Global Insurance Trends Analysis 1H 2017 - Ernst & …...Page 4 Global insurance trends analysis 1H...

Global insurance trends analysis 1H 2017

Upside potential, sideways risks

October 2017

Global insurance trends analysis 1H 2017Page 2 Global insurance trends analysis 1H 2017

► Uptick in global growth and rebound in employment levels, if

sustained, will have favorable implications for the sector.

► As central banks turn cautious, bond yield improvements are

likely to slowdown in near term, implying limited investment yield

upside for insurers.

► External influencers: mixed macroeconomic signals

► Supported by a strong bull run, global insurance stocks continued

to rise as several large insurers saw improved investment and

underwriting results.

► Pick up in long-term buy recommendations for UK and EU insurers

reflect improved analyst expectations.

► Natural catastrophe (NatCat) losses: Active hurricane season is

expected to halt the relatively benign period of losses and limit

further pricing weakness that has persisted after 2012.

► Sector trends: hurricanes to set course

► Addressing the evolving nature of risk through innovation is a key

imperative for insurers.

► Blockchain has now progressed beyond pilot stage, with early

adopters looking to gain significant advantages.

► EY has taken a strong lead in helping insurers create a blockchain-

based new-age information infrastructure.

► Tech disruption: blockchain rising; EY takes lead

► Insurers need to proactively initiate implementation plans to

effectively address the changes introduced by the new accounting

regulations (including IFRS17 Insurance Contracts).

► General Data Protection Regulation (May 2018): With more than

half of the two year post-adoption grace period now over,

insurers will have to act fast to address the impending challenges.

► Regulatory landscape: insurers prepare for impact

Key highlights


► Uptick in global growth and rebound in employment levels, if

sustained, will have favorable implications for the sector.

► As central banks turn cautious, bond yield improvements are

likely to slowdown in near term, implying limited investment yield

upside for insurers.

► External influencers: mixed macroeconomic signals ► Sector trends: hurricanes to set course

► Tech disruption: blockchain rising; EY takes lead ► Regulatory landscape: insurers prepare for impact

Key highlights


Uptick in global growth and rebound in employment levels, if sustained, will have favorable implications for the sector.

1) US$ basis, constant pricesSource: Oxford Economics

2.8%

1.9%

2.9%

1.1%

6.9%

2.2%2.3%1.7% 1.5%

1.0%

6.7%

1.8%

2.8%

1.6% 1.8%

0.9%

5.8%

1.9%

World EU USA Japan China UK

FY15 FY16 Forecast (Avg. 2017 -2022)

► Recent rebound of global growth has been driven by improving

prospects in the US and China (mainland), a gradual rise in

employment levels and a recovery in the commodity markets

(during last three out of four quarters).

► US GDP grew at its fastest pace since 1Q15 (3.0% in 2Q17

and 1.2% in 1Q17) driven by rising employment, accelerating

wage growth and improved business investments.

► The EU is forecasted to post its highest growth (FY17e: 2.1%)

since the financial crisis, driven by a rising manufacturing

output and reducing unemployment levels.

► Japan too expanded faster than expected in 2Q17, as

investment and household consumption scenario improved.

► However, UK’s economy slowed in 1H17 as rising inflation

affected household spending power, which along with Brexit-

related risks may impact growth in 2017-2018. The UK was

also among the few markets which saw a fall in employment.Change in GDP growth (y/y): 2Q17 vs. 4Q16

+0.30pp +0.25pp +0.23pp +0.10pp -0.25pp

Unemployment levels fell across several key markets.

0%

2%

4%

6%

8%

10%

12% US EU China UK Japan

+0.26pp

GDP growth1: global growth rebound continued

Improved economic growth scenario and more engaged labor

market will have a major impact on the overall income levels

both at commercial and personal levels.

While, a gradual rise in demand for insurance can be

expected, multiple threats remain in the form of risks from

Brexit, rising debt levels for several key economies (e.g., US,

Greece, Italy and Spain), possible reversal of the extended

bull run seen in global equity markets since 2009 (third

longest ever) and potential escalation of tension in East Asia.


As central banks turn cautious, bond yield improvements are likely to slowdown in the near term, implying limited investment yield upside for insurers.

August 2014 August 2016 August 2017

Duration (yrs.) 1 5 10 30 1 5 10 30 1 5 10 30

Switzerland

Eurozone

Germany

Japan

France

UK

US

China (mainland)

Negative

0% - 1%

> 1%

Source: Oxford Economics

► While bond yields had seen an upward trajectory until early

2017, most major markets have displayed limited inclination

toward any strong monetary policy change in coming months.

► US Federal Reserve provided no further guidance on more

interest rate hikes, as Trump administration’s pressure to

keep rates low might prevent another hike. Analysts were

expecting at least one more rate rise in 2017.

