General Insurance Update 2016 - Empowering New Zealand for the future November 2016 - assets.kpmg
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General Insurance Update 2016 Empowering New Zealand for the future November 2016 kpmg.com/nz
ii | KPMG | General Insurance Update 2016 © 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
General Insurance Update 2016 | KPMG | iii
Contents
Welcome to the 2016 Creating a The Fire and Emergency
edition of our General digital future New Zealand Bill –
Insurance Update private insurer
funding model
1 3 7
The role of culture Playing in the sandpit ICAAP – creating a
in conduct risk of ideas: Adaptation better risk culture
and change
9 15 17
Evolving insurance risk Getting strategic about Considerable
and regulation: Insights inorganic growth: accounting changes on
from insurance global risk Insurance CEOs speak the way for insurers
and regulatory survey
22 25 29
From cyber-weary Our authors Our thought
to cyber-energised leadership
33 37 39
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1 | KPMG | General Insurance Update 2016
Welcome to the 2016 edition of
our General Insurance Update
Kay Baldock – Partner, Head of Insurance, and Jamie Munro – Partner, Financial Services
To prosper and As we stand at the edge of the
Fourth Industrial Revolution, never
emerging risks such as cyber
threats and interconnectivity.
fuel New Zealand’s has the need to adapt and innovate
been more imperative. The industry
Tim highlights both the need for,
and the importance of, setting aside
economy, insurers must continue to consider how time and resources for idea generation
technology will reshape the economy, to create new opportunities.
must continue and social and cultural environments,
The Reserve Bank of New Zealand
and impact day-to-day lives.
to adapt their This year’s publication has
(RBNZ) announced that, later this
year, they intend to consult on the
business strategies a strong future focus. Insurance (Prudential Supervision)
Act 2010. This is timely, given that the
to respond to In our first article, on page 3, Steve
Graham, KPMG’s Head of Digital
legislation has now been in place for
just over five years and, also, given
changing customer Futures, discusses how Artificial
the recent International Monetary
Intelligence (AI), new business models,
needs, technology simplification of transaction processes,
Fund Financial Sector Assessment
Programme review. Whilst there is
changes in risk, competition and
advances and customer behaviour are impacting the
currently no Internal Capital Adequacy
Assessment Process (ICAAP)
way in which insurers are conducting
regulatory demands. business and thinking about the
requirement in place for New Zealand
insurers, nevertheless, given the
future. In the words of Albert Einstein,
recent media reports around conduct
insanity is “doing the same thing over
risk gone wrong, we look at how
and over again and expecting different
ICAAP requirements can contribute
results”. New mental models are
to better conduct risk and ask if it
critical to the future of the industry.
is time for the RBNZ to introduce
Next, we consider the new Fire and ICAAP for insurers in New Zealand.
Emergency New Zealand Bill, and
Following on from this, and keeping
what this means for both policyholders
to the topic of risk and regulation,
and insurers, and whether the
Rob Curtis, KPMG Global Insurance
proposed expansion of the insurance
Regulatory and ASPAC Risk Lead,
levy model is equitable and, indeed,
presents the key findings arising from
sustainable as a funding base.
the recent KPMG global evolving
Last year, we discussed the increasing insurance risk and regulatory survey.
prominence of conduct risk. One year The survey focuses on four major
on, the focus is now on the underlying areas: governance, capital/ICAAP,
drivers of conduct risk, and what risk management and regulatory
insurers can do to mitigate and developments, with responses
manage that risk. An insurer’s grouped by area: Australia, Europe,
operating model, organisational Japan, US and the rest of the world
culture and values are key. (including New Zealand). One thing
is certainly clear, both senior
We are, once again, privileged to
management and boards are spending
have Tim Grafton, Chief Executive,
more time on risk management
Insurance Council of New Zealand,
than they did this time last year.
as a guest author. In the article on
page 15, Tim explores the concept of Earlier this year, KPMG International
adaptation and change, particularly surveyed more than 100 insurance
in respect of climate change and CEOs to discuss the question on
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
General Insurance Update 2016 | KPMG | 2 everyone’s mind – how to achieve profitable growth in today’s insurance market. On page 25, we share an article from the KPMG Global Insurance team based on the insurance CEO survey results. The findings highlight the importance of inorganic growth, strategic partnerships and alliances; these are increasingly important given low-interest-rate, highly competitive market conditions. While the release of the long-awaited new insurance contracts accounting standard is now not anticipated until Q1 2017, our article on page 29 discusses the key areas of change. The anticipated effective date is annual periods beginning on or after 1 January 2020. We note the impact of the new standard will reach beyond financial reporting processes and, therefore, it’s crucial that insurers start now to assess not only the financial reporting changes but also the wider business impacts: actuarial, capital and risk, asset-liability management, IT requirements, and, last (but by no means least), people/training needs. We close with a cyber risk update. We highlight the importance of balancing risk acceptance, mitigation and transfer, with the protection of assets, noting that such a strategy can be the key to transforming your business strategy from one that’s reactive to one that’s energised and proactive. On behalf of KPMG, we hope you enjoy the read. Please do not hesitate to contact KPMG to assist your organisation in addressing any of the matters raised in this publication. © 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3 | KPMG | General Insurance Update 2016
Creating a
digital future
Steve Graham – Head of Digital Futures
The exponential Digital disruption: two words that,
when combined, often stir anxious
The world’s first peer-to-peer
(P2P) insurance company
explosion of provocation. According to the
KPMG 2016 Global CEO Outlook, 82
Lemonade.com boldly states on
its home page that it is The World’s
technology percent of CEOs are concerned their
First P2P Insurance Company. Scroll
current products and services may
applications and the not be relevant to customers three
down its home page and you are
immediately introduced to Maya, its
years from now. The root cause of
assumption that the CEO apprehension may stem
charming AI bot who will craft the
perfect insurance policy for you.
digital solutions are from the digital speed of change.
