General Insurance Update 2019 - November 2019 kpmg.comnz/insurance - assets.kpmg
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
General Insurance Update 2019 November 2019 kpmg.com/nz/insurance
CONTENTS
New Content
to come
4
FOREWORD
18
CUSTOMER
34
RISK AND
AND CONDUCT RESILIENCE
8
INDUSTRY
24
LEGISLATIVE
36
CONTRIBUTORS
INSIGHTS AND REGULATORY
CHANGE
12
CEO OUTLOOK
28
IFRS 17
38
THOUGHT
SURVEY LEADERSHIP
4 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 5
Foreword
Jamie Munro Financial Services Partner, Head of Insurance
For New Zealand’s This edition of our annual General
Insurance Update highlights industry
three years. There is widespread
recognition that organisations must
jointly conducted by the Reserve
Bank of New Zealand (RBNZ) and
On page 24, we hear from Insurance
Council of New Zealand CEO, Tim
economy to views and provides commentary
around trends, challenges and
change from within, embrace culture
change, technology transformation
Financial Markets Authority (FMA). Grafton, on the key features of
regulatory and legislative change
prosper, insurers opportunities influencing the and greater customer focus. Those regulatory reviews identified from an industry perspective.
New Zealand insurance industry. significant weaknesses in the
must adopt agile Contributors to this edition have Disrupting themselves and the governance and management of There is change too, on the
focused on themes of sustainability marketplace is top of mind among conduct risks. In its 2019 annual accounting front. The long anticipated
operating models and resilience, customer and insurance industry CEOs, while report, the FMA admonished life insurance accounting standard – IFRS
to build resilience, conduct, and legislative, regulatory
and accounting change.
they strive to instil organisation-
wide innovation and make the most
insurers for being too complacent
around risk and highlighted practices
17 Insurance Contracts – which was
published in 2017, reflects a wholesale
and continue to The release of this year’s publication
effective technology and workforce
investments. These leaders feel
that were ‘materially worse’ than
those in the banking sector. And
change in the accounting for insurance
contracts. That standard is getting
evolve to respond to also marks the inaugural launch the need to upgrade their own more recently, a new regime to tuned up by standards setters, with
of our KPMG General Insurance skills as they try to overcome an regulate financial conduct has been the aim of supporting implementation
changing customer Insights Dashboard, which brings internal ‘innovation disconnect,’ announced for banks, insurers and addressing challenges raised
to life key financial information forge strong external partnerships, and non-bank deposit takers by insurers. An exposure draft
needs, community from general insurers’ filed financial and embed the agility and resiliency regarding their general conduct. has put forward a number of key
expectations, statements in a publicly-available
online interactive dashboard.
to develop holistic, flexible
strategies for new opportunities This year, regulators requested that
amendments to the accounting
standard and is expected be finalised
technology Our Insights Dashboard includes
and threats in an uncertain future. our general insurers were complete an
internal review of conduct and culture.
in mid-2020. We summarise the
amendments in our article from
advances and the financial position and results up As concluded by Laura Hay, On page 18, James Brownell, our KPMG director, Ann Au, on page 28.
to 30 June 2019 of all New Zealand KPMG’s Global Head of Insurance Insurance Conduct Lead, focuses on
regulatory demands. general insurers and contains a range “To become the resilient insurer the challenges and lessons learned so Major external forces, equally, are
of interactive charts and graphs for the future, organisations must far, the questions that organisations shaping our insurance industry.
presenting key industry metrics for adopt agile operating models and should be asking to ensure they Climate change is associated with
the past five years. It enables the data complementary technology and data have done enough to address an increase in both the intensity and
to be filtered to view the metrics for a capabilities, increase partnerships regulators concerns, and the future frequency of extreme natural events
particular year or insurer, and provides to spark greater innovation, and outlook for the general insurance such as storms, floods, hurricanes/
comparison of metrics for an individual embrace new ways of collaboration market, including how conduct and typhoons and droughts. Niels Chlupka,
insurer to others in the market. On and automation to build the required culture should be integrated into a leader in our KPMG Sustainable
page 8 we provide a snapshot of digital workforce. Our survey findings insurers’ strategies going forward Value team, discusses climate
the Insights Dashboard and profile suggest that, despite the many change, insurance perspectives,
the sector result to 30 June 2019. challenges, insurance CEOs are An unprecedented level of legislative and what can be done to mitigate,
eager to tackle these opportunities.” and regulatory reform is also abound. adapt and meet the challenge in
On page 12, Nick Moss draws our final article, on page 34.
out the themes from our latest Arguably, front and centre in this A new conduct regime will be
KPMG Global CEO Outlook Survey. changing landscape is the heightened before Parliament by Christmas. A On behalf of KPMG, we hope
Particular focus is provided on the regulator and public focus on conduct Bill to revise and consolidate New you enjoy the read. Please do
views of insurance sector leaders and culture. We’ve previously explored Zealand’s insurance contract law will not hesitate to contact one of
internationally, and local perspectives findings from the 2018 Australian be fast on its heels. A review of the the team at KPMG to assist your
from New Zealand CEOs. Royal Commission into Misconduct Insurance Prudential Supervision Act organisation in addressing any of the
in the Banking, Superannuation and start shortly. No aspect of insurance matters raised in this publication.
Although the competitive landscape Financial Services Industry, and the will escape change. But how well
is shifting, CEOs are confident thematic reviews of New Zealand co-ordinated will these changes be?
in business growth over the next banks and life insurers, which were
8
INDUSTRY
INSIGHTS Our KPMG General
Insurance Insights
Dashboard includes the
financial position and
results up to 30 June
2019 of all New Zealand
general insurers...
8 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 9
Industry insights:
2019 Results and analysis
KPMG’s 2019 The highlights Net claims expense has decreased
6% from $2,561 million in 2017/18
2019 results snapshot
Overall, 2018/19 has been a very
New Zealand positive year for the general insurance
to $2,403 million in 2018/19, with a
relatively benign year for weather
General Insurance market. Insurance profit has grown
by $488 million from $1,589 million
and little in the way of natural perils. Gross written premium Insurance profit
Insights Dashboard in 2017/18 to $2,077 million in
contains a range
2018/19. This has been driven by
a combination of strong gross
This has been a welcome experience
after a number of years of severe $6,959m 2018/19 $2,077m 2018/19
weather events and natural disasters.
written premium (“GWP”) growth
of interactive and positive claims experience.
