Capturing Opportunity through Technology › content › dam › statestreet › document… · 2...

Capturing Opportunity

through TechnologyGrowth Readiness

for Insurers

A TARGETEDAPPROACH

Molecular biologists have made enormous

strides in understanding the processes

that drive human cell growth.

One of the biggest breakthroughs occurred when Japanese scientists developed a technique to reprogram adult cells to become pluripotent, or self-renewing, stem cells. By introducing reprogramming factors into a mature cell, scientists could direct its development, with the ultimate goal of growing new organs for transplantation.

This groundbreaking discovery upended the prevailing belief that adult cells were permanently locked into their fundamental state. In fact, their path could be altered.

Intradisciplinary collaboration and the strategic application of technology had opened an entirely new avenue for growth, along with a wave of further innovation in the field. As today’s insurance institutions stand at a potential impasse for growth, struggling to grow both their investments and their customer base within a highly competitive environment, a similar principle can be applied. Insurers need to reprogram their operating models for a new kind of growth, and they must embrace advanced technologies to make it happen.

2 • CAPTURING OPPORTUNITY THROUGH TECHNOLOGY: GROWTH READINESS FOR INSURERS

INSURANCE

3

Keys to Growth for Insurers

Align digital strategy with ambition

Technological development is directly and indirectly transforming the insurance industry. Companies will be forced to upgrade technology and data infrastructure to drive new efficiencies, enhance investment capabilities and better manage risk.

Rethink investment models

To meet long-term liabilities under new market realities, insurers need to further diversify their portfolios, increasing allocations outside of traditional fixed income investments.

Strengthen client engagement

Customers expect products that are tailored to their needs, digitally accessible and low cost. Insurance companies must devise new ways to differentiate and add value in the hyper-competitive digital era.

New research from State Street shows that 72 percent of insurers surveyed are concerned they may lose this competitive race if they can’t become more operationally agile, while 68 percent say it’s becoming

more challenging to find avenues for growth in today’s environment.1 To capture new growth opportunities against this backdrop, insurers may need a new model.

1 State Street 2017 Growth Readiness Study. State Street commissioned Longitude Research to conduct a global survey of more than 500 investment industry executives, including 100 respondents from the insurance sector, during March and April of 2017. Study participants spanned investment, operations, sales and distribution roles. For more details, see page 20. All figures in this report originate from this research unless otherwise noted.

3

Insurers’ business models are facing pressure

from multiple directions, suggesting that, unless

they change, there will be negative consequences

for revenue growth and profit margins.

Regulatory complexity

Insurers see regulation as a major challenge to their growth ambitions (Figure 1). In a bid to control the stability of financial markets, regulations such as Solvency II in Europe have introduced new risk-based capital requirements, while evolving global standards such as IFRS 9 and IFRS 17 continue to shift the goalposts for insurers, in terms of how they calculate and report their risk exposures.

The upshot for insurers is a need to undertake costly, time-consuming implementation projects, and to continue to devote significant resources to compliance activity.

Demographic shifts

As life expectancies continue to increase globally, life insurers offering retirement products are facing challenges similar to pension funds in that longevity risk exposure is increasing. In our survey, 72 percent of the insurers that plan to increase their investment risk appetite over the next year are motivated by concerns about meeting long-term obligations.

AN IMPASSE FOR GROWTH


INSURANCE

The rising wealth of emerging market consumers represents an important source of future growth for life insurers in particular, as it brings increased demand for retirement, wealth protection and life insurance products in markets that have traditionally been underserved. However, the non-digitized sales model that many life insurers rely on will attach a significant cost to expanding their footprints in these markets.

Digital advances are changing the rules

Insurance executives are struggling to get to grips with the pace of technology change. In our survey, only 26 percent say their senior leadership team is highly effective at understanding digital innovation and its implications for future growth.

Downward pressure on premium prices is straining insurers’ profit margins. In markets such as the UK, recent growth of the online aggregator market is partly responsible for driving increased competition and spurring a race to the bottom on price. Property

Figure 1: Regulatory threat to growth

Of the following factors, which provide the greatest threat to your organization achieving its growth targets over thenext five years?

Source: State Street 2017 Growth Readiness StudyNote: Respondents could select multiple items.

Regulatory attention to investment fees

Regulation governing liquidity risk

Regulation governing investment behavior

Economic growth outlook in our key market(s)

Political outlook in our key market(s)

Monetary policy in our key market(s)

43%

42%

39%

45%

42%

27%

5

and casualty (P&C) insurers are being hit the hardest and will need to offer dynamic pricing on these platforms, and to find new ways to differentiate themselves from their peers — both of which will require more sophisticated use of data analytics.

