The ageing challenge - The single biggest issue facing the insurance industry

There is no one-size-fits-all for the globally prevalent problem of providing security for ageing populations, according to a discussion by a panel of experts yesterday. One speaker observed, not only is pensions reform a politically sensitive issue, “one thing pensions have in common with insurance is, it’s an important problem, but it’s always viewed as a problem you can put off for another day.”

Principal International president and CEO Luis Valdes, who moderated the session, noted that there are three general pension trends: the move from payable system to fully-funded ones; from defined benefits to defined contributions; and from occupational pension plans to those tailored to individuals. From the discussion, the way to close the pension gap is for the public and private sector, including life insurance companies and asset managers, to look at new solutions, including innovative ones

Here are takeaways from the experts, including three case studies on Japan, India and China:

How acute is the retirement gap?
McKinsey principal Ari Chester

Providing a global perspective from his experience working with multiple pension schemes, Mr Chester noted that the pension gap in eight major economies (Canada, Australia, Netherlands, Japan, India, China, the UK and the US) stood in excess of $70tn in 2015, but is predicted to hit $400tn in 2050. The gap is getting worse for these reasons:

  • Longevity. Someone who was 65 in 1980 would live until 80, but someone who is 65 today lives on average till 95.
  • Old-age dependency ratio has increased. In 1950, OECD countries saw 10 workers for one retiree. Now there are five to one, and in 2050, this will be just two to one.
  • People are not saving.
  • Public pensions in OECD were 5% of GDP in 1980 and 8% now. In the US, the cost of social security programmes are going to exceed income for the first time in 2020.
  • Interest rates are down and will bring low returns.
  • Morbidity. There is a health gap, with people living longer but unhealthier lives.

Changing work patterns
OECD private pension analyst Jessica Mosher

With increasing job mobility and the gig economy, and based on the premise that pension plans are moving from public to private, Ms Mosher addressed the need to design portable pension plans to suit the new work patterns. One must also consider the different needs of the self-employed like their need for more liquidity given their less stable income. There are two main approaches:

  • Plan follows the member - this is easier to manage but the challenge is in tax treatments, particularly across jurisdictions.
  • Assets are moved from one employer to another - this could be inhibited by guarantees in the plan.

She has also observed innovative solutions, like one in Australia that offers two parallel accounts, one being superannuation while another liquid account that individuals can access offers the possibility of eventually diverting funds to retirement savings. She noted that more innovation can be explored in making it conducive for those with less stable income, or ‘not in the system’ to contribute to pension schemes.

A super-ageing society
Sompo Holdings manager, group CEO supporting office Takahide Maruki

As a ‘super-aging’ society with around 18% of its population over the age of 65, Japan faces mounting medical and nursing care costs. Its ‘Society 5.0’ masterplan aims at a human-centred society that balances economic advancement with the resolution of social problems by a system that integrates cyberspace and physical space. With this as the backdrop, Japan is looking at better health management as a risk mitigation measure so that its population can enjoy a long and healthy life.

Three areas Japan is looking at to enhance the lives of its ageing population

  • Measures which help the population to have a healthy long life expectancy.
  • Addressing dementia, which currently affects one in six.
  • Co-existing of humans and machines and using AI and robots at work.

India’s rising middle class
Life Insurance Corporation of India chairman Vijay Kumar Sharma

India’s rising middle class provides numerous opportunities for pension funds and insurers. It is unique in being a diverse country, with 60% rural population against 40% in urban areas. In rural areas, there is little or no access to pension schemes and the government has made recent efforts to improve social security. In 2014, the government introduced Pradhan Mantri Jan Dhan Yojana (PMJDY), a scheme that aims to expand and make affordable access to financial services such as bank accounts, remittances, credit, insurance and pensions.

Another major initiative was to introduce a guaranteed pension scheme for senior citizens in 2017. PMJDY is offered by LIC and offers an assured return of 8% over 10 years. If there is a shortfall between the actual return earned under the scheme and the guaranteed return of 8%, the government will subsidise LIC for it.

China’s pension reform
Principal International president North Asia Thomas Cheong

China is facing demographic challenges. It is projected that 30% of the population will be aged over 65 by 2050. Its population will decrease and dependency ratios will fall. Yet this is happening when it is still growing from an emerging economy to a developed one, and has not yet accumulated a stash of wealth, unlike mature Western economies. The majority of its pension accumulated savings resides in Pillar 1 while the remaining is in Pillar 2 (mainly state-owned enterprises) and none in Pillar 3. Eighty per cent of the population is not covered by any mandatory pension plan.