► The European Central Bank re-emphasized that interest rate

hikes remain a distant possibility although it is expected to

announce a tapering of its QE Program in October 2018.

► Bank of England is expected to maintain its neutral policy

stance but the case for a rate hike could build later this year

or in 2018 if growth and inflation expectations rise.

► Despite increasing expectations of a revival in inflation, global

inflation remains low. While global growth has picked up in the

recent past, inflationary pressures are yet to materialize.

2.8%

0.0% 0.1%

0.8%

1.4%

0.1%

3.0%

0.2%

1.3%

-0.1%

2.0%

0.6%

2.9%

1.7%1.9%

1.1%

2.4%

2.0%

World EU US Japan China UK

FY15 FY16 Forecast (Average 2017 - 2022)

Inflation (avg. consumer prices): potential revival expected

Bond yields higher than 2016’s record lows, stagnant in recent months.

Sharp bond yield revival from all-time lows seen late last year,

had raised hopes for insurers of a revival of investment

income that would have allowed favorable returns for

customers on assured return products.

However, bond yield gains have been inconsistent in recent

months owing to policy uncertainty, particularly in the US,

where hopes of further rate hikes by the Fed have been

curtailed by pressure from the Trump administration.

Persistent improvements will only be possible if the global

economic growth and inflation pick up.




► Supported by a strong bull run, global insurance stocks continued

to rise as several large insurers saw improved investment and

underwriting results.

► Pick up in long-term buy recommendations for UK and EU insurers

reflect improved analyst expectations.

► Natural catastrophe (NatCat) losses: Active hurricane season is

expected to halt the relatively benign period of losses and limit

further pricing weakness that has persisted after 2012.

Key highlights


Supported by a strong bull run, global insurance stocks continued to rise, as several large insurers saw improved investment and underwriting results.

16%

23%

14%

23%

8%

28%

9%

16%

5 year CAGR(1H 2017 vs. 1H 2012)

YoY(1H 2017 vs. 1H 2016)

S&P 500 Insurance Stoxx Europe 600 Insurance

SNL Asia-Pacific Insurance S&P Global 1200

Global insurance stock price returns1► US life insurance stocks outperformed on a year over year (YoY)

basis, led by tax reform expectations and financial deregulation

by the new US Government while P&C insurers underperformed

the benchmark indices on underwriting concerns.

► The US P&C industry recorded a US$5.1b underwriting loss

in 1H17 led by losses posted by key insurers.

► UK insurance stocks outperformed in 2Q17, as most insurers

saw analyst upgrades and positive EPS revisions for FY17, with

most large players outperforming analyst estimates, primarily

on the back of improved investment results.

► European insurers witnessed positive earnings per share (EPS)

revisions on the back of favorable underwriting performance.

► Listed Chinese (mainland) life insurers rallied in 2Q17 after the

Chinese (mainland) Government indicated relaxing norms to

allow commercial pension funds to invest in equity markets.

► This action also comes on the back of a crackdown by CIRC2,

mainland China’s regulator, on dubious, high-return life

insurance policies being offered by large unlisted players.

1) The top chart is not directly comparable with bottom charts as indices used have different constituents (Life: FTSE China A 600 Sec/Life Insurance; Stoxx Europe TMI Life Insurance; FTSE UK 350 Sec/Life Insurance; DJ US Life Insurance Index. Non-Life: Custom P&C Insurance Index for China (mainland); Stoxx Europe TMI Nonlife Insurance; FTSE UK 350 Sec/Nonlife Insurance; DJ US P&C Insurance)2) China Insurance Regulatory Commission

While analyst expectations remained strong, the returns for

several insurers particularly in the US and the major global

reinsurers may see a correction as a highly active hurricane

season in the Atlantic is expected to lead to high losses in

selected geographies. In addition, with chances of interest

rate hikes gradually reducing insurers’ investment income

gains may see only a limited upside.

37.3%

29.9%

25.1%

46.2%

US

UK

Europe

China

16.1%

18.1%

23.3%

20.2%

US

UK

Europe

China

Segment stock price returns (YoY as on 30 Jun 2017) 1

Life

Non-life


Improved long-term buy recommendations for UK and EU insurers reflect analyst expectations of a less adverse Brexit deal than anticipated earlier.

► Analyst estimates for FY17 turned very bullish, as analysts

made upward revisions to both revenue and net income

forecasts post the announcement of 2Q17 results.

► Both spread margins and investment income were impacted

by sustained weakness in interest rates although they were

more than offset by equity market gains.

► Insurers in two of four key regions, primarily in the UK,

outperformed consensus estimates in 1H17, with most large

players witnessing large scale upgrades as they were led by

strong investment returns and improved underwriting results.

