December 22, 2016

Insurance industry predictions: 2017

Each working day between now and Christmas we'll be publishing insurance industry predictions from Clyde & Co's global insurance practice.

23 December: Brexit planning will accelerate

Insurance businesses across Europe will make their moves

The actual timing of the triggering of Article 50 in 2017 will be of little consequence to insurance companies. With a carrier company taking nearly two years to set up, insurers haven't waited and are already well underway in planning for Britain's exit from the EU.  It is worth remembering that it is not only those in the UK that are affected; there are over 550 general insurance companies headquartered in continental Europe who passport into the UK (some of those on a branch basis) that have been considering their options.

The biggest issue to consider is whether the size of the business, or its potential for growth and profitability, warrants the establishment of a locally-authorised branch or subsidiary in another EEA country, a fronting arrangement, or the acquisition of an existing business. The decision not to continue operating within the EEA will require a plan to run off the existing business through a sale of the renewal rights and / or the transfer of historic portfolios.

Another issue under consideration concerns existing European distribution arrangements. It is vital that businesses undertake a review of all their distribution arrangements to see whether services are being provided to, or received from, a third party using EU passporting rights. If they are, decisions would need to be made about how these arrangements operate after the UK withdraws from the EU.

Leaving the EU will lead to many complex changes taking place and for this reason we predict insurers will be rapidly developing their post-Brexit strategies in the coming months, with plenty of announcements likely to be made through 2017, whatever the outcome of Brexit negotiations.

Ivor Edwards, London

22 December: Beginning of the end for mass agency in Hong Kong

Twin forces of regulation and technology will see the emergence of new distribution models

Hong Kong has for a long time discussed the opportunities for evolution in insurance distribution, but in reality it has largely remained a traditional agency based market.

However, this is set to change in 2017. We expect to see a drive to new affinity, bancassurance and direct distribution channels, led by the arrival of new market entrants in combination with innovative technology, resulting in a transition away from costly mass agency distribution models. This will be given greater impetus when the cost of administering such channels increases under the additional scrutiny of the new Independent Insurance Authority, due to take over in 2017, and the recent regulatory changes relating to the sale of life insurance, which are intended to reform the industry's approach to sales, with a greater focus on customer protection.

Companies that will be best placed to take advantage of these changes are those with established brands that are not tied to existing costly mass agency forces and can bring in or partner with innovative technology companies to create cost effective distribution models. There is a lot of opportunity for disruption in a market where significant volumes of direct sales have yet to take off.

Joyce Chan and Kevin Martin, Hong Kong

22 December: Indian government looks to attract global reinsurers

Changes to regulatory norms will encourage more reinsurers to set up a branch office in India

In a bid to create a conducive investment climate for the insurance sector, the Indian government is all set to ease regulatory norms, including licence rules, to attract foreign reinsurance firms. The Finance Ministry will soon meet all financial regulators and Reserve Bank of India to discuss possible investment options for foreign players.

Global reinsurers are not happy with the current rules, under which they have to conduct their core activities – such as claims settlement, risk management and investment – within the country itself, rather than outsourcing them abroad. They believe that the present situation increases their cost base.

In addition, they do not feel that they are on an equal footing with Indian reinsurers as under current regulations Indian insurers must first offer business to a domestic reinsurer and, only if it is rejected, to a branch office of a foreign player.

We feel IRDA may come up with new liberalised regulatory norms for global reinsurers in the near future. This will facilitate the process of setting up a branch office and remove a number of operational issues. As a result, more reinsurers will move to set up a branch office in India.

Vineet Aneja, Mumbai

21 December: US insurance M&A activity will decrease during 1H 2017 due to uncertainty about the Trump administration

However, deal-making in the sector should come roaring back in the second half of the year

On January 20, 2017, Mr. Donald Trump will become President of the United States, promising a dramatic departure from recent US public policy on many fronts.  During the first half of 2017, there will remain considerable uncertainty for insurance dealmakers, but deal activity should return to high levels during the second half of the year.

The key factor leading to decreased deal activity during the first part of the year will be uncertainty about the Trump administration’s policy plans, particularly on economic and trade matters. For instance, Mr. Trump has called for potentially revisiting existing trade agreements, which tend to cover trade in financial services and cross-border investments, and has made comments against certain countries such as China.  Such uncertainty about what President Trump might do and the potential retaliation by other countries (in the event that the United States under President Trump seeks to unilaterally impose trade barriers) is likely to chill acquisitions by non-US acquirors of targets in the US insurance industry. Similarly, even US parties considering US targets will also likely postpone deal-making until there is greater clarity about the Trump administration’s economic policies.

