Insurance CEOs embrace disruption

CaptureInsurance CEOs are more concerned than those in any other sector about the combined threats to their growth prospects from over-regulation, the speed of technological change, changing customer behaviour, and competition from new entrants. But while this indicates that insurance is an industry most affected by disruptive change, insurance CEOs are fairly confident their companies can Continue reading Insurance CEOs embrace disruption

The wait is nearly over – IFRS 17 is coming, are you prepared for it?

We are close to a new IFRS insurance contracts accounting standard. IFRS 17 (previously referred to as IFRS 4 Phase II) is expected to be issued in early 2017 with an effective date of 2021.

IFRS 17 applies to all insurance contracts. The general model is the Building Blocks Approach (BBA) and is based on a discounted cash flow model with a risk adjustment and deferral of up-front profits through the Contractual Service Margin (CSM) which cannot be negative.

  • Changes in the initial building blocks are treated in different ways thus determining Profit recognition:
  • Changes in cash flows and risk adjustment related to future services are recognised by adjusting the CSM, whereas those related to past and current services flow to the P&L
  • The CMS amortisation pattern is based on the passage of time and drives the Profit recognition Profile
  • The effect of changes in Discount rates can either be recognised in OCI or P&L

The IASB has recognised the diversity in insurance contracts and have introduced alternative approaches to address particular features, subject to eligibility criteria as illustrated.

Download the full report here.

Blockchain: The $5 billion opportunity for reinsurers

Reinsurance industry could save $5 billion with blockchain

Reinsurers are in line to build some of the biggest blockchain applications outside the payments sector with the potential to save $5-10 billion in costs, says a new report from PwC.

PwC’s report shows that blockchain has huge potential to transform the reinsurance industry, given the amount of data flowing between clients, brokers, reinsurers and outsource service providers. PwC estimates that, by simplifying reconciliation and multiple data entries, blockchain solutions could remove 15-20% of expenses from the reinsurance industry, delivering $5-10 billion of savings.

The report shows that blockchain technology can speed up claims processing verification. It can also allow primary insurers to cede/ retrocede risk using an application specifically designed to process treaties, notify all parties and process premium and commission payments.

Potential wins from blockchain in reinsurance:

  • Processing – using blockchain to remove task duplication and multiple rekeying of data
  • New business – the industry has already seen pilots in the catastrophe swap market and PwC expects blockchain to support entry into new markets and products
  • Transparency – if all underlying risks are on a blockchain, the reinsurer can more accurately identify and quantify the risks that are to be protected by reinsurance. Effectively information on the underlying risks can be aggregated onto a reinsurance blockchain so all information, documents and transactions flow into the contract.PwC has been working on a number of proof of concept applications to demonstrate the potential for blockchain within insurance and reinsurance and how the technology could be applied in practice. We believe it’s important to show that blockchain applications not only work but provide the right solutions to important business problems.

Stephen O’Hearn, PwC’s global insurance leader, commented:
“Blockchain technology is still a new and uncertain area for reinsurers but those who are able to quickly build, assess and refine their applications will differentiate themselves. At a time when companies are searching for cost savings, the potential of blockchain to vastly improve efficiency and accuracy cannot be ignored.”

Download the full Report here.

Breaking through: How insurers can harness the diversity dividend

Realising the power and potential of a changing workforce

Management wants greater diversity. Clients and employees expect it. But while progress is being made, there’s still a big gulf between management’s intentions and the reality for many people working within insurance.

In this round-up of our research and viewpoints on diversity and inclusion in the insurance industry, we outline why diversity in all its forms – from gender, generation, ethnicity, sexuality and disability to people with a broader range of skills, experiences and cultural backgrounds – can give your business an edge. We also look at how far the industry has come and how to break though the remaining barriers.

Our perspectives draw on our wide ranging work with insurance clients and support for groups campaigning for greater diversity and inclusion. We also draw on our own experience of seeking to make diversity a reality within our Organisation.

Download the full research here.

More for less: Five steps to strategic cost reduction

‘Be bold, be brave and be creative’ – PwC challenges reinsurance industry to step up their strategy for cost reduction

In a new report released on the 12th September at the Monte Carlo Reinsurance Rendez-Vous, PwC challenges the insurance and reinsurance industry to take brave steps in their cost reduction strategies.

70% of insurance business leaders plan to implement a cost reduction initiative over the coming year, but PwC argues that squeezing a few percentage point savings is no longer enough in such a competitive and disrupted marketplace. The industry is facing a perfect storm of soft rates, low investment yields and new regulation alongside the impact of new technology, shifting customer expectations and the threat of losing margins to nimble InsurTech entrants. Investment in technologies that sharpen the precision of risk selection and pricing but also improve the overall operations efficiency and effectiveness will be crucial for companies looking to differentiate themselves. Those who take up the challenge will see significant cost savings and a game-changing boost in customer relationships.

Stephen O’Hearn, global insurance leader at PwC, commented:

“Many insurance executives have had bruising prior experiences with cost initiatives failing to deliver long-term gains or culture change within the organisation. But the time to confront the challenge is now. Real business transformation is necessary. Outsourcing and shared services are certain to yield some benefits but automation may be the most sustainable long-term solution.”

PwC’s five steps to distinctive cost reduction

1. Know the score – insurers and reinsurers must start by taking the time to understand the operational costs across every element of the business, and analyse the return from each of these. Insurers without a clear sense of what costs to keep and what ones to eliminate risk being left behind. Insurers should also consider what these returns will look like in five years’ time in the face of technological adoption, changing customer behaviours and competition from new market entrants.

