Insurance market trends for 2018
Another year of change ahead for the Maltese market
By Stefan Lia
Never a quiet year…
Two years on from the landmark regulatory changes brought about by Solvency II, 2018 will see the insurance industry going through another year of change. The Insurance Distribution Directive (IDD) will change the face of insurance distribution in Malta and the EU, whilst the General Data Protection Regulation (GDPR) will inevitably have an impact on a data-heavy industry such as insurance.
In addition, the low interest rate environment and the soft market will continue to constrain insurers’ operations and profitability. One can expect great supervisory scrutiny of firms’ responses and resultant risk profiles, focused on board and senior management understanding and accountability. Resources of critical Risk and Compliance functions will also be high on the supervisor’s agenda.
Local market overview: challenges and opportunities
Following considerable losses due to hailstorms and weather conditions in 2016, 2017 was a better year for domestic insurers in terms of loss events. Yet, the industry still faced a number of challenges coming from outside the market that will continue to be felt this year. Being part of the financial services industry, the onslaught on Malta’s reputation may have an impact on foreign investors in the sector. Malta has been an attractive domicile for Captives and Protected Cell Companies, but this could easily change. Brexit is another black box that may reveal more of its contents during 2018.
The challenging human resource situation will continue in 2018. Scarcity of skills is coupled with increasing upward pressure on wages coming from other sectors such as gaming. This has undoubtedly had an impact on the operational costs and competitiveness of local insurers. This hits at a time when operators are expected to strengthen their teams, especially around Compliance. As hinted in the introduction and developed in some detail further on, new regulatory requirements will mean additional costs and work as well as opportunities for the industry.
Regulator Developments: a busy year for risk and compliance departments
Although Solvency II has entered the day-to-day business phase, EIOPA will only conclude its Solvency II review for the European Commission this year. This will include topics with potentially significant effects on capital, of which the risk margin and associated cost of capital rate are among the most important. Another European development, which might have a significant impact on the local market, is the push for greater supervisory convergence. In a recent interview, Justin Wray, Deputy Head of the Policy Department at EIOPA hinted that the Authority might be taking the path of the European Banking Authority. This would be a significant step towards achieving a converged EU market, which would represent another shift in the insurance landscape.
In the meantime, insurance companies will have the IDD to contend with. Recently postponed to 1 October 2018, the Directive aims to harmonise insurance distribution laws across Europe. It will also bring with it a number of changes, especially in the interaction between insurers and consumers.
The information provided to consumers will be subject to close scrutiny, with a view to preventing mis-selling. Product innovation will provide opportunities for both insurers and consumers for products to be tailored, relevant and well priced. Brokers, agents and tied intermediaries will also be impacted, especially with respect to remuneration practices and disclosures to clients.
Product governance will have to be strengthened to ensure that proper oversight is being exercised by insurance companies. Particularly from a life insurance point of view, the focus will be on ensuring that appropriate advice is being provided to consumers, and on eliminating conflicts of interest in the course of providing that advice. This will open up opportunities for new sales channels, especially for investment-based insurance products, but also for general insurers.
A regulatory development which is likely to have a wide impact is the GDPR which comes into force on 25 May. Many regard this Regulation as likely to have a large and detrimental impact on the Insurance industry, which may be constrained in the areas of data collection activities and subject to an additional compliance burden. The main obligations with a perceived high impact to insurers include:
- New consent model whereby explicit consent is mandated for certain data categories.
- The ability for consumers to be informed of and object to automated decision making and profiling which may result in changes to existing underwriting processes.
- Purpose limitation and data minimisation of personal data are GDPR principles which may be involve significant changes at the operational level.
- Fair processing notices requiring insurers to be fully transparent about how personal data which is collected is used.
Noncompliance is not an option with potential fines going up to €20 million or 4% of global turnover, whichever is highest.
Technological Developments: accelerating at a faster pace
Despite perceptions of the sector as being traditional and risk-averse, the insurance sector is no stranger to digital transformation. Regulatory demands, customer needs and a changing market environment have driven change. Recent developments follow a number of years where insurance lagged behind other sectors, especially banking and investment services, which have seen dramatic technological developments.
In the last two years, ‘InsurTech’ has experienced exponential growth that is expected to continue. In fact, the rate of product innovation and disruption in general insurance will accelerate in 2018, as firms explore further new data usage to develop underwriting, pricing and product delivery. Having a properly formulated digital strategy will be kept to ensure that organisations continue to develop and innovate, especially against the backdrop of an integrated EU market which could drive pan-European competition, especially in the life and non-compulsory parts of general insurance.
Conclusion: making 2018 a successful year
With technological innovation, regulation and higher customer expectations redefining the marketplace, insurers must remain focused on addressing challenges and competing in a dynamic industry. As always, regulation and compliance requirements are important and seem ever changing. Although not all challenges are within the industry’s control, how insurance companies adapt to their shifting circumstances, both strategically and operationally, can help differentiate them in the market and exploit potential opportunities.