It couldn’t be easier or faster. Scroll a
The exponential explosion of bit further down and you view
the panacea for all technology applications and the an explanation of how peer-to-peer
assumption that digital solutions insurance works. “P2P reverses the
the corporate ills are the panacea for all the traditional insurance model. We treat
will only perpetuate corporate ills will only perpetuate
the role of digital disruption.
the premiums you pay as if it’s your
money, not ours. With P2P, everything
the role of digital Despite this perpetuation, industry
becomes simple and transparent.
We take a flat fee, pay claims superfast,
is being disrupted by more than just
disruption. digital. Consequently, it’s important
and give back what’s left to causes
you care about.” Scroll a wee bit
to develop a comprehensive
further, and Lemonade discusses
view of disruption that includes
the social impact. “Lemonade Inc.
new technologies, new business
is a Public Benefit Corporation and
models, simplification of processes,
certified B-Corp. Social impact is part
competitive threats, customer
of our legal mission and business
behaviour and the transformational
model – not just marketing fluff.”
mind-set, critical to the way forward.
How relevant is a potential P2P model
As the Head of Digital Futures at
in general insurance? And when you
KPMG New Zealand, I am of the view
combine AI, does the model become
that successful insurance firms will
more significant? If we travel back
systematically develop plausible future
in time to 1999, we are reminded
state scenarios. It’s my hope that the
of the P2P architecture popularised
trends that are highlighted in this article
by the file-sharing system of music-
will help contribute to the forming and
sharing company, Napster. How big
framing of a transformed digital future.
was that impact? Global recorded
music industry revenue, adjusted for
inflation, dropped from approximately
Artificial Intelligence (AI) $40 billion in 1999 to less than $15
and new business models billion today. General insurance
firms should continue to monitor the
To illustrate the possible disruptive opportunities and impacts of new
opportunities within general insurance, business models that are incorporating
we look at a start-up that has combined leading-edge digital solutions.
cutting-edge AI technology with a
cloud-based, agile business model.
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
General Insurance Update 2016 | KPMG | 4
Simplification of Change in consumer
Change in risk
transaction processes behaviour
Insurance experts agree that there Examining the potential implications It’s quite clear that digital is pushing
will be gargantuan cost reductions of driverless vehicles on the the market from a reactive disposition
on the horizon due to technology general insurance market, one to a proactive focus on risk prevention.
solutions providing insurance firms is instantaneously struck by the This trend has introduced tools that
with simplified transaction processing. potential blow the insurance industry enable a ‘pay as you behave’ model.
Old actuarial practices and statistical may sustain after automotive TOWER Insurance has a SmartDriver
modelling will be displaced by highly manufacturer Mercedes-Benz app that collects driver information
effective algorithms based on AI, and tech behemoth Google both through sensors on your smartphone,
cognitive computing, big data, the announced that they would cover including GPS locations. The data
Internet of Things (IoT) and sensors. claims that occur from the faults of collected includes the distance
Anything predictable or repeatable self-driving cars, hence reducing the travelled and your braking and
will be automated by robots, leaving need for insurance by a significant acceleration. This information is then
the human being to other forms of number of existing policyholders, used to assess driving behaviour.
work that more commonly involve potentially, to third-party cover only. The app shows you how you compare
empathy, creativity, problem- to other drivers, which could be a bit
solving and negotiation skills. According to Bloomberg, insurers such
of fun but, more importantly, your
as Allianz SE and Munich Re are trying
score could reduce the cost of your
to assess the impact of automation
premium. Some ‘safer’ drivers would
on their biggest non-life insurance
hypothesise that this approach is a
market as car makers from Tesla
Change in competition fair way to pay for car insurance.
Motors Inc. to Daimler AG and Volvo
AB embrace technology. Personal auto Progressive.com, an American
It’s not only autonomously driven insurance accounts for 47 percent of insurance provider, is aligned to
vehicles and the introduction of new global premiums, according to Aon. TOWER Insurance’s behaviour-driven
business models that need to be In Europe, motor insurance is the incentives, saying it just makes sense –
considered when looking at the future main non-life insurance business line insurance should be based partly on
of general insurance. Digitally focused with annual premium income of about how you actually drive, rather than just
organisations with robust balance 120 billion euros (NZD $187 billion), on traditional factors like where you
sheets and significant networks of according to data from Insurance live and what kind of car you have.
friendly customers, such as Apple, Europe. KPMG researchers have
Solutions such as the SmartDriver
could, potentially, sell insurance. predicted that the motor insurance
app are based on understanding the
market may shrink by 60 percent by
Start-ups like lemonade.com, with high customer journey, the experience
2040 and some think that number
levels of automation and no unwieldy and the ability to reward individual
is a serious underestimate.
legacy IT systems, may be able to pivot behaviour through understanding
rapidly according to customer desire, their unique interactions.
subsequently attracting some of the
most profitable customers of traditional
insurance firms. According to the
popular business book Exponential
Organizations by Salim Ismail, “New
organisations are ten times better,
faster and cheaper than yours”.
