2016 Deloitte Insurance Outlook

Perspectives

2016 Insurance trends: Taking a closer look

Interview with Gary Shaw

Gary Shaw, US Insurance leader, provides a view into expected trends and issues for the year ahead - including trends that may disrupt business as usual.

What are the top three issues you see as a focus for the coming year?

In 2016, I expect growth, technology, and regulatory uncertainty to continue to be among the major issues facing insurers.

Growth is a central issue, especially given the relatively slow economic recovery since the last downturn. Even with an apparently improving economic outlook, insurers may continue to move cautiously. This may mean trying to extract growth from things as they are now, rather than anticipating faster growth developing as a result of a more robust recovery.

Two areas that may be key to profitable growth for insurers will be harvesting data in new ways, and being more nimble and proactive in launching new products, services, and distribution options.

More effective technology may make that easier, and many insurers have been steadily increasing technology spending, including on digital technology, core systems transformations, and others. These tools help insurers cope more effectively with changing business conditions, and help enable a better customer experience to promote loyalty/stickiness. In addition, cyberattacks are increasingly common, continuing to drive technology spend even as consumers seek more and easier access to their information.

In today’s economic environment, there often is increasing pressure to increase efficiency and control costs. As insurers focus in 2016 on the cost of needed technological initiatives versus the expected return, it may be prudent to keep in mind that some technology spending, especially that directed at automating processes, may enable other capabilities or help drive growth in the future even if it is harder to assess benefits in the short term.

Technology, properly applied, can add value to existing resources in addition to increasing efficiency. A tax transformation, for example, could allow a firm’s tax professionals to shift their emphasis from reporting to analysis and projection, increasing their value without adding costs.

Insurers will need to keep working on getting ahead of regulatory changes. All these years after Dodd Frank, regulatory uncertainty is still a big concern. In the recent past, we have seen progress toward certainty in some areas, but we still expect big shoes to drop, capital standards being one example. In addition, new regulation like the Department of Labor’s (DOL) proposed fiduciary role has the potential to be severely disruptive to the life insurance and annuities model.

Key takeaway:

Growth, technology, and regulatory uncertainty will continue to be among the major issues facing insurers.

Where do you see opportunities for growth and innovation?

We expect the wave of mergers and acquisitions (M&A) that we have seen since 2014 to continue, largely driven by the need for growth in the face of excess capital, intense competition, commoditized products, and a shift in consumer buying preferences. 2015 may end up as a record year for insurance M&A, and 2016 may be similar in terms of deal volume.

The big insurance M&A story of 2015 may be the extent to which foreign acquirers from both Japan and China have made a big splash, paying high multiples of book value to acquire US properties. The US is still the largest insurance market in the world and, on an absolute dollar basis is still driving more growth than anywhere in the world. These transactions represent diversification and a growth play for these companies, and we expect to see this continue into 2016.

The current M&A wave has featured increased interest by insurers in doing fintech deals—such as ACE Group’s investment in CoverHound1 and John Hancock’s acquisition of Guide Financial2 —to enable growth and digital innovation, and that should only become more strategically significant in the near future. We remain in the early innings of the insurance M&A “ball game.”

There are also areas that may yield significant growth opportunities. The dislocations caused by the proposed DOL rule, for example, may lead to opportunities in the retirement area for innovators. Cyber is another potentially huge growth market. The potential of the cyber insurance market is huge. According to a recent Insurance Information Institute report, a market that was worth an estimated $2 billion in gross written premiums in 2014 could reach $7.5 billion by 2020.3

Innovation in other industries may also lead to new opportunities. Florida’s Senate passed a bill in November making drone operators liable for any damage they cause through negligence, and there is similar legislation pending in other states such as New Jersey. One Federal Aviation Administration (FAA) official estimated as many as 1 million drones could be sold in the 2015 holiday season.4 With many potential crashes and invasion of privacy lawsuits to cover, being nimble and proactive may pay off for insurers.

One structural change we have seen in some companies that I expect to spread more widely is the creation of a function responsible for that intersection of digital technology, customer experience, and innovation, possibly reporting to the CIO or CEO directly, charged partly with being an evangelist for innovation. That is a concrete acknowledgment that innovation is a necessity.

