How can insurance position itself as the customer’s champion?
Based on numerous research calls and conversations with senior risk managers within insurance, Eleanor Halsey, Editor-in-Chief for RiskMinds Insurance, has collated the five key trends that are dominating this sector.
Climate change risk
How should insurers facilitate to a low carbon economy? For insurers, climate change risk in addition to incorporating sustainability and green policies into everyday business operations is crucial. There are many social and governmental factors to consider, along with increasing regulatory and stakeholder attention and changing customer behaviours.
Climate change is at the top of the list in the emerging issues strategy and has increasingly been made vocal by the UK treasury and regulators, in addition to firms who are now really beginning to think about climate risk for their own balance sheets. There is now a real push across the board for sustainable developments and environmentally cautious decision making.
As a result, organisations need to be more pro-active and put this into practice. What risk appetites do organisations have with climate change from a reputational point of view? How do you assess risk appetite with regards to climate change? Do they want to be real movers and shakers or just keep up with the minimum that regulators or investors want? How can insurers operate a climate friendly way of doing business? These are the questions that insurance firms need to find answers to in order to effectively forecast their business strategy and outlook for 2020 and beyond.
A CRO said:
“Apart from requirements to amend the risk management systems, regulation and quasi regulation, such as court law making, will also lead to additional loss trends which we need to monitor and react upon. ESG regulation and efforts fit well in this context. Beyond pure regulation, CROs will need to become more vocal and visible in the ESG area. This is to ensure that reputational and transition risks stay under control.”
Following on from this, insurers are revisiting business recovery and disaster recovery plans regarding their risk appetite framework which is high on the agenda at present. Firms want to ensure these are still appropriate. However, one of the key challenges they are facing is that there are several components of recovery planning which are driven by regulations from different sources. So how do you re-design a framework to accommodate this? Questions around how risk appetite monitoring works and how you could re-build this from scratch, not building on pre-existing frameworks, remain a work in progress.
Globally, changing customer behaviours have already started making an economic impact on plastic consumption, and closer attention is now being paid to concerning weather patterns such as flooding, forest fires etc., which researchers state is a direct result of climate change. For insurers, this is becoming increasingly concerning in how their products are sold and whether they are still fit for purpose – for example, in coastal areas where the increase of rain and floods pose a heightened amount of risk. In addition to this, insurance firms across the industry are focusing on sustainability more than ever before. Increased scrutiny from regulators, the media, and potential customers increases the risk of reputational damage which is a major concern for insurers who are not doing enough to invest sustainably and poses the question: how can insurance position itself as the customer’s champion?
A CRO said:
“New UW-risk factors such as climate change and social inflation as well as qualitative risks around outsourcing and conduct will shape a broader understanding of the CRO role. Profiles both at the helm and in the risk teams will reflect this shift: a more interdisciplinary persona will be sought who moves competently within these new boundaries of their role.”
Operational resilience is big for 2020 – a topic that has been placed under the spotlight as regulators are now paying closer attention to the reporting of this. Under its huge umbrella, operational resilience incorporates several different components such as cyber resilience, IT resilience, business continuity, crisis management, succession planning, and more. In order to unbundle its various chunks, insurers need to look at this strategically to ensure all components are incorporated and better aligned to maximise efficiency and resilience of firms. Unlike credit and market risk which experts can easily quantify and forecast predictions, operational resilience remains an on-going challenge for insurers as it cannot be as easily quantified.
Another key concern is how institutions can demonstrate that they are a resilient business? Insurers need to think about lean processes and how to be more efficient. For example, not only can business resilience, cyber, IT etc. be better aligned, but the industry also needs to figure out how this sits overall in the risk management agenda. This covers many different frameworks including how metrics and risk appetite can be better integrated with resilience.
Outsourcing is a key concern for risk professionals. Besides the effect that this can have on the overall supply chain, dependence on how third, fourth, and fifth-party risk poses a threat of concentration risk that builds up. Having a unified approach and common understanding also comes as a challenge because although you need to have a global macro perspective, you also cannot lose perspective on the micro level. This is particularly challenging when firms are entirely dependent on one specific infrastructure only, making migration particularly difficult and considerably risky.
If you broke this down further, questions around how to best manage outsourcing, how resilient you are (ensuring person risk, IT, cyber, BCP arrangements) and how you get back up and running after an incident is vital for insurers. All these components are crucial and need to be built into a sound and reliable resilience framework incorporating stress scenario testing.
A big trend that firms are looking at currently, sitting under operational resilience, is how they can strengthen their 1st, 2nd and 3rd lines of defence which is a key component in the risk management agenda. The re-structing of this however, poses the question: who has accountability now? It has been argued that senior management need to drive accountability to the 1st line of defence so that all risks are owned.
Unsurprisingly, a key focus for insurers across Europe for 2020 is market instability. As firms are operating at an ever-increasing low/negative rate environment, the economic outlook is very concerning. This is now arguably pushing insurers into changing strategies and offerings in what markets they want to operate – a more strategic thinking is now required, not only where organisations need to be ahead of their competitors, but to simply survive.