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5 | KPMG | General Insurance Update 2016
From vertically to Lessons from other
Blockchain
horizontally integrated industries
As a former Microsoft employee, Blockchain is itself a way of Long-established industries, e.g.,
I concentrated on assisting verifying the accuracy of data newspaper, photography and
enterprise firms to develop adaptive and has all sorts of applications music, have all been decimated by
environments so that they could that move beyond the traditional technological change. Less-high-profile
meet the future expectations of both vertically integrated hierarchies. industries have also been digitally/
internal and external stakeholders. technologically disrupted. Mr Rifkin
Blockchain, the IoT, AI, new business
I encouraged clients to consider notes the energy sector as an excellent
models and P2P models all enable
future state questions in order to example, highlighting that the marginal
individuals to take big data and
anticipate the changes required cost of renewable energy is zero and,
analytics and create new algorithms
for future operating models. therefore, effectively becomes free.
that produce insights that allow us
In Germany, in less than seven years,
In 1985, Microsoft leaders posed to do new things more efficiently,
25 percent of electricity is now green
the question, “How do we solve the including buying just the right amount
electricity. How? A million buildings
problem of distributed trust in a global of general insurance, when needed.
have used technology to convert
computer network so we do not need Jeremy Rifkin, author of The Zero
to micro power plants. Germany
trusted intermediaries?” Twenty-five Marginal Cost Society: The Internet of
is now producing an abundance of
years later, the answer to this question Things, the Collaborative Commons,
free energy and, therefore, the large
emerged in the form of Blockchain. and the Eclipse of Capitalism is,
multi-billion-dollar global power and
Blockchain technology is a distributed according to Forbes, “very good on
electricity companies in Germany are
ledger that is trusted and verifiable the historical origins of the giant,
rapidly declining, e.g., E.ON, EnBW.
through a distributed consensus vertically integrated organisations
Did they anticipate the speed of
mechanism. When more than that dominated the 20th-century
change and erosion of market share?
50 percent of involved parties support economy. He makes a powerful case
the transaction, the transaction is that from a longer-term perspective,
accepted into the ledger, completely it is these giant hierarchies that are
automated and anonymised. the anomalies of economic history.
It’s a tool that disintermediates The shredding of vertical value chains,
multiple layers of bureaucracy the creation of vast new horizontal
and inefficiencies. Therefore, from value chains, and the social change
both an internal process efficiency of people preferring access to
improvement and an external ownership… bring massive economic
engagement approach that digitally and social changes to business and
supports intermediaries attempting society, the implications of which
to establish trust (e.g., underwriters, are only beginning to be glimpsed”.
agents, brokers, banks and lawyers),
the possibilities for simplifying and
reducing costs are significant.
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
General Insurance Update 2016 | KPMG | 6
Next steps
The sheer pace of change and
market disruptions are forcing
leadership teams to create more
structured ways to anticipate
the future. The temptation to
remain focused on the certainty
of current operational demands is
understandable but, ultimately, will
prove to be strategically ineffective.
The way forward
Leaders must talk about the vision
of a digital future and recognise the
Digital disruption conversation can be Otto Scharmer, Senior Lecturer at inherent possibilities that change
very demoralising or incredibly exciting. MIT and creator of Theory U, heard brings. It’s also important to engage
How do we govern and lead amidst the O’Brien respond this way and thought, with the disruptive thinkers in your
continuous technology change and the “What do I really know about this organisation. Management guru
need for transformation? What can we inner place? I know nothing. I didn’t Gary Hamel has said that young
do to prepare ourselves? How do we know, because that place is in the people, dissidents and those working
lead in a volatile, uncertain, complex blind spot of our everyday experience. on the geographic and mental
and ambiguous emergent future? We can observe what we do and peripheries of your organisation
how we do it. But the quality of the are the most interesting, free and
I believe Jeremy Rifkin would
source from which we operate in the open thinkers. Look for rebels.
encourage leaders to think differently,
now tends to be outside the range The good news is that they won’t
become more circumspect and
of our normal observation, attention be difficult to find and they can
engage in an ongoing dialogue that
and awareness. The essence of our be excellent participants in the
supports the development of fresh
view concerns the power of attention: development of future scenarios.
narratives and rich scenarios that
We cannot transform the behaviour
include millennial social behaviour, The need to embrace uncertainty
of systems unless we transform the
new technology solutions and and drive the strategic conversation
quality of attention that people apply
future operating models. is now more vital than ever. A useful
to their actions within those systems,
approach to the development of
New mental models are critical to both individually and collectively”.
the strategic dialogue is through
the future of industry: in other words,
Scharmer goes on to say that wherever strategic foresight – a set of
thinking in a new way. Albert Einstein
you place your attention is where the techniques used to help inform,
said, “We cannot solve problems
energy of the system will go: “Energy challenge and frame plausible future
with the same thinking that created
follows attention”.This means that we states through future-oriented
them.” Outdated mental models are
need to shift our attention from what insight. Developing plausible future
intellectually bankrupting our future
we are trying to avoid to what we want state scenarios helps organisations
economic prosperity so the time
to bring into reality. This is at the heart understand the impact of change,
to reimagine the future is now.
of dealing with digital disruption… see the implications of change
When Bill O’Brien, the late CEO we need to shift the focus from being and tackle existing assumptions.
of Hanover Insurance, was asked disrupted to creating a digital future. It
From my experience, the strategic
about leading transformational is imperative we continue to identify
foresight approach provides the
change, he said, “The success of critical trends, uncertainties and
foundation to achieve this. It enables
an intervention depends on the disrupters, and recognise that the best
leaders to explore future worlds and
interior condition of the intervener”. way to predict the future is to create it.
develop a collective understanding
of preferred future state scenarios.
