Competition, compliance & cost continue to challenge the c-suite of Australian insurers

Competition, compliance & cost continue to challenge the c-suite of Australian insurers

The Australian insurance market is reasonably well capitalised and profitable, but it remains highly dynamic. C-suites must understand how multiple changes within and outside the market will affect their organisations and adapt accordingly. We discuss our views of the key changes below. Digital has begun to disrupt traditional operating models. ASIC s conduct focus and APRA s governance focus continue to grow. Cyber risk management is red hot. Expense control is a key focus in virtually every analyst s report. Many Australian insurers have responded to varying degrees, from revisiting their operating models to rethinking their approach to risk transfer including use of self-insurance or utilising new capacity in the market. An influx of new participants is bringing new ideas and capacity to the market, putting pressure on existing business models and financial results. New entrants such as Pacific Life Re and Berkshire Hathaway will increase reinsurance capacity. The acquisition of MLC will give Nippon Life exposure to the Australian insurance market. Zurich has also materially increased its Australian insurance portfolio with the partial acquisition of Macquarie Life. Global regulatory developments are ongoing and will continue to impact Australia, requiring insurers to continue to invest in governance, capital optimisation and investor communications. Banks are currently implementing Basel 4 with a focus on capital, profitability, governance, disclosure, data management and risk modelling, potentially affecting bank-owned insurers. Australian insurers must keep an eye on global developments to stay ahead of the market. Current priority areas for Australian insurers Stress and scenario testing Across the world, regulators are giving increasing importance to stress and scenario testing. This is apparent in ORSA and ICAAP requirements, EIOPA s 2016 industry stress test and APRA s life and general insurance industry stress test. Stress and scenario testing is one of the most versatile tools an insurer can deploy with tangible linkages to strategy, capital, risk management and recovery planning. As a result, many Chief Risk Officers in Australia have been given responsibility to strengthen their firm s approach to stress and scenario testing, focusing on modelling transparency, governance, board understanding and mitigating actions. Insurers need to remember that, although capital sufficiency is at the heart of stress and scenario testing, this in isolation is not enough. Firms need to move beyond a black box quantification exercise and gain real-life insights on management actions and resilience to multi-period stresses. Quality data and systems Many insurers are aware they need better systems, producing better quality data to perform real-time analysis and better understand their business. Executives are concerned about: legacy systems, inadequate integration from past acquisitions, not keeping pace with changes in technology and non-alignment between disparate systems. Most executives understand that addressing these issues will require considerable investment, together with management and Board buy-in. When executing system changes, insurers need to seek consensus across the business around processes and priorities. Competition, compliance & cost continue to challenge the c-suite of Australian insurers 2

Operating model enhancements Globally, and in Australia, insurers operating models are coming under scrutiny. Such changes highlight competing perspectives, such as legal entity versus management view, centralisation versus decentralisation and influence. Offshoring to low cost regions is also a recurring topic. Digitalisation is also driving organisational change. Insurers are setting up innovation hubs and appointing digital and future executives. Apart from the obvious impact on product design, such as the use of telematics, digitalisation will continue to impact the way insurers run their operations and deliver customer experience. Internal capital models These powerful management tools have yet to become prominent in the industry, but their importance is growing. In particular leading insurers are realising competitive advantages from internal capital models for example when pricing risks to better optimise return. Australian and European insurers use markedly different internal capital models. In the UK, PRA recently accredited a number of insurers internal models, which not only raises the bar on capital management but also pushes for greater discipline, use and oversight of these models. In Australia, insurers are only starting to scratch the surface. Only the largest insurers run comprehensive, stochastic internal models for management purposes. Even these firms need to regularly reconcile model-generated capital numbers to regulatory numbers. The local market has yet to become disciplined in internal model application and governance. Regulatory compliance We expect compliance teams to face evolving demands from regulators, boards and senior management as regulatory emphasis on customer protection and organisational culture continue to grow. ASIC has been actively examining the appropriateness of life insurance commission levels. The perceived value and fairness of consumer credit insurance has also put the spotlight on premiums and sales practices. Investigations into these issues and conduct in banks are now also crossing over into the life insurance space. Capital optimisation With the influx of capital and competitive pressures, insurers must carefully consider how to deploy their capital to optimise and achieve returns that meet shareholder expectations. Larger insurers are also considering nontraditional methods to fund their capital base, including using the debt and reinsurance markets. Sound technical models, together with a good knowledge of the regulatory and market environment, will be critical as insurers examine new capital optimisation strategies. As insurers focus on results, prioritising risk activities to focus on what matters most will be critical. The challenge will be balancing this with the rising regulatory expectation and increased competition in the market place. Striking the right risk-reward balance on risk management will increasingly become an area for competitive advantage. Competition, compliance & cost continue to challenge the c-suite of Australian insurers 3

Keep an eye out for icebergs on the horizon If HIH and the 2008/09 Global Financial Crisis have taught the industry anything, it is to watch out for icebergs dangers that are far larger than they appear on the surface. The Cyber Iceberg For insurers to move to a safer and more sustainable place in the digital world, they must apply a cyber-risk lens to everything they do. Insurers need a single, coherent and accessible view of enterprise-wide cyber risk. This is not a responsibility that can be delegated to one or two individuals. Insurers need to assign a wide range of responsibilities to the right individuals throughout the organisation and its broader ecosystem. I think everyone is learning rapidly on cyber. Given the speed of evolution and pace of change, no firm can really regard themselves as leading. I m also not sure I would recognise any country s market as being developed on this. Martin Bradley, EY Global Insurance Finance, Risk and Actuarial Leader Other potential icebergs Smart and artificial intelligence How will these emerging technologies alter insurance business models? Social demographics Will millennials demand different insurance products? Will insurers suffer from talent gaps? China s economic slowdown Will the ensuing global upheaval leave insurers better or worse off? Other sector disruption How will new entrants with customer centric and technology background disrupt the insurance model? Four priorities for Australian insurers The insurance industry is facing large global challenges. There is a need to create positive customer experiences with digital activity in light of the current macro-economic environment, growing levels of regulatory pressure, and lots of capital seeking a home in the sector. Insurers need to seek solutions to these issues that also confer value. Grant Peters, EY Oceania Insurance Sector Leader Competition, compliance & cost continue to challenge the c-suite of Australian insurers 4

EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com. 2016 Ernst & Young, Australia. All Rights Reserved. APAC No. AUNZAU00002695 ED None This communication provides general information which is current at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk. Liability limited by a scheme approved under Professional Standards Legislation. ey.com