► European insurers also outperformed in 2Q17, as two of the

top five global insurers saw analyst upgrades and EPS

revisions for FY17.

3.1%

-4.1%

16.1%

2.8%

-6.9%

Estimated

Actual

1) FY17 estimates for growth forecast are as on September 2017

3.7

3.5

3.8

3.6

3.4

3.1

3.4

3.7

Jan-15 Jan-16 Jan-17 May-17 Aug-17

North America

Asia-Pacific

Europe

United Kingdom

Hold

Global insurance (all lines) avg. analysts’ consensus growth forecast 2017

Mean of analyst recommendations (1: Strong sell, 3: Hold, 5: Strong buy)

3

4

4.2%

7.0%

4.0%2.2%

10.1%

Revenue1 Net income1

FY15 FY16 FY17 FY15 FY16 FY17

Buy

1 1

Hike in FY17 estimates between June 2017 and September 2017: +3pp Hike in FY17 estimates

between June 2017 and September 2017: +2.5pp

Some of the key risks that may hurt premium and earnings

growth going forward include:

► Large NatCat losses from the ongoing active Atlantic

hurricane season in North and Central America (including

Hurricanes Harvey and Irma).

► Gradual but persistent softening of non-life commercial

line rates over the last 16 quarters.

► Increased regulatory restrictions, such as MiFID 2, which

may hit margins in a notable way.


73 50 42 36 5422

219 208

135 128

210

53

2012 2013 2014 2015 2016 1H17

Total economic losses

Insured losses

NatCat losses: active hurricane season is expected to halt the relatively benign period of losses and limit further pricing weakness.

19.0

5.59.1

17.5

2.2 2.2

Americas EMEA APAC

10 year 1H average 1H 2017

► During 1H17, global CAT insured losses were estimated to be

~US$22b, nearly 35% below the 10-year average of US$34b.

► ~80% of insured losses were sustained in North America, led

by significant severe weather outbreaks across the US.

► During the first six months of 2017, the US has already

experienced the highest number of catastrophe events (even

before Hurricane Harvey) since 1980, which resulted in the

highest insured loss total for the period since 2011.

► Other major insured loss events included Cyclone Debbie that

prompted significant flooding in eastern Australia (US$1.2b)

and Windstorm Zeus in France (US$340m).

► Insured losses in EMEA and Asia-Pacific remained subdued, each

accounting for around one-tenth of the insured losses.

► This was despite large flood related losses in mainland China

(US$6.4b) and Peru (US$3.2b). However, insured losses are

expected to be minimal given the extremely low insurance

penetration in these countries.

Half-yearly insured catastrophe losses by region (US$b)

Average Atlantic hurricane activity forecasts for 2017 now adverse.

Average economic losses (2000-15): US$178b

Average insured losses (2000-15): US$50b

67% 76%69%

72%

74%

**%Proportion of uninsured losses

58%

Global NatCat total and insured loss estimates (US$b)

Month of Forecast

No. of Storms

No. of Hurricanes

Major Hurricanes

Atlantic hurricane activity forecast for 2017

Apr-17 11 4 2

Aug-17 17 (+6) 7 (+3) 3 (+1)

Historical average (1981 – 2010) 12 6 3

Source: Aon Benfield

Going forward, the low loss scenario will strongly change as

insured losses (initial est. US$45b-US$80b) from

Hurricanes Harvey and Irma (North and Central America),

both being major hurricanes, will start being registered.

While Harvey made a landfall as a “Category 3” hurricane

(first in 12 years) in southern Texas, which houses major oil

refining and pipeline infrastructure, Irma proved

catastrophic for multiple locations in Florida. Owing to

aggressive storm activity, researchers have sharply

upgraded 2017 hurricane forecasts.


Reinsurance landscape: reinsurance capital continued to grow in 1H17 with record levels of catastrophe bond issuance seen in 2Q; persistent fall in RoE1

428 461 490 511 493 514 516

2844

50 64 82 81 89455

505540

575 565 595 605

2011 2012 2013 2014 2015 2016 1H17

Alternative capital

Traditional capital

CAGR: 6%

Global reinsurance market capital (US$b)

4.4%

11.5%10.7%

11.3%10.1%

8.4% 8.4%

2011 2012 2013 2014 2015 2016 1H17

Global reinsurance return on equity

Full year FY17 RoE may fall further owing to losses from recent hurricanes

2Q alternative capital got a huge boost on account of record CAT bond issuance

► While reinsurance capital continued to grow, traditional capital

growth remained negligible as demand for alternative capital

remained strong.

► Within alternative capital, CAT bond issuance, which had not seen notable growth in recent years, saw a strong rebound

with 2Q17 being a record quarter. CAT bonds worth US$8.5b were issued during 1H17 as demand from capital market

investors and public entities grew. For e.g., the Mexican Government recently launched a pandemic CAT bond.

