2015 EY US property-casualty insurance outlook
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2015 EY US property- casualty insurance outlook Market summary Current economic and marketplace trends in the US suggest a continuation of modest gross national product (GDP) growth and a low rate of inflation in 2015. Despite this generally positive macroeconomic environment, increasing risk and economic uncertainty continue to prevail. Consequently, the US property-casualty market is confronted by contradictory signals of opportunity and challenge. For example, corporate revenue growth is strong and job growth is increasingly improving, but job wage growth has lagged. Similarly, core US inflation has remained within the Federal Reserve’s targeted range, but food and energy prices are volatile and medical inflation continues. Volatility in global economic conditions further complicates the macroeconomic environment. The anticipated interest rate recovery has stalled, and volatility in the financial markets may accelerate.
Combined Ratio vs ROE
US property-casualty industry
On the surface, the property-casualty Figure 1: Combined
Profitability ratios ratio vs. return on equity
industry appears well on its way to
110 16%
a second year in a row of strong 107.7
performance. Combined ratios and return 14%
104.2
105 103.1
on equity (ROE) have reached levels not 102.3 12%
seen since before the financial crisis 100.8 100.8
99.7 10%
(see figure 1). This strong performance 100 98.2
96.8
has helped strengthen balance sheets, 95.7 8%
increasing both surplus and invested 95
92.6 6%
assets. However, as of year-end 2014,
ROEs were beginning to fall from a 4%
90
combination of capital accumulation, 2%
competitive pricing, weak investment
85 0%
returns and rising loss expense.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
In this environment, pricing is constrained by Return on equity (GAAP basis)
capital accumulating faster than insurance Statutory combined ratio
exposures. The benign catastrophe
Source: Conning, Inc. "Property & Casualty Forecast & Analysis, 3Q2014"
results over the last two years have
pressured reinsurance rates, which have
correspondingly depressed pricing in primary are another factor in companies’ declining segment and reach profitable customers,
lines. Additional pressures are anticipated if insurers also are using new technologies to
profitability, since maturing investments
alternative capital providers, such as hedge develop and manage multiple distribution
are being reinvested at lower yields. This
funds, further their expansion into the and communication channels. Nevertheless,
factor is compelling carriers to assume
casualty insurance business using predictive new competitors leveraging more available
more credit and liquidity risk in their
analytics. Several years of profitable property investment portfolios. To manage these and cost-effective solutions in analytics,
catastrophe reinsurance risk assumption communication and infrastructure may
strains on profitability, insurers need to
have bolstered the alternative providers in pressure the market’s technology leaders
continue to invest in technology solutions
their expansion plans. in 2015. In response, leading companies
across the entire enterprise that respond
are migrating from stand-alone technology
As margin pressures mount in the industry, more effectively to ongoing competitive
Page 1 1 January 2014 pressures, Presentation title projects to an environment of continuous
this increases the emphasis on expense increased risk and uncertainty.
technological improvement.
management through technology upgrades Market leading performance in the
and better integration of business units. The likelihood of increasing burdens and
property-casualty sector is being driven
To reduce costs, property-casualty jurisdictional competition will continue to
by investments in technology, distribution
insurers that grew over the past decade characterize the regulatory milieu in 2015.
and risk management systems. As
via acquisitions will need to increasingly Regulatory bodies have proliferated at
mission-critical information becomes more
focus on the post-merger integration of the international, federal and state levels.