The government needs to shift the pension burden from Pillar 1 to Pillars 2 and 3 and address structural problems:

  • Retirement age in China is relatively low, at 55 for women and 60 for men even as life expectancy is above 80
  • Declining fertility rates as the economy develops. This has proved to be difficult to reverse in most countries.

Mr Cheong highlighted the following policy reforms China is already working towards:

  • A shift from Pillar 1 to 2, to alleviate the burden on the employer. For a start, Pillar 2 will be mandatory through introducing an occupational annuity that applies to all civil servants
  • Addressing the labour mobility issue by reallocating the pension pot. This means resolving the distribution of surpluses in wealthy urban areas where people work and contribute to pension schemes, compared to rural areas, where people eventually retire but are only able to tap small coffers.
  • Incentivise a shift to Pillar 3. In Shanghai, Suzhou and Fujian, China has launched a pilot programme to encourage the purchase of commercial pension insurance by offering tax exemptions to buyers, with a view eventually to expand this nationwide to include pension and asset management firms.

Some recommendations…

  • Change consumer behaviour to make them help themselves - eg, encourage saving through tax incentives and raising awareness
  • Annuitise retirement assets. This is easier said than done, given the large capital needed for annuity markets and the population’s general dislike for annuities, which are seen as risky investments should their life expectancy be lower than expected
  • Design new products that are structured to be less capital intensive, reduce guarantees but offer higher pay-outs
  • Some US successes in wealth management products can be brought to other markets - low-cost mutual and ETF target date funds and monetising illiquid assets into income streams, eg, reverse mortgage and home equity loans
  • Move to collective products, like collective defined contribution plans which eliminate guarantees and are based on pooled risks and economies of scale.
  • Insurers should look beyond insurance in providing complementary services. Companies like Sompo are expanding into relevant nursing and healthcare business which also increases customer contact.
  • The insurance industry has the responsibility to communicate the need for urgent reform of pensions systems

Keep the message for the population at large simple: Start early, save enough and diversify your risks.


Duty of care: Technology paves the way for new solutions

Globalisation has led to an increase in mobility and the need to travel to operate a business, with staff being exposed to risks ranging from illness to terrorism and Nat CAT. The complexity of these risks, along with technological developments, creates opportunities for insurers, risk managers and security experts to come together and provide a comprehensive approach towards duty of care, according to a panel discussion yesterday.

With staff travelling more than ever against the backdrop of an expanding risk landscape, employers have a duty to take reasonable steps to protect staff from risk incidents at work. AIG EMEA regional security manager James Morton said a tip he came across is that reframing the notion of ‘duty of care’ as an ‘avoidance of negligence’ task helps to sharpen the attention on the issue, so that managers will recognise the importance of procedures to protect their staff.

On the subject of providing a comprehensive duty of care programme, Special Contingency Risks divisional director Cathal Bracken, a former insurance executive turned risk consultant, highlighted the need for MNCs to ensure that their multinational insurance programmes also can be applied to local jurisdictions. As to whether local policies are needed, that is often determined by the number of staff requiring cover.

Organisations should also ensure that the triggers for their insurance coverage, traditionally aligned to guidance from foreign ministries, are indeed current and adequate for their staff’s travel plans, said Mr Bracken. He also emphasised that locally-recruited staff should also enjoy a duty of care consistent with expatriates, with many firms only focusing on the latter.

Moving on to the major challenges in duty of care, the panellists noted that it should be a two-way street between employer and employee. Willis Towers Watson head of insurance Clive Clarke said there is a gap in communication as employees often do not know what tools are available to them as business travellers and what they should look out for. In response, Mr Morton said that there is also onus on an employee to make an effort to look out for himself. For example, he should be aware of the risk situation at his destination. A firm should also work with its insurers, security and travel companies to provide the right amount of information to staff that helps them understand the risks, without overwhelming them.

The discussion turned towards the technology available today to help firms manage business travel. Mr Morton recommended travel tracking systems to monitor the flow of employees and having a robust 24/7 local response service in place to provide immediate assistance. Mr Clarke noted that such technology has enabled firms to be more “proactive rather than reactive”, to reach those at risk in time.

Mr Morton also addressed using tech tools for ‘data-scraping’ and tapping sources of information like social media, which can provide firms with valuable alerts on the whereabouts and movements of clients and can be shared quickly with insurers and relevant duty of care partners. The latter can then provide the clients on the ground with timely updates. Most of these tools are based on open-sources, which can provide a wealth of information.