1 SNL Financial.
2 Ibid.
3 Robert P. Hartwig, Ph.D., and Claire Wilkinson, “Cyber Risk: Threat and Opportunity,” Insurance Information Institute, October 2015.
4 Richard Newman, “Drones: a new frontier for insurers,” The (New Jersey) Record, November 15, 2015.

Key takeaway:

2015 may end up as a record year for insurance M&A, and 2016 may be similar in terms of deal volume.

What trends might disrupt “business as usual” in 2016? What role specifically do you think FinTech companies may play?

We are still waiting for that killer app or new entrant from outside the industry that will completely change insurance as we know it. We may not get that in 2016, but entrepreneurs are working on it and insurers should be the ones to take the lead and get it right. As my colleague Boris Lukan has noted, insurers who successfully integrate digital capabilities into their ongoing operations, either through fintech acquisitions or ecosystem partnerships, will reap the greatest benefits.

Some technologies may have dramatic repercussions that are as yet unknown. One obvious example is blockchain technology. While the short-term uses for insurers may be unclear, what is clear is that there are ramifications that must be considered. That ability to enable trust while decentralizing across a group of any size, for instance, may allow for the mutualization of risks with minimum friction on a scale not now possible, possibly disintermediating insurers unless they lead the way.

On a positive note, the ability to track and provide rules for every step of a transaction may help reduce fraud and administration costs. Blockchain technology, being complete and verifiable, could be used to verify identity, auto insurance coverage, health status, or to settle claims expeditiously. The International Association of Securities Commissions (IOSCO) recently embraced blockchain as a way for regulators to track transactions and aggregate derivative exposures, for example.5

With consumers, imagine an insurer being able to provide the insurance a consumer needs, all the insurance a consumer needs, but only the insurance that consumer needs, all because everything that consumer does – becomes part of the blockchain and subject to the insurance rules governing the chain. Walking into an airport could trigger travel insurance, taking a transportation network company vehicle would add another type of coverage for the duration of the ride – the possibilities are endless, and will only become evident as the technology is better understood. But the potential for a significant transformation of the insurance space over the medium to long term is already obvious.

The biggest short-term disruptor in 2016, though, may be regulation. In 2015, we saw the exposure of capital requirements for global systemically important insurers, the adoption of enhanced corporate governance requirements for US insurers, the proposal of the DOL fiduciary rule, US movement toward a group capital standard, work by the Federal Reserve on capital standards for the US insurers it regulates, and others. Late in 2015, we saw steps by the National Association of Insurance Comissioners (NAIC) to increase protections afforded to consumers affected by cyberattacks, while the European Court shut down a safe harbor allowing US companies operating in Europe to transfer cyber information about European citizens to the United States.

While individually any of these is important, taken together, they may represent the cresting of a new wave of regulatory changes to which insurers must adapt in 2016.

5 Jason Webb, “Blockchain could give regulators total market overview, slash collateral, IOSCO Secretary General David Wright says,” SNL Financial, December 4, 2015.

Key takeaway:

The biggest short-term disruptor in 2016 may be regulation.

What overall advice would you give insurance companies?

Innovate to respond to how consumers now act. They compare companies not just to others within a particular industry, but benchmark firms cross-industry to determine what a good company looks like. They are more informed and are more multi-channel users, with more customer-to-customer dialogue. This customer-to-customer communication may lead to greater reputational risk, but also offers an opportunity for brand enhancement through quicker, often more credible diffusion of positive customer experiences.

Insurers need to step out from the insurance industry basket and look at how other companies function—including other financial services companies, but also companies that are the best at what they do in other industries—to create new benchmarks. For the chief customer experience officer, this may mean comparing how much useful information a consumer can easily get on his company’s site compared to that available on a major search engine.

If I could sum it up, it would be “become disruptive innovators.” Because if insurers do not disrupt themselves, others will.

Key takeaway:

Become disruptive innovators. If insurers do not disrupt themselves, others will.

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