However, the Trump administration and the Republic Congress together are expected to decrease financial regulation (although insurance is regulated almost exclusively at the state level), implement pro-business economic policies, and reduce taxes for businesses, which are expected to lead to a growing economy and rising stock markets. Those factors should lead to an increase in insurance M&A deal activity during the second half of 2017.    

Vikram Sidhu, New York

20 December: To mandatory reporting and beyond – Australia moves towards best practice in data management

Closer regulatory scrutiny of the management of data is likely in 2017, in particular in financial services and other market critical sectors

The introduction of mandatory breach reporting is almost a certainty in Australia in 2017, with regulators looking more closely at how businesses manage the data they collect. Businesses operating in Australia, or with an Australian link, will have to effectively manage and respond swiftly to data breaches affecting personal information once there is knowledge or suspicion that a data breach has occurred.

This represents a quantum shift to businesses as currently there is no legal obligation to report personal data breaches (subject to some limited exceptions in relation to health and medical records). The new reporting framework is expected to apply not only to personal data held and collected in Australia, but also to data held offshore on behalf of Australian businesses.

2017 will also likely see Australian regulators look more closely into the management of commercially or market sensitive information by market critical sectors (perhaps in a similar fashion to the EU Directive on security of network and information systems adopted in Europe in July 2016). The use of data sharing, data standardisation and the creation of tools to empower consumers are all being closely considered, as is the implementation of sophisticated regulatory technology to monitor the financial services market.

Dean Carrigan and John Gallagher, Sydney

19 December: Singapore’s sandbox will support insurtech surge

Regulator’s move to promote innovation will see more ground-breaking ideas come to fruition

One of the biggest hurdles facing the industry in pursuing insurtech-driven innovation is the challenge of bringing such developments to market amidst a regulatory landscape that does not always provide the kind of flexibility necessary to accommodate new concepts. 

This is set to change in 2017. The Monetary Authority of Singapore (MAS) has recently responded to this challenge by introducing a 'Fintech Regulatory Sandbox'. The regulatory sandbox will enable all financial institutions (including insurers), as well as technology companies, to experiment with innovative financial products or services in the marketplace, but within a well-defined space and subject to appropriate safeguards to ensure that any negative consequences can be contained and the overall safety and soundness of the financial system preserved. 

Significantly, the MAS has confirmed that it will provide appropriate regulatory support, including by relaxing its own specific legal and regulatory requirements, where they may inhibit the development of a sandbox project.

In the short time since its launch, the MAS has already received a number of applications for participation in the Fintech Regulatory Sandbox and it recently bolstered the program with the release of a detailed set of regulatory guidelines to provide potential applicants with further details of how the initiative will operate.  In another sign that this new initiative will gain momentum during 2017, at Singapore's inaugural Fintech Festival held in November 2016, over 20 innovation labs established by insurers, banks, technology companies and others opened their doors to the public.

Ian Stewart, Singapore

16 December: Forget driverless cars, its motor-cyber that’s going to transform the motor market

It’s what you do in your car rather than how you drive it that will soon present the biggest risk

Technology has not done the motor market any favours. Direct marketing has cut distribution costs; but the rise of the aggregation sites has closed down opportunities for brokers and put carrier margins under threat, driving many out of the market altogether. Now the advent of driverless cars has led one consultancy to predict the traditional motor market will shrink 60% by 2040.

But opportunities for insurers remain. Individual drivers will still require some level of liability and property cover. Car manufacturers will certainly require product liability – particularly if more follow the lead set by Volvo to accept liability for their cars when in driverless mode.

But perhaps the biggest challenge will be getting to grips with the combination of motor and cyber insurance. We predict it won’t be long before criminals start hacking the car auto drive management system thereby causing accidents, raising questions over where liability will sit. Furthermore, hackers will look to access car wifi to see if it’s been used for work and contains sensitive data; or whether bored passengers have been online shopping. In this scenario it might soon be the case that the data in the car is far more valuable and far harder to protect than the car ever was.

Mark Hemsted, London

16 December: Title insurance will bring growth opportunities in India

Foreign (re)insurers can use their expertise to help the Indian market offer a new product

The Regulatory and Development Authority of India (IRDA) has proposed a new product aimed at providing cover to property owners in case of defective property titles and related issues. In order to progress this, IRDA constituted a seven member working group to study the scope of ‘Title Insurance’ in the Indian market.

