2015 Insurance Industry Outlook

Analysis

2015 Insurance Industry Outlook

Interview with Gary Shaw

What are opportunities and challenges for the insurance industry in 2015? Read this interview with Gary Shaw, Deloitte’s US Insurance Industry Leader, for insights on big picture issues likely to have a significant effect on consumer behavior and insurer operations in 2015 and beyond.

Where do you see the opportunities for growth in your sector?

The economy continues to gain strength, with GDP on the rise and unemployment continuing to fall, which means that insurers should have a more favorable environment to support growth in the year ahead.

On the property-casualty (P&C) side, the economic recovery is boosting the number of properties and exposures requiring coverage, which should fuel another year of positive premium growth. And while a large influx of capacity into the market over the past couple of years has undermined pricing leverage somewhat, most carriers are still getting modest increases or at least holding the line on renewal rates, and that will translate into additional top-line revenues. For example, adding hundreds of thousands to the work force each month means more exposures for workers’ compensation carriers to write, and that means more premium dollars coming in.

Additionally, Deloitte’s “U.S. Economic Forecast” sees both net household wealth and real disposable personal income on the rise over the next two years. The improving economy should also spark a rise in consumer confidence. That’s good news for life and annuity insurers, as any increase in disposable income, coupled with a more comfortable consumer outlook should prompt more people to start thinking about their longer-term financial security, which could translate into revived demand for the sale of life insurance and annuity products.

There are some specific lines to spotlight as particular growth generators in 2015.

For P&C insurers, cyber-liability is clearly on the rise, and is becoming a more prominent exposure with all the recent news coverage of major data security breaches. Whether or not there’s coverage in place for such exposures could make a big difference on the bottom lines of every large company. But cyber-risk is not limited to the largest organizations, as even smaller businesses could face some potentially crippling events. We’re also likely to see more direct sales of small-business coverage as additional carriers look to maximize returns on this line, which has relatively tight margins and is being increasingly commoditized.

Among life and annuity (L&A) writers, perhaps the biggest growth opportunity will be for products offering some sort of lifetime income guarantees to help people in our aging population finance their retirements. There’s tremendous upside here, but the challenge will be to write such longevity risks profitably. To accomplish that will require some keen product development, pricing, and investment strategies. A number of carriers have already had to modify their policy terms and conditions in this low interest rate environment, which have undermined investment returns.

There also could be increasing demand for more flexible hybrid L&A products that can address a number of concerns for the growing number of elderly Americans, integrating life insurance, retirement income, and long-term care components.

What should businesses be mindful of as they plan for growth?

We’re encouraging insurers to look beyond the short-term ups and downs of their own particular markets and the economy as a whole to consider the bigger picture. To be a market leader and achieve sustainable, long-term growth, insurers should be focusing on three broad pillars requiring transformation efforts.

The first is achieving information fluency. Insurers on the whole are not positioned to fully leverage the vast amount of data they already have, let alone the new sources of information and real-time analysis at their disposal through emerging outlets such as auto telematics and the Internet of Things. A new data management infrastructure and governance architecture could help many carriers break free of outdated, siloed systems, while turning proprietary information into more of a strategic asset and competitive advantage.

Second is getting ahead of regulatory changes. Insurers can rely on regulatory uncertainty as an ongoing way of life rather than a passing conundrum as multiple overseers — state, federal, and international — sort out new standards and rules. Indeed, we see the potential for ongoing disputes and perhaps overlapping rules as regulators from different jurisdictions compete for supremacy. Meanwhile, even if certain companies aren’t technically subject to some new rules at first blush, they may eventually be swept up into the rising tide of regulatory standards over time.

Third is the need to upgrade capital management. To start, insurers will require better frameworks and models to meet the increasing demands of stakeholders for more robust stress testing and scenario planning. Over time, carriers will likely have to show an improved understanding of capital consumption among different products to facilitate or justify capital deployment decisions and assess risk-adjusted returns. Carriers will need more effective capital management to support growth needs, particularly in P&C at a time when alternative investors such as hedge funds and catastrophe bond buyers are helping establish record levels of capacity in the property market.

These are tough issues to navigate as they require an unprecedented level of collaboration across functions and businesses which, in many organizations, have operated historically in more distinct silos. Companies are facing a governance challenge in balancing the need to include the right stakeholders in these initiatives with the risk of impeding progress by having too many individuals involved and failing to gain consensus and make real progress.

What’s the next big thing? What markets do you see emerging in the sector?

In the P&C sector, usage-based auto insurance (UBI) has been taking root over the past few years, but the market is poised to expand dramatically as the playing field is leveled for mid-size and smaller carriers, which will increasingly be sharing data with central clearinghouse facilities. The early adopters of telematics have mostly come from among the large, national carriers, who have the advantage of being able to draw upon a deep well of data from across the country. But with cooperative efforts emerging to share such information among smaller insurers, such carriers will be able to generate the critical mass of data they’ll need to make UBI a viable proposition.

However, the next big thing could be the expansion of telematics into other lines of business. Consider the potential for insurers of so-called “smart homes,” equipped with Web-based monitors that could alert policyholders about intruders, changes in temperature in the pipes, excessive stress on a roof after a snowstorm, windstorm stress on doors and windows, and other factors that could prompt a major loss if not addressed quickly.

There are also applications on the commercial lines side, with real-time telematics supporting property, commercial auto, and workers’ compensation loss control efforts. This trend will accelerate as the industry learns how to tap into the growing Internet of Things phenomenon, with a growing number of products and facilities transmitting their location and status in real time. Advanced analytics and more sophisticated predictive models will likely be needed to cull all this new data and provide actionable correlations and insights for those in underwriting, pricing, and claims.

You can also expect U.S. insurers to play a much bigger role over the new few years in assessing the causes and mitigating the impact of climate change. While some major European carriers already took up this cause years ago, U.S. insurers have been slow to follow, perhaps because of the controversial nature of the political debate on the subject here at home. Still, American insurers are likely to become more engaged for a number of reasons. One is an increase in regulatory and rating agency scrutiny into how insurers are accounting for climate change issues. Second is the reality that it is better to prepare for the potential impact of climate change in case scientific warnings turn out to be well-founded. Third, there is the potential for insurers to capitalize on a growing market for sustainability-related “green” products and services.

In the Life and Annuities sector, expect insurers to start thinking and acting more creatively about how they market, design, and distribute their products, while becoming more customer-centric to excel in an increasingly technology-enabled, self-directed environment.

The key is to develop precision around who the consumer is and specificity with regards to their needs, as well as develop tailored, simplified, and perhaps more flexible niche products that correspond to those individual requirements. At the same time, customized delivery and service options should be offered that widen consumer choice while aligning with profitability expectations.

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