► RoE for reinsurers continued to fall, as excess capital supply

implied weakening margins.

► Relatively benign loss activity in the first six months (more

than a third less than the 10-year average) added to the pricing pressure.

► It did not help that investment yield maintained its downward

journey, having fallen to 2.7% in 1Q vs. ~3.5% in 2011.

► 2017 RoE may sharply fall on account of losses from Hurricanes Irma and Harvey.

Abnormally low RoE as 2011 was the highest loss year ever

1) Return on equitySource: Aon Benfield

Potential losses from Hurricane Harvey and Irma are expected

to change the narrative that we have seen in recent years,

which includes downward pricing pressure, huge surplus

capital and favorable combined ratios for reinsurers.

While the short-term impact may be severe, high magnitude

of losses have the potential to reverse the weak pricing

environment across several lines and increase the demand of

both reinsurance capital and reinsurer’s expertise in product

design and pricing for both traditional and emerging risks.


Insurance M&A trends: signs of recovery seen in global insurance M&A space after relatively stronger deal market in 2017 vs. a slow 2016.

133 150 174 146 128 118

126 108158

160126 121

131 122

164141

100

154121

168

114

119

544501

664

561

473

239

2012 2013 2014 2015 2016 2017

4Q

3Q

2Q

1Q

► Deal volume remained largely stable in 2Q17 vs. 2Q16,

however, the value of deal activity increased significantly vs. the

same period in 2016, driven mainly by three large US$1b+

deals.

► The return of the US$1b+ deals points to improved confidence

in global insurance M&A, and is in sharp contrast to 2Q16 where

deals with size greater than US$1b had all but disappeared.

► Key drivers of M&A in insurance include:

► Ongoing insurers’ strategies to enter profitable lines of

businesses, such as specialty.

► Achieving cost efficiencies and improving margins by gaining

economies of scale.

Global insurance M&A deal value (US$b)

4 8 15 203 8

810

1722

49

1314

14

58

10

23 7

18

10

29

4940

64

110

46

17

2012 2013 2014 2015 2016 2017

4Q

3Q

2Q

1Q

Global insurance M&A deal volume (number of transactions)

Looking ahead, we expect the insurance M&A market to

remain active in Q3 2017 against a backdrop of an improving global macroeconomic environment and easing regulatory

uncertainty (e.g., the proposed DoL fiduciary rule extension).

Insurers’ focus on profitability through inorganic top-line growth and expense rationalization, coupled with technology-

driven investments will continue to drive M&A in the sector.




► Addressing the evolving nature of risk through innovation is a key

imperative for insurers.

► Blockchain has now progressed beyond pilot stage, with early

adopters looking to gain significant advantages.

► EY has taken a strong lead in helping insurers create a blockchain

based new-age information infrastructure.

Key highlights


Addressing the evolving nature of risk through innovation is a key imperative for insurers.

Change in

nature of risk

in existing lines

of businesses

► Line between commercial and personal will blur in an

increasingly automated and sharing economy.

► Key example will be the shift of motor insurance from

being a predominantly personal to a mainly commercial

line as autonomous cars and ride sharing gain

prominence.

Evolving their approach to the very nature of risk will be critical for insurers

because margin pressures on most of the existing lines of businesses continue

to worsen on account of excess capital availability, homogenization of risk and

lack of growth in demand in the advanced markets.

It will be important for insurers to identify the right markets, target relevant

customer profiles, address new risks created by technology and even change

their role from being a post-loss cover provider to preventer of loss.

New risks from

cyber, IoT and

AI

► We are already witnessing cyber insurance emerging as

a key lever to manage rising cyber risk (annual global

premiums already > US$3b).

► Also expected are new liability classes from a much

higher use of artificial intelligence and greater adoption

of IoT systems.

Ways in which nature and form of risk is expected to evolve.

Shift from

covering to

preventing risk

► Insurers are gradually shifting toward offering products

which include not just coverage but also services which

reduce claims by monitoring changes.

► Greater adoption and improvements in sensor

technology can drive insurers toward business focused

on prevention of risk rather than covering risk.

Number of lines of business for which one of the world’s top two reinsurers is already offering risk management solutions

7

Size of motor insurance market in its current form – which is likely to be disrupted by 2030 with the prevalence of self-driving cars

US$700b

Estimated count of IoT devices globally by 2018 – Malfunction or privacy issues can lead to significant liability payouts

22b


Cyber insurance remains the most prominent emerging risk, as growing digitization is raising stakes from cyber risk significantly.

Biggest trends unfolding in the cyber insurance space

► Regulations raising adoption: Implementation of data protection regulations (mainly General Data Protection Regulation [GDPR] in the EU) are pushing firms to

enhance their cyber resilience, for which cyber insurance will play a key role.

