Series 7 Episode 6: Financial services in transformation - insurance

Transcript

Tessa Norman: Hi everyone, and welcome to this episode of Risk & Regulation Rundown, the podcast where we analyse the latest risk and regulatory hot topics in financial services. I should start by saying I am recording remotely today while our guests are in the studio, so you may notice some difference in the sound. Today we're recording the third and final episode of our mini-series in which we've been taking a deep dive into industry sectors. This episode is focused on the regulatory and market forces which are influencing insurers, and we'll be talking about how insurers can effectively respond to both the challenges and the opportunities which were created by those drivers, whether that's regulatory scrutiny or factors such as cost pressures, technological innovation and climate change. I'm delighted to be joined by two brilliant guests who are here to help us discuss all those fascinating topics, I'm joined by Alex Bertolotti, who is PwC UK's Insurance Leader, and Sam Jones, who's a Director in PwC's Insurance Risk and Regulation Practice. Welcome to the podcast.

Alex, now feels like a particularly interesting time to be talking about the insurance sector which is really having to respond to some quite fast-moving changes, whether that's economic or geopolitical instability, to changes in trends that we're seeing across technology and customer needs and demands, and we've also seen some really quite noteworthy transactions and consolidation in the market recently. It would be great if you could start off our conversation today by setting the scene in terms of how would you characterise that environment that insurers are operating in and what do you see as the key forces which are reshaping the sector?

Alex Bertolotti: Thanks Tessa, and thanks for having me on your podcast. I'm very excited, it's the first ever podcast that I've done. I've done TV, I've done webcast, this is my first ever podcast, so thank you. Looking at the insurance sector, there's a load going on. I think it's an interesting time for us as a sector, so four or five things to bring up. I think firstly, the need for technological transformation, years of underinvestment in technology has left quite a significant technology debt and the industry is really grabbing hold of that right now. It also doesn't have a particularly great track record of putting in technologies, so a question where does it get the skills from, the capability to do that. Number one, tech transformation. Number two, cost pressures and inflation, we’re now publicly talking about the impacts of tariffs on the sector and on costs. Geopolitical and economic volatility. I tell you; this is probably the biggest time in my career that I've talked to clients about politics and uncertainty in geopolitics, it's up there whenever I talk to CEOs, that is certainly causing focus at the moment. I guess thirdly, shifts in consumer behaviours. Greater demand for personalisation and seamless digital-first experiences.

If you think now as to how do you buy insurance, it's very different today than it was three years ago, five years ago and people want that personalisation. I guess fourthly, and I'll come back to this a bit later, market consolidation trends, there's a lot of consolidation, people wanting to drive value through transactions. For example, Aviva and Direct Line Group. Then finally, climate change. I guess those are the biggest ones. I guess one last thing. Sorry Sam, I'm able to talk for hours on here but one last thing, so today, Monday the 8th of September, we've issued our Insurance Banana Skins report, which comes out every two years. It surveys hundreds of risk professionals worldwide on what are the top issues facing the sector and in the top three, AI and tech, and climate. In the top five you'd add in macroeconomics, and I've talked about regulatory change as well. So, the big factors are being recognised by the sector as well.

Tessa: Brilliant, thanks Alex. It's helpful to start with that overview and, as you've touched on, we'll certainly be returning to some of those themes in more detail. But before we do that, Sam, I wanted to bring you in here and get your reflections on how the regulatory environment is impacting insurers at the moment. That's clearly another major driver of change. How would you describe that regulatory environment for insurers, Sam?

Sam Jones: Thanks Tessa, and I think it's an important question. I would say in the regulatory world we're at a little bit of an inflection point; we have this renewed focus on growth, we've got the government being incredibly focused on growth and, issuing its Growth and Competitiveness Strategy for FS, which includes specific provisions for insurance. We've got the regulators clearly also focusing on growth as a concept, but you've also got Consumer Duty implementation and the regulator now focusing on how effectively have firms implemented Consumer Duty. Particularly looking at the GI sector over the past few years, I don't think anybody would say we've had a regulator that has been quiet, there's certainly been a huge amount of activity but we're at that inflection point of actually where is that balance between growth and actually the implementation and effectiveness of how firms are managing those regulations, particularly Consumer Duty, how is that going to play out? I think, picking up on what Alex was just saying around our Banana Skins publication, actually that's really coming through there. If you look at what's coming out around regulatory change, there's this real concern as to will it be supportive of growth and some scepticism as to whether current regulations are supportive of growth in places. I think that's also coming through in the sentiment of businesses. We are starting to see some things coming out around growth and more proportionate regulation, particularly around, for example, commercial