You can engage the foresight
approach on your own, request
assistance from KPMG or continue
doing what you’ve always done.
You may also choose to do nothing
and, as one of my favourite cartoons
illustrates: “Instead of risking anything
new, let’s play it safe by continuing
our slow decline into obsolescence!”
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7 | KPMG | General Insurance Update 2016
The Fire and Emergency New Zealand
Bill – private insurer funding model
Nicholas Moss – Senior Manager, Audit
On 30 June 2016, New Zealand’s fire services legislation
has not changed fundamentally since
The current funding mechanism
fails to achieve at least three of
the New Zealand the 1940s. However, since then,
the activities performed by the
the five objectives – and so does
the proposed funding mechanism
Parliament New Zealand Fire Service have under the Bill. Funding the fire
developed in response to community service through levies on property-
introduced the Fire demand – particularly in providing based insurance policies does not
assistance in non-fire-related provide funding which is simple to
and Emergency emergencies. As a result, the current administer, calculate or collect and
New Zealand Bill (the funding mechanism for the fire service
does not align with the activities it
it does not provide funding which is
stable, predictable or equitable.
Bill). The Bill seeks performs and does not necessarily
provide a stable and sustainable funding
The Insurance Council of New Zealand
(ICNZ), representing the interests of
to replace the base. For this reason, a review of
the fire and general insurance industry
New Zealand’s fire services legislation
New Zealand Fire is appropriate and welcomed.
in New Zealand, has made three
submissions on the review of
Service Commission The Bill follows the government’s
release of its Terms of Reference
New Zealand’s fire services
legislation – one on each of the
with a new entity: for the Fire Review Panel in Terms of Reference of the Fire
2012 and its Fire Service Review Review Panel (2012), the Fire Service
Fire and Emergency Discussion Document in 2015. Review Discussion Document
(2015) and the Bill (2016)2.
New Zealand (FENZ). The Terms of Reference for the Fire
Review Panel established three All three submissions clearly articulate
objectives for the review. The insurance the reasons why the funding
industry is primarily concerned with the mechanism under both the existing
third objective: fire service funding – legislation and the Bill does not
currently, more than 90 percent1 of provide funding which is simple to
funding comes from levies on property- administer, calculate or collect and
based insurance contracts. does not provide funding which is
The objective of the review stable, predictable or equitable.
of fire service funding was to
undertake an analysis of future
funding options which would:
—— provide sufficient funding
—— be simple to administer,
calculate and collect
—— be stable and predictable
—— be equitable
—— minimise distortions in
investment decisions, insurance
price and coverage.
1 New Zealand Fire Service Annual Report for the
year ended 30 June 2015. Levies account for
$350,705,000 of total $372,028,000 revenue.
2 Insurance Council of New Zealand Submission on
the Fire and Emergency New Zealand Bill, dated
18 August 2016.
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.General Insurance Update 2016 | KPMG | 8
Simple to calculate and administer both impacting the stability and —— There is the potential for ‘double
Insurance products are complex. predictability of funding through dipping’ where more than one
Attaching a levy based on a general levies. Examples include: insurance policy covers the same
principle tied back to property is property for different risks.
—— Driverless car technology is
both challenging and judgemental. expected to reduce insurable —— There is a conflicted assurance
Some examples include: risk with a reduced risk of motor model which enables FENZ to
vehicle accidents. There is also an impose penalties on insurers for
—— A commercial liability policy
expectation that manufacturers non-compliance. Insurers have
protects the interests of the
of driverless cars may cover no incentive to avoid the levy in
insured in the case of a legal
the costs of accidents resulting the same way that taxpayers are
liability. One interpretation of
from their driverless cars. incentivised to avoid paying tax –
this, under the Bill, is that the
insurers are merely collection agents.
third party’s property is insured —— Real-time insurance, which enables
This issue is compounded when there
by the insured’s commercial a policyholder to switch their cover
is complexity involved in determining
liability policy. However, this does on and off, will be problematic
whether a levy is applicable or not –
not make sense and it would for levy provisions which rely on
such as is the case for commercial
be impossible to quantify the property being insured for a year.
liability policies.
damage that the insured may —— Holistic personal risk products,
cause to third-party property. Given the issues above, to name but a
which cover not only property
few, it is no surprise that New Zealand’s
—— Bailee’s insurance covers a but also liabilities, health and
funding mechanism for the fire service is
bailee or property during their the life of the insured, not
not widely used internationally. Across the
temporary possession of another only will add complexity to
Tasman, Australia is in the process of
person’s property. Similar to calculating the correct levy but
phasing out an insurance levy funding
the example above, this is not also may reduce the levy.
