Stephen Netherway, Partner and Head of Law firm CMS’ Insurance Sector Group provides pick of the key issues concerning the industry in 2018, leading with a familiar foe; rates.
- Making a profit in a soft market
Cycle profit management has always been about shaving expenses and reserve releases to offset low investment returns and low technical pricing of all direct classes of insurance. 2017 turned into a year with significant catastrophe losses and for the reinsurance market in particular, it will be difficult for some entities to make a profit with trade-offs needing to be made between increased retentions and decreasing reinsurance costs. Moving forwards, is managing claims and claims leakage rather than expenses likely to make a greater difference to results?
The probable loss of passporting rights in the UK after Brexit, as matters stand, has sent companies seeking alternative homes with many having already identified their relocations of choice. In stark contrast, there has been little, if any, progress in clarifying what will happen to the EU legal structure post-Brexit and in respect of the UK in which (re)insurance currently operates.
UK regulators have required firms to be ready for Brexit but cannot offer any guidance on what Brexit means or its timetable, so the worst case scenario (the crash landing in late March 2019), has to date been the only basis for firms to model. Everybody is now more familiar with WTO rules, but these are predominately focused in relation to trading goods and market access (in WTO/FTA terminology) is not the real or immediate priority for financial services. Can the negotiations facilitate a regulatory acceptance by the EU of the UK post-Brexit regulatory regime or must businesses effectively decide now to de-risk the possibilities of this happening by planning to relocate now, irrevocably, relevant business operations?
It is happening. It is transformational. The costs-savings and efficiencies generated by embracing AI can transform the economics of a business. In what seems an interminably soft cycle could it offer business a way to stay relevant and profitable in the future? Questions remain as to how disruptive it will be to existing distribution and supply models in the sector, and to future staffing? First mover advantage will generate the greatest rewards and may be the key to many businesses’ survival and profitability. Who will lead the way?
Launch date for GDPR compliance of the new regime is 25 May 2018. The key message given to the industry at the start of the journey to its application was that it needs a greater command over the data it holds, why it is held and how long it is held for. That message remains but how far are businesses along the road of that journey? There is no scope for further delay; the insurance market must urgently look towards this date and the way it treats personal data, to assess and understand organisational exposures and take steps to develop build and implement GDPR compliant documentation, processes and systems.
- Ogden rates
If there was ever an event you could describe as ‘seismic’, the UK Ministry of Justice announcement in February 2017 that moved the Ogden Discount Rate from 2.5% to minus 0.75% was it. One only had to track through the series of first quarter and half-year charges throughout the market to see the impact that had. However, is there light at the end of the tunnel and a balance sheet bounce back to be had with the Government’s recent announcement in September that the discount rate could be set between 0% and 1% under new draft legislation? Motor insurers in particular are anxious to avoid any further inflation given the imposition of 12% Insurance Premium Tax. The sector’s reputation has taken a hit, through no fault of its own, so here’s hoping for a quieter year in 2018.
- Cyber Risk
Cyber is an acknowledged risk throughout our interconnected society – for individual, consumer and business alike. Whoever is at risk, there is one common consequential thread: it can generate complete catastrophic loss and in Wannacry and Petya, 2017 resulted in significant damage to the bottom lines of numerous global multi-nationals. Interestingly, ratings agency Fitch reported in November 2017 that the influence of cyber risk on insurer ratings is “likely to be gradual” reminding investors that overall exposures remain low as the market continues to take a cautious approach to underwriting.
As the FCA recent announcement of its investigation into the wholesale market in the UK so timely demonstrates. As always where will the pendulum rest between consumer protection, and business cost and business flexibility? Management of regulatory risk is a zero sum gain for insurers- the market must continue to embrace and adapt to the regulators’ demands – or die.
- The war for talent
As margins tighten, the cost of capital rises, there is increasing market competition allied with the potentially seismic disruptive forces of technology and automation, ensuring that businesses have the highest quality talent and personnel is a necessity. It is not just about ensuring tapping into the best talent from within the market place – but ensuring the best young talent enters it. The technological changes that this industry will face will bring with it demands for the very best talent to be working in conjunction with it. However, that battle is potentially a fight with the gig economy as the tech industry offers young graduates a description of an exciting future.
The world has gone through interesting times in the recent 12 to 18 months. More so than at any point before, there is pressure on insurance companies to provide products and to deliver services that meet social need and new price expectations. The industry must remain on top of its game to come up with the right products, to sell them in a user-friendly way and at a user-friendly price if a business does not remain relevant to its market, it will not survive. Developing the right products for customers, identifying opportunity and responding to that opportunity – swiftly – is simply a business imperative.
Capital demands are also increasing, as regulators (and rating agencies) demand increasingly embedded levels of capital to match increasing expectations of solvency and counter party protection. Surplus capital abounds but that is also another challenging risk –too much capital, chasing too many deals, can itself promote imprudent risk taking.