Asked what emerging risk the industry would face in future, Mr Clarke expressed concerns about firms having to be prepared for the ‘no fear’ attitude of well-travelled millennials who are entering the workforce as business travellers. “Millennials have an outlook on life where they don’t see danger and don’t sense it like the older generation does,” he said.

Rounding up the panel discussion, moderator AIG Distribution Partners and multinational clients president Ralph Mucerino noted that insurers like AIG were investing significantly in technology in order to provide global coverage for their clients. The important takeaways from the panel discussion included the importance of cooperation among insurers and their multiple stakeholders for a good duty of care programme, the need to be prepared and do due diligence on business travel destinations and the value in tapping new technology solutions like travel-tracking systems to manage employee travel.

And one valuable lesson from Mr Bracken, who cited a case study where a firm provided assistance to partners without coverage even though there was no legal obligation to do so, was that duty of care can be more of a moral and ethical priority than a legal one. Sometimes it’s just about doing the right thing.


The future of insurance: Leaders as agents of change

Moderated by ITL COO and chief counsel Wayne Allen, yesterday’s panel discussed how leaders can facilitate change and innovation in the industry.

“When we talk about innovation, we cannot ignore diversity and inclusion. Innovation means that there is going to be an accumulation of ideas. It has to come from every sector within your organisation and those ideas should come from diverse backgrounds and perspectives in order to have them funnelled up to make it to an effective organisation. At the board level, there is a clear urgency to change the tone - and changing the tone from the top - because we know we need a cultural shift. Silos are being dismantled. We are having multi-disciplinary teams working together in a much more creative type of environment.”

Grace Global Capital founder and MD Grace Vandecruze

“The biggest challenge is to embed innovation into the culture of an organisation. It is a lot easier to do that in a start-up than in an established company. As leaders, you’re given that opportunity to create an environment where anybody can ask questions. It does not matter if you are at the top or the bottom. In fact, a lot of the best ideas come from the people who are doing the job in the first place because they can see the red tape ... If you can create an environment where anybody can ask that difficult question knowing that it is OK to try something and potentially fail, and learn from that failure, then you’re going to embed innovation in the company. It does not matter if it is a young company or an old company.”

WeGoLook client director Philip Madeley

“We had to convince everyone in our company that the old way of doing things, which worked for 100 years, was not the way it needed to be in future. Because the slowest rate of change we are going to face is the rate of change we face today because it is only going to accelerate. What is always a challenge is the cultural component of getting people to buy into change. So what do you do as a leader? Appeal to a larger purpose. In our company, we have meetings where we give out cash bonuses to have people stand up and talk about their failures. We had to create an environment where it is OK to fail. I have never learnt anything when I do something really well. It is when I do something poorly, that’s when learning happens. We have to create an environment where people are willing to take risks.”

The Institutes president and CEO Peter Miller

Navigating IFRS 17

IFRS17, the new international insurance contracts standard, brings with it a fundamental change in insurance accounting and will give users of financial statements a whole new perspective. From their experience in completing IFRS17 projects for various clients, executives from Cognizant, Deloitte and Aptitude Software shared their roadmap to navigate successfully through this new set of regulations.

The 10 scariest words in the English language, according to Cognizant head of insurance Rahul Phondke are, “I’m from the government and I’m here to help you.”

Speaking at an exclusive roundtable – Comprehending the Blueprint for IFRS17 Insurance Contracts – Mr Phondke said, “Never before has the financial services industry been subject to so many regulations in so short a time.”

“The typical IFRS17 compliance project takes 14 to 18 months, in an ideal world,” said Mr Phondke. With only 30 months until December 2020, which is the deadline for IFRS17, insurers must start their projects by Q3 of this year, he said.

Four key elements to a successful IFRS17 project

“Every IFRS projects requires the use of a solid implementation strategy and a roadmap,” said Deloitte technical director Liza Gonzalo. In addition, companies should work towards the design of an end-to-end infrastructure, as well as perform a financial-impact analysis which would include creation of a key prototype model and testing of the related methodology.

Companies should conclude project delivery with a training programme that is repeatable and updated periodically. This should include on-site training for local operations as well as advanced topic-learning sessions for core functional teams.

Dealing with data

Cognizant lead consultant and practitioner for analytics, performance and compliance management, Nishanth Ramesh, closed the roundtable by identifying the five data challenges that an organisation might face in developing a blueprint to leverage existing processes.