mechanism, with New South Wales
property insurance – it is liability
(NSW) being one of the last states to
insurance. However, this type Equitable
introduce a new funding model. From
of insurance policy may be The most simple example of why 1 July 2017, a new Emergency Services
subject to a levy under the Bill. funding the fire service through Property Levy will be paid by all property
—— Travel insurance for visitors to insurance levies is not equitable is owners in NSW alongside council rates,
New Zealand may attract a levy property owners who do not insure which will be collected by local councils.
under the Bill as it insures the or who underinsure their properties. This replaces the current model which
traveller’s belongings against loss These owners have the benefit of levies property-based insurance policies –
or damage. While there is certainly the fire service but do not pay for in a similar way to that of the current
the potential for fire services to it, or what they pay is not based on New Zealand model.
be required in respect of that the value of their properties. It is
property, it would be difficult to not mandatory to insure property in Funding the fire service through council
identify travellers to New Zealand, New Zealand and it is common for rates is a common funding mechanism
particularly when they are unlikely property to be underinsured – whether for fire services around the world. In our
to have taken out insurance with intentionally or unintentionally. view, funding through council rates, or
a New Zealand-based insurer. through general taxation, would be a
There are many other reasons why better funding mechanism for the
Should travellers to New Zealand
funding the fire service through New Zealand Fire Service. Such a funding
help fund the fire service?
insurance levies is not the best model: model would better meet the objectives
Stable and predictable —— There are difficulties implementing set out in the Terms of Reference for the
Emerging technologies and innovative the collection model, which forces Fire Review Panel – it would provide
insurance products disrupting the insurers into the role of collection for funding which is simple to calculate,
insurance industry will impact agents, despite the fact that a administer and collect, and which is
the types of insurance cover and significant percentage of insurance stable, predictable and equitable.
their premiums in the future – business is sold through brokers.
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.9 | KPMG | General Insurance Update 2016
The role of culture
in conduct risk
Adele Wallace – Associate Director, Advisory
Culture is being In our 2015 General Insurance
publication, we focused on the
to contribute to a comprehensive
understanding and assessment of
viewed increasingly increasing prominence of conduct
risk across financial institutions.
a sound risk culture and to raise
awareness of conduct risk for
as one of the The current focus for business, insurers. The paper identified broadly
regulators and academics is that, three sources of conduct risk:
potential root causes both locally and globally, we continue
—— The nature of insurance as
to see examples of misconduct and
of conduct risk and regulatory fines, despite extensive
a business and its inherent
asymmetries and uncertainties
as a factor in the regulation. More and more,
businesses are asking not just, “what —— External factors, which
include environmental
deterioration of are our conduct risks?” but also,
“what are the root causes of those and economic factors
trust in the financial conduct risks?” —— Internal factors, such as business
processes and governance.
services industry. Culture is being viewed increasingly
as one of the potential root causes Under this last source of conduct risk,
of conduct risk and as a factor in the business processes and governance,
deterioration of trust in the financial the paper emphasises the role of
services industry. The industry is culture in driving good conduct.
considering whether or not it has a It highlights that, “a governance
more pervasive problem in attitudes framework has culture at its heart;
and behaviours and whether or not this influences the way in which
culture could be part of the problem individuals behave”.
as well as part of the solution. In the IAIS’s view, to mitigate conduct
Restoring trust in the industry needs risk, an insurer needs to focus on
to go beyond compliance with laws a culture of ‘fair treatment’. It says:
and regulation. There needs to be “where a culture of fair treatment of
a fundamental change in building a customers is not embedded within the
culture where customer outcomes business objectives and strategies,
pervade everything. Insurers need there is a higher risk that staff and
to take the next step in the interests management behaviour or business
of customers: avoid focusing only processes give rise to poor customer
on customer satisfaction scores and outcomes.” This ‘fair treatment’
focus more holistically on whether or needs to be “sufficiently reflected
not the right outcome was achieved in the governance framework and
for the customer overall. Has the business objectives and strategies,
right product been sold to the right with sufficient attention paid to
customer at the right value? ensuring fair customer outcomes in the
corresponding policies, procedures,
What is the regulators’ view? risk management and internal controls”.
In June 2015, the International Of course, the concept of what
Association of Insurance Supervisors constitutes ‘fair treatment’ can
(IAIS) released its Issues Paper be much debated and, as one
on Conduct of Business Risk respondent pointed out, no amount
and its Management, which was of policies or procedures will “compel
complemented a few months later individuals to do the right thing”.
by a compilation of the comments Overall, however, in our view, the
it received. The issues paper sought paper makes a clear case for a link
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.General Insurance Update 2016 | KPMG | 10
Figure 1.
Cultural change
between establishing a culture of
fair treatment in the governance and
risk frameworks and minimising the Leadership Clarity People Individual
risk of poor customer outcomes. development beliefs
It sets the tone for the regulators’
view of the importance of culture.
Closer to home, the Financial Markets
Authority (FMA) has also actively
pointed towards a focus on culture
in its recently released consultation,
A guide to the FMA’s view of conduct. Competing Selection and Measures
Submissions closed in October 2016. interests promotion
In the paper, the FMA sets out its
framework for a good conduct profile.