Insurers are potentially required to operate in a low interest rate environment for the foreseeable future which will have a big effect on global economic growth and investment rate. Fears over how firms will make their returns is concerning. Five years ago, nobody was expecting a low interest rate for more than five years and all the conversations were focused around how firms can sustain a nearly 0 interest rate. Many insurers previously thought the interest rate would rise again, so buyers have bought into the investment space. However, now as a result, there is significant investment risk. Expectations of high interest rate bonds maturing in Europe, but also in the US, are alarming. If the economic environment stays like this for the next ten years, insurance companies will suffer a lot.
In addition to this, concern over low yields, equity risk, and risk concentration are the biggest problems insurers are facing in their portfolios. How do you develop products in this low yield environment and make attractive payments?
A CRO said:
“Market volatilities are there to stay. Relatively small events can create significant impacts. Market trust is fragile. CROs need to ensure that proactive and reactive measures are in place, while market volatility continues to take significant management time. It needs to be seen whether societies have also become more fragile, i.e. whether recent trends (Brexit, unrest in Chile, Hongkong, yellow vest in France ...) are individual events or trend indicators. Risk management frameworks need to respond in one way or another.”
It appears that unfortunately the macro-economic situation will not get better and we may well be heading towards the next recession. As equities and inflation are at a minimum, they are wobbling due to all the other uncertainty and change. This is a key area of discussion in everyone’s mind, not just in the insurance space but across the financial industry.
In order to regain capital optimisation and insurers are to find strength to navigate their way through uncertain market conditions, the need to innovate and bring out new products to meet changing customer demand is vital.
Product innovation and customer expectations
The nature of the insurance business is that the industry must keep innovating as their products get monetised. Identifying where the gap is in the market and developing the ideal product is crucial. In addition to this, adding in features that would make products marketable and staying within realistic expectations of capital, are key to insurers’ success in product innovation.
The fragmentation of different customer groups is changing customer needs and expectations. This ultimately has had a huge impact on distribution channels, which now poses a key challenge for insurers looking to innovate and re-vamp their products. How can the sector work with the customers more effectively? Insurers have said this is a completely new dimension on which companies are required to take a more strategic stance. This change in distribution channels also poses the question: how do we capture customer value amongst different dimensions?
In addition to this, partnerships, identified by some CROs, are key to moving forward and strengthening insurance portfolios. For example, partnerships between insurance and asset management firms are becoming favourable, such as Generali who own general investment but also have different partnerships.
A CRO said:
“The transformation of the re/insurance business into fully customer-centric organisations will undoubtedly accelerate in the near future. Underwriting new risks, such as cyber, and unlocking new business models and partnerships will be key elements of this transformation. CROs and their organisations will have to become a lot more UW-risk-centred and business-minded in order to accompany this transformation.”
Another key concern for insurers is the types of products they can sell in the current environment. Shifts in consumer habits, along with increasing regulatory demands have put enormous amounts of pressure on the industry. How does insurance position itself as the good guy? A customer’s champion, an environmental champion? How can insurers be better represented in society without losing commercial reality?
Risk management in the insurance industry has gone through immense change in regards to evolving customer expectations and interaction. In order to innovate, insurers need to identify exactly what the customer of today expects, and how they interact with their banks. For example, in order to establish what strategic objective to take is dependent on response times, how quickly a claim is to be paid and so on. Insurance portfolios must become more diverse depending on a specific customer group – for example what car insurance policy is most suitable for a millennial in comparison to other age groups?
As insurers become more pro-active, moving towards a more agile workplace, and collaborating to work in multi-disciplinary manner, risk culture is becoming more important than ever.
Risk culture and conduct
Risk culture and conduct is a key component of the risk management agenda for insurers in 2020, as CROs are taking a more active role in setting and embedding a sound risk culture within their organisations.
Risk culture is essential to an organisation’s infrastructure that sets out the expected shared values, behaviours, and goals for employees, processes, and practices, in order to smoothly operate.
Arguably, certain risk cultures can be tribal within organisations that are geared to volume/only putting controls in, so a misstep can be very damaging for firms, resulting in a high turnover of employees, bad team morale and ethics, along with inefficiency and profitability affected across the board.
Frank discussions around culture and what role insurers have to play in this are beginning to take real shape now. In addition to governance, conduct risk, regulatory, and board interactions, which are key conversations for 2020, the FCA (Financial Conduct Authority) are also looking at independent audit groups on risk culture. Educating the board, inclusion, diversity, inspiring and empowering employees, and effective communication are all conversations that are expected to gain increasing interest this year.
How conduct risk is managed in an integrated way in firms’ overall risk is a particularly topical area at present, especially in regards to reputational risk. There is a regulatory pushback on this for which board education is key – what are the questions you need to answer as a board and how does this differ from a policy perspective? Firms are seeing an increase in fines and sanctions that are starting to come in, therefore making sure you have the basis covered is very important. In addition to conduct risk, AML and financial crime is increasingly becoming an area that the CRO is more heavily involved with as teams become more closely aligned.
The general consensus that risk management cannot work and operate effectively in silo, is gaining more momentum, thus encouraging collaboration across teams and an increased emphasis on agile working. This is key to moving forward in tackling conduct risk and providing a good risk culture for insurance firms.