accessible, this is driving more assured data-
their physical plant, people, processes and All will likely increase their demands for
driven business decisions in the C-suite. To
data resources. Weak investment returns information, reporting and compliance,
2 2015 EY US life insurance-annuity outlook
External forces in 2015
Technology Customer
Regulations Catastrophes Capital adequacy Pricing
changes expectations
Excess capital Competitive
Conflicts arising
Pace of change Increasing customer Benign CAT leading to pressures
between regulatory
accelerating needs environment increasing negatively affecting
bodies
competition pricing
with regard to accounting, solvency, fair retention of superior management 3. Improve customer connectivity by
practices, transparency, governance and talent is a key challenge, given that the expanding distribution and customer
marketplace equity. In the US, jurisdictional role of underwriters, claims and service service
competition is evidenced by the potential personnel is evolving. With organic growth 4. Retool operations for new and evolving
overlapping oversight of the National uncertain, management must explore risks
Association of Insurance Commissioners acquisition opportunities, particularly 5. Proactively address multiple regulatory
(NAIC), state insurance regulators and more targeted strategic expansion as requirements and potential tax
the new Federal Insurance Office (FIO). opposed to large-scale consolidation. The considerations
Navigating possible conflicting rules and ability to successfully plan and operate in
6. Address investment performance and
regulations may increase both human this fast-changing environment is crucial,
capital management
resource and financial capital costs. as the variable growth US economy will
pressure insurance company management
These various factors indicate that 2015
to assume greater risk, while determining Respond to increasing competition
may present a more challenging market
which of these risks is economically sound. with strategic cost management
environment for property-casualty insurers.
Companies that proactively manage To remain industry leaders, successful and focused pricing
these evolving events will differentiate property-casualty insurance companies will In 2015, insurers are entering an uncertain
themselves from those that respond need to react to these macro and industry operating environment marked by
reactively. In this regard, insurers need challenges in 2015 in the following ways: slower premium growth and increasing
to invest in new markets, products and 1. Respond to increasing competition competition. Personal lines exposures
approaches to existing customers. To grow with strategic cost management and remain below historical levels (see figure
the top line will require organizational laser-focused pricing 2), further pressuring top-line growth.
realignment, a commitment to innovation Maintaining good profit margins requires
2. Engineer an enterprise data excellence
and the implementation of advanced insurers to focus on cost, efficiency and
strategy
data analytics. The recruitment and more refined segmentation and pricing
2015 EY US life insurance-annuity outlook 3
Property & Casualty Exposures
strategies. For the past three years, Figure 2: Property-casualty exposures
insurers have been able to maintain stable US property-casualty industry
expense ratios due in large part to premium Personal lines exposures — auto and home
growth. However, if rates ease in 2015,
2,500 12
premium growth may not be able to keep
up with expense growth. 2,068 11.4
1,956 11.3
2,000 1,848 1,801 11.1
The continued expansion of aggregator
and direct-to-consumer business models 10.8 11
is enhancing insurance product cost 1,500 1,355 10.5
10.4
transparency, while the need to operate 10.2
10.3
multiple distribution and communication 10.1 906 925
1,000 10.0
9.9 781
channels is increasing carrier expenses. 10
554 587 609
Additionally, many insurers are just
500
beginning to rationalize previously
acquired operations and legacy systems.
To improve efficiencies and be more 0 9
competitive, insurers must attend to 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
redundant operations, processes and data Average age of US autos (years)
resources. Cost reduction is no longer just US housing starts (000s)
an operational issue; it is now a competitive
necessity. More forward-thinking companies Source: U.S. Census Bureau; R.L. Polk Co.; U.S. Department of Transportation; EY analysis, 2014
will aggressively tackle their costs.
Technology solutions are critical to
achieving strategic cost management and Several approaches are available to against their respective goals and
customized pricing and segmentation insurers to improve cost effectiveness, competitive differentiators. In turn, this
goals. Sustainable competitive advantages such as selective offshoring, shared service should guide better decisions to reduce
flow from precise, segmentation and centers, process optimization and third- costs and improve business performance.
optimized customer pricing using internal party spending controls. Some insurers Identifying the most effective long-term
and third party data. Micro-segmentation also have established onshore captive cost reduction opportunities is important in
of customer risk attributes is equally service centers in lower-cost geographies these deliberations.
important. Leading insurers also are with educated workforces to replace their
Page 4 1 January 2014 Presentation title
improving their profitability through existing, higher-cost infrastructure.
integrated cloud computing solutions that Engineer an enterprise data
cost less than on-premise technology. In the effort to reduce expenses, insurers excellence strategy
They are further trimming expenses by must not limit their ability to build
Property-casualty insurers in 2015 must
implementing straight-through processing new capabilities in today’s competitive
embrace an enterprise data excellence
to reduce duplicate data entry across environment. Strategically, they must
strategy that addresses all aspects of
functions. weigh prospective expense reductions
4 2015 EY US life insurance-annuity outlook
their operating model. Data collection also able to better understand the different
and analysis are necessary decision- distribution channels best equipped to
making tools, particularly as more insurers provide the solicitations, which can be
compete on their respective levels of data tailored to consumers based on whether
superiority and/or develop new business they are price-sensitive or more interested
models enabled by these capabilities. in customer services or security.
