Insurance still has its work cut out in proving its value to customers
The insurance industry needs to do a lot more to gain trust as a force for good, said Willis Re International chairman James Vickers.
Mr Vickers was speaking at a panel discussion sharing wide ranging global perspectives on the challenges facing the insurance industry. He said that the industry still has to work a lot harder at explaining what it does. Being by nature not a transaction that is in an ‘instant gratification’ format, with pricing based on its own sophisticated models and data that is not evident to the public, the lack of understanding of the industry is further undermined by its inconsistent service level to customers, the price-based selling without adequate explanation of policy exclusions, and the “huge element of mis-selling going on”.
“The reality is there is bound to be some disappointment,” he said. “We have to work a lot harder explaining what our role is.”
Providing the perspective of an Asian emerging market with huge potential, India First Insurance Co CEO and managing director R.M. Vishakha said India’s insurance industry is moving from a ‘buyer beware’ to a ‘seller aware’ model, with a lot of onus placed on insurance companies to responsibly market to a diverse population where some segments have very low financial awareness.
The industry, however, in seeking to prove its worth, faces a number of challenges. These include creating value and staying profitable in the face of mounting costs and a changing risk environment. One significant rise in expenditure comes from increasing regulations.
Hannover Re board of management member Michael Pickel acknowledged that compliance costs could be “burdensome”, with the new IFRS 17 reporting standard bound to cost more than Solvency II and could affect pricing. “What increases costs year after year is costs of approval for manpower and IT systems associated with regulations,” said Mr Pickel.
However, he was sanguine about the benefits new regulations can have, and noted that the processes put in place as a result of Solvency II have helped to streamline risk management and pricing. Over time, these processes could be simplified, he said.
Mr Vickers said that while he sympathised with regulators in charge of an industry where people pay upfront for a service they may or may not receive, the question is to find where the balance and degree of intervention lies. What he is more concerned about though, is the deglobalisation of regulation, where individual countries stifle new competition and only some players can bear the cost of operating in them. After all this undermines an insurance key principle—the diversification of risk.
“Within the industry that is a very difficult subject for us to push back against because we look entirely self-serving when we start complaining about that,” he said. “We need to engage others to help us, in particular the academic community which can talk about the costs of such behaviour.”
Mr Pickel said that diversification has helped in difficult claims situations like the disasters of 2017. However, the protectionist tendencies in certain markets like Latin America, Asia and the Russian Federation are working against reinsurers, making it hard to get business out of these countries.
Building the local industry – not too self-serving
The panellists noted the difficulty in international insurers arguing that they could build the local market as a whole, given how self-serving it seemed while they were also to profit from it. Mr Vickers said that the best way would be to look at relevant success stories which speak for themselves.
For example, in the 2011 Christchurch earthquake in New Zealand, where insurance penetration is relatively high, losses amounted to about 20% of the country’s GDP but were largely recovered by foreign insurers and their global reinsurance. This was a contrast with, sadly, some local insurers which were overwhelmed by the disaster. This is a powerful story for the value of insurance, as is the similar total dependence of the smaller Caribbean markets on foreign players he said.
Ms Vishakha, expressing a view not just of India but probably the BRICs economies, said regulations were evolving towards welcoming players which were willing to come in and provide capital. She acknowledged that there were many benefits that the foreign players could bring, as long as they looked at how to meet the very different needs of the diverse local insurers—for example, reinsurance companies have not come up with capital support or support towards financial reinsurance in India.
The panel addressed what Mr Vickers called one of the elephants in the room when it comes to proving the role of insurance—which was that for every dollar of premium, the industry only pays about $0.60 in claims. This is not tenable in the long run. “We have to get to paying at least 75 or 80 cents to a dollar in claims. We have to aggressively look at our own cost base and running them lean,” he said.
He noted that the biggest costs are in distribution and this has to be squeezed. However, despite the progress towards innovation taking place, insurance is at its heart an emotional purchase based on personal risk tolerance and in his view, cannot be done “entirely on an online app”. Ms Vishakha noted that often in India, claims ratios were in excess of 100% and a lot of underwriting was still based on outdated tables. This just reflects that many insurers have not caught up with the risks, despite availability of data and the possibilities of reducing distribution.
The discussion extended to topics like alternative capital, innovating with dynamic underwriting and pricing to streamline insurance, the interest rates environment, and the rise of non-traditional players and FinTech. The panel was moderated by IIS chairman Greig Woodring.