Insurance Council of New Zealand
data shows just four natural disaster $6,388m 2017/18 $1,589m 2017/18
dashboards, events in the June 2019 year at a total
available online,
Results and analysis
Across the general insurance
cost of $14.7 million. There were nine
events at a total cost of $263.4 million
$5,984m 2016/17 $1,339m 2016/17
market, GWP has increased 9% in the June 2018 year. Excluding the
that bring to life from $6,388 million in 2017/18 to estimated $2.12 billion cost of the
Kaikōura quake, the 10 other natural Loss ratio Net incurred claims
key financial $6,959 million in 2018/19. This
strong growth stems primarily from events in the June 2017 year cost
2018/19
information for the premium rate increases initiated in
2018, earning through in the 2019
the industry $213.7 million. Whilst
we would all welcome the benign
54% $2,403m 2018/19
past five years from financial results. Rates are now weather and lack of natural events 2017/18
general insurers’
levelling off as we head into 2020. of 2019 to continue, trends in recent
years suggest 2019 was a favourable
62% $2,561m 2017/18
Whilst this strong GWP growth is year, rather a return to normal. 2016/17
filed financial seen across the market, some of the
As a result of strong GWP and positive
67% $2,690m 2016/17
statements. largest contributors are IAG
New Zealand ($140 million increase claims experience, we have seen an
from $2,696 million in 2017/18 to improvement in loss ratios, with a
Net earned premium
Our Insights Dashboard includes $2,836 million in 2018/19); Vero market average of 54% in 2018/19.
the financial position and Insurance ($67 million increase 2018/19
results up to 30 June 2019. from $1,047 million in 2017/18
to $1,114 million in 2018/19); and
Result announcements from some
of the large insurers indicate that the
$4,481m
You can access the General Insurance 2018/19 profits will contribute to the 2017/18
Hollard Insurance ($61 million
Insights Dashboard below:
increase from $41 million in 2017/18 significant and necessary investment
in products and services, including
$4,150m
to $102 million in 2018/19).
digital platform offerings, in order to 2016/17
General Insurance
Insights Dashboard
Compared to GWP growth, net respond to changing customer needs. $4,029m
earned premium has increased only
8% from $4,145 million in 2017/18
to $4,474 million in 2018/19. This
reflects the increasing cost of
reinsurance to New Zealand insurers.
12
CEO OUTLOOK
In an increasingly
SURVEY
turbulent world,
it’s more important than
ever for New Zealand
businesses to look to the
future and to challenge
ourselves to grow...12 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 13
CEO Outlook Survey:
Confidence from resilience
Nick Moss Director, Insurance, KPMG New Zealand
In KPMG’s fifth annual Global CEO In the context of an increasingly a customer experiences an event In addition, considerable lead time is
“We’ve seen Outlook survey, we spoke to 1,300 turbulent world, we asked CEOs
what a truly resilient business means.
and needs to submit a claim. required for any organisation, including
insurers that may face significant
CEOs, including 50 New Zealand 77 percent of global CEOs and
CEOs’ optimism CEOs, to discuss how they are 42 percent of New Zealand CEOs
believe a truly resilient business is
80 percent of New Zealand CEOs
legacy technology challenges, to reach
a point of readiness to successfully
confronting long-held market beliefs
rise in tandem and assumptions that govern decision- one that can adapt quickly to the
agree that, to elevate the end-to-
end customer experience, they
incorporate new technology. As an
making. The CEOs operate in 11 changing business environment. example, in recent years insurers
with their key industries including insurance. “We’ve seen CEOs’ optimism rise
must transform their front, middle
and back office functions.
experienced similar extended
timelines to prepare for and adopt
considerable It’s clear from our discussions that in tandem with their considerable
work to increase resilience. Their
related advancements such as
insurance CEOs are confident in Technology supported growth
work to increase business growth over the next confidence has gone up as they take
Not surprisingly, insurance CEOs
robotic process automation and
machine learning. AI is expected to
action and they know their activities
resilience. Their 3 years, despite a widespread
recognition that they must change are going to pay off.” – Laura Hay, pointed to the crucial role of be equally challenging for companies
to incorporate, since it will require
KPMG Global Head of Insurance technology investment in support
confidence has from within, embrace culture
change, technology transformation
of future growth and 95 percent of them to build out both their cultural
these leaders agreed that they see and physical infrastructures first.
gone up as they and greater customer focus. Confidence from resilience
technological disruption as more That encompasses both improving
their data capacity and accelerating
take action and Confidence amid uncertainty
This strong show of confidence
by insurers can be linked back to
of an opportunity than a threat.
their migration to the cloud.
In light of the pressing importance
they know their “In an increasingly turbulent world, insurers’ recent efforts to ramp
up transformation initiatives and
of technology, an astounding 85 “And of course,insurers need
it’s more important than ever for percent of global CEOs and 70 to find the right usage for AI,
activities are New Zealand businesses to look closely aligns with observations by
percent of New Zealand CEOs since it will not be the answer for
to the future and to challenge KPMG professionals over the past everything. Companies must not
going to pay off.” ourselves to grow. A growth mind- 2 years as clients initially defined
say they are directly involved in
devising and leading the technology equate automation with customer
set is essential. Without it, we don’t their transformation plans. Now, satisfaction, and insurers will
strategy of their organisation.
create opportunities, embrace change many insurers are immersed in have to experiment with the right
– Laura Hay, Global significant, multi-function, multi-year Despite CEOs’ stated enthusiasm mix of automation and human
and contribute to New Zealand’s
Head of Insurance prosperity.” – Godfrey Boyce, KPMG efforts — on an enterprise-scale or for technology, we found lower agents to enhance the customer
business-unit wide — to transform levels of action in new technology
at KPMG New Zealand Chief Executive experience.” – Gary Plotkin, Principal,
their business, either to drive implementation. Specifically, when CIO Advisory, KPMG in the US
Our survey shows some heartening strategic growth or cost objectives. we asked global insurance CEOs
results. New Zealand CEOs are about the actual application of AI
confident in the growth prospects for The story in New Zealand is the Defining innovation
in automation processes, only
their organisation and industry (almost same. We see a number of insurers
14 percent claim to have already Although insurers have always known
90 percent of CEOs) and country on their transformation journeys
implemented such programs. Most the importance of customers, they
(78 percent of CEOs). You can to drive strategic growth or cost
companies were still piloting or now see the need to improve the
access the 2019 New Zealand objectives and at the heart of these
conducting limited implementation client experience holistically. This task
CEO Outlook here. strategies is typically the customer.