For example, customer acquisition and
Insurers face the prospect of competition
retention will improve through sharpened
from non-traditional sources with Technology has enabled some
data acquisition and predictive modeling.
sophisticated data analytics capabilities. entities to provide small business
Led by chief data officers, enhanced data
For example, technology firms have coverage electronically without any
analytics is sure to improve competitive
become more comfortable with risk agent or even carrier involvement.
positioning, as well as attract management
identification and selection because of the
at all levels capable of adopting the
wide availability of significant third-party
expanding uses of data analytics.
data sources. A case in point is mobile
Improved data acquisition and predictive apps that allow ride-sharing businesses to Improve customer connectivity
modeling capabilities will provide a more provide commercial automobile insurance by expanding distribution and
detailed understanding of customer risk coverage to drivers for the period in which customer service
profiles, generating more customized they are transporting passengers, instead
insurance coverage, better pricing and of continuous coverage. Technology also Reaching the insurance customer in a
cross-sell opportunities suited to each has enabled some entities to provide small variety of formats is increasingly becoming
buyer’s needs. Customer loss analyses business coverage electronically without a competitive necessity, given the
will speed claims adjudication processes, any agent or even carrier involvement. An expansion of channel choices available to
further improving customer retention and industry that had been relatively protected consumers from other industries today.
brand loyalty. The micro-segmentation of may well be a target for disintermediation. Adding channels and offering alternative
a customer’s risk profile also presents the modes of communication improves client
An effective enterprise data excellence access, enhancing competition for the
opportunity for an integrated customer
strategy requires the recruitment, most profitable customers. To address
solution, rather than the more discrete
hiring and retention of top science and competitive distribution challenges,
responses offered by less technologically
management talent. The industry’s aging insurers first need to expand their methods
astute competitors.
workforce complicates this need. In an and modes of customer interaction.
To effectively segment customer prospects increasingly competitive marketplace,
for acquisition purposes requires leveraging management that combines technological Competitive pressures have created
both third-party data and internal data. data sophistication with risk mitigation the need for insurers to evaluate the
Armed with this information and using skills can more effectively navigate and effectiveness of their traditional customer
sophisticated data analytics, insurers can make midstream corrections. connection points. In personal lines, some
predict which customer segments are companies have strategically developed
most likely to respond favorably to specific a suite of capabilities that meets the full
insurance product solicitations. They are spectrum of customer distribution and
service needs. Other carriers are adding
2015 EY US life insurance-annuity outlook 5
Customer Expectations
Figure 3: Customer expectations
US property-casualty industry
Top 10 most important characteristics when shopping for a policy
Value for the money 70%
Easy to deal with 60%
Responsive 46%
Insurer brand reputation 44%
Customer expectations are rising
Clear communication 44%
with regard to price transparency,
real-time customer service and Policy fit needs and budget 38%
support and instant delivery. Financial stability of insurer 32%
Right information in preferred format 32%
Single point of contact 29%
new channels, driven by their similar 24/7 access 23%
assumptions regarding the market’s
direction. Source: EY Global Consumer Insurance Survey, 2014
At the same time, customer expectations
are rising with regard to price transparency,
real-time customer service and support and guide them to these prospects. Improved seamless customer experience across an
and instant delivery (see figure 3). These data and implementation technology also insurer’s sales and service activities is the
expectations also are influenced by provides deeper insights into customer next competitive differentiator.
customer interactions with retailers, where preferences, identifying the most profitable
they seamlessly progress from information customers. Products and pricing can then
gathering to shopping, purchase and be customized and/or bundled to address Retool operations for new and
service. In this environment, insurers individual customer needs. evolving risks
must improve the customer experience by
Effective integration of technology As insurers pursue top-line revenue
providing additional distribution outlets and
solutions will enhance an insurer’s ability growth in new products, the effective
customer contact points.