These included:

  • Granularity of data - existing policies and contracts need to be reclassified and provide more detail;
  • Historical data - ensuring that legacy data is updated to the new requirements;
  • Data format - ensuring that all data collected from various systems is in the same format that meets regulatory transparency requirements;
  • Data duplicates - consolidating and ensuring duplicates in data are accurate and error-free; and
  • Data reconciliation - standardising new or custom systems to existing data formats and systems, to minimise user error.

Mr Ramesh then suggested that it would be wise to instigate a dry run for testing purposes, implementing these changes onto sample data in an incremental manner. This helps familiarise users with the changes, avoids user error in the future and provides a smooth transition towards IFRS17.


ABCs of insurance – go beyond

Artificial Intelligence (AI), big data and cloud computing are just a few of the hottest developments in digital. While each has its benefits, China’s first and largest online-only insurer ZhongAn Technology CEO Chen Wei told Asia Insurance Review at an InsurTech conference in Shanghai why the industry should look beyond adopting the new technologies in silos.

Q: How do you see new technologies, besides big data and cloud computing, transforming the insurance business?

We can classify technology into two groups – new technologies, such as blockchain and AI, and traditional or existing solutions such as CRM. The potential for new technologies is massive because it can be scaled throughout the organisation, whereas the latter is only able to achieve normal enhancements that are only modular to specific business functions.

At present, the operational efficiency that is achievable with big data and cloud computing alone is limited. It is one thing to be able to collect and store the data, another to effectively integrate and transform all the information into valuable insights. These technologies cannot be used in silos. To truly maximise the potential of big data, we also need to leverage AI and blockchain, driven by cloud computing. 

Q: Blockchain is one of the hottest technologies on many insurers’ agendas. What are your thoughts?

We see blockchain as an enabler for the entire economy and ecosystem, not just insurance alone. One of the goals we want to achieve through the use of blockchain is financial inclusion for the population. 

ZhongAn Technology recently launched a product called “GoGo Chicken” catered to farmers. The product leverages a combination of technologies such as big data, blockchain and IoT to drive and monitor the farming activities. 

Through the data collected, banks and insurers have better risk assessment of the farming industry, which allows them to offer suitable financial products to the farmers. With this initiative, we have created a new business case for the financial services industry.

Ultimately with blockchain, we want to provide a trusted and secure network for the insurance industry to thrive by drastically reducing fraud. At the same time, the operational costs for financial institutions and service providers can be greatly reduced.

Q: The use of tech is also expected to raise efficiency and the reach of insurance. How do you foresee the evolution of insurance distribution?

When it comes to distribution, traditional insurers are still heavily reliant on agents to drive offline sales, while AI powers online sales. The role of AI is to enhance the customer experience and traditional business lines. With big data as a complement, AI adoption can quickly and accurately determine and meet the needs of every customer. This thus brings us a step closer to offering truly personalised products. 

While traditional insurers are digitising and empowering their agents with various technology tools, the fact is that distribution fundamentally remains agency-driven.

Given the rapid development of AI sales in the digital space, I foresee that in the next five years, both AI and agency will eventually merge to form a hybrid “AI-Agent” distribution model once traditional insurers are finally able to fully digitise and migrate their business to the digital world. 

Q: What is your assessment of the present state of innovation in the industry?

There remains abundant opportunity for innovation in insurance within the wider financial ecosystem. Because if you look at banking, tech has already deeply penetrated and is well-embedded in the sector, at least in China. So naturally, the next target sector for development is the insurance sector. 

Even as traditional insurers continue to operate within their existing models, there is an immediate need for them to modernise and digitise. For instance, our partnership with PingAn Insurance allows them to enhance and drive efficiencies to their existing processes and products via our latest technology services, such as AI-as-a-Service and Blockchain-as-a-Service.

Existing “innovation departments” will cease to exist in the future. The innovation culture needs to be embedded into every department, and every employee should be empowered to drive innovation using tech. This is what will shape and determine the future of organisations – the ability to innovate on an enterprise level without having an innovation arm.


Belt and Road Initiative - The potential and pitfalls of China’s ambition

The first-ever Insurance Summit on China’s Belt and Road Initiative (BRI) organised by Asia Insurance Review saw experts discuss both the enormous growth opportunities (estimated by Swiss Re to be worth an additional $23bn in commercial insurance premiums by 2030) and risks which the development strategy that straddles three continents could bring. Here are some key takeaways from the summit.

