seems that investment is being made with limited efficiency gains, suggests a review of the 2007-2013 financial results of 12 large-sized p&c insurers.

Indeed, 38% of survey respondents identified the cost and risks of IT investments as a significant challenge to their respective businesses.

The real challenge for the p&c insurance industry in Canada is to harness technology to successfully deliver both business improvements and greater efficiency – to become fitter, rather than fatter.

DATA & ANALYTICS

Unsurprisingly, data and analytics (D&A) remains listed at the forefront of opportunities that p&c insurers want to capitalize on in the coming months and years. While other industries, such as telecoms, may have already focused on digitally enhancing customer experience, insurers have largely focused on their core competencies of risk and pricing when it comes to client service.

Transforming Insurance, a KPMG Global study of more than 500 attendees of the International Insurance Society 2014 Annual Seminar, found the challenges insurers face to be intensely practical, with 35% of global respondents citing legacy systems as the biggest single barrier to greater use of data and analytics.

While there remains more that can be done to hone the pricing of risk, the optimization of the customer journey – refining customers’ interactions across multiple touch points and multiple channels – is clearly a significant opportunity that insurers must not overlook. The potential for more informed interactions with customers (tailored to their specific needs and preferences) holds a significant opportunity for increased customer satisfaction, improved retention and cost savings, as well as cross-selling and upselling.

Operating successfully in a digital world is driven by an experimental, test-and-learn culture – the most challenging step on the D&A journey will often be simply taking the first one.

ORSA: ROUND TWO

The understanding of risk and capital remains prominent in the opportunities identified for a second straight year. In 2014, it looked as though the imminent production of the inaugural ORSA (Own Risk and Solvency Assessment) led to a belief that better use of capital and management of risk represented a significant opportunity.

Now one year later, the ORSA first edition has been completed and as insurers stand back and admire their work, they are wondering how they compare to their competitors, and what the reactions of their regulators will be.

It appears that the ORSA process has sharpened the focus of discussions on risk and capital at executive and board levels, despite some initial reservations.

The fact that the insurance industry still views the improved understanding of risk and capital as an opportunity speaks to how far the understanding of risk management has come over the past few years, and it may be that the new ORSA requirement has been the catalyst.

Looking forward into 2015, companies want to understand where they are in comparison with their peers, and see what leading practices emerge to optimize their use of capital as they shape their 2015 ORSA agendas.

WHAT A DIFFERENCE A YEAR MAKES

2015 follows a year of calmer waters, which, in turn, followed a choppy 2013 that saw a run of natural catastrophes and significant uncertainty in the regulatory arena. Despite smooth sailing on the catastrophe front, one constant remains – the sector’s concern with the regulatory and compliance burden it faces.

Cyber security: centre stage

Cyber security risks replaced the risk of catastrophic loss events in the survey’s Top 3 risks identified. Last year, it was surprising that cyber security did not resonate strongly – it did not so much as land a place among the Top 10 risks identified.

Minds were focused over the last year by several high-profile attacks to major corporations, where hackers were able to access personal information, credit card details and even photographs. It is now clearer than ever that cyber security presents a very significant risk to all sectors.

The potential that cyber criminals have to destroy reputations is of particular concern to insurers given that trust is the foundation of the p&c insurance industry. With hackers able to penetrate any weakness in defence, it seems that no company or sector is immune – and so, the focus has switched from planning for “if” to planning for “when.”

On the flip side, commercial lines insurers are offering specific cyber liability coverage and associated risk mitigation to assist their commercial customers in managing loss in the event of a breach.

Although not yet identified as an opportunity in the survey, time will tell whether or not this proves a profitable new market.

Danger ahead: oil on the road

Traditionally regarded as an issue of greater concern to life insurers and wealth managers, low interest rates remain a significant and growing risk for p&c insurers. Since last fall, the unexpected and quickly dropping global price of oil eventually materialized in the Bank of Canada taking markets by surprise this January, cutting the benchmark interest rate by 25 basis points to 0.75%, as plunging oil prices started to take their toll on Canada’s economy.

Last year, the hope was for a less volatile outlook for interest rates and a calmer year for weather. While the wish for the weather was granted, interest rates will likely continue to remain unpredictable.

As the rest of the year plays out, the country will continue to observe the effects of the lowered Canadian interest rate and the volatile price of oil.

Faced with the prospect of lon ger-term low interest rates, it becomes even more important that insurers grasp opportunities from a sound foothold of risk and capital management to help ensure they become leaner and fitter, so they may succeed, and thrive, in the long run.