with a few processes. However, KPMG is made more complicated by the
Global insurance CEOs are equally 64 percent of global insurance CEOs technology professionals note that fact that customer expectations are
confident in their growth prospects. and 60 percent of New Zealand CEOs insurers’ progress to date with AI is not changing every day, as they deal with
85 percent are highly confident in the believe that they need to significantly surprising, in light of the complexity of other companies in other sectors that
growth of the insurance industry and improve their understanding of this new technology. As with any new redefine what good means. As a result,
97 percent about growth in their own customers. These insurers realise technology, there can be a lot of hype customer demands are dynamic, and
organisation. You can access the 2019 that the customer experience goes about its potential, which can often insurers must continuously gather and
Global Insurance CEO Outlook here. beyond the moment of sale to other exceed its actual delivery capability. analyse the latest customer insights
key touch points, for example, when to keep up with these expectations.14 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 15
This requires insurers to act with agility.
Globally, there has been an increase
Creating workforce 4.0 is crucial that insurers save and retain
their current workforce, in addition to
maintain these systems. That said,
it’s also important for leaders to
Top of the CEO agenda
“In an increasingly
Disrupting themselves and the In summary, the 2019 Global CEO
in the number of CEOs who believe
that acting with agility is critical to the
marketplace is top of mind among
actively hiring the next generation. This
can be done in part by creating a value
understand that technology is not the
silver bullet to their challenges, and
Outlook highlights how today’s turbulent world,
success of their business. Locally we
global insurance CEOs, while they
strive to instil organisation-wide
proposition and employee experience technology is only half the story.
insurance CEOs are well-attuned to
the future they face. With customer it’s more important
saw the opposite – significantly fewer that goes beyond pay and benefits to
(18 percent) of New Zealand CEOs
innovation and cyber controls and
make the most effective technology
a culture and environment where they
They must carefully balance
investments in building their people
needs changing and expectations
rising, and the competitive landscape
than ever for
believe this in 2019, compared to 2018. can thrive and do their best work.
and workforce investments. skills, change management and evolving, insurers understand that New Zealand
Our view is that New Zealand CEOs To create workforce 4.0, insurers training. Formal change management their legacy operating models will
need to think differently about what
These leaders feel the need to
upgrade their own skills as they try
must learn to manage their people practices are essential to support the no longer be fit for purpose. The businesses to
agility and innovation mean in their in a new way, which includes evolving human/technology mix. Such future of insurance lies in achieving
business. It’s really important to
to overcome an internal ‘innovation
disconnect,’ forge strong external
defining people by what they can programs must extend beyond the a deeper understanding of the look to the future
define what innovation means in the do versus specific job codes. usual ‘communication and training’ and customer, operational excellence,
context of a particular organisation.
partnerships, and embed the agility and
incorporate disciplined methodology intelligent automation and adapting to and to challenge
resiliency to develop holistic, flexible “With rapidly changing business
Innovation should be considered
a daily occurrence and doesn’t
strategies for new opportunities needs, companies must rethink
delivered by a professional change
management function. By doing so,
the industry’s shifting talent needs.
ourselves to grow.
and threats in an uncertain future. the currency of human capital and These findings reflect the current
have to be a formal programme
requiring significant investment. Our survey shows that CEOs across
move away from the 20th century
the necessary change management
activities can begin early and the
efforts by the large insurers to become A growth mind-set
To compete and succeed,
the board recognise the need to
concept of workforce planning to a
more fluid view of skills versus jobs
necessary continuity will be achieved
more agile. This challenge is often
intensified by the need to balance is essential. Without
transform their core executive teams to ensure they are executed effectively.
organisations must respond to their
customers’ changing expectations
to enhance their resilience (78
and learn how to practice workforce
shaping.” – Evan Metter, Principal, The right kind of leadership
dual priorities of both protecting their
current business and short-term
it, we don’t create
percent of New Zealand CEOs and
and requirements quickly. Creating a
culture where people are empowered
77 percent of global CEOs). New
People and Change, KPMG in the US is also essential. objectives while also investing in the
future. Investing in the future requires
opportunities,
and view innovation as something
Zealand CEOs’ attention to leadership
transformation is on a par with that
This new approach means that
insurers must ask themselves, ‘What
“There is a big difference between
great generalist, operational and
considerable strategic planning, embrace change
that happens every minute of the day not just inserting innovations into
is critical – it’s in everyone’s hands.
of global CEOs at 78 percent. competencies will we need?’ instead
of only asking, ‘How many actuaries
technology leaders versus a true
change leader, in terms of their
current operations that respond to and contribute to
But we can’t afford to be complacent; today’s customer challenges, but also
This leads to the concept of fail fast.
our ability to respond to critical
do I need?’ They must then begin characteristics and behaviours.”
considering the future needs they New Zealand’s
Over 50 percent of New Zealand investing in their people so these – Evan Metter, Principal, People
CEOs feel confident their organisation
changes in the local and global markets
relies heavily on the capabilities of
capabilities are ready for deployment and Change, KPMG in the US
will have. Insurers must increasingly
consider what future platforms they
prosperity.”
accepts and celebrates a culture when the work demands. Although
our people. Our survey shows that Organisations often look for leaders build and develop transformation
of fail fast. But when it comes to this change in approach is a ‘heavy
CEOs wanting employees to feel
compared to our global peers, New
lift’ for large insurers with traditional
who can drive results, but they plans that extend across functions. – Godfrey Boyce,
Zealand CEOs have significantly less also need to put the right kind of Their success depends on being
empowered to attempt innovation,
confidence in the availability of critical
HR functions, these firms also have
leaders in place who can lead the more responsive, faster at
KPMG New Zealand
even if it fails, New Zealand lags a huge advantage as they have a
skills in digital transformation (40 organisation through change. That introducing products, and better at Chief Executive
behind its global counterparts bigger talent pool to shape and
percent), sustainability (36 percent) means elevating leaders who exhibit building effective partnerships.
