Challenges and Opportunities of the Global Insurance Industry

Introduction The global insurance industry seems to have escaped the worst of the financial crisis in comparison to other financial institutions. Day to day business has been relatively unaffected but the area that gave the most cause for concern has arisen from exposures to risky financial instruments. â€Å"The Reactions Magazine’s Global Insurance Conference 2009† was held in Swissotel, Zurich, Switzerland. At this conference the financial services industry tried to re set itself following the worst crisis for years. (www. euromoneyseminars. com). Insurance is an established industry. Like other companies insurance is facing increased competition from global players. It has been difficult for insurers to accomplish profitable growth, so they need to improve this. They will need to adopt new advanced approaches to expand their distribution networks. This essay is divided into two sections. The first talks about the types of risks that are present in the global insurance industry. I will take each of these points and discuss them in detail: growth, governance and risk management, market reporting, mergers and acquisitions, human capital and lastly compliance and regulation. The second section looks at the opportunities that are available to the global insurance industry within the next twelve to twenty – four months. They include: disaster modelling, disaster planning, managing the industry’s reputation, grow globally, innovative products and delivery and Focus on readdressing product and distribution strategies. The insurance industry is always looking for new opportunities in different services and geographies. To take advantage of these opportunities insurance companies need to re-examine their strategies and be prepared to drive basic changes in the way they work. The primary function of insurance is to act as a risk transfer mechanism. The basic principle of insurance is that the losses of the few are paid by the many. Its underlying purpose is to provide protection against the risk of financial loss, thus giving peace of mind to the policyholders. † (www. peerpapers. com) Challenges are getting bigger for insurers as an increas e in pressure for bigger profit margins. This means taking a hard look at reducing costs and top line revenue growth. Making a profit is due to the ability to accurately assess risk and look after customer relationships over time in order to get financial success. I am going to look at the following six challenges. 1. 1 Growth After a spell of cost cutting and readjustment, insurers are again moving up a gear and trying to strive for managed growth. While growth is valued by investors, it is hard to find in the fairly mature insurance industry. To be successful in the future companies will need to create and design new products and services, cross – sell more effectively, strengthen their ties with brokers and agents and avail of any opportunities presented by emerging markets such as China and India. (www. pwc. com). Further demand for pensions and health insurance is likely to rise in the Western world as the population ages and lives to enjoy a longer retirement. Costs will remain critical however to meet the ever exacting demands of today’s customers is liable to be the main point of contention. There are new openings from the increasing wealth of customers in new markets e. g. China. As their insurance industry is one of the fastest growing in the world with GDP at 3. 2% and the end of December 2008, they stand far behind the global average of insurance industry which stands at 7%. www. lloyds. com) Saturation of insurance markets in the developed world has made the Indian market more attractive for international insurers according to â€Å"Booming Insurance Market in India (2008-2011)†. This is due to its huge population base and large untapped market. (www. newsblaze. com) 1. 2 Governance and Risk Management Natural calamities are another challenge facing the industry. Global warming has caused a change in weather patterns which have caused a shift in the underlying probability of insured loss by storms, floods, wind and heatwaves. Natural disasters like hurricanes Katrina and Rita whose losses amounted to $61. 5 billion (www. duncansadviceonmmoney. vox. com) These disasters posed some very serious problems for the insurance industry as they are faced by difficult and uncertain financial burdens because of this this has shown the importance of quality data and calibration of model outputs, effective validation and also the experience and initiation of the underwriter. Structures will have to be put in place to tackle the threat of climate change. The development of Enterprise Risk Management (ERM) capabilities help to protect insurers from damages to their reputation and provide a platform for strengthening governance, decision making and compliance with regulations. Pricewaterhouse- Coopeus (ERM for the insurance industry) revealed that many insurers have difficulty implementing and enforcing ERM in the face of containing data, systems and governance challenges. Also found in this study were examples of how resourceful and efficient management and helping to overcome these hurdles and bring greater insight to the insurers ERM missions. www. pwc. com) 1. 3 Market Reporting Insurers are facing a major overhaul of market reporting. This contains the launch of the market Casistent Embedded Value Principle, a planned move to a finalised IFRS level for insurance contracts and the increased risk and capital management disclosure foreseen by EU Solvency II â€Å"Scheduled for implementation in 2012, it is a new regulatory regime de signed to provide a principles-based supervisory framework for European insurers and reinsures. Solvency II is a risk-based system and is being built to meet the challenges of rapidly developing financial markets. It will also bring an increased level of transparency and harmonisation to the sectorâ€Å". (www. towersperrin. com). These changes are likely to set a model for global disclosure for others to follow in relation to risk. The key elements , include the possible adoption of IFRS(International Financial Reporting Standards) in the US form 2014. Implementation of Solvency II and IFRS reporting will be demanding. The good news is that corresponding timings and basis of valuation could open up cost – savings in areas like data, modelling and reconciliation. These changes help to increase stakeholder confidence by enabling insurers to show a single view of their business that shows more clearly how it is run on the inside. A survey by (IFRS 2007) insurance states that companies will need to provide more risk information and explanation to meet the exacting expectations that have come about from market events. (www. pwc. com) 1. 