13/04/2017
2017: Predictions for the insurance industry
Beyond the impact of Brexit and the Trump presidency on businesses’ strategy, some developments that legal firm Clyde & Co has forecast for the insurance industry in Asia are the increase of regulatory scrutiny in Australia when it comes to risks involving climate, cyber and data and opportunities for foreign reinsurers in India with further liberalisation of the sector. As we leave behind the annus horribilis of 2016, here are more predictions for this year from Clyde & Co’s global practice representatives.
Australia: Directors and officers will see a range of new threats, and potentially be exposed to legal action for failing to properly account for the impact of climate change on their business. 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.
With this expected introduction, closer regulatory scrutiny of the management of data is likely in 2017, in particular in financial services and other market-critical sectors. This will be a quantum shift for businesses, as most other than the health-related currently have no legal obligation to report personal data breaches. 2017 will also likely see Australian regulators look more closely into the management of commercially or market sensitive information by market critical sectors. Following a year of new regulations for the life industry, 2017 will likely be another challenging year, where life insurance in Australia will see more reform and oversight on business and claims practices.
China: The regulator will encourage innovation through further reform and flexibility for insurers, while being wary of possible side effects and imposing heavier corporate governance obligations and other rules to prevent internet finance risks. This will increase compliance costs. 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. The regulator will also pay close attention to any potential market disorder and finance risks from them.
Hong Kong: The dominance of a traditional agency-based market will see the beginning of its end. Twin forces of regulation and technology will see the emergence of new distribution models. One could 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.
India: Debit card fraud in India will spark a rush for cyber insurance. Recent data breaches will serve as a wake-up call. Insurers here will recognise the opportunities in cyber, launch more products and many will collaborate with foreign insurers for reinsurance and underwriting support. Title insurance will bring growth opportunities. The regulator is studying the scope of this, and will probably come up with draft rules on this soon. Foreign (re)insurers can use their expertise to help the Indian market offer a new product. In fact, the Indian government looks all set to liberalise 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.
Singapore: The “Fintech Regulatory Sandbox” introduced by the Monetary Authority of Singapore in 2016 will support an InsurTech surge, seeing as in the short time since its launch, the MAS has already received a number of applications. The regulatory sandbox aims to enable financial institutions and technology companies to experiment, subject to appropriate safeguards to contain any negative consequences on the financial system.
Middle East: Regulatory change will continue to increase and confound the Middle East market. Regulators will continue their move towards RBC models for insurers and increasing the requirements for intermediaries. This reflects a drive by the UAE and Saudi Arabian authorities 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.
Life insurance will be a focus for overhaul. 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. 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.
US: Insurtech will permeate almost every expect of the industry. 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.
The Trump administration will cause some uncertainty where it comes to cross-border economic and trade matters. Uncertainty about what President Trump may do and potential retaliation by other countries may cause a decrease in insurance M&A activity in the US, but deal making should come roaring back in 2H 2017, as the the administration and Republican Congress are expected to decrease financial regulation, while pro-business policies and reduced taxes are anticipated.
Global: When Article 50 is triggered will not matter, as Brexit planning is already under way and will accelerate. Insurance businesses, not just those in the UK but also the 550 headquartered in Europe which passport into the UK will make their move. Leaving the EU will lead to many complex changes taking place and there will be plenty of announcements likely to be made through 2017, whatever the outcome of Brexit negotiations.
The concept of “insurance as aid” will come of age. 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. Commercial insurers will develop an appetite for offering this type of cover to national and regional governments. Can they work with aid bodies to extend the reach of these products?
M&A will remain a key objective as insurers consider other routes to growth. But there will also be an increasing interest in other routes for growth. Some companies will look to enter new markets by establishing a subsidiary, as has been seen in Singapore. Entering into joint ventures with local partners has been attractive and the raising of FDI limits in markets like China and India will encourage this. Brexit will also further spur M&A as there is fear that passporting rights may be rescinded.
Forget driverless cars, its motor-cyber that’s going to transform the motor market. While the traditional motor market may shrink, drivers will still require some level of liability and property cover, and so will car manufacturers-especially those which will accept liability for their cars in driverless mode. The biggest challenge however, will be getting to grips with the combination of motor and cyber insurance. It may not be long before criminals start hacking the car auto drive management system thereby causing accidents, raising questions over where liability will sit.