The last few years have not been easy for general insurers. Strong competition and falling or flat premium rates have meant a pressing focus on efficiency and underwriting discipline. But could the cycle be about to turn? Win-Li Toh outlines the industry conditions ahead of her Plenary talk at the 2016 General Insurance Seminar.
Being in the business of managing risk, insurers are well-equipped at dealing with challenging landscapes. Traditionally, this has involved limiting the consequences of unexpected and adverse events for policyholders. More and more, however, insurers are being required to confront challenging unknowns in their own landscapes – from sales and distribution, to underwriting, pricing, reserving and claims management.
A tough few years: when will the cycle turn?
It’s fair to say the last few years have not been easy for insurers. The current environment is one of strong competition and excess capacity, with several years of falling or flat premium rates, reducing reserve releases and low yields. Consequently, the pressing focus for insurers has been on efficiency and underwriting discipline.
Things may well be starting to turn around. The latest APRA statistics show a drop in the overall combined loss ratios across the industry of 3% – from 95% in the previous year to 92% over FY16. Results have varied across classes, with commercial motor and property both experiencing combined ratios in excess of 100%.
Insurers want to know whether the cycle will turn soon, or will these conditions persist? There are some reasons for optimism. Recent global merger activity may result in greater focus by the acquirers on profitability, and provide a catalyst for change. Also underwriters and regulators are gaining more insight as time persists and so will be better able to identify unreasonably low rates and to act on them.
Climate change: feeling the heat?
On top of this, the very real, and well-accepted risks of climate change have the potential to significantly impact insurers’ business models worldwide. In Australia such business-risks are amplified – we’re the developed nation most exposed to natural perils.
Insurers looking to thrive in this unstable climate would do well to actively engage in the discussion on the potential risks, the right data to collect, and be prepared for the flow-on impacts of increasing premiums and tougher capital requirements.
Big data and technology: perfect conditions for driving change
Despite this uncertain environment, or perhaps because of it, investment in innovation across the entire insurance value-chain is gaining momentum. The digitisation of the industry, big data, plus increasing consumer desire for real-time solutions and greater customisation to their needs, mean that conditions are perfect for driving change.
The use of new IT technologies also provides scope for significant reductions in costs in insurer systems, back office and claims processes. Advancements in blockchain technology and other data pooling mechanisms have the potential to enhance insurers’ abilities to detect and act on fraudulent claims.
To exploit these new technologies, savvy insurers will be looking for the optimal mix of building their own technological capability, acquiring innovators, and forming the right partnerships.
On the subject of driving change, driverless cars are expected to be commercially viable within the next five years. This will be a major disrupter to the motor industry, and therefore those insurers with motor portfolios.
Such disruption raises many questions. How will this impact claim frequency, and the sort of cover needed? Will fault be on the occupant, car manufacturer, systems manufacturer or the GPS network supplier? How will premiums be determined?
Cyber risks and privacy – is big brother watching you?
The downside of our increasing connectedness is a greater risk of cyber-attacks and privacy breaches. Insurers can benefit from broadening their product-offering to cover these risks, but must also keep a firm eye on their own systems.
We’ll be discussing these risks – and more – in depth at the 2016 Actuaries Institute General Insurance Seminar.
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