Technology advances can also have more indirect consequences for insurers. Engineers succeeded in creating safer cars, which has reduced the number of claims in the P&C sector. However, this is also having a negative impact on the premiums insurers can charge, impacting their future business models.

Some leaders in the InsurTech sector are deploying robo-advice platforms to reduce the cost and increase the efficiency of onboarding new customers. Embedding innovative digital technologies into the distribution model will become a critical ingredient for achieving growth in the future.

The growth shortfall

Insurers need a diverse mix of competencies to support their growth ambitions — and that mix is evolving.

Our Growth Gap Matrix (Figure 2) identifies the areas insurers should strengthen most urgently to execute their growth strategies. It does this by analyzing the competencies they rate as most important for long-term growth versus their current relative strengths and weaknesses.

Across the industry, there are three areas that respondents deem to be of critical importance for growth, yet are recognized as relative weaknesses today:

• Ability to adapt to industry regulation

• Ability to manage investment risks

• Proficiency in digital distribution

INSURANCE


Figure 2: Mind the gap

How important do you think these internal capabilities will be in enabling your organization to meet itsgrowth targets over the next five years? And how would you rate your organization’s capabilities today?

Performance (% rating “highly effective”)

Impo

rtan

ce (%

rat

ing

“hig

hly

impo

rtan

t”

KEY AREAS FOR IMPROVEMENT KEY AREAS OF COMPETENCE

LOWER PRIORITY AREAS OF IMPROVEMENT LOWER PRIORITY AREAS OF COMPETENCE

Importance/Performance Average

30 35 40 45 50 55 60

60

65

70

55

50

45

40

Investment expertise in new asset classes

Adequacy of our talent tokeep pace with evolving

business needs

Strong governance framework

Geographic scope ofour distribution network

Proficiency in digital distributionof our products and services

Ability to manageinvestment risks

Ability to adapt to industry regulation

Ability to manage operational risks Ability of our technology to keeppace with evolving business needs

Efficiency of our investment operations

Ability to managetechnology risks

Strong organizational culture that isconnected to our mission and values

Ability to extract meaningfulinsights from data

Source: State Street 2017 Growth Readiness Study

7

As insurers seek to broaden their reach and

develop innovative new offerings, they must

upgrade their IT systems to move away

from the outdated, complex and expensive

infrastructure that is holding many back. (Figure 3)

In fact, among the P&C insurers we surveyed, 74 percent say that their ability to upgrade technology to keep pace with the changing demands on their business is highly important for their growth, ranking it ahead of all other operational competencies we investigated. However, only half of insurers (53 percent) believe they are effective at this today.

Established insurers must adopt strategies to move faster as new technologies such as artificial

intelligence (AI) and blockchain are set to have a transformative impact on the industry. Much of this innovation is being powered by start-ups: CB Insights recorded $4.74 billion of investment in InsurTech newcomers, with record levels of investment in InsurTech start-ups in the second quarter of 2017.2 Industry incumbents are taking decisive action, too.

Allianz recently made a strategic venture investment in Lemonade, a US insurance start-up that uses

ALIGN DIGITAL STRATEGY WITH AMBITION

2 Willis Tower Watson, Quarterly InsurTech Briefing, July 2017

INSURANCE


INSURANCE

machine learning algorithms to speed up its processes — approving claims in minutes rather than days — and automates its service to keep costs down. And in Japan, Fukoku Mutual Life Insurance plans to implement an AI solution to manage its claims processing. The company believes the change will increase productivity by 30 percent and expects to see a return on its investment in less than two years.3

The insurers in our survey recognize that these innovative technologies are likely to deliver competitive advantage for early adopters (Figure 4). That’s because they can enable operational efficiency savings for investment-related and business-related processes, as well as enhancing customer experience at a time when younger, tech-savvy consumers demand online servicing.

The benefits of automating processes can also improve data governance

Figure 3: Prioritizing growth objectives

Please rank your institution’s top growth objectives today.