(62 percent vs. 84 percent). considerable internal HR expertise
and cyber security (24 percent). the right combination of empathy,
and data to guide their efforts.
“So what’s behind this hesitation?” curiosity, resilience and humility.
Our survey respondents made it clear
Simon Moutter, Former Managing These individuals also need to
that they plan to create a “Workforce Technology over people
Director of Spark New Zealand, practice new tactics including pacing
4.0”, by upgrading the skills of their investments?
thinks New Zealand businesses, implementation, managing political
employee base. In fact, almost half
and New Zealanders as a whole, It’s interesting to note that, when dynamics, creating an enabling
of global CEOs (48 percent) say
are not fully comfortable with CEOs were asked about their environment and activating networks
they plan to upskill more than half
failure in general – “Fear of failure specific investment priorities to to be effective change leaders. For
of their entire workforce, particularly
is embedded in our DNA”. improve organisational resilience, example, a few of the critical skills
in digital capabilities like advanced
a majority (68 percent) are of strong change leaders include
Simon contrasts this with his data visualisation and coding, within
emphasising capital investment in their ability to communicate a
experience offshore where the next 3 years. This challenge is
technology rather than on developing compelling story, activate networks,
stakeholders are more comfortable amplified by the fact that, not only is
workforce skills (32 percent). manage political dynamics and
talking about success and failure in the the work changing, but there is also
create an enabling environment.
same sentence, and failures can be a premium on the skills required by This is not necessarily a contradiction
seen as a real strength for the future. insurers across many industries. since it is natural that companies
Perhaps the concept of ‘learn As a result, companies must consider see the need to invest in the
fast’ is more helpful in a New a diversified, ‘build, buy and save’ technology first before they flesh-
Zealand context than ‘fail fast? approach to develop their workforce. It out the staffing requirements to18
CUSTOMER
Understanding
AND CONDUCT
customers’ needs and
outcomes is essential
for an organisation
to innovate and stay
competitive…18 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 19
Customer and conduct: Lessons,
questions and future outlook
James Brownell Director, Insurance Conduct Lead, KPMG New Zealand
Following on from The FMA/RBNZ’s review of life
insurers in January led them to
1
Lessons learned from
the wider industry
Identification and
remediation of issues
Systems and controls
The majority of issues we identified
the Australian Royal request both life and general insurers
to undertake two specific activities: Recognising there are distinct
The regulators are realistic, and through working with our clients have
Commission and 1. An in-depth product review
differences between life and general
understand that organisations are
not perfect; therefore, where no
not originated from bad intentions, but
point to potential cultural issues around
insurance operations in terms of both
subsequent New 2. A gap analysis against the product complexity and distribution,
issues have been identified, they are
likely to be sceptical that the process
allowing systems and operational
risk issues to continue unabated. It is
Australian Royal Commission there are nevertheless important
Zealand banking findings; has resulted in a lessons to be learned from the life
has been rigorous enough. Insurers apparent that there has been some
significant programme of work need to be proactive in identifying reluctance to invest in systems, to
reviews, 2019 has across the insurance sector.
sector given they have been subject
to direct reviews by the regulators and
potential issues. In some cases, address known issues and a general
executive teams may have overly lack of accountability for identifying
been a year of This work needs to be considered
against the backdrop of substantial
have therefore had a four month
head start.
positive or biased views; gaining and establishing controls to stop
independent feedback from front-line issues from continuing to occur. A
intensive focus from regulatory change relevant to culture
staff, mystery shopping and feedback lack of appropriate consideration for
and conduct. Amongst other reviews Product review
the Financial Markets around insurance contract law and
through customer forums can be
effective ways of demonstrating this.
operational and conduct related risks,
including putting formal tolerances in
the role of appointed actuaries, two New Zealand insurers have not
Authority (FMA) and key changes include the introduction been required to have formal or Where issues have been identified,
insurers typically do not have formal
place so that they can be proactively
monitored and mitigated has also
comprehensive product review
the Reserve Bank of a new advisory regime (Financial
Services Legislation Amendment processes, and some have relied on investigation or resolution frameworks exacerbated these problems.
informal processes and discussion. so calculating customer impact and
of New Zealand Act) and the Ministry of Business,
Innovation and Employment (MBIE)’s As a result the amount of work the identifying root causes is incomplete
and unsurprisingly progress in terms
(RBNZ) on culture review of the Conduct of Financial
Institutions and the introduction of
specific product review requirement
has entailed has generally been of rectifying issues has been slow or “Insurers need
and conduct in the a new conduct regime. Under both underestimated by the market.
Indeed, the RBNZ and FMA recently
absent. This is demonstrated through
examples of insurers knowingly to be proactive in
of these changes, new licencing
insurance sector. requirements for insurers and formally requested a large number sending out incorrect information
to customers. There are plenty of identifying potential
advisers will impact the way that of life insurers to re-submit their
the sector is regulated, introduce product reviews, because they were case studies outside of New Zealand
which demonstrate the importance of
issues. In some
additional obligations for insurers either incomplete or did not go deep
and advisers and give the FMA enough in terms of identifying risks investigating and remediating issues
quickly and efficiently in order to limit
cases, executive
and issues, and/or investigating issues
more power to monitor and enforce
against licencing obligations. This that had been identified. This will be the longer-term negative impacts. teams may have
most relevant for general insurers
will put the regulatory regime here
more in line with frameworks in with a large number of products and overly positive
Australia and the United Kingdom, distribution channels, and where
products have rapidly evolved over the
or biased views;
and will have a significant impact on
manufacturers’ obligations both in last five years, meaning substantial
legacy books. Organisations without
gaining independent
terms of how products are designed
and how customers are engaged. appropriate data management and feedback from front-
governance have struggled to pull
In this article we will focus on the together consistent and meaningful line staff, mystery
challenges and lessons learned so analysis across their product portfolios.
far from both the life and general shopping and
insurance market, the questions that
organisations should be asking to feedback through
ensure they have done enough to
address regulators concerns and the customer forums can
future outlook for the general insurance
market, including how conduct and
be effective ways of
culture should be integrated into
insurers’ strategies going forward.
demonstrating this.“20 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 21
Oversight of intermediaries Customer centric focus
and measurement
“Understanding Areas of focus
Any conflicts of interests created by
commissions need to be proactively Understanding customers’ needs and customer experience —— How do firms ensure that they have identified
all the culture and conduct issues that exist
—— How do you demonstrate that
commissions across your portfolios are
monitored by insurers, as it is apparent
that soft commissions are still being
customer outcomes is about more
than culture and conduct, it is essential and customer within their business?