4 Mergers and Acquisitions Although funding is a challenge from time to time. Mergers and Acquisitions is vital for business to expand complementary earnings streams, realise opportunities for cost saving synergies and reinforce their existence in fast increasing emerging markets. Emerging markets are underinsured and these present potential business for the insurance market. Within ten years China is expected to become a leader in the global insurance market, while India is set to double its digits in the growth rate. However, due to cultural conflicts and protectionism could stop growth in economies. In the near future, the insurance industry is liable to be a very active period for mergers and acquisitions. US insurance companies attractive evaluation will make it easier for insurers in the EU to infiltrate the US market. (www. pwc. com) 1. 5 Human Capital All organisations in the world realise the importance of people in the conduct of their business therefore the trend of classifying their employees as assets. The human resource management school of thought tends to focus on the enrichment of the knowledgeable worker in terms of its theory. Human resource planning should be part of the total resource planning equal to planning devoted to capital development and materials and equipment purposes. Many insurers are facing an skills shortage in their workforce. Training and development of staff is now on the agenda as a rule in all organisations. Improved productivity is expected to result in trained and motivated workers. The employee training programs are intended to provide them with more knowledge and skills so they can do their job to the best of their ability. Training is a visible pay-off and is seen immediately whereas development is future- orientated.. Lessons are being learnt on a continuous basis in the requirement of human capital in the new economy in comparison to the old economic labour force. M Morley et al 2004). This investment in recruitment and career development lags behind other financial sectors. They look at short term fixes rather than looking at the long term prospects. However, looking to the future demographic shifts accelerating globalisation look set to change the shape of the labour market and make it more difficult to attract and retain good peo ple. (www. pwc. com) 1. 6 Compliance and Regulation Growing regulatory demands are bringing increased problems to insurers. Solvency II is included to require a critical check of capital and risk management along with sustaining information and documentation. The EU Reinsurance Directive gives a standard system of regulation and mutual recognition across Europe. This includes an ease of the regulatory limitations on securitisation which could give way for a large increase in risk transfer to the capital markets. Also they give a new definition of reinsurance that will prevent several contracts. Insurers are also facing a ceiling on regulatory changes including anti-money laundering and harder conditions on consumer protection. A key challenge is to know how to include these requirements into â€Å"business as usual†. Enterprise wide risk management can assist in providing ways to do so. They can help by giving a greater understanding of the trade off between reward and risk which will result in a brighter capital allocation. (www. pwc. com) As I have discussed in the challenges previously opportunities in the next twelve to twenty-four months can be found by global expansion adopting the latest technologies to give better service delivery and provide services to meet the exacting requirements of the next generation of retirees. The insurance industry is in the process of undergoing transformation as a result of the following three factors : sector specific, macro and operational. Increased regulation requirements outsourcing, globalisation, new distribution channels, more modern IT systems and climate change are adding to the increased volatility in the insurance industry today and they are now positioning themselves to be successful in the future that requires many changes in the way they do their business. China is one of the fastest growing insurance industries in the globe. â€Å"China Insurance sector forecast 2013† is the outcome of much research and in – depth study of the insurance market in China. Between 2009 and 2013 it is expected to grow CAGR of 28% – 30%. Chinas insurance industry is already out of the financial crisis and is expected to make great headway in the coming years. In 2008, the industry grew in the fastest pace since 2002, due to the rising insurance awareness level and government support. Insurance products which include life, health, and personal accidents accounts for the majority of growth. Property insurance products are also growing rapidly and are basically divided into two segments â€Å"motor and commercial property insurance†. Non life insurance products i. e. that is product liability, credit and marine insurance etc. These will decide the long term viability of the non- life insurance market. 2. 1 Disaster Modelling The tragic impact of the Asian Tsunami, as well as the worst Japanese typoon in 2004 was the year of improbable disasters. As a result, this forces us to look at how we prepare for such risks. Hurricane forecasting began in the 1980's, forecasters have tried for many decades despite being unsuccessful to deliver accurate predictions, and landfall activities. Scientists of tropical storm risk in London announced that they had developed a new model which represents a major step forward.. (www. lloyds. om) Insurers also use models developed by companies e. g. Air Worldwide Corporation to predict the damages caused by storms so that insurers can forecast the payouts to be made. (www. informationweek. com). This reminds us of the importance of investing in scientific research to help our understanding of risk and its impact 2. 