2015 Insurance Industry Outlook

2015 Insurance Industry
Outlook
Focusing on the Bigger Picture
January 2015

2 Copyright © 2014 Deloitte Development LLC. All rights reserved.Deloitte Center for Financial Services | 2015 Insurance industry outlooks | @DeloitteFinSvcs
Contents
Big Picture Trends 3
Cross industry trends 4
P&C challenges 12
L&A challenges 14
Next steps 16
Download 17
Contacts 21

‫‏‬Despite continued micro- and macroeconomic fluctuations, huge opportunities
exist to grow business, and make it more profitable and sustainable
• Achieving information
fluency
• Overcoming regulatory
challenges
• Upgrading capital
management
• Getting ahead of
climate change
• Alternative capital
• Transforming for
growth
• Tackling longevity
risks
‫‏‬Cross
industry
‫‏‬Trends ‫‏‬Trends
Big Picture Trends
‫‏‬Property & Casualty
Insurance
‫‏‬Life Insurance
& Annuity
‫‏‬Trends

An Integrated Capital
Management
Framework
A risk-adjusted capital
adequacy framework capable
of responding to the capital
management requirements of
varied external and internal
stakeholders
Regulatory
Framework
Enhancements
Stricter Rating
Agency Capital
Models
More Predictive
Internal Economic
Capital Models
An integrated risk-adjusted capital
adequacy framework will allow
carriers
 Conduct a thorough bottom-up analysis
of their risks by product line and risk
type
 Enhance transparency and consistency
in pricing and underwriting
 Meet the demands for more robust
stress testing and scenario planning
 Cleary articulate how capital is viewed
and optimized, enabling better
collaboration between various functions
 Make more accurate and informed
executive and business decisions
‫‏‬Insurers look to integrate internal, external capital frameworks for more
effective decision-making
Implementation would require a multi-pronged effort, involving technology and advanced
analytics, holistic capital management processes, talent management, and an enabling
governance mechanism
Cross industry: Upgrading capital management

• ORSA integrates capital, governance, strategy and risk-based decision making
• Captives are receiving closer scrutiny
• Corporate governance standards are being enhanced
• Group supervision, primarily through supervisory colleges, now supplementing traditional
legal entity supervision
• Holding companies being examined in more detail, including non-insurance segments
• Group capital standards are emerging
• Increased focus on consumer protection, such as with ULSG illustrations
• New focus on cybersecurity practices
Governance
Strategy
Capital Risk Management
‫‏‬US state regulators are enhancing their regulatory regimes
Cross industry: Evolving regulatory standards

Evaluation and feedback loop
Section 1 Section 2 Group risk capital and
prospective solvency
assessment
Assessment of
Risk Exposures
Risk management
framework
Evaluation and feedback loop
Section 1 Section 2 Section 3
Capital forecasting
and prospective
solvency assessment
Risk reporting and
communication
Risk culture and
governance
structures
Risk monitoring
methods
and controls
Risk identification
and categorization
Group risk capital
adequacy
determination,
approaches and
assessment
Stress testing
methodologies and
documentation
Qualitative
risk assessment
Quantitative
risk assessment/
economic capital
modelling
Scenario development
and analysis
Model validation and
calibration
Risk prioritization
and assessment
tools
Risk appetite,
tolerances and
limits
Risk policies,
procedures, and
programs
Board of Directors
oversight
Integrating capital
management into
decision-making‫“(‏‬Use‫‏‬
Test”)
11
‫‏‬Now in effect, ORSA might be a filing but it is ultimately a risk and capital
decision making process
Cross industry: Own Risk and Solvency
Assessment

• Focus has been on life insurer use of affiliated captives, but
broadening to captive use in general, especially offshore
captives, with concerns about opacity cited
• NAIC engaged consultant to provide report on way forward
• Revised Rector Report presented at NAIC summer meeting
• NAIC adopted recommendations over New York and
California objections
• Expected increase in transparency and focus on capital
quality
• Despite NAIC moves, concerns have been raised by the FIO,
Federal Reserve
• Federal Office of Financial Research (OFR) highlighted
captive use as a systemic risk in year-end 2014 report to
Congress
‫‏‬Insurers using some types of captives for reinsurance should prepare for
increased scrutiny, transparency, and possible changes in the cost of capital
Cross industry: Captives

Planned
effective
date is
2016
Model Act and
supporting
Model
Regulation
adopted at
NAIC 2014
summer
meeting
Provides a
structure to
promote
regulatory
oversight of
insurer
corporate
governance
Act should help
satisfy one
requirement of
the IMF in its
current FSAP of
the US
regulatory
system
Insurers
must report
annually to
regulators
Industry has
agreed to support
the Act if state
legislatures
ensure
confidentiality
protections are
maintained
‫‏‬Regulators add another qualitative measure to their toolbox
Cross industry: Corporate governance

18
Corporate Governance Model Act
The processes by
which the board of
directors, its
committees and senior
management provides
an appropriate level of
oversight to the critical
risk areas impacting
the‫‏‬insurer’s‫‏‬business‫‏‬
activities
The policies and
practices
directing senior
management
The policies
and practices
of its board of
directors and
significant
committees
The‫‏‬insurer’s‫‏‬
corporate
governance
framework and
structure
‫‏‬What insurers will need to tell
Cross industry: Corporate governance (cont.)