The group is currently studying the need and scope for such a product in the domestic market vis-à-vis the existing practices in the international market and to identify the insurable risk and define the compensation structure. We believe IRDA will soon come up with draft regulation in relation to title insurance, which will consist of details on product design, a risk assessment framework, pricing, structure of policy wordings, reserving and accounting, while keeping in mind the long term sustainability of the product on a standalone basis.

This will provide new opportunities for foreign re/insurers who have experience in writing title business to collaborate with their Indian counterparts to develop this new product.

Vineet Aneja, Mumbai

15 December: France will continue to position itself as a top choice for (re)insurers looking to establish an EEA base

French regulators have announced measures designed to woo British businesses to relocate to Paris in preparation for a ‘hard’ Brexit

With the process for the UK to leave the European Union likely to start in 2017, (re)insurers that do not currently have a subsidiary in a non-UK,  European Economic Area (EEA) country are investigating their options.

Recent initiatives have positioned France as a credible alternative to more obvious contenders such as Ireland, Luxembourg and Malta. In an unusual move, the French financial markets regulator (AMF) and the banking and insurance supervisor (ACPR), issued a joint press release promising red carpet treatment to anyone wishing to establish an insurance company in France post Brexit.

For existing activities already supervised in the UK, the licensing procedure may be simplified and speeded up by using documents already available in English such as forms that have been submitted to the supervisory authorities in the UK, and papers concerning French branches whose business would be taken over by the subsidiary firm. In addition, an English-speaking contact is to be appointed to guide applicants through the procedure starting with the pre-authorisation period and to provide all necessary information to ensure the smooth processing of the application.

Other factors make France an attractive choice: a fairly sound and stable insurance and reinsurance regulatory framework, a qualified workforce, the key actors all being in one place and, of course, a good quality of life! 

Yannis Samothrakis, Paris

14 December: Regulatory change will continue to confront (and confound) the Middle East market

It appears inevitable that pace of regulatory change will continue to increase across all sectors

Regulators in the region continue their moves towards risk-based capital models for insurers and increasing the requirements for intermediaries. This reflects a drive by the UAE Insurance Authority and the Saudi Arabian Monetary Agency to encourage consolidation in the insurance sector. There will continue to be a focus on corporate governance and compliance requirements as regulators seek to comply with international standards. 

The regulators in the UAE are increasingly focused on the life insurance sector. The Emirates Securities & Commodities Authority (SCA) overhauled its funds regime in 2016, proposing radical new methods for arranging and promoting financial products. When implemented this will require the funds into which unit linked life insurance products are invested, and potentially other classes of assets, to be registered with the SCA‎.

Intermediaries wishing to advise on asset selection will need to be licensed by the SCA for these purposes. So, for the first time, the insurance broking community will be exposed to dual oversight by the Insurance Authority and the SCA. The UAE Insurance Authority has also recently published a consultation paper which will overhaul the manner in which the life insurance industry operates in the UAE, and will entail substantial changes for product providers and intermediaries.

Despite this fast moving regulatory change, the relative non-accessibility of regulatory materials in certain jurisdictions, sporadic implementation and supervision standards, will continue to confound regional insurance market.

Wayne Jones, Dubai

13 December: South African government to prepare raft of legislative and regulatory changes

First half of 2017 will see a flurry of activity as foreign re/insurers scramble to restructure their businesses

One of the substantial changes impacting the insurance market reflected in the Insurance Bill is a tightening on the prohibition of foreign insurers and reinsurers conducting business in South Africa. The vast majority of operating models which were utilised by foreign insurers and reinsurers, for example the typical 'fly-in fly-out' models, will in most instances no longer be viable.

Foreign direct insurers caught by the prohibition will have to consider whether they will seek to amend their model to comply (though this may be more challenging under the new dispensation), incorporate a local insurer in South Africa, operate via a Lloyd's Underwriter, or simply abandon their South African business altogether. Foreign reinsurers will, in certain instances, have the additional option of establishing a branch office in South Africa.

With the regulatory and cost burden of a fully incorporated entity, we foresee a substantial up-tick in business by way of Lloyd's underwriters, and it is likely that Lloyd's will increase its local capabilities ahead of this. We expect that the first half of 2017 will see a flurry of activity as foreign insurers and reinsurers scramble to restructure their businesses in line with the structures envisaged in the Insurance Bill, with some (though a minority) withdrawing from underwriting South African risks where their footprint does not justify the incurring of costs in pursuing the market.

Ernie Van Der Vyver, Johannesburg

12 December: M&A will remain a key objective as insurers consider other routes to growth

Despite a drop-off in activity this year, businesses will seek out transactions

Growth is a priority for many insurance businesses but remains hard to find in today’s ultra-competitive, low-interest rate environment. Despite this, there was a dip in M&A activity in 2016, partly due to a natural cooling down in a market that hit a three year high in the first half of 2015 and challenges in finding the right target at the right price. We predict that in 2017 M&A will remain a popular route for companies looking for consolidation, diversification and geographic reach. But there will also be an increasing interest in other routes for growth.

Some companies will look to enter new markets by establishing a branch or subsidiary. In Singapore, for example, we are seeing an increase in interest from international (re)insurers looking to set up shop and establish a base for wider access to markets across the region. Likewise, Miami is emerging as a regional hub for Latin American and Caribbean (re)insurance business – attracting a number of international players who are drawn to the city’s deep connections with, and accessibility to, the region.

Another option that is attracting attention is to enter into a joint venture with a local partner. The raising of foreign direct investment limits in markets such as China and India is offering foreign insurers greater access to some fast growing markets leading to an increase in international insurance businesses raising their shareholdings, something which is set to continue in the coming year.

Of course, no prediction would be complete without considering the impact of Brexit. In our view, this will act as a further trigger for M&A. Many businesses will be considering transactions to create a platform within the EU so that they can continue to access business that might be harmed if passporting rights are rescinded.

Andrew Holderness, London

9 December: 2017 is likely to be another challenging year for the life insurance industry in Australia

Government reviews will require the industry to re-evaluate its business and claims practices.

2016 was an important year for the life insurance industry in Australia. A number of changes were introduced following the release of a series of reports into the industry, including the Australian Securities and Investments Commission's (ASIC) Review of Retail Life Insurance Advice in October 2014, the Financial System Inquiry (Murray Report) in December 2014 and the industry-funded Trowbridge Report in March 2015.

In October 2016, the first Life Insurance Code of Practice was launched and a bill, which provides regulation for remuneration/commissions that can be paid by life insurers to insurance intermediaries, was reintroduced into the Australian Parliament.

2017 is likely to be another challenging year for the life insurance industry in Australia. The Joint Parliamentary Committee on Corporations and Financial Services will continue its further inquiry into the industry, including reviews of the need for further reform and improved oversight of the industry, and the sales practices of life insurers and brokers. Separately, ASIC is continuing its industry review of life insurance claims handling. Both reviews will put the life insurance industry under the spotlight for another year and will require it to re-evaluate its business and claims practices.

Avryl Lattin and Troy Mossley, Sydney

8 December: Chinese insurance regulator to encourage innovation but wary of possible side effects

New business models responding to technological evolution require a watchful eye

To implement the industry-specific 13th Five-Year Plan, the Chinese insurance regulator has been taking various steps, including the reform of its commercial auto insurance market, the development of a multi-layer intermediary market, and the change in supervision of insurance products. The regulator will no doubt keep furthering the reform.

Whilst more flexibility will be given to insurers in respect of product diversification and business innovation, the regulator will impose heavier corporate governance obligations on insurers, increasing their cost base as they have to comply with new regulatory requirements.

New business models have also developed in response to technological evolution, for example many insurers have been using the popular Tencent platforms, i.e. WeChat and QQ, to explore new business opportunities targeting individual customers. While most of the market players are doing business within the regulatory regime, some have taken advantage of virtual tools to conduct activities in violation of existing laws. Although the regulator expressly encourages business innovation, it will pay close attention to any potential market disorder to echo the State Council's plan of preventing internet finance risks, and will adjust its rules as a result.

Carrie Yang, Shanghai

7 December: Agribusiness insurance ripe for growth in Brazil

Climate change a key driver behind rising demand

As a world leader, Brazilian agriculture has seen strong growth for over three decades. Total agricultural output has more than doubled in volume compared to its level in 1990 and livestock production has almost trebled, primarily due to productivity improvements and technological developments.

Despite this success, the sector continues to face significant risks predominantly from adverse natural phenomena. Brazil has experienced a range of these in recent years including heavy rainfall, devastating floods, high winds and hurricanes, storm tides and severe droughts.

In the face of these exposures, demand for agribusiness insurance policies has skyrocketed, with the number of policies covering agricultural risks rising from only 849 in 2005 to more than 100,000 in 2016. However, despite this rapid expansion, the market is still has room for growth. Currently less than 20% of Brazil’s planted agricultural area is insured, although the market aims to increase this to 70% in the coming years, in part through government subsidies – the Ministry of Agriculture announced one of more than  1 billion Brazilian Real (approximately GBP230 million) for the period 2016 to 2018 – and other incentives such as facilitated rural credit. We expect the exponential growth in the agribusiness insurance market to continue through 2017.