—— How are issues investigated and remediated
appropriate and do not drive poor customer
outcomes?
used and are considered by the FMA
and RBNZ as high risk. In the general
for an organisation to innovate and
stay competitive in a rapidly changing
outcomes is about within your organisation, what frameworks
are in place to ensure these are carried out
—— What kind of oversight is required / practical
to ensure you know your products are
being sold appropriately?
more than culture
effectively?
insurance market there are a wide environment. A more customer centric
—— How do you ensure you get to the bottom —— What do you do when you identify
variety of distribution channels and focus and an improved understanding
types of arrangements which has of customers’ circumstances and and conduct, it is of the issues identified to ensure
they don’t happen again?
misconduct by an intermediary?
—— How do you know that
made investigation and oversight of needs will ultimately result in
these more challenging. The FMA higher retention and sales. Lack of essential for an the way your staff are
incentivised results in good
and RBNZ have made it clear that investment in this is a double edged customer outcomes?
the onus sits with the manufacturer sword - in an increasingly more organisation to
to ensure customers are getting
good outcomes from their products.
connected and open world, negative
outcomes can have a significant
innovate and stay
Expectations are that insurers
understand the outcomes being
impact on an insurer’s reputation. competitive in a Identification and Oversight of
remediation intermediaries
delivered to customers by intermediary
Appropriate measurement and
reporting of customer outcomes is rapidly changing of issues and incentives
channels. For agency relationships,
where insurers only provide product
critical to enable strategic decision
making; customers’ needs and
environment.” Role of boards
design and pricing support and How do boards appropriately
financial performance should be challenge culture and conduct
legacy arrangements, this has meant
synonymous. Use of advanced activities and initiatives?
insurers have to take a different
techniques for data analysis allows How are senior managers held to account for
approach. Utilising data and analytics
insurers to gain insights where data is delivering good customer outcomes?
will help insurers to understand
unstructured or to identify trends and How do you leverage conduct risk
whether intermediaries are doing
relationships that would otherwise not appetite / tolerances to ensure they are
the right thing for their customers. considered strategically?
be possible. New Zealand banks and
now insurers are developing customer How does the board know that
they are getting the correct
What are the key questions outcome measurement tools and
2 story from their executive
insurers need to answer? dashboards which have tolerances team?
built in and allow appropriate ongoing
Based on the work we have monitoring, allowing insurers to be at
carried out in the insurance space, the cutting edge of product design.
we have outlined the questions Systems and Product
that insurers should be asking to There will undoubtedly be challenges controls review
understand whether they have the insurance market need to face
done enough to change the way up to in the foreseeable future if
they are considering customer insurers want to get ahead of the
outcomes in their organisations: coming conduct regime and build
—— How are legacy portfolios
culture and conduct into their strategic —— Where does it makes sense to
reviewed when there could be
direction. Insurers who are treating invest in appropriate data collection
3 Future outlook knowledge and data gaps?
where capability does not already exist?
their conduct and culture programmes —— What are the appropriate lead and
as a conduit for change rather than a —— How is culture and conduct being
Based on initial feedback to life considered as part of your overall IT
lag metrics to monitor customer
insurers and the legislation for a compliance box ticking exercise are outcomes?
transformation?
new conduct regime that has been those who will have a competitive —— How can the product review process be
—— How do organisations gain comfort that
fast tracked for implementation, it is advantage over their competitors. data governance and quality in particular leveraged on an ongoing basis to ensure
with legacy systems? changes are having the desired effect?
clear that the focus on conduct and
culture is here to stay and is likely to —— How does the business manage its risks
intensify as we move into 2020. and ensure its control environment is
operating effectively?24
LEGISLATIVE A new conduct regime.
AND REGULATORY Revisions to key
CHANGE
insurance legislation.
No aspect of insurance
will escape change. But
how well co-ordinated
will these changes be?24 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 25
Legislative and regulatory change:
An industry view
Tim Grafton Chief Executive, ICNZ
By any measure Conduct intermediaries and insurers need to be
clearly and appropriately provided for
Prudential supervision Insurance pricing
General insurers are not sitting on On the back of the CBL collapse, Misunderstanding surrounds ‘risk-
2019 has seen their hands waiting for the law to
compatible with other legislation, the
common law and business practices.
the initial priorities for the Insurance based’ pricing. Insurers have always
unparalleled scrutiny change. They are amending systems,
practices and incentives to align Responsiveness to the customer at
Prudential Supervision Act (IPSA)
Review will be on escalating
priced risk. If pricing becomes more
granular reflecting better understanding
of the financial with expectations that customers’
interests are understood and met.
claims time is paramount. A future
model for settling EQC claims
supervisory powers, solvency and
the role of the appointed actuary
of risk, the principles of pooling remain.
All house premiums still contribute
sector with change The test will be to demonstrate how
when catastrophe strikes must where work is well underway. Given
to seismic or climate risks;
have the customer at the centre. the focus on culture, governance
now to come. this has become part of an insurer’s
DNA. Accountability will rest with
Having one accountable entity, their is likely to be part of the mix too.
some pay more while others
pay less reflecting their risks.
insurer, meets this need best.
Boards to demonstrate how they Shifting away from the light-handed
Significant premium increases
re-set expectations and importantly approach of the past few years, we
A new conduct regime will be before Insurance law reflecting technical risk pricing should
monitor their implementation. can expect the RBNZ not to take
Parliament by Christmas. To be not attract market interventions
Insurance law needs updating insurers’ actuarial assessments at
administered by the Financial Markets This will require changes to unless there is market failure.
not least to reflect the digital age face value. Establishing a solvency
Authority (FMA), it will have powers to performance metrics and the Technical price is financially
and more complex distribution buffer will bring those who fall
review and require changes to policies, introduction of lead indicators sustainable pricing and signals the
arrangements. Insurance contracts within it into greater scrutiny. The
processes, systems and controls. of how customers’ interests are need for resilience. If affordability is
are also fundamentally different question is whether this will de facto
being met. It will mean offering an issue, then address that without
A Bill to revise and consolidate New from and should not be treated increase solvency requirements and
customers products they understand, distorting the markets’ signals.