Page 5 1 January 2014 Presentation
to track title
financial performance, customer identification, analysis and mitigation of
To further sharpen their competitive edge, satisfaction and the operational efficiencies new and emerging risks is increasingly
successful insurers will optimize the channel of multiple distribution channels. New important. Throughout the global
mix and provide channel partners with data customer contact channels continue economy, new business models are
analytics tools. Agents and brokers will find to emerge, including car dealerships, replacing traditional services while altering
it easier to collaborate with an insurer that mobile phones, kiosks and social media. customary risk patterns. In this new
leverages data analytics. This will enable them Integrating these channels to provide a sharing economy, services provided by
to identify potential high-value lifetime clients individuals inexperienced in risk mitigation
6 2015 EY US life insurance-annuity outlookInternet of Things
and delivery issues are on the upswing. Figure 4: Worldwide “internet of things”
Consequently, the risk characteristics for Worldwide internet of things
these services will be different from the Installed based of IP-connected devices*
risks inherent in more traditional models,
30 28.1
insofar as frequency and severity.
25.2
To address these challenges, insurers 25
22.2
need to re-engineer their traditional
business processes. Overhauling 19.2
20
Billions of units
outdated underwriting processes will be 16.3
critical, as new product time-to-market 15 13.7
accelerates in response to shortened 11.4
product life cycles. More modular and
10
granular product development will assist
management in responding to real-time
5
customer feedback and fast-changing
customer preferences.
0
Insurance coverage in the future will 2014 2015 2016 2017 2018 2019 2020
need to address new ways of activating Source: IDC, “Worldwide and Regional Internet of Things (IoT) 2014–2020 Forecast”
and terminating the risk transfer, given *Excludes stand-alone sensors, smartphones, tablets, PCs and wearable devices.
the marketing of insurance products in
short, distinct time frames in today’s
sharing economy. As consumer demand appliance breakdowns. As massive amounts
Proactively address multiple
increases for shared services, insurers of information are gathered, evaluated
regulatory requirements and
that best capture unique risk profiles to and stored, insurer underwriting, claims
potential tax considerations
offer more customized products will be in and distribution processes will struggle to
a prime position to seize these new market maintain pace. The growing volume and complexity of
opportunities. insurance regulations, in addition to the
Cyber-crime coverage is another area
various overseers of these rules such as
Other new risks offer additional of opportunity, given the recent spate
the NAIC and FIO, compel insurers to invest
opportunities for growth. A case in point is of highly publicized attacks at large and
in more flexible technology, data analytics
the networked connectivity of machinery smaller companies. Networked products
and skilled management. While more
Page known
and appliances, 3 as1the
January
“internet2014 Presentation
are sure title
to increase the risk of criminal
stringent regulations may impede growth,
of things.” While this provides greater intrusions, which will correspondingly
increase expenses and divert valuable
risk transparency, it also introduces fuel demand for cyber coverage. Bundling
human resources, the impact will be less for
increasing data collection challenges. insurance products such as warranty
insurers that select appropriate technology
Networked products, such as appliances coverage and cyber insurance could
and data solutions to address their broader
that transmit failure reports, will help facilitate new cross-sell opportunities.
risk management and reporting demands.
insurers to more precisely predict future
2015 EY US life insurance-annuity outlook 7Invested Assets
Figure 5: US property-casualty industry invested assets
US property-casualty industry
Invested assets
14%
BBB rated bonds*
12%
10%
8%
6% Schedule BA assets**
Insurers should monitor the
proposed tax law changes currently 4%
in discussion in Congress, such as
2%
the Camp proposal.
0%
2008 2009 2010 2011 2012 2013
*Percent of total bonds
Insurers need to expand their management **Percent of cash and invested assets
pools with management talent that is well- Source: A.M. Best Company; EY analysis, 2014
versed in regulatory and reporting matters.