One of the six key components it
highlights is culture, which is described
as leadership and behaviour. It notes
that, under culture, its focus will be on
two things: firstly, firms clearly being
able to demonstrate what behaviour
Risk culture
is expected from everyone at the
provider, including its leaders; and,
secondly, it says, more importantly,
“we want to see examples of how
staff (including leaders) conduct makes
those expectations clear and that any
breaches are identified and appropriately
acted upon”. This puts the emphasis on Risk Risk appetite Risk Risk training
being able to provide concrete examples communication measurement
of communication of expectations
from leaders and tangible action to
redress any breaches identified.
What is the difference between
conduct risk, risk culture and
wider cultural change, and what
contributes to the failure of each? Conduct risk
Both of these papers from the FMA
and the IAIS focus on culture as a key
driver of good conduct. As this concept
becomes more familiar, the market
is starting to use the terms conduct
risk, cultural change and risk culture
interchangeably. Not surprisingly,
there is significant confusion about Customer Incentives Product Sales
the difference between those outcomes gov. processes
concepts and a lack of clarity around
where the business should focus.
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International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.11 | KPMG | General Insurance Update 2016
Conduct risk can be defined as the focus on more perfunctory compliance Risk culture focuses on the core
ability to identify and address specific with relevant regulations, rather beliefs that drive implicit and
risks in core product and sales than on the spirit of doing the right explicit prioritisations and the
processes with a focus on achieving thing and driving the right customer importance of risk management.
the right customer outcomes. outcomes. Of course, the firm must How do individuals behave
Risk culture addresses the articulation, meet its regulatory obligations but towards risk and compliance?
communication, measurement and a focus on conduct and customer
What happens if there are
prioritisation of risk. Overall cultural outcomes encourages a more holistic
incidents or breaches? How does
change is the holistic view of the approach. In fact, many players in
leadership set expectations
potential to drive a high-performance the market, including respondents
around risk appetite?
culture throughout an organisation. The to the IAIS paper, are saying that
diagram on page 10 (Figure 1) sets out more regulation will actually have How do different business
the key features of these concepts. a counterproductive effect and will functions take ownership of
hinder businesses from focusing on risk and compliance issues?
When we think about risk in the
delivering great customer outcomes.
insurance sector, we typically think These attitudes and prioritisations can be
about prudential and solvency Actually, conduct risk drivers measured and assessed. For example,
risks, rather than conduct risks. are usually in the decisions and KPMG’s risk attitudes assessment
However, regulators are starting to judgements that are made early in the framework focuses on assessing the risk
see that conduct risks and solvency value chain: strategy setting, product attitudes that are likely to lead to a strong
are inextricably linked and that design and training. All of these can risk culture: tone at the top, commitment,
both need to be addressed. subsequently have a negative impact communication and responsiveness.
on the customer. For example, a It also focuses on the specific behaviours
Conduct risk is not just a subset
key insurance conduct risk is claims that make up each of these attitudes.
of operational risk management.
handling, not necessarily the customer
Operational risks are, in effect, We’ve seen a real focus in this area
sale or the risk of miss-sale. In the
risks which cause detriment to the in New Zealand. Particularly with
UK, two of the major insurance
business. By contrast, conduct risk is CPS 220 and APRA’s focus on risk
regulatory fines were about complaints
the risk of detriment to the customer culture across Australian groups.
handling: not honouring claims due
or market, not just to the business.
to restrictive terms and conditions.
Some take this as far as placing the
So what influences risk culture?
interests of the customer and market Conduct risk is all about balancing and
ahead of profit maximisation. reconciling the financial interests of The overall culture of the business.
the business with the needs of the Culture operates at different levels
Isn’t conduct risk just
customer. It’s also the reconciliation within the business: in its structures,
reputational risk?
of these types of dilemma that is processes and behaviours, and
Damage to a business’ reputation fundamental when looking more espoused beliefs and values,
can be a consequence or impact of widely at cultural change, which as well as the basic underlying
a conduct risk event. However, just we will touch on shortly. First, let’s assumptions within the business.
seeking to mitigate risks that threaten have a look at how risk culture Some of these are easier to change
a firm’s reputation doesn’t necessarily contributes to conduct risks. than are others; refer to Figure 2.
go far enough in actively ensuring
So, if conduct risks are a specific Culture is the accumulation of
the right customer outcomes.
set of risks which arise in the years of corporate history. It is not
product life cycle relating to the risk defined top-down and imposed on a
Isn’t conduct risk just legal or
of poor customer outcomes, what business but, rather, it is created by
compliance risk and don’t we
contributes to those risks occurring? the actions, beliefs and attitudes of a
just need more regulation?
In part, it must be attributable to how broad set of people. For example, a
This view again encourages a narrow seriously risk is taken in the business. decision that may seem as though it
view of compliance. It encourages a In other words, ‘risk culture’. has little to do with culture can send
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.General Insurance Update 2016 | KPMG | 12
a strong cultural message about cultural assessment and change, business, interact with one another
the basic assumptions of leaders. if needed, risk culture and specific to drive your business outcomes.