14%

50%

20%

16%

16%

17%

24%

14% 14%

7%

7%

11%

12%

18%

15%

15%

11%

11%

13%

12%

11%

Acquire new customers in existing markets

Improve investment performance

Enhance our products and services

Increase the amount of assets we manage

Improve operating margins

Improve our ability to meet future obligations

Acquire new customers in new markets

Rank 1 Rank 2 Rank 3

17%

50%

3 Fukoku Mutual Life Insurance press release, December 2016

9

and end-to-end risk management. These will be critical outcomes for insurers as they respond to a regulatory and strategic need for deeper, more dynamic analysis of organizational risk exposure.

More advanced data analytics can also support more effective investment portfolio management. Only 20 percent of the insurers we surveyed believe they have a highly digitized operating model today — with strong levels of process automation and sophisticated data analytics capability. This elite group told us that the ability to perform more comprehensive risk analytics and the capacity to diversify into new asset classes are two major benefits that this digitized model has delivered for them (Figure 5).

The demands being placed upon insurers’ technology infrastructure will intensify over the next five years, as regulatory reporting requirements increase, the need for real-time customer and investment insight grows, and margin pressures dictate that only the most efficient institutions will thrive.

As they sense the urgency of this technology imperative, a sizable portion of the insurers that we surveyed expect to increase their use of outsourcing over the next year. Among this group, the main motivations are to attain a strategic partner capable of supporting long-term growth (47 percent) and an inability to scale certain functions quickly enough in-house (37 percent).

Figure 4: Transformative technologies

Please rate the following emerging technologies in terms of how much you think theywill impact your business over the next five years. (Percent rating highly significant impact)


Machine learning to enhance risk analysis

44%

Distributed ledger

Machine learning to enhance the investment process

32%

Automated advisory solutions

28%

RegTech solutions

36%

32%

INSURANCE


Figure 5: Outcomes associated with a digital operating model

What are the biggest benefits your institution has achieved by moving toward a digital operating model?

Reducing overhead expenses

Support seizing growth opportunities in new asset classes

Converting to a more favorable cost structure (i.e., fixed to variable)

Support seizing growth opportunities in new geographies

Improving compliance and reporting processes

52%

44%

40%

32%

32%

24%

Better forward-looking investment risk insights

Source: State Street 2017 Growth Readiness StudyNote: Respondents could select up to three options.

Figure 6: Targeted outsourcing

Will your institution seek to outsource (or increase outsourcing of) any of the following functions over the next year?

Investmentoperations

Globalcustody

Assetmanagement

Accounting Distributionsupport

32%40% 28% 24% 16%


11

The insurers in our study are pursuing a

broader range of investment strategies

in a bid to drive better returns.

While investment grade fixed income assets will remain core to their portfolios, they are increasingly willing

to accept higher levels of risk as they add higher yielding investments to the mix (Figures 7 and 8).

RETHINK INVESTMENT STRATEGY

5%

10%

15%

20%

25%

30%

35%

Today In 1 year

1 2 3 4 5 6 7

5%

10%

15%

20%

25%

30%

35%

Today In 1 year

INVESTMENT RISK

conservative aggressive

LIQUIDITY RISK

conservative aggressive

1 2 3 4 5 6 7

Figure 7: Shifting the risk dial

Where would you place your institution’s overall investment risk appetite and liquidity riskappetite today and in one year’s time?



INSURANCE

Figure 8: Diversifying portfolio allocations

For which of the following asset types will your institution make the biggest increases in overall portfolioallocations over the next five years?


Domestic fixed income—Corporate, investment grade

Domestic fixed income—Government

International equities—Emerging markets

International fixed income—Corporate, investment grade

Domestic fixed income—Corporate, high yield

Domestic equities

International fixed income—Government, developed markets

International equities—Developed markets

International fixed income—Corporate, high yield

Alternatives—Private debt

Alternatives—Real estate

38%

36%

34%

30%

30%

30%

30%

24%

22%

18%

16%

13

This expansion of traditional investment practices will require new skills and analytical capabilities. Half of respondents cited expertise in alternative investments as a recruitment priority for their investment team, and 32 percent highlighted improved investment risk analysis and forecasting capabilities as a focal point.

As they shift their investment strategies, insurers are also rethinking how they engage with external managers. The majority (60 percent) are looking to consolidate their business by placing larger mandates with fewer providers.

This is an important trend we see across other sectors of the investment industry, as institutional investors seek closer control and enhanced negotiating power with their external managers.

The insurance sector is exploring many other ways to more effectively manage portfolios and produce better risk-adjusted performance. The majority (58 percent) expect to increase their securities lending activity over the next year. Derivatives strategies are also attractive, with 56 percent anticipating increased usage over the next five years (Figure 9).


INSURANCE

Figure 9: Shifting strategies

Will you increase your use of any of the following strategies over the next one or next five years to strengthen yourinvestment portfolio?


Currencyhedging

Securities lendingor borrowing

Derivativesstrategies

Directlending

40%

42% 58%

36% 56%

42% 22%

36%

1 year 5 years

15

At a time when insurers need to find new

ways to differentiate and add value to attract

and retain their customers, transforming

the client engagement model is critical.

There are many possible routes to take. The P&C insurers we surveyed are putting greater strategic focus on upgrading their front-office technology and developing their product suite over the next five years, while life insurers are more concerned about widening the reach of their distribution network (Figure 10).

The top objective that insurers say their digital strategy must achieve is increasing up-sell and cross-sell opportunities, cited by 60 percent. Accordingly, the development of mobile platforms ranks as the top technology priority for the sector (Figure 11). Moving to a distribution model that harnesses

Figure 10: Strategic priorities

Which of the following strategies will your institution prioritize over the next five years toachieve its growth objectives?

Expanding our distribution network

Expanding products and services

33%

24%

21%

29%

15%

29%

Upgrading front-office technology


P&C / Diversified Life insurers

STRENGTHEN CLIENT ENGAGEMENT

INSURANCE


Figure 11: Technology priorities

What are your institution’s top technology priorities for the next year?

Source: State Street 2017 Growth Readiness StudyNote: Respondents could select up to two options.

Artificial intelligence /machine learning

Automated advisory platforms

Mobile platforms

Advanced investmentperformance analytics tools

Advanced risk and liquidityanalytics tools

RegTech solutions

Distributed ledger solutions forinvestment operations

26% 26%

35% 28%

44% 45%

24% 39%

21% 36%

26% 34%

18% 23%

P&C / Diversified Life insurers

emerging technologies such as automated advisory platforms will be key to improving the customer experience and lowering costs across all insurance lines.

If insurers are to succeed in reinventing their client engagement models, they’ll first have to solve for some significant skills gaps. The biggest shortfall is expertise in analyzing customer data, which is essential in driving

actionable business insights and fostering a culture of continuous improvement. Only 12 percent of respondents working in the sales and distribution function assess their teams as highly effective today in customer analytics. Experts in digital delivery are also sorely needed, with only 24 percent rating their current talent in this area as highly effective.

17


INSURANCE

Challenging economic conditions coupled with profound technological and demographic shifts are transforming the insurance industry at lightning speed. Insurers with the agility and foresight to reprogram their existing growth strategies will be best positioned to thrive in the new environment.

Our research shows that insurers are beginning to come to terms with this accelerated pace of change, investing in new technologies and digitizing their operating models

to deliver better outcomes for customers, support more diverse investment strategies and meet evolving regulatory requirements.

A minority of industry incumbents are already deploying strategies such as venture investments and collaborations with InsurTech start-ups, and are forging long-term strategic partnerships with outsourcing providers to expedite digital innovation. The rest of the industry must now follow their lead and learn to reprogram for growth.

REPROGRAMMING FOR GROWTH

Benchmark your institution's growth readiness at growth.statestreet.com

19

growth.statestreet.com

About the Research State Street commissioned Longitude Research to conduct a global survey of more than 500 executive respondents representing institutional asset owners, asset managers and insurance companies during March and April of 2017.

The respondents span investment, operations and distribution roles and collectively represent 19 countries. Approximately 36 percent of respondents were located in the Americas, 40 percent in Europe and 24 percent in Asia Pacific.

In addition to the survey, we conducted a range of in-depth interviews with select leaders across the industry about their priorities and strategies for growth.

For more information, please visit growth.statestreet.com

For more industry insights, please visit listen.statestreet.com

©2017 State Street Corporation - All Rights Reserved17-31351-0817 CORP-3232Expiration date: 10/31/2018

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street’s express written consent.

State Street CorporationState Street Financial CenterOne Lincoln StreetBoston, Massachusetts 02111-2900+1 617 786 3000

For more information about our solutions for insurers, please contact: APACBeng Eu Lim +65 6826 7360 [email protected]

NORTH AMERICAPeter Thurmond +1 617 664 6676 [email protected]

EMEAOliver Berger +49 69 6677 45277 [email protected]

growth.statestreet.com

listen.statestreet.com

Capturing Opportunity through Technology › content › dam › statestreet › document… · 2...

Documents

Transcript of Capturing Opportunity through Technology › content › dam › statestreet › document… · 2...