Demands from multiple and potentially
conflicting jurisdictions require solutions
with enterprise-wide application. Investing of these risks on their balance sheets. specifically governing pricing and rate
in the efficient use of data to satisfy current They must also submit a description of the regulation practices. The FIO’s potential
and future regulatory demands will be more company’s processes for model validation. involvement in consumer protection
cost-effective if accompanied by judicious Although ORSA requirements are an initiatives, such as the affordability of
staff additions to respond to increasing annual process, they may be iterative — personal lines insurance in underserved
regulatory information requests. should an insurance commissioner request communities, would increase data demands
additional detail, the insurer must be in in the future. At present, it is unclear
In 2015, insurers with more than
a position to provide robust data, as well if the information requests from new
$500 million in direct premium
as a detailed understanding of risks, their regulators will conform to standard statutory
($1 billion for insurance groups) are required
interrelationship and how these risks can information or accounting conventions,
to comply with the NAIC’s requirement to
Page 2 of their
1 January be mitigated. In addition, ORSA is likely increasing their potential impact on insurers.
submit annual reports Own Risk2014
and Presentation title
to evolve to entail additional reporting
Solvency Assessment (ORSA). The scope Finally, insurers should monitor the proposed
challenges.
and detail of the data to be provided vary tax law changes currently in discussion in
according to the nature and the complexity Insurers also need to be ready to respond Congress, such as the Camp proposal. In
of the insurer. Nevertheless, insurers to increased data requests from the FIO, the proposal’s current draft are changes to
must provide the quantitative methods which has indicated interest in developing how property-casualty insurer loss reserves
they used to assess risks and the impact standards for personal lines insurance, would be treated for tax purposes.
8 2015 EY US life insurance-annuity outlookbond allocations has been the migration investment allocations need to be modeled
Address investment performance
toward lower-rated NAIC-2 category assets and better understood. To do this, insurers
and capital management
(BBB rated credits). Insurers also have increasingly need global enterprise risk
After a brief initial rise in interest rates taken on more liquidity risk by investing a management capabilities, improved risk
in mid-2013, rates have since retreated. greater portion of their bond portfolios into analyses and technology solutions that
The concerns over a rapidly rising interest private placement securities. While these measure investment risk across multiple
rate environment appear to have given actions have enhanced overall yields at the asset classes and economic scenarios.
way to anxiety over continued low rates. margin, they have not mitigated insurers’
Although the property-casualty industry’s credit exposures and concentration risks. To optimize capital deployment, insurers
investment income is improving modestly, will continue to pursue capital management
Given an abundance of capital, most insurers strategies such as share repurchases,
this is primarily due to new cash flows and
are re-evaluating their investment allocations extraordinary dividends and even merger
invested asset growth, as reinvestment
to enhance performance and improve and acquisition transactions. Management
yields continue to languish. While the
diversification. Among the asset classes that will rely on both internal and external
industry’s embedded yield appears to have
insurers are considering are common stocks, capital models to balance their return
bottomed out in 2014, it is not expected to
loan products, master limited partnerships objectives with regulatory, solvency and
rise appreciably in 2015.
and hedge funds. While these alternatives rating agency capital margin requirements.
As a result, insurers continue to seek can improve an insurer’s investment risk Expectations are for global political and
enhanced yield and investment income profile and provide added diversification, they economic volatility and uncertainty to
through changes in credit quality, liquidity require greater sophistication in risk modeling continue to influence the capital markets
and maturity. However, the prolonged and monitoring, in addition to both internal in 2015, requiring insurers to take a more
investment market challenges leave and external reporting. proactive approach toward managing
insurers with few ways to achieve these their investment and capital management
In today’s increasingly demanding
aims. One of the more significant shifts in strategies.
regulatory environment, these new
Among the asset classes that
insurers are considering are
common stocks, loan products,
master limited partnerships
and hedge funds.
2015 EY US life insurance-annuity outlook 9Notes 10 2015 EY US life insurance-annuity outlook
Contacts
David Hollander
EY Global Insurance Advisory
Leader
+ 215 448 5756
david.hollander@ey.com
2015 EY US life insurance-annuity outlook 11EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2014 EYGM Limited All Rights Reserved. EYG No. EGO212 1411-1355136 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com
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