Overall, culture is experienced most conduct risks. Insurers cannot
Strong business culture and values,
intensely when there is a dilemma solely focus on meeting regulatory
as well as a risk culture enforcing staff
or choice to be made between obligations. Although, of course,
attitudes and behaviours, play a large
conflicting objectives. This process you need to meet these obligations;
part in managing conduct risk. But it
of dilemma reconciliation is a good they cannot just be a box-ticking
is equally important to avoid focusing
place to start when looking at culture exercise at the expense of driving
only on culture but to identify and
overall and is the focus of Dr Fons the right customer outcomes.
understand the specific conduct risks
Trompenaars who leads our Global
In addition to focusing on flowing that arise in your business’ life cycle
Culture Practice out of Amsterdam.
in as inputs good policy, charters, and business model so that they are
Our culture practice helps businesses
values, controls, etc., you need to known, and you can mitigate them.
realise opportunity and innovation
consider whether or not those inputs
through reconciling dilemmas: from Culture could be a real differentiator
are achieving the right outcomes.
dilemmas at the heart of a business, for your business in an industry where
Good policy, controls and compliance
such as challenges between the products and pricing can be easily
alone won’t get you there; risk
competing interests of customer copied. A genuine relentless focus on
culture and overall firm culture are
satisfaction and shareholder return, the interests of the customer could
critical drivers of success. Forming a
to more specialised dilemmas, such differentiate your business and help
view on your overall culture should
as legacy products where you need you stand out for the right reasons.
also be a priority: to enable you to
to ensure the customer always has
consider the influence that it is having To close, we encourage you to
the best product for their needs,
on conduct risk management. You consider a negative example and
as well as maintaining margins and
need to have tangible evidence and a positive example of a customer
deriving profits from the back book.
examples of how your stated rules outcome and which is more
In summary, our view would be and expectations, and the beliefs prevalent in your business.
that you must work on all three: and values of individuals in your
Figure 2.
Schein’s3 definition of culture change
VISIBLE,
EASY TO Structures,
CHANGE processes
and behaviours
Espoused
beliefs and
values
Basic
LESS VISIBLE, underlying
HARDER assumptions
3 Edgar Schein believed there are three TO CHANGE
levels in an organisation culture.
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.13 | KPMG | General Insurance Update 2016
How to get it wrong: How to get it right:
An insurer who sells insurance through An insurer sends text messages to
an intermediary is fined for significant all customers wishing them well
failings in the way they handled after a recent major weather event.
complaints. Customers lost their trust They provide the phone number to
because complaints were not taken process claims should their customers’
seriously and were not resolved. property have been damaged.
Customers are paying for an insurance This strategy could increase claims
product they potentially don’t need, are short term but has the upside of
feeling angry that they have not been increasing customer loyalty and,
treated fairly and are upset that their potentially, leading to greater revenue
complaints were not fully investigated. long term. Customers say that the
They tell family and friends of their insurer’s empathy makes them feel
experience and vent on social loyal and protected. They are more
media. The insurer puts enhanced likely to recommend them to other
mechanisms in place to monitor people. They are more interested
complaints more effectively, particularly in the business’ other products
where third parties are involved. because they feel as though the
They look at training third-party staff insurer has their best interests at
better to resolve complaints the right heart. The insurer carefully considered
way and consider what management the dilemma around the short-term
information and assurance they need increase in claims against the longer-
in place to ensure customer service term retention and loyalty of those
received from third parties is positive. customers. They thought about the
long-term needs of those customers
and realised that the needs of those
customers long term is a more
sustainable strategy than is short-
term profit. They used the right
technology channels to reach out to
customers in an appropriate way.
T
EN
M
CU
LY
EMPO
LTUR
E
PE
OPLE
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
15 | KPMG | General Insurance Update 2016
Playing in the sandpit of ideas:
Adaptation and change
Tim Grafton – Chief Executive, Insurance Council of New Zealand
The way we think Adaptation and mitigation measures
are how we talk about the responses
peer-to-peer models like Lemonade
displacing traditional insurers, let
about climate required to de-risk the uncertain
impact of climate change.
alone about distribution channels.
Equally, the opportunity exists to
change, though, Climate change effects are just one of harness the data to deliver enhanced
may provide a many unknowns with which insurers
must grapple. The way we think about
customer experiences and products.
We’re already seeing the incorporation
framework for climate change, though, may provide
a framework for thinking about the
of non-insurance product offerings
like home security linked to house
thinking about the uncertainties that rapid technological
change and potential disruption
policies, motor policies with concierge
services and just-in-time insurance
uncertainties that present to the insurance sector. (for example, texts on your mobile
phone offering travel cover as you
rapid technological Climate change has global, profound
impacts. Because it affects the
take your seat on the plane).
change and biosphere, its effects have a virtually
incalculable number of interconnections
In a world awash with cheap capital, the
opportunities for strategic mergers and
potential disruption playing out a challenging number acquisitions are boundless. The scope
of plausible scenarios. It may alter for change, either due to climate or
present to the quality of life, health status, food technology, is profound so, perhaps, the
supplies, infrastructure and where most significant difference between the
insurance sector. people can live, and may disrupt two is the pace of change. Even then,
social, financial and political stability. the response framework to the risks
each pose is not essentially different,
Impending change creates new
though the speed of response will be.
opportunities, particularly where to
do nothing brings dire consequences. An insurer’s risk analysis for climate
We may become more dependent change events starts by asking
on synthetic foods for nutrition, what it is we wish to avoid – loss of
living in more artificially controlled life, property damage or business
environments might become interruption. It should identify the
preferable, greater reliance on biggest risks so there would be a
robotics could improve life quality, worst-case scenario (high impact,
or 3D-printed organs may improve low probability) in terms of long-
longevity. It may not be a romantic term change as well as attention to
scenario but it could be a better, more short-term events. The full range of
pragmatic reality to any alternative. probabilities would be considered,
bearing in mind that a very low
Thinking of the potential cyclonic
probability may correspond to a very
effect of the exponential increase
high risk if the result is catastrophic.
in connectivity across the Internet
To do that analysis, proven science
of Things, the step change in the
would be drawn on along with expert
volume of data collected about
judgement, and even a best guess
individuals and the speed with which
would be considered as that would
it can be intelligently processed,
be better than it would be to make
it’s possible to describe plausible,
no estimate of what might happen.
profound impacts on insurance too.