► Small to mid sized firms also showing strong interest: With the latest spurt of ransomware attacks adversely affecting small to medium sized firms, these firms

are gradually realizing the importance of preventing liability and business discontinuity from data breaches and other associated indirect costs.

► Bundling of allied services: Insurers are increasingly offering pre-emptive and responsive solutions in addition to cyber cover including 24x7 access to a network

of cyber experts, cyber security risk assessment, training and compliance tools and real-time access to latest developments.

► Increased risk appetite driving marginal correction in cyber insurance pricing: Cyber insurance rates in the US – which constitute more than four-fifths of the

world’s cyber insurance market – decreased marginally for a second consecutive quarter in 2Q. This was mainly due to increased capacity from growth in risk

appetite by incumbents (both insurers and reinsurers) and entrance of new insurers into this product area.

Cyber threat can be of catastrophic proportions.

Losses from a major cyber attack can easily be comparable to

those from a major catastrophic event as:

► Most processes are being digitized and a large part of data architecture is moving to cloud

► Businesses are highly underinsured for major breaches

► Regulatory pressures to effectively protect customer data and privacy have heightened

To achieve a greater cyber adoption and to support a sustained growth, some of the key

challenges which this relatively nascent market will have to address include:

► Confidence in cyber coverage being provided: across cyber insurance products,

significant variations exist in terms of applicable sub-limits and deductibles, types of

losses covered, as well as the time basis for claim eligibility. These lead to a concern

about whether claims will be paid in case of a cyber incident.

► Data availability for quantifying exposures: lack of willingness to disclose breaches

fearing reputational hit and absence of market wide comprehensive data imply low

confidence among cyber insurance providers, leading to higher cost of cyber cover.

► Limited policy support: so far, very few markets have taken concrete steps to

proactively address the economic and social implications of the cyber threat landscape.

This consequently affects the demand creation in the market.

£70mThe amount a major telecom firm could have been fined under GDPR - instead of the £400,000 fine it paid for its data breach last year

£53bAverage estimated losses in a scenario where cloud services are disrupted on account of a major cyber attack (estimated by a major global reinsurer)


Blockchain has now progressed beyond experimentation, with early adopters looking to gain significant advantages. EY too has taken a strong lead …

Experiments with blockchain have continued.

Both incumbents and insurance focused start-ups continue

to experiment with blockchain.

► Multinational smart contracts: A large US-based insurer

has partnered with the world’s largest IT services

provider to create the first multinational “smart

contract” based insurance policy using blockchain.

► Blockchain for broking space: Blockchain tech firm,

Bitfury Group, has allied with a US based broker and

adviser to use blockchain tech in broking market.

► Insurance for IoT: Recently, Singapore witnessed the

launch of a demo app showcasing a Peer-to-Peer (P2P)

digital insurance blockchain protocol for IoT devices.

This signals creation of a fully Decentralized

Autonomous Organization (DAO) marketplace for smart

contracts based consumer insurance.

► Multiple insurance prototypes in works: At a recent

insurance blockchain hackathon organized by Travelers

(via Simply Business), several new blockchain based

insurance solutions were introduced (e.g., automated

claims payouts based on weather APIs1 and loT tools;

insuring Initial Coin Offering investors against cyber

attacks; improving reinsurance market efficiency).

Some have already hit the ground running!

► India’s second largest private general insurer launched a blockchain based

product for overseas travel policies, which allows customers to receive their

claims instantly without actually filing for an overseas flight delay.

► Insurance for blockchain based ecosystems: Two Japanese bitcoin

exchanges recently launched insurance products to cover losses tied to

failed transactions.

► A Berkshire Hathaway-owned reinsurer has partnered with a London-based

vendor to develop a blockchain platform for life and health insurance clients

For blockchain deployment, insurers are expected to focus initially on areas such

as payments, claims processing, administration and back office operations (vs.

underwriting, pricing). Through blockchain, insurers are looking forward to:

► Offering low cost insurance products catering to potentially high demand

segments such as flight delay and cancellation, flooding, crop and event

weather disruption

► Disintermediating middlemen (e.g., brokers)

► Recording real-time premium payments and receipts across shared networks

► Providing regulators with controlled policy views to demonstrate compliance

► Improving claims adjudication through a robust validation engine


… as it launched the world’s first real-time blockchain platform for marine insurance in tie-up with Guardtime and other industry leaders.

The business issue which EY set out to solve using blockchain

Which partners have EY aligned with and what roles do they play?

What capabilities will the platform offer?

► EY has launched Tesseract, an integrated blockchain based mobility platform which

facilitates fractional vehicle ownership, shared use and seamless multimodal transport.