First ORSA filing
Captive
oversight
Enhanced
consumer
protection
US Group Capital
Standards
Increased
Federal
involvement
Given continued
regulatory change, it
may be time for insurers
to consider the process
of compliance
transformation.
‫‏‬= In effect
‫‏‬= Moving forward
Cross industry: Current state of regulatory changes

The potential payoff: Improved market competitiveness, enhanced customer relations, more
responsive and reliable compliance reporting, more insightful enterprise risk management and
decision-making, as well as enhanced business growth and a better bottom line.
Data
‫‏‬?
‫‏‬? ‫‏‬?
‫‏‬?
Knowledge RichInformation Rich
Data
Best Practices
 Develop a blueprint
 Assess process maturity
 Identify data champions
 Get executive buy-in
 Identify pilot function –
align with strategic
priorities
 Build and socialize data
governance
 Ensure compliance
‫‏‬Insurer intelligence should be enhanced by an increasingly interconnected
world, but data barriers persist
Cross industry: Achieving information fluency

‫‏‬Rising weather exposures offer opportunities for innovative new products
and risk management
39%
74%
65%
69%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Have a climate change policy with respect to risk and
investment management
Have a process for identifying climate change-related
risks and assessing the degree to which it could affect its
business, including financial implications
Taken steps to encourage policyholders to reduce loses
inflicted by climate change-influenced events
Engaging consultants on climate change
NAIC Climate Risk Disclosure Survey Results
‫‏‬Insurers surveyed
0Source: California Department of Insurance, based on 2013 risk disclosure data on climate change collected in five states for National Association of
Insurance Commissioners (California, Connecticut, Minnesota, New York, and Washington).
0
US carrier involvement will likely grow: carriers can respond to mounting pressures by
launching their own initiatives, as well as contributing to industry-wide efforts already underway
or yet to come
P&C sector: Getting ahead of climate change

‫‏‬An influx of funds from alternative investors expands P&C capacity and
undermines pricing leverage and profitably
The impact of alternative capital flowing into the p/c sector must be considered as part of an
insurer’s‫‏‬overall‫‏‬strategic,‫‏‬operational,‫‏‬and‫‏‬capital‫‏‬management‫‏‬planning.‫‏‬Trend‫‏‬could‫‏‬spread‫‏‬
into casualty lines.
‫‏‬An influx of alternative capital
pressures insurers efforts to
generate higher RoE
‫‏‬Capital from sources like hedge funds launching
reinsurers and institutional and individual investors buying
catastrophe bonds in droves are increasing overall p/c
sector capacity
P&C sector: Alternative capital impact

‫‏‬Insurers should rethink consumer approaches for more effective
marketing and sales
Insurers should reassess their products, distribution platforms, communication options, and
consumer outreach campaigns with the goal of connecting with and educating prospects more
effectively, particularly in reaching niche markets.
Multi-media effort to educate consumers
L&A sector: Transforming for growth

Half of respondents surveyed have
not saved enough to cover them
through retirement2
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Survey
Respondents
40% say no matter how much they
save,‫‏‬it‫‏‬won’t‫‏‬be‫‏‬enough‫‏‬to‫‏‬provide‫‏‬
sufficient retirement income2
‫‏‬10,000 Baby Boomers
will turn 65 every day
between now and 20301
10,000
Insurers explore designing, modeling, and distributing products and policies to benefit from a
potential uptick in demand for longevity coverage. However, potential downside risks over the
long term must be carefully considered.
‫‏‬Aging population, new regulations expand opportunities for guaranteed
lifetime income coverage
‫‏‬
1Source: Pew Research Center
‫‏‬
2Source:‫‏‬Deloitte’s‫“‏‬Retirement‫‏‬Challenge”‫‏‬survey
L&A: Tackling longevity risk

Focus on what is in an insurer’s control, and that which will likely impact the
competitive position over the long haul, regardless of market conditions
Achieving information fluency: Calls for a comprehensive effort to widen access to data across an
organization and put the analytical tools and talent in place to make sense of it
Overcoming regulatory challenges: Better position to adapt more quickly and be more innovative to turn
threats into an opportunities
Upgrading capital management: Consider a cohesive game plan and operating model to better integrate
finance with risk management and business planning
Adapting to alternative capital influx: Brace for falling property-catastrophe rates; consider merger or
acquisition to cut excess capacity and grow market share; explore getting into securitization market.
Getting ahead of climate change: Launch individual initiatives, and contribute to industry-wide efforts already
underway or yet to come
Transforming for growth: Reassess products, distribution platforms, communication options, and consumer
outreach campaigns to connect and educate prospects more effectively
Tackling longevity risks: Explore design, models, and distribution of products and policies to benefit from a
likely uptick in demand for coverage, but carefully consider potential long-term downside risks
Insurers should reexamine the way they do business internally and externally through a
transformative lens-one‫‏‬that’s‫‏‬wide‫‏‬enough‫‏‬to‫‏‬allow‫‏‬them‫‏‬to‫‏‬synchronize‫‏‬and‫‏‬coordinate‫‏‬their‫‏‬
efforts across the organization.
Next steps

Our outlooks discuss big picture issues likely to have a significant effect
on consumer behavior and insurer operations in 2015 and beyond
‫‏‬Share your thoughts with us by tagging and following @DeloitteFinSvcs
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Download now: 2015 Insurance Industry Outlooks

Gary Shaw
Partner
National Insurance Leader
Deloitte LLP
gashaw@deloitte.com
Neal Baumann
National Insurance Consulting Leader
Deloitte Consulting LLP
nealbaumann@deloitte.com
Howard Mills
National Insurance Senior Advisor
Deloitte Services LP
howmills@deloitte.com
Sam Friedman
National Insurance Research Leader
Deloitte Center for Financial Services
Deloitte Services LP
samfriedman@deloitte.com
Contact info

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