Home / Analysis / Ten insurance trends in 2020
16 December 2019
As part of its annual General Insurance Industry Review, KPMG outlined 10 emerging trends for Australian insurance companies. Here’s our summary of the findings:
The first wave of digital transformation is over – and now it’s time to get ready for the next one.
C-level executives of general insurers have made digital transformation part of their strategies and accelerated investments in foundational capabilities such as seamless interaction between channels, data and analytics, mobile apps, cloud and more agile ways of working.
This has set their organisations up for easier interactions, more personalised products and experiences, and greater operating efficiencies.
To become truly customer-centric, general insurers need to take a more holistic view on transforming their business to become a connected enterprise through joining their front, middle and back offices digitally.
New start-up ventures targeting various aspects of the insurance industry have rapidly emerged. They take advantage of a range of trends including new technologies and changing customer needs, the slow response by incumbents, availability of plentiful investment funds, supportive regulators, and accelerators/incubators/hackathon innovation hubs that are all transforming the industry.
Most began with ambitions to disrupt, but their enthusiasm has been tempered by the reality of investment, regulation, capital requirements and the risks and challenges of offering something new to cautious customers.
Insurtechs have largely recast themselves as enablers of innovation – collaborating and partnering with incumbents to bring their ideas to market.
Over the past few years Blockchain projects in the financial services and insurance sectors have delivered numerous proof of concepts and pilots across the whole value chain.
KPMG expects blockchain developments in the insurance sector to evolve along the following three trajectories:
Artificial Intelligence and robotics
Today, AI and robotics allow for technology to perceive environments, mimic human cognition to make decisions and replicate human actions at scale and with precision.
This is enabling insurtech disruptors to operate with less than 20% of the workforce of traditional insurers.
An element of AI is machine learning which has provided a massive increase in abilities to analyse data and forecast outcomes. This has allowed insurers to get ahead of insured risks to help actively prevent and manage.
The ability for AI to ingest and interpret all the source data that can be generated is transforming the industry. Previously, insurers used historical data and self-declared information to price risk.
Now, customers’ individual behaviour and situations can be considered in real time, providing insurance as a service. Your behaviour will be rewarded – or penalised.
The challenge now is for insurance leadership to stretch its thinking to encompass all that today’s AI and robotics capabilities offer.
Many companies want to be more customer-focused but struggle to create a culture and supporting infrastructure to realise this ambition. Being customer-centric is not just about market research and smart marketing. Every function and interaction is required to be tailored towards the customer experience, and these interactions cut across a multitude of channels.
Today insurers are fighting for relevance with customers who have high demands. Customers now expect insurers to understand their values, preferences, situation and lifestyle. They demand immediate, global, one-click, 24/7 access to a personalised, contextualised, empathetic experience. They want a rapid, seamless journey integrated into their overall engagement with the insurer through purchasing a policy and throughout the claims experience.
Generic insurance products that renew each year are losing their appeal. Insurers need to continue to enhance the customer experience because customers will continue to be even more informed and in control of the relationship with their insurer.
Climate-related insurance losses across the world in 2018 were the fourth-highest on record at $US76 billion ($110 billion), according to Munich Re’s annual natural catastrophe report.
While 2018 was a far cry from the highest-ever losses from 2017, it acts as a clear signal to the insurance industry – this is the new normal.
In previous years, climate-related insurance losses were tied to a small number of large natural events which caused massive destruction, such as Hurricanes Harvey, Irma and Maria in 2017.
A higher frequency of severe localised events causing high levels of damage was observed in 2018, with 29 events each resulting in an economic loss of $US1 billion ($1.45 billion) or more.
While insurers continue to play a critical role in helping communities recover from catastrophic events, there will be increasing economic and social pressure on the industry to work with communities and customers to improve climate resilience from increasingly severe events.
The ever-evolving cyber threat landscape continues to present challenges in all industries with the introduction of Australia’s Mandatory Data Breach legislation in February 2018, closely followed by the EU’s broad General Data Protection Regulation (GDPR) in May 2018.
The penalties for serious or repeated non-compliance with Australian mandatory notification requirements include fines up to $360,000 for individuals and $1.8 million for organisations.
The GDPR states that serious infringements of its requirements may be punished by a fine of whichever is greater – 4% of annual worldwide turnover, or €20 million ($32 million).
Regulatory fines are only one of many costs associated with a data breach. Other costs are often far-reaching and include legal and litigation fees, business interruption, remediation, public relations, customer compensation and notification costs – each of which can be risk transferred through the use of an appropriate cyber insurance policy.
The road to implementation of IFRS 17 Insurance Contracts continues to extend as proposed changes to the Standard have been exposed and subsequently commented on. Further deliberations by the International Accounting Standards Board (IASB) over certain areas are expected over the next few months.
This brings both opportunities and potential costs which insurers should seize and manage.
The proposed extra year before the standard becomes effective gives insurers the opportunity to further develop and strengthen implementation plans.
It’s critical that momentum is maintained and that insurers don’t lose sight of the ultimate goal of having a global standard that aids comparability and transparency of reporting for insurers.
The final report on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry included 15 recommendations that are relevant to core areas of insurance.
Soon after the final report was released, the Government announced its commitment to implement each of the royal commission’s recommendations, setting up an ambitious regulatory agenda for the industry.
With a heavy focus on addressing consumer harms, this regulatory agenda affects nearly every aspect of the relationship between consumers and their insurers, including selling and distribution practices, pre-contractual disclosures, the handling of claims and the fairness of insurance contract terms.
In this changing environment, there are clear competitive advantages for those industry players that can embrace change, and in particular re-imagine the practices that guide their interactions with consumers.
Investment returns – low interest rates
Interest rates in Australia have fallen by more than 80% since 2011. The official cash rate has fallen from a high of 4.75% to a low of 0.75% in 2019. Similar reductions have been observed across the yield curve.
Investment income for the insurance industry includes capital gains and income on all asset classes and so has not followed the downward trend in the official cash rate.
Specifically, interest income on interest-bearing assets has also experienced more stable reductions over time (currently at approximately 3.5% but not to the levels observed through reductions in the official cash rate and yield curve).
This is because it takes time for assets to mature and then be reinvested, leading to a lower interest income once new money is reinvested.
Given this, KPMG expects income from fixed interest securities to continue to reduce over the next two to three years to below 2% if this low yield world continues.
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