It will help lay the groundwork for managing autonomous vehicle fleets and can also

have huge implications in the future motor insurance landscape.

► EY is leading a consortium of 13 Indian insurers to use blockchain based tech to create

a central policyholder repository and streamline policy admin and registration.

How EY is working toward moving blockchain from concept to reality

Most lines of businesses face gaps in coverage and

both underpayment and overpayment of claims,

primarily due to the following:

► Insurance value chains currently involve

complex paperwork, poorly integrated manual

processes and high level of duplication that

lead to lack of transparency, compliance and

accurate exposure management.

► Asset information is incomplete, out of date or

unreliable at every point in the process. Data is

not standardized, tough to share and can't be

accessed securely.

Following a successful 20-week proof of concept,

EY is building a working blockchain platform that

connects every major stakeholder in the marine

insurance value chain, with the following

organizations:

► Guardtime: the world’s largest blockchain firm,

will build the platform.

► Microsoft: will host it on its cloud platform.

► Maersk, the world’s largest shipping company,

is providing first hand account of unique

challenges faced in marine ecosystem.

► ACORD1: international industry data standards

body, will enable wider global adoption.

► XL Catlin, MS Amlin and Willis Towers Watson

will bring sharp insurance business expertise.

This platform addresses structural issues related

to the insurance value chain while connecting

clients, brokers, insurers and third parties to

distributed common ledgers that capture data

about identities, risks and exposures. Its

capabilities include:

► Creation and maintenance of asset data from

multiple parties

► Linkage of data to policy contracts

► Pricing or business process change based on

information received

► Linking client assets, transactions, payments

► Capture and validation of up-to-date first

notification of loss data

Such a blockchain platform can be applied to any

commercial line with high-value assets.

Other major blockchain initiatives by EY

For further perspective on how EY is working toward a

better-working insurance world by moving blockchain

from concept to reality, please visit:

EY - Blockchain-enabled platforms are changing marine for the better

1) Association for Cooperative Operations Research and Development

http://www.ey.com/gl/en/industries/financial-services/insurance/ey-blockchain-marine


Key highlights



► Insurers need to proactively initiate implementation plans to

effectively address the changes introduced by the new accounting

regulations (including IFRS17 Insurance Contracts).

► General Data Protection Regulation (May 2018): With more than

half of the two year post-adoption grace period now over,

insurers will have to act fast to address the impending challenges.


Regulations (1/2): enhancing financial stability in the sector continues to be the underlying driver for regulatory developments.

Canada: E-21 Operational Risk Management guideline fully implemented in June 2017. Will provide consolidated guidance for operational risk management across all Federally Regulated Financial Institutions (FRFI).

► Following IFRS17 release earlier this year, the IASB aims to establish a Transition Resource Group (TRG) to provide support on implementation-related questions.

► Recent progress in the development of the Global Insurance Capital Standard (ICS) of the Financial Stability Board (FSB) and International Association of Insurance

Supervisors (IAIS) included extended field testing for Internationally Active Insurance Groups (IAIG) in July 2017 and the fourth round of annual field testing being conducted on the ICS (from May to September 2017) and ongoing consultation on proposed revision to a number of IAIS Insurance Core Principles (ICP).

US: Major provisions of the Dodd-Frank Act, including decision-making process of the Financial Stability Oversight Council (FSOC) are being reviewed.

Brazil: Insurers to implement ERM framework aligned with Solvency II and operational losses database by the end of 2017.

Mexico: Post implementation of new solvency regime, Mexican ORSA reports to include results of the Dynamic Solvency Test.

Australia: Consultation on life claims data collection launched in May 2017, as part of an industry review of life insurance claims handling and reporting.

European Union:

European Insurance and Occupational Pensions Authority (EIOPA)invited consultation on first set of advice to the European Commission – which it aims to finalize by October 2017 - on specific items in the Solvency II Delegated Regulation (July-Aug).

Infrastructure investments: EIOPA’s proposal to extend infrastructure asset class to include firms which carry out infrastructure activities (or “infrastructure corporates”) was enforced in June 2017.

Mainland China and Hong Kong: Final ALM standards for life and non-life insurers are expected to be released later in 2017 (consultations happened during May-Jun). In Hong Kong, new regulator Insurance Authority (IA) began operations in June.

Japan: Draft of new standard mortality table (effective Apr 2018) proposed by the Institute of Actuaries of Japan (IAJ) expected to reduce life premiums.

While a lot of countries have now implemented new regional

or local capital standards, industry focus has now shifted to

ironing out potential open issues.

Simultaneously, it now appears that the world is inching

closer to a global insurance capital standard. If implemented

effectively, such a standard will promote comparability,

transparency and trust. At the same time, it may lead to

significant adjustments to companies’ structures, strategies

and footprints.