Zealand’s insurance contract law like other consumer products. therefore costs across the board.
can easily compare and matching
will be fast on its heels. It will seek
the expectations of service they The limited terms and conditions As an aside, it is noteworthy that Resilience
to redress a perceived imbalance
are used to in other sectors. deemed reasonably necessary to receivables from the Crown in the
in favour of the consumer. Being able to understand what risks
protect the legitimate interests of guise of funds owed to insurers by
Changes to The Insurance Council of we face is at the centre of ICNZ’s
A review of the Insurance Prudential the insurer should remain part of any EQC from the Canterbury earthquakes
New Zealand (ICNZ)’s Fair Insurance ambition to create a bespoke model
Supervision Act (IPSA) will start shortly. changes. Current prohibitions on unfair can no longer be counted as capital
Code (FIC) which come into effect of New Zealand’s natural hazard
Separate but related, the Reserve Bank terms contract terms should still apply. in the solvency calculation.
in April 2020 talk to developing, risks, Rezealiance. Drawing on public
of New Zealand (RBNZ) is steering
marketing and selling products Even though ICNZ already requires Additional supervisory powers funded science and applying insurance
away from light-handed regulation
responsibly and stress the need a reasonable response to non- may include changing solvency techniques to price all property
to more intrusive supervision. Its
for plain English policies and clear disclosure by consumers and SMEs, factors as a condition of a license risks benefits New Zealand Inc.
scope is shifting to financial stability
communications. It beefs up reporting this too must be given effect in law through to administrative fines
being its primary purpose. For climate change risks, it will
from members of complaints and though it’s not clear whether that and greater enforcement powers.
The sector awaits the Government’s breaches and reinforces a reasonable Other measures, including requiring inform changing risk exposure,
should apply to all businesses.
response to large premium increases response to non-disclosure to an statutory funds to be kept onshore investment, planning decisions to
in the Wellington commercial property insurer of material information. Any moves to promote comparison to protect policyholders in the event inform central and local government,
market, felt most acutely by fixed sites must avoid price-driven an offshore entity is distressed and businesses and individuals.
We have trademarked a logo which consumer behaviour at the
income apartment dwellers. have been mooted before. Living in a risky country requires a
must be used on websites, claims and cost of appropriate cover.
No aspect of insurance will escape complaints material for consumers. All measures need to carefully balance between public and private
change. But how well co-ordinated Future proofing is critical too. While balance the cost to end consumers, interests, jointly working together to
Last year, of 1.2 million claims maintaining a high level of consumer manage risks and being an attractive
will these changes be? Will they maintaining the attractiveness
from customers, there were 3,280 protection, the law and regulations destination to share insured risks.
be proportionate to the problems of New Zealand to offshore
complaints of which 261 were referred should support flexibility to react,
identified? Will they align with capital and good regulation. It is so important to regulate in a
to external dispute resolution schemes adapt and innovate, to improve
the way product is distributed? way that supports insurance to carry
where 40 were partially or fully upheld. products and services, and to meet
out its critical roles for society.
A challenge for the sector is to apply shifting consumer expectations.
changes across the value chain It should be technology agnostic
no matter the form of distribution. and not unduly interfere with
Brokers and underwriters will need competition and collaboration.
to redefine their relationships to
achieve this. The responsibilities of28
IFRS 17
Your guide to the
amendments and
how to transcend
compliance with
accounting change…28 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 29
IFRS 17:
The new frontier
Ann Au Director, Insurance, KPMG New Zealand
“The amendments Ever-changing ever-flowing Included in most implementation
roadmaps is IT solution and selection.
products tend to require more time
and effort for insurers to complete
“Moving to IFRS
Since the release of the new
are helpful, but insurance accounting standard in
The deferral to 2022 provides insurers
time to select an accounting system
their impact assessment. This is
possibly worsened by the inherent
17 is a big task
implementing IFRS May 2017, insurers experienced
implementation challenges which
that suits best its business and complex features and potential and this proposed
financial reporting needs. This also limited documentation retained on
17 is still a complex prompted a change in IFRS 17.
gives insurers more time to ensure these legacy products. With recent package of targeted
With the aim of supporting the that processes and people (not just the focus by regulators on legacy and
and significant implementation, the International tool) are ready for implementation. closed products, insurers are able amendments
undertaking requiring Accounting Standards Board (the
Board) proposed amendments
In managing future costs, most
to tap on the information gathered
from the five-year product review
will help insurers
insurers will design, test and
substantial effort and to address the challenges and
concerns raised by insurers.
implement new controls around
for its IFRS 17 impact assessment.
in their ongoing
the revised and new processes.
new or upgraded The Board also proposed to defer Additional time means more time Amendments in seven key areas implementation of
data, systems, the effective date of IFRS 17 by one
year to financial reporting periods
for test runs and parallel runs.
Understanding results from these
The proposed amendments focuses on the new Standard.”
the following seven areas in IFRS 17
processes and beginning 1 January 2022. test runs and ensuring controls
»» Scope changes for certain
and processes are in good order - Hans Hoogervorst
controls. It’s vital that The Board will consider comments
on the proposed amendments and
will allow insurers to contain costs credit cards and loans that
provide insurance coverage. Chair of the
from work-around in the future.
insurers make good publish any resulting amendments
to IFRS 17 in mid-2020. Some insurers are using their time and
»» Accounting for International Accounting
use of the extra year. effort more efficiently and effectively
investment services in Standards Board
an insurance contract.
Not a snooze button! by leveraging the analysis derived
Even with this, many from their five-year product review. »» Allocating acquisition cash
flows that relate to future
The additional time is not meant Acknowledging that the focus of the
insurers will need to to be a snooze button for affected review was to identify conduct and contract renewals.
companies to wait for the exposure culture issues, the data extracted for »» Mitigating the financial risk of
step up the pace of draft to be finalised in mid-2020. this exercise can still be multi-purpose direct participating contracts.
their implementation Many insurers would have – it can also be used as a source
information to help insurers map out
»» Presentation of insurance
preferred a longer deferral, contract assets and liabilities.
efforts to reach but the extra year affords an and better understand the complexities
of certain product features in its
»» Reinsurance of
opportunity to step up the pace.
the finish line Some insurers are grabbing
IFRS 17 impact assessment.
onerous contracts.
»» Accounting for acquired claims
with systems the opportunity to refine their Due to challenges in extracting data
either due to system limitation or
liabilities on transition.
implementation roadmap to generate
and processes an improved financial reporting to multiple manual interface, legacy
products compared to contemporary
capability, creating greater value
tested and results from finance and managing future
understood by costs. More time means insurers
can better understand the results
management and optimise the impact of IFRS 17.
and investors.”
- Mary Trussell,
KPMG’s global
lead, insurance
accounting change30 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 31
Out of the seven proposed amendments, there are three which are relevant to most general insurers:
1
Presentation of insurance 3
Accounting for acquired
contract assets and liabilities claims liabilities
Allocating premium cash flows and Assets Under the current IFRS 17, insurance
the liability for incurred claims to contract liabilities are treated differently
carrying amounts at group level can depending on whether the insurer: Contracts issued Liability for
be challenging for some insurers. be the insurer incurred claims
»» issued the contracts; or
The Board proposed to present »» acquired them (either in a
separately on the balance sheet – at business combination or
portfolio level rather than group level in a portfolio transfer)
– the carrying amounts of insurance
The requirement to account for acquired
contact assets and carrying amounts
claims liabilities for remaining coverage
of insurance contract liabilities. Contracts aquired
poses a challenge for some insurers on Claims incurred Liability for
A group of insurance contracts is a lower transition. If insurers use a single system in a business
after date of remaining
level of aggregation than a portfolio of to manage all claims liabilities, they combination or
acquisition? coverage
insurance contracts. Insurance contracts Liabilities may not be able to distinguish between portfolio transfer
at a group level are based on profitability claims liabilities arising from contracts
Many groups would be in a In most cases, the portfolio
and dates of initial recognition. In that it issued and those that it acquired.
liability position, some could in aggregate will be in
contrast, contracts at portfolio level are
be in a assets position a liability position The Board proposed to amend the
based on contracts of similar risks which
transition requirements for claims
is at a higher level of aggregation.
liabilities acquired by an entity, adding a
This would provide practical relief specified modification to the modified
to insurers who may find it time- retrospective approach. Under this source of volatility will also trigger feedback from these stakeholders will
consuming and costly to allocate specified modification, the insurer changes in product mix. Insurers will also help tailor not just financial record-
cash flows at group level. would be allowed to account for these need to regularly cross check these keeping and reporting but also budgeting
liabilities as a liability for incurred claims. changes against its future strategy and forecasting of financial results.
The insurer would be permitted to and good customer outcomes.
Reinsurance of use the specified modification only With the recent conduct and culture
2
onerous contracts to the extent that it does not have Some insurers’ implementation plans review, the regulator is seeking for a
reasonable and supportable information include re-designing IT architectures change in performance metrics, and
IFRS 17 as initially issued requires an and systems – taking the opportunity most insurers are currently revising
insurer to recognise losses in profit or to identify the acquired claims liabilities
and account for them separately as to transform and optimise business their performance metrics to meet
loss when it issues onerous insurance systems for a better, cheaper and regulatory requirements. Insurers
contracts, with no corresponding a liability for remaining coverage.
faster end-to-end process. may need to plan ahead and look into
gains recognised in profit or loss if any potential changes in systems and
the losses are covered by reinsurance Transcend IFRS 17 Most insurers are currently exploring
processes that would lead to future
contracts held. This can result various potential scenarios under IFRS
Front-runners in implementing IFRS changes in data capture and data
in an accounting mismatch. 17 and considering how these scenarios
17 are taking IFRS 17 beyond solely an management for these metrics.
may impact solvency requirements.
The Board proposed that if an insurer accounting change. They are taking a Early discussions with the regulators In summary, insurers can use the
recognised a loss on underlying tactical approach – exploring how to regarding these various impacts will changes required by IFRS 17 to enhance
contracts that are onerous at initial reduce volatility, strategising how best prove beneficial in the long run. their financial capability. Achieving
recognition, then it would at the same to amend product features to achieve this will require lots of preparation
time recognise a gain in profit or loss desired financial results and working out Stakeholder management is also key.
– insurers taking the opportunity to
on reinsurance contracts held, to the how to optimise systems and processes. Some insurers are planning how to
step up the pace during this extra year
extent that the underlying contracts communicate the potential impacts on
Gain on proportionate The requirement under IFRS 17 to will reap the benefits in the future.
are covered on a proportionate basis. statutory, regulatory and management
reinsurance contracts held recognise losses on groups of onerous financial records with key stakeholders As insurers climb towards the precipice
The Board decided to propose an Loss on onerous underlying contracts will potentially prompt such as regulators, investors, brokers, of this new frontier, they will not only be
amendment only for proportionate insurance contracts important changes in product design reinsurers and employees. This step will reminded of the rugged terrain and steep
reinsurance. This is because the and distribution strategy. Having a help manage expectations and ensure challenge but also the soaring heights of
mismatch between the timing of the better understanding of the drivers of the right story is being communicated. innovation and business transformation.
recognition of claims and the recognition future financial results and potential To offer more business-useful insights,
of recoveries can be directly identified
for proportionate reinsurance contracts.34
RISK AND
Physical risks from extreme
RESILIENCE
climate events, which
include storms, heavy
rain, flooding, drought,
heat waves and fires are
broadly understood, but
it is hard to predict...34 | KPMG | General Insurance Update 2019 General Insurance Update 2019 | KPMG | 35
Risk and resilience: Meeting the
challenge of climate change
Niels Chlupka Manager, Sustainable Value, KPMG New Zealand
In 2018, California Adding further urgency to the
issue, in October 2018, the UN
globe caused insured losses of US$80
billion5. In New Zealand, insurers spent
extend the transmission season and
geographical range for many infectious
of climate change. Embedding climate
risks into overall governance and risk
had the deadliest Intergovernmental Panel on Climate
Change1 stated we have at most,
NZ$226 million helping customers
recover from extreme weather.6
diseases, with millions of lives at risk.9 management frameworks is critical.
This includes sharpening financial risk
and most destructive 12 years to make the drastic and Transition risks modelling around climate impacts and
unprecedented changes needed to measuring potential for liability claims.
wildfire season avoid irreversible climate change.
Physical risks
Transition risks occur as the economy
The Task Force on Climate-related
The World Economic Forum’s Global Physical risks from extreme climate moves towards a low-carbon future.
ever recorded. Risks Report 20192 identified extreme events, which include storms, heavy Some sectors of the economy are Financial Disclosures (TCFD) provides
rain, flooding, drought, heat waves and facing big shifts in asset values or a comprehensive framework for
In 2019, tropical weather events, failure on climate
change mitigation and adaptation, and fires are broadly understood, but it is higher costs of doing business. The action covering governance, strategy,
and risk management, as well as
Cyclone Idai caused natural disasters as the three most
likely risks of significant concern to
hard to predict the changing intensity,
frequency and concentration of these
energy industry is a prime example: to
avoid irreversible climate change, 62 metrics and targets.14 Its uptake has
been enormous, with 91 percent of
catastrophic damage society. No wonder climate change is events such as clusters of typhoons.
Insurers are also finding it difficult
percent of current fossil fuel reserves
must be left in the ground.10 This 1,100 surveyed companies having
rapidly rising up the public agenda.
and tragic loss of It is also escalating up the insurance
to foresee the indirect risks such as stark fact has resulted in a group of decided to fully or partially implement
the TCFD recommendations, and 75
disruption to economic value chains. insurers and pension funds managing
life in Mozambique, agenda: not just because natural
disaster insurance claims are rising, but New Zealand has a very long coastline
US$2.3 trillion in assets to commit percent of users of the information
see a marked improvement in the
to shifting their investment portfolios
Zimbabwe and also because insurers are increasingly with numerous areas prone to flooding.
Research from the National Institute
away from carbon-heavy industries.11 quality of climate disclosures.15
recognising that the mid- to long-term
Malawi. Hot on outlook on climate change carries of Water and Atmospheric Research
Liability risks
Insurers should also ensure that
their liabilities and investments are
massive risk. According to the 12th (NIWA) shows that NZ$38 billion of our
its heels was a Annual Survey of Emerging Risks3, residential and commercial buildings Liability risks arise from organisations
properly diversified to avoid excessive
concentration of climate risk. This may
may be at risk of flooding if sea levels
summer heat wave actuaries ranked climate change
as the top risk for 2019, beating rise one metre7. In May 2019, the
not fully considering or responding
to climate risk. In November 2018,
include shifting investment portfolios
away from carbon-heavy industries
that set all-time out concerns over cyber damages,
financial instability and terrorism.
Reserve Bank of New Zealand (RBNZ)
warned that, as climate risks become
the RBNZ noted that financial sector
participants need to ensure climate
towards those that are climate resilient
and best positioned to benefit from
high temperature more acute, insurance for properties
susceptible to sea level rise and
risks are adequately reflected
the transition to a low-carbon future.
Climate change risk in their business. 12Businesses
records across much coastal inundation may become more who fail to respond to climate Insurers have an important role to
Mark Carney, the Governor of the Bank expensive and difficult to obtain. This change put themselves at risk of play in helping our society meet
of Europe. This is of England, used his speech4 at the may profoundly reduce their value.8 litigation. As of July 2019, 1,328 the profound challenge of climate
UN Climate Action Summit 2019 to change. Recognising and rewarding
what climate change implore insurers to use their money,
Risks from extreme climate events
are not only to physical property.
climate change litigation cases
have been filled in 28 countries, organisations that build climate
deep risk management expertise and
looks like, and it long-term perspective to ease the
Indeed, adverse health effects from with 17 in New Zealand alone.13 resilience with lower insurance
premiums is a powerful tool to
increasing temperatures and higher
is having serious burden of climate change. Insurers are
well aware that the physical impacts
humidity are also on the rise. Swiss So what can be done? drive the change we need.
Re has identified the impact of
consequences for of climate change; in 2018 alone,
extreme weather events across the
climate change on the life and health
There are a number of actions that
insurers can take to improve the way
insurance sector as one of its top five
people, economies emerging risks for 2019, noting it will
they assess and manage the impacts
and ecosystems.
7
https://www.newsroom.co.nz/2018/11/20/329590/125000-buildings-worth-38bn-at-risk-from-first-1m-sea-level-rise-draft-report
¹ https://www.ipcc.ch/site/assets/uploads/sites/2/2019/05/SR15_SPM_version_report_HR.pdf 8
https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Financial%20stability%20reports/2019/fsr-may19.pdf?revision=47e0d60a-bdca-4fbb-bddc-2ad9f20a4b2d
² http://www3.weforum.org/docs/WEF_Global_Risks_Report_2019.pdf 9
https://www.swissre.com/media/news-releases/nr-20190522-sonar2019.html
³ https://www.soa.org/globalassets/assets/files/resources/research-report/2019/12th-emerging-risk-survey.pdf 10
http://www.climatecouncil.org.au/uploads/a904b54ce67740c4b4ee2753134154b0.pdf
4
https://www.bankofengland.co.uk/-/media/boe/files/speech/2019/remarks-given-during-the-un-secretary-generals-climate-actions-summit-2019-mark-carney. 11
https://www.unepfi.org/net-zero-alliance/
pdf?la=en&hash=C0D3A9F2C86647B04D88E7C0DC23264639D03BE2 12
https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Financial%20stability%20reports/2018/fsr-nov-2018.pdf?revision=d55c1f94-59ac-4903-a411-5642bf81c096
5
https://www.munichre.com/topics-online/en/climate-change-and-natural-disasters/natural-disasters/the-natural-disasters-of-2018-in-figures.html 13
http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2019/07/GRI_Global-trends-in-climate-change-litigation-2019-snapshot-2.pdf
6
https://www.icnz.org.nz/media-resources/media-releases/single/item/insurers-pay-226m-to-support-recovery-from-extreme-weather/ 14
https://www.fsb-tcfd.org/publications/final-recommendations-report/
15
https://www.fsb.org/wp-content/uploads/P050619.pdfYou can also read