And while this information may enable
Much has been written about potential
a model of potential loss to be built,
new entrants, such as a Google
it would still be only a model. So, to
or a telco, and the emergence of
supplement that, plausible scenario
© 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.General Insurance Update 2016 | KPMG | 16
planning would be employed to create or a technological breakthrough More broadly, regulators have not
a more holistic view of risk, while in alternative energy sources. kept up with change with respect
being mindful that human behaviour to the emergence of services like
Some commentators have suggested
and interactions within a system can those offered by Uber or ride-sharing
that the under and non-insurance of
produce different possible outcomes. arrangements, and tend to seek a
assets that would be impacted by
one-size-fits-all regulatory framework.
Value judgements would inevitably climate change and the reduced ability
It seems ill-advised for regulators not
be made, and these would need to for insurers to cover risks affordably
to recognise a sharing economy as
be explicit and open to debate. could lead banks and other lenders
it is data rich, will grow exponentially
to be exposed in a way that could
Then, having identified the likelihood and will attract many casual users.
trigger a future financial crisis.
of occurrence and the impact of
We live in a world where initial
what could happen, it would be the These risks appear to have their parallels
screening by regulators of ride-hailing/
turn of adaptation and mitigation. in the context of disruptive forces that
ride-sharing companies is being
could impact the insurance sector’s own
In the case of climate change, displaced by continuous quality control
business. There is clearly the threat of
this means doing new things to via rating and feedback from registered
new entrants with a game-changing,
strengthen resilience and preparedness customers and real-time GPS tracking.
low-cost insurance offering, and more
to minimise disruption and risk
detailed underwriting knowledge Regulators exist to protect the
(adaptation), as well as avoiding doing
of individuals’ risk to traditional public from harm but must also
more of the same (mitigation) that
underwriters. The transitional risks of remain attuned to the benefits of
only increases exposure. But, equally,
stranded assets in the form of legacy competition, choice and innovation,
in the face of technological disruption,
systems are certainly there. And, for which the public increasingly
the response is surely no different?
the boards of insurance companies, demands from digital platforms.
The similarities go further. Consider the there is the risk that shareholders will
It is perhaps inevitable that regulators
comments made a year or so ago by take their investments elsewhere.
will be reactive and, thereby, behind
the insurance regulator in the UK,
Emerging risks arising from cyber threats the eight-ball. It makes it more
Bank of England Governor Mark Carney,
and high levels of interconnectivity also challenging, when change is rapid,
with respect to the risks to insurers
raise questions about the extent to for them to be enablers rather
from climate change.
which the risks are being appropriately than to add dead-weight costs to
He identified three categories of risk priced or covered. If the transfer of those adaptation. So, there is a challenge
to the solvency of insurers. The first risks is not well managed, then is that for them, too, to be supportive of a
was physical risk. That is, the risk to another source of potential financial competitive and sound industry.
underwriters that arises from increased market failure? Just as the insurance
For insurers faced with the risks and
losses resulting from property regulator in the UK has started to ask
opportunities of rapid technological
damage, supply chain disruption and some probing questions of the industry,
change, there needs to be an
business interruption (think of the it is interesting to think about the broader
opportunity to divert time and resource
global shortages of electronic and regulatory environment and the extent
from the every day, to devote it to
motor components brought about by to which it hinders or enables insurers to
playing in the sandpit of ideas and
the 2011 flooding in Thailand, because seize the opportunities available to it so
imagine what is possible. By moving
of international interdependencies). it can adapt and become more resilient.
closer to see what is happening
The second was liability risk, which Certainly, with respect to climate in other industries, we can gain
arises from those who have suffered change, the legislative and regulatory insights into what, by application,
loss from the effects of climate machinery is increasingly intervening could be ways in which we can adapt
change seeking compensation from to enable or require adaptation and and keep ahead of the curve.
those who knew the risks and failed mitigation. So, we have seen carbon
to do anything about them. So, for trading schemes, 30-year infrastructure
instance, that could mean local planning requirements to address
authorities might be liable with the flood risks, plans to include natural
flow-on implications for their insurers. hazards in Resource Management Act
requirements and other initiatives.
The third risk was transitional. This arises
While these are steps in the right
from the investment exposure
direction, other decisions like applying
insurers may have in assets with
an insurance tax to fund fire and
heavy fossil fuel dependence should
emergency services, and attempts
there be a swift repricing of those
to extend the tax from property to
assets. This could stem from either
forms of liability policies, are backward
a significant change in regulatory
steps that make risk transfers less
requirements in a large economy
affordable and accessible to people.
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