Deloitte’s annual Global Insurance Industry Outlook report has identified three key areas of challenge and opportunity for insurers:

• finding growth – which in Australia is more challenging than ever given the soft market
• the increasing need to predict trends and mine customer data through intelligent analytics
• compliance – how to manage the complexities of regulation, security, capital adequacy and reporting.

“There has rarely been a more challenging time in the industry,” said John Meacock, Deloitte’s Managing Partner NSW. “Insurance companies across the world find themselves juggling ways to improve profitability, to grow and to compete.”

Caroline Bennet, actuarial and life insurance partner at Deloitte pointed out that “Life insurance companies have to find ways to contend with demographic changes that are altering their customer base, and learn to serve the soon-to-be retiring baby boomers, as well as the technically savvy younger individuals who are just starting on their wealth accumulation journey.”

Elaine Collins Deloitte’s actuarial and general insurance lead partner said, that general insurance companies face complex and increased exposure to significant risks due to factors that include natural disasters and terrorism.  She said, “The recent storms in Newcastle, Sydney and the Illawarra region are expected to equal the $350 million residential costs of Cyclone Larry last year. That is close to the costs of the 2003 bushfires in Canberra ($373m) and at this point, due to the mainly vehicle damage of the hailstorms in Sydney in 1999, less than the estimated $2.093b worth of damage.”

To meet these demands the industry has to shorten the time it takes to turn strategy into action according to the Deloitte global report and companies need to implement their programs with high levels of precision and efficiency.

“Particularly in dealing with regulatory requirements,” Ms Bennet added. “The industry needs to find ways to leverage the effort and resources used to solve one problem to assist with others they face.”

She said that to be more successful the industry needs to find ways to crack the promise of bancassurance. “Bancassurance continues to remain elusive according to banks both here in Australia as well as across the world. Cross selling activities only deliver on average two products or services per customer and despite sophisticated customer relationship models, cross selling has yet to be more effective.”

The report pointed out that whilst organic revenue growth is valued by investors it has been hard to get in the relatively mature industry.

Leveraging data analytics
A way to get cut through is to leverage data analytics for a deeper insight into the volumes of data available to industry players to make smarter decisions within their business, Deloitte Data Analytics partner Anthony Viel advised.

“Today’s advanced analytic tools and data transformation techniques can help insurance companies predict future behaviours and events better, manage claims more efficiently, and reach and retain customers more effectively,” said Viel.

“These tools have traditionally been used by most players in underwriting, however they are increasingly proving successful in improving loss control, more accurate pricing and servicing, managing claim loss exposure, the control of fraud and the identification of the most profitable and effective channels to market and marketing activity.”

The Deloitte Insurance Industry Global report pointed to the fact that direct insurers are transforming their distribution networks with the internet, call centres and direct mail - all helping to achieve stronger performance.

Ms Collins said that “The growth of sales over the internet and through call centres is changing the business of selling personal lines. In Australia brokers are an additional and growing part of the distribution network. Insurance brokers’ market share is growing year on year.”

The report pointed out that companies are beginning to look towards emerging markets as another growth option. China is the third largest insurance market in Asia and India is anticipating 15% growth.

The challenges in these markets include restrictions on foreign ownership, wide variance on tax rules, regulatory approvals, lack of credit data and in some cases the distribution networks.

Finally the introduction of Solvency II – the industry’s Basel II – is worrying some of Australia’s global players. The draft framework is scheduled for release next month (July 2007), and it requires insurance companies to set aside regulatory capital based on the amount of risk they face.

Ms Bennet said, “The Solvency II proposals require the ability to calculate capital and use innovative capital instruments to manage capital. The regulations will ultimately benefit the industry but there are some significant risk and data management systems which need to put in place to do so.

“The issues to avoid are the financial and reputational risks of non-compliance,” she said.

Please read Deloitte’s annual Global Insurance Industry Outlook report.