2014 Could Be a Game-Changing Year for Insurers
Posted by Sam Friedman, Insurance research leader, Deloitte Services LP, on January 07, 2014
Gazing into the crystal ball for our annual insurance outlooks, it appears that while both property and casualty carriers as well as writers of life and annuity products face obstacles that may be outside of their control, that doesn’t mean they don’t have the ability to shape their own destinies.
Consider the following potential game-changing developments for 2014 and beyond. Whether these are opportunities or threats may be entirely up to how each insurance company deals with them.
Be prepared for a more dynamic mergers and acquisitions market
Overall, many of the insurance markets are becoming more competitive, driven by new entrants and demands for more efficient use of capital in a tough economy. One result could be a far more volatile environment for mergers and acquisitions.
Positive micro-factors are in play as well. Valuations are on the upswing, while momentum from stock buybacks may be losing steam, perhaps prompting more carriers to make a deal. Reinsurance seems particularly ripe for consolidation, with capital pouring into the property-catastrophe market from individual and institutional investors. Heightened interest from private equity groups has also been heating up the market on the life and annuity side.
The distribution landscape is morphing into an increasingly diverse mosaic
Insurers are looking for new, more cost-effective ways to reach consumers, particularly in underserved markets. A key consideration is how carriers might make the overall pie bigger, rather than keep battling over slices of the existing insurance marketplace.
One manifestation of this trend is the expansion of direct-to-consumer sales of small-commercial insurance, which could not only disrupt the agency distribution system, but draw a significant number of currently uninsured businesses into the market as well. A Deloitte survey found that about one-in-five small businesses would be very likely to buy from carriers over the Web, while another third would be somewhat likely to take the plunge.
On the life side, insurers will increasingly look to expand beyond the saturated baby boomer market, providing simplified products and distribution options to Gen X and middle-market consumers. In addition, more carriers will assume private sector pension liabilities by in effect creating group annuity programs.
Both sides of the industry should start setting the stage this year to take advantage of cross-selling opportunities via private health insurance exchanges being established to capitalize on coverage mandates in the Patient Protection and Affordable Care Act.
Regulatory uncertainty leaves many insurers in a holding pattern
Although the Federal Insurance Office (FIO) finally came out with its long overdue report last month on how regulation of the industry can be modernized and improved, most of its recommendations require Congressional action (unlikely in the current political environment) or involve a call for states to take action (which for now the FIO cannot compel). Still, the FIO’s reform proposals introduce yet another element of uncertainty into an already shifting regulatory landscape.
The looming expiration of the Terrorism Risk Insurance Program will impact renewal considerations for property carriers, while auto writers are still anxiously awaiting an FIO report on availability and affordability in underserved communities, which could lead to attacks on their standard operating procedures.
On the life insurance side, implementation of principle-based reserving remains in flux, while the use of insurer-owned captives for reinsurance has been challenged by regulators. Meanwhile, preparing for the National Association of Insurance Commissioners’ Own Risk and Solvency Assessment and revised group supervision requirements will be a clear priority as the filing deadlines draw closer.
Transformations and the ‘talent paradox’
More carriers will be launching transformations in underwriting, claims, finance and other core functions, realizing that incremental improvements in efficiency may not deliver enough value in a slow-growth market. However, insurers are also coming to appreciate that to truly transform their operations they might have to upgrade not just their software or processes, but their people power as well.
One obstacle standing in their way is the ‘talent paradox,’ meaning that despite persistently high unemployment many carriers are having trouble finding, attracting and retaining those with specialized skills in high demand, such as in advanced analytics or predictive modeling.
To overcome this challenge, insurers may have to broaden recruitment strategies and target candidates not just from outside the company, but beyond the industry as well — for example, hiring out-of-work teachers with math skills who can be retrained for a career as an actuary or in analytics. They may also move to create a more flexible career lattice that rewards lateral as well as vertical moves within the company where key skills sets are more urgently needed.
Carriers look to up their games with tech enhancements
More economical information-gathering options may soon propel auto insurance telematics to the level of an industry disruptor, with the playing field being leveled for smaller and regional competitors by external data aggregators.
On the life insurance side, expanded use of predictive analytics will fuel a growing number of functions, including behavior-based pricing as well as target marketing based on predicted interest, perceived value and anticipated life events.
Mobile technology will play an increasingly important part in marketing, sales and service across the industry, as carriers look to move beyond transaction-based applications to become more relevant in the everyday lives of their clients.
Through it all, as carriers expand the types and volume of data they collect for underwriting and claims, cybersecurity will loom ever larger as an operational and reputational risk.
The bottom line, however, is that insurers will likely need to be more innovative and flexible in their thinking and business models if they expect to be market leaders in an increasingly competitive, more tightly segmented and ultimately customer-driven environment.
Sam Friedman is insurance research leader with Deloitte’s Center for Financial Services in New York. He may be reached at firstname.lastname@example.org.
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