Stirling Leech, Sao Paulo

6 December: Huge debit card fraud in India will spark rush for cyber insurance

More insurers to recognise the scale of the opportunity and look to launch new cyber insurance products

The recent data breach impacting a number of major Indian banks, thought to have been caused by malware on an ATM network, compromised the security of an estimated 3.2 million customers in one of the country's largest-ever cyber incidents. While alarming, it was not entirely unexpected as cyber security continues to be an after-thought in every sector of the economy.

However, this incident may serve as a wake-up call and help to precipitate a reversal of the low growth trend in the cyber insurance market. There is a growing awareness that any business with a web presence or dependency on IT faces a range of cyber exposures, which is resulting in an uptick in demand for affordable cyber protection.

The number of providers of cyber cover in India has been limited but more and more Indian insurers are already including it as part of their treaty arrangements. Now, an increasing number of insurers are recognising the scale of the opportunity and looking to launch new cyber insurance products. Many of them will seek collaboration with foreign insurers – who have greater experience and capacity in writing cyber insurance business – for reinsurance and underwriting support.

Vineet Aneja, Mumbai

5 December: The concept of ‘insurance as aid’ will come of age

But only with concerted action by willing insurers

Parametric insurance is set to transform the way disasters are managed as governments and aid agencies re-set expectations about how fast aid can be made available using these developing insurance products.

Neighbouring countries in the developing world have formed mutuals that pay out promptly for defined natural hazards. This Autumn CCRIF SPC in the Caribbean (the pioneer of the concept in 2007) paid out $29.2 million to member countries within two weeks of them being hit by Hurricane Matthew. ARC did something similar when Malawi was hit by drought. But so much more could be done.

We predict that in 2017, commercial insurers will develop an appetite for offering this type of cover to national and regional governments. Swiss Re and a Lloyd's consortium have led the way in China and other parts of Asia. Can insurers work with the UN and other bodies to extend the reach of these products so that other agencies (including NGOs) can use them to fund their own humanitarian interventions?

One of the key challenges for the industry will be to help NGOs and others explain to potential donors why it makes sense to fund premiums for a parametric cover that might only occasionally pay out. In insurers’ favour is the inalienable argument, borne out by the hurricane Matthew experience, that payment based on a range of scientific data triggers is faster and more reliable than politicised decision-making about aid allocations could ever be.

Nigel Brook, London

2 December: Insurtech will permeate almost every aspect of the US industry in 2017

Existing state laws and regulations will require a rethink to avoid stifling innovation

The insurance industry is the area of financial services in which technological innovation has been especially lagging.  However, for most of 2016, investment in “insurtech” – the innovative use of technology in insurance – outpaced investment in other areas of fintech.  Examples of insurtech innovation in the United States have ranged from the launch of the peer-to-peer insurer Lemonade in New York for home insurance to the sale of drone insurance via a mobile app by Verifly. 

In 2017, entrepreneurs, investors, existing insurers and other players in the insurance industry in the US will intensify their efforts to bring innovation and modernization to the sector. These developments will affect every part of the insurance industry – but especially in personal lines – from sales and marketing through underwriting to administration of claims. 

However, existing state laws and regulations will require a rethink to avoid stifling such innovation as many were formulated to address the sale and administration of insurance in ways that will cease to be relevant. In the longer run, insurtech developments might even put pressure for more federalization of insurance regulation as new technologies will have a greater nationwide reach, such that state-level regulation of insurance may become increasingly difficult to administer.

Vikram Sidhu, New York

1 December: Directors and officers in Australia to see a range of new threats

Climate change and cyber top the list of emerging risks facing business leaders

Australian company directors and officers (D&O) could potentially soon be exposed to legal action for failing to properly account for the impact of climate change on their business. This risk is set to become a hot topic for discussion in 2017, following the recent release of a legal opinion from a prominent Australian barrister which concludes that climate change risks would be regarded by the Courts as being foreseeable, and therefore relevant to a director's duty of care and diligence under Australian law.

The relevance of climate change risks is heightened for D&O in industries such as insurance, energy and commodities, where the company's business model would be directly impacted by the increase in the frequency and severity of extreme weather events linked to climate change.

Cyber risks will also move up in the list of priorities for D&O with the expected introduction of mandatory breach legislation in Australia in 2017 and the resulting potential for financial exposure and reputational damage to the company and directors, who may incur personal liability as a result of a data breach. Directors will need to ensure that robust cyber resilience frameworks are embedded in their companies, consistent with the expectations of Australia's corporate regulator.  

Dean Carrigan and Yvonne Lam, Sydney