2 Disaster Planning Insurance and disaster planning are closely related as they both deal with the risk of the disaster happening and the after math. Due to the upward trend of catastrophe events we see the need for robust and effective disaster planning for the future. Part of the solution must be insurance markets and their regulators working together sharing their respective knowledge and expertise. By doing this, we can be sure that response procedures are well tested and run as smooth as possible for when the next disaster strikes. In terms of claim handling, lessons can be learnt. The shortage of adjustors on the ground and the mishandling of claims by some shows how important the relationship between the insurer, the adjustor and the regulator is. As the frequency and cost of disasters goes upwards it will be very important to have a relationship based on trust and flexibility. (www. lloyds. om) 2. 3 Managing the Industry's reputation Improving transparency and disclosure are two issues which are needed to manage and improve the industries reputation that has been rocked by high profile developments. For instance in the USA the New York State Attorney Generals investigation sparked very close scrutiny of the commercial insurance market. In th e minds of customers, commentators and regulators the financial service industry has been left with a very poor image, after the recent investigations. These investigations highlighted the lack of transparency and accountability that are expected of a 21st century business environment. These issues can no longer be ignored. In a survey, by Lloyds of a hundred underwriters, one third admitted that the industries reputation is tarnished. Transparency and disclosure as well as good communication appears to be the answer to those outside the industry globally. Basically more time communicating and building bridges with consumers, economic leaders and world politicians initially means less problems down the line. (www. lloyds. com) 2. 4 Grow Globally Sales in new markets or by new acquisitions insurance companies need to grow globally more than ever before. Growth in the European and American market is slowing down while growth in India and China is increasing. The aging population presents insurers with a dilemma. The industry has great difficulty in attracting and retaining talent than other sectors of the financial services industry.. This situation is going to get worse as there are more retirees and fewer graduates moving into the top jobs. There is also a loss of graduates to banking and other financial institutions. Concern is expressed about the career path from insurance company hire to insurance agent. If this problem is not addressed the industry’s sale force would diminish. By moving into the European and American markets, insurers can grow a less risky strategy rather than expanding into new product lines. Those who do go overseas have to look at the various business lines in different markets. Chinas middle class and aging population with long term care and security needed make it a very viable option for foreign insurance companies. By 2010 China will be a major player on the insurance market. The same is also said of India. (www. rmislab. com) 2. 5 Innovate Products and delivery Innovation is seen as the main driver of profit over the next three and five years both in delivery and product innovation. By building relationships with customers moving them for example form car insurance to other insurances as they become asset rich. By providing better service and delivery insurers can strengthen their customer base. Technology can strengthen relationships with intermediaries which helps them run more efficiently and reduce their running costs. Insurers must look to cut cost they can do this by cost reduction initiatives like outsourcing and use of shared services, rationalizing product portfolios . Companies need original approaches and to continue to invest in this very complicated environment. (www. rmislab. com). â€Å"In 2007, AXA Equitable Life Insurance Co introduced a variety of enhancements to its variable annuities including an expanded choice of â€Å"living benefits† and the upbundling of optional income and death benefits† (www. deloitte. com) 2. 6 Focus on readdressing product and Distribution Strategies As the economy continues to even out, insurers need to evaluate their decisions and distribution channels. These decisions are vital in assisting insurers rebuild capital as well as positioning themselves for future growth. (www. ey. com). Insurance companies that sell directly through call centres, internet and direct mail have been performing better and this is due to lower costs because of their economies of scale and strong internet capabilities. Compared to independent insurance agents who lack these advantages have been put under pressure they require support and further development. Insurers need to find ways to work more effectively across product lines e. . give a customer packages that reward him/her for being a good driver. (www. deloitte. com) Conclusion In my findings I have found that the insurance industry has survived the financial crisis much better in comparison to the banking sector. This is due to its strong focus on risk management and long term prospects. Even though capital markets have decreased downwards their insurance assets, insurers are optimistic about the fu ture and some are expecting an improvement in prospects in mergers and acquisition over the next twelve to twenty – four months. The global insurance industry faces many challenges but despite these that they are being faced with the majority of insurers must move into fast growing markets i. e. India and China or find new innovative ways to get more businesses out of slower growing developed markets. China with its huge population is an obvious choice while the latter options include diversification, new products and speciality products. Insurers need to improve their risk management especially in the areas of disaster modelling and managing the industries reputation as it is vital to have a tarnished free reputation. Finally insurers need to work effectively and efficiently to develop and market a range of products aimed at older customers. In this intensely competitive market, employers will need to develop an excellent human resource management capable of responding to business needs and the workforce expectations. They will need to be able to identify and realise opportunities for career development prospects and other key areas of their employment. (www. pwc. com) With this knowledge insurers will be able to position their business models to optimize investment returns and control operations using the most effective and efficient methods available.