The BRI has the potential to be truly transformative in providing an unprecedented opportunity for the private sector to be involved in infrastructure in the developing world. To facilitate BRI projects, a multitude of financial services is required - from strategic advisory and transactional banking services to risk management and project and export finance, said HSBC Holdings group head of insurance Bryce Johns. And insurance companies, in addition to banks, can play a supporting role.

Insurance opportunities

Highlighting BRI projects as having four principal risks— political, economic and financial, regulatory and operational, Mr Johns said that as risk appetite for financing in less developed BRI countries varies, political risk insurance and credit insurance have an important role to play independently and in conjunction with export credit agencies and development banks. Infrastructure projects offer generally stable and predictable cash flows over long periods that are also more suited to investment by life insurance companies.

Speakers at the summit said product gaps in the Chinese market which foreign players could fill include CEAR DSU, political, business interruption, kidnapping and terrorism products.

Risk management and green finance opportunities
DBS Bank economist Ma Tieying said China remains a middle-income economy and is still at ‘the early stage of exporting capital’. Chinese firms are thus not familiar with the risks and execution challenges of operating in emerging markets, like economic instability and forex volatility. There is also a BRI project financing gap that private and foreign entities can help the government with.

Allianz Global Corporate & Specialty Asia Pacific regional head of engineering Matthew Hooker said that risk management, together with product development and innovation in niche areas, is a domain where international players can focus. “It is not viable to try to compete with the Chinese market on capacity or price,” he said, as Chinese insurers are sufficiently enabled. Mr Hooker also said BRI would allow for the rise of bonds (eg, insurance-backed) as an alternative financing instrument to domestic banks.
The BRI needs to be executed with the environment in mind while also providing an opportunity for China to tackle climate change and for green financing - including bonds, loans, insurance and securities - to support projects, said HSBC’s Mr Johns.

Impact on foreign players

Some regional representatives examined the BRI’s impact on foreign players. During a panel discussion, Southeast Asian insurers shared concerns that early BRI projects saw reinsurance ceded only to Chinese players with little participation from the local market, and highlighted the need for host governments to move insurance up the agenda at the start of project negotiations, and to lobby actively for China to tap local expertise and reinsurer capacity in the first instance.

Speakers also saw BRI as a potentially collaborative platform with risks also serving as opportunities to be shared by many far beyond the shores of China. It can be win-win even for competing hubs like Hong Kong and Singapore to work together. Additionally, a collaborative approach, such as the Singapore-based consortium led by China Re, can be a good way for smaller players to pool resources like capacity, underwriting and analytical capabilities and access BRI projects.


Lessons from the East Asian Insurance Congress

The 29th East Asian Insurance Congress took place in Manila from 6-9 May 2018, with over 700 delegates gathering to discuss the ever-present problem of change. We take the choicest quotes from the three-day conference that highlight the threat of disruption in the industry.

“FinTech is at the cutting edge of this change and should be seen as a blessing that will lead to greater financial inclusion. While insurance is the most closely regulated area of financial services, this means that it will be the sector that benefits most from FinTech developments.

Asia is now the centre of gravity of the global economy. The Philippines is one of the fastest growing economies in the world – and we are undertaking reforms (to the financial system) that will ensure this continues.”

Carlos Dominguez, Philippines Secretary of Finance

“Lesson number one: Don’t conduct grand transformations. But following quickly on that is lesson two: Don’t be complacent.”

There is no such thing as an agile organisation – in the same way a start-up is agile. There are just big organisations and small organisations. Even the big tech companies such as Amazon and Google, viewed by many to be agile and fast organisations, will get bogged down by gatekeepers, regulators and red tape, due to their sheer size.

Even today, there is no long-term transformation roadmap in these organisations. If you knew today everything you would be doing in five years’ time, then why wouldn’t you be doing that today?”

Andrew Rear, Munich Re Digital Partners, Chief Executive

“Climate change, whether you believe it or not, and rising sea levels are some of the biggest disruptors for the industry now. Rising sea levels contributed an additional 30% to the total losses caused by superstorm Sandy, which hit the eastern seaboard of the US in 2012. We are seeing the sea levels rise. We are seeing the incidence of natural catastrophes increase and unfortunately Asia Pacific is right at the heart of that.

The important thing for the industry is that climate change and its consequences are something that can be modelled, and insurers have plenty of historic data collected on Nat CATs. It’s what we do. We study and understand these events and we pay natural catastrophe losses.”

Kent Chaplin, former Lloyd’s Asia Pacific CEO


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General Manager Business Development: Sheela Suppiah-Raj
Editorial team: Chia Wan Fen, Zuhara Yusoff
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