2. Target your investment –Separate ‘good costs’ (needed to fuel profitable growth) from ‘bad costs’ (e.g. low-performing business lines) and compare what you have with what you need.

3. Be brave – be bold, be brave and be creative. Insurers must aim high – settling for marginal gains is not an option.

4. Treat cost reduction like M&A – insurers should run the process with the same strategic initiative, board sponsorship and direction as they would an acquisition.

5. Keep focused – cost reduction is not a part-time process and should be regularly reviewed in order to track improvements and identify further opportunities.

Stephen O’Hearn, global insurance leader at PwC, commented:

“By identifying the markets and exposures with higher returns and directing resources towards them, insurers can be strategic in their approach. Technologies such as blockchain, artificial intelligence and robotics are increasingly on leaders’ radars and have the potential to deliver millions in savings. Those who embrace the change will see the benefits and will raise the bar for the rest of the industry.”

Patrick Maeder, EMEA insurance consulting leader at PwC, concluded:

“Resistance from within the organisation is a common challenge for leadership teams looking to streamline, but insurers must bite the bullet and tie their cost reduction measures to their modernisation strategies. Ultimately, buy-in from all levels of an organisation will be make or break for insurers and an innovative, accountable and convincing cost reduction strategy will be crucial in getting this support in making changes throughout the company.”

Read the full Report here.

Chain Reaction: How Blockchain Technology might transform wholesale insurance

Blockchain technology (Mutual distributed ledger) has the potential to be applied to a range of business processes that involve multiple parties exchanging data, with the ability to create a shared common view of data and automate inefficient business processes. And PwC has been investing heavily in building up our blockchain capability, creating Blockchain Delivery Lab in Belfast and announced strategic partnerships with Blockstream, Eris Industries and Digital Asset Holdings.

The new research conducted by Z/Yen and sponsored by PwC, is based on 50+ interviews with brokers, insurers, reinsurers, regulators and trade bodies from across the global wholesale insurance market. The findings highlight enthusiasm within the wholesale insurance industry to work together and implement blockchain solutions, and are complimented by a technical Proof of Concept developed by the PwC Blockchain Team in Belfast illustrating how blockchain technology can be applied to solve business problems.

 

Full information available here.

Opportunities await: How InsurTech is reshaping insurance

Many believe insurance is on the brink of a major disruption, but few are putting InsurTech at the heart of their strategy.

Insurance companies are very much aware of the FinTech revolution: 74% of respondents see FinTech innovations as a challenge for their industry. There is good reason to believe that insurance is indeed heading down the path of disruptive innovation, whether it is the effect of an external factor, such as the rise of the sharing economy, or the ability to improve operations using artificial intelligence (AI).

However, despite these emerging trends, a disconnect exists between the amount of disruption perceived and insurers’ willingness to invest to defend against and/or take advantage of the innovation: 43% of the industry players claim they have FinTech at the heart of their corporate strategies, but only 28% explore partnerships with FinTech companies and even less than 14% actively participate in ventures and/or incubator programs (figure 1).

Incumbent insurers who are currently focused on catching up with their competitors around customer centricity and other current trends are missing the opportunity to become proactive. They need to create a clear and consistent message that will demonstrate their willingness to play in the new InsurTech space and act accordingly – only such an approach will position incumbents to be front-runners in the new insurance era.

Read on in our Insurance focused report: Opportunities await: How InsurTech is reshaping insurance. 

 

 

VAT exemption to insurance related services about to change

Recent judgement from the Court of Justice of the European Union is likely to lead to greater focus on insurance related services that have previously been treated as VAT exempt.

 

Summary

The Court of Justice of the European Union confirmed in its recent judgement (Aspiro, C-40/15) that insurance claims handling services should be taxable for VAT purposes. This decision is in line with the current practice and/or rules in a number of member states (e.g. Germany, France), however, it is likely to lead to greater focus on the VAT treatment of insurance related services in countries which, to date, have widely granted VAT exemption to insurance related services (e.g. the UK).

Action recommended

We anticipate that the above decision will trigger a review of the scope of national VAT exemption for insurance related services, especially in countries which apply VAT exemption more broadly. Insurers and their suppliers should carefully review their service arrangements and assess the impact of the potential changes – such as potential for higher VAT costs for insurers as well as opportunities to maximise input VAT recovery for suppliers. It may be possible to consider claims handling services as VAT exempt if they are provided as part of single supply together with insurance intermediation (Aspiro did not deal with this matter explicitly).

The Aspiro case

Aspiro provided claim handling services (i.e. receiving and processing of claims and losses covered by insurance, contacting the insured person to conduct inspections to determine the causes and circumstances of an accident, preparing expert loss reports, dealing with appeals and complaints regarding claim handling and administrative and technical tasks related to these activities). Aspiro had a legal relationship with the insurer who engaged them to provide services in the name and on behalf of the insurer, i.e. Aspiro did not have any contractual relationship with the insured persons, however dealt directly with them. Aspiro considered its activities to be VAT exempt insurance services on the grounds that they are a key element of the business for the insurance company.

VAT exemption – what’s in / what’s out

Using the Aspiro example – the court considered two routes to VAT exemption; 1) services which are part of an insurance service, and 2) insurance related services typically performed by insurance agents and/or brokers. It concluded that the services provided by Aspiro did not represent either of the services leading to VAT exemption as Aspiro did not have a contractual relationship with the insured person (key condition for characterisation as an insurance service) nor undertook the role of finding prospective clients to introduce them to the insured with a view to concluding an insurance contract (key condition for characterisation as an insurance related service).

 

Please contact one of our authors if you have any questions about this matter:

Immy Pandor
Dieter Wirth
Marcella Dzienisik
Tobias Meier