South Africa: New law (Financial Sector Regulation) enacted in August 2017 to pave way for enactment of Insurance Bill, giving effect to the new solvency regime (SAM).


1) Only insurers which meet the criteria for deferral

Regulations (2/2): insurers need to proactively initiate implementation plans to effectively address the changes introduced by the new accounting regulations.

In July 2014, the IASB issued the IFRS9 Financial Instruments standard and more recently, in May 2017, the IFRS17 Insurance Contracts standard was also released.

The new reporting standards (IFRS17 and IFRS9) aim to improve the comparability and transparency of accounting practices, while promoting better alignment between finance, risk and actuarial functions through enhanced disclosure of valuation, performance and risk information, and the adoption of principles-based

accounting frameworks.

What lies ahead

► Early adoption in some geographies: While IFRS17 will become effective in 2021, certain local regulators (e.g., Taiwan, Thailand) may require early adoption

through regulatory overlay requirements.

► Possible deferment of IFRS9 for insurers: IFRS9 will be effective in 2018. However, a recent IASB amendment gives insurers the option - subject to certain

terms and conditions - to defer implementation of IFRS9 until 2021 (i.e., along with IFRS17). Insurers qualified for the deferral approach need to fulfil IFRS9

disclosures from 1 January 2018.

► Other accounting changes: In addition to the IFRS9 and IFRS17 standards, insurers will need to adapt to a wave of other accounting changes over the next five

years, including IFRS15 Revenue from Contracts with Customers - effective 1 January 2018 - and IFRS16 Leases - effective 1 January 2019.

Given the scale and scope of IFRS17, insurers must start formally assessing

the potential impacts and mobilize their resources accordingly. This will

require a well-planned program and a clear organizational view of the end

state.

These accounting changes (IFRSs 17, 9, 15, 16) present new challenges

and opportunities for asset allocation, asset-liability management (ALM),

performance measurement and business management. Insurers must look

to educate stakeholders on expected impacts and communicate execution

plans to manage expectations.

Timeline of changes

2014 2015 2016 2017 2018 2019 2020 2021

IFRS17 implementation window

Final IFRS17 standard(May 2017)

Final IFRS9 standard (July 2014)

IFRS9 to be enforced for insurance dominated firms1

IFRS17 to be enforced (January 2021)

IFRS17 to be enforcedpre-emptively in select markets

IFRS9 to be enforced for non-insurance dominated firms


Special focus

Understanding GDPR’s impact on insurance

“The impacts of GDPR compliance will be seen across all areas of the insurers’ operations. Failure to comply could result in significant fines and reputational damage.”

Cheryl Martin

EY Global Insurance Cyber Leader


GDPR (May 2018) will substantially redefine ways in which customer information is currently being managed which, in turn, …

Enhanced data subject rights

The GDPR will create multiple new rights for individuals (and strengthen some existing rights under Data Protection Act or DPA) including, the right to:

► Be informed about how personal data is being utilized.

► Be forgotten where personal data is no longer necessary in relation to the original purpose or when individual withdraws consent.

► Data portability: Controllers must provide personal data to data subject and transfer to another controller if subject so requests.

► Rights around automated decision making and profiling: to check risk of a potentially damaging decision taken without human intervention.

GDPR comes with an extended jurisdiction and applies to all companies processing personal data of EU-based subjects, regardless of company’s location.

► GDPR imposes restrictions on personal data transfer outside the EU, to non-EU countries or international organizations, so that the level of protection of individuals covered by the GDPR is not undermined.

Organizations in breach of GDPR can be fined in two ways:

► 4% of annual turnover (minimum €20m) e.g., for unlawful international transfers, or inability to respond to Data Subject Access requests.

► 2% of annual turnover (minimum €10m) e.g., for a failure to report breaches within 72 hours.

The most serious infringements will include not having sufficient customer consent to process data or violating the core of Privacy by Design concepts

Comprehensive extra-territorial applicability

Significantly high penalties

Biggest changes which will impact insurance sector

Enhanced accountability

Organizations must prove they are accountable by:

► Adopting “privacy by design” i.e., designing data protection into development of business processes and new systems.

► Establishing a culture of monitoring, reviewing and assessing data processing procedures.

► Undertaking Privacy Impact Assessments when conducting risky or large scale processing of personal data and embedding “privacy by default”.

Data protection officer (DPO) appointments

DPOs must be appointed if an organization conducts large scale systematic monitoring or processes large amounts of sensitive personal data.

Breach notifications

Organizations must notify authorities of data breaches without undue delay or within 72 hours, unless the breach is unlikely to be a risk to individuals. If there is a high risk to individuals, those individuals must be informed as well.

GDPR is a welcome change which will give greater power to individuals and

will harmonize laws across all EU member states which, in turn, will make the

complex data protection landscape easier to navigate for multinational

organizations, including insurers.

However, insurers need to take strong and timely measures to make certain

that they are ready to comply when GDPR comes into force next year.


… will have a significant impact on the way insurers operate across most elements of the customer value chain.

Extra-territorial applicability (to affect these cases)

Outsourcing and data transfer to non-EU states

Non-EU firm underwrites risks for EU firm

Marketing outsourced to non-EU states and involves personal data transfer

Selling into EU states to EU data subjects

Servicing outsourced to non-EU states

Claims outsourced to non-EU states and travel claims in non-EU states

Complaintsoutsourced to non-EU states

Data processing Product literature to be aligned as per target customer segment

Review of data collected for profiling and marketing purposes needed

Marketing materials to clarify privacy and can not be misleading

Staff competence to be driven for handling regulation awarenessand data inquiries

Servicing scripts to handle inquiries about data usage to be reworked

Training for claimshandlers in data subject privacy and protection

Training for staff and establishing systems to effectively address concerns

Privacy by design and default

Factoring in data protection may lead to possible delay in product launch.

Restricted access to data for processing and storage of data

Restrictions on data which can be used for marketing procedures (e.g., profiling)

Limited access to data and strong rationale needed for data retention

Right to be forgotten

Clear customer consent required – may limit size of the reference data pool

Clear consent for marketing and training for staff

Reworked sales scripts requestingconsent

Focused training and systems for addressing requests

Data Protection Officer

DPO to monitor each value chain element for GDPR compliance, leading to an additional layer of compliance in all processes

Product development

Marketing

Underwriting and pricing

Servicing Complaints

Sales Claims

Impact of GDPR changes across the insurance value chain

Biggest impact for insurers will be around the following areas:

► Managing data transfer between EU and non-EU states and organizations

► Seeking and justifying collection, storage, access and retention of data held in variety of means in multiple locations and often held/provided by third parties

► Restructuring of process designs and improving data usage explicability


With more than half of the two-year post-adoption grace period for GDPR now over, insurers will have to act fast to address the impending challenges.

Biggest challenges faced by all insurance companies …

Data – the use of profiling within marketing activities

Establishing linkage between the GDPR programs and business as usual activities

Accounting for “right to be forgotten” while managing other non-GDPR regulatory obligations

Managing communications and creating a “culture of data protection”

Setting program scope for GDPR and limiting scope creep

Setting a clear vision and defining compliance for the organization

Identifying home for Data Protection and new DPO role within organization

Setting budget and resource allocation to GDPR programmes

Nature of business specific challenges

► Life/ Pensions: Presence of range of legacy contract engines and supporting systems lead to absence of a comprehensive single customer view. These systems can be hard to change and are likely to have low quality of data.

► General and specialty: Sourcing pricing data is expected to become tougher. For example, use of telematics to price policies will become more limited, particularly as customers become aware of the type of personal data held. Similarly the use of IoT (including wearables) will be limited by the level of consent received from customers.

► Brokers: Customers are being encouraged to shop around will seek historic information and may question data quality. Data from various means will need to be in a consolidated form to address transfer and other requests.

Preventing data breaches even as most insurers and brokers are still going through initial digitization

Staying alert to extended territorial impact for Insurers with offshore data processing/set-ups

GDPR will forcefully drive insurance players to assume greater accountability

and attain privacy maturity by providing privacy to customers, both by design

and default. Key imperatives for insurers in this new landscape will include:

► Driving new revenue sources by using data obtained with customer assent

► Proactively preventing data breaches and subsequently avoiding

associated remediation costs, loss of customers and market share

► Using privacy as a competitive differentiator in a data driven world

► Building trusting relationships with stakeholders to drive retention and

viewing data protection as a moral responsibility toward customers

► Fulfilling stakeholder expectations in view of increasing public awareness

Source: EY Data Privacy and Protection Survey 2016

One-fourth of the biggest privacy breaches were due to lack of staff awareness on privacy related controls

Nine out of 10 companies see employees and insiders as one of the most likely sources of a privacy data breach

… at a time when companies remain under-prepared.


EY | Assurance | Tax | Transactions | Advisory

About EY

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guarantee, does not provide services to clients. For more information about

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© 2017 EYGM Limited.

All Rights Reserved.

EYG no: 06055-174Gbl

ED None

This material has been prepared for general informational purposes only and is

not intended to be relied upon as accounting, tax or other professional advice.

Please refer to your advisors for specific advice.

ey.com

Shaun Crawford

EY Global Insurance Leader

[email protected]

Luca Russignan

EY Global Insurance Knowledge Leader

[email protected]

Nilabh Kumar

EY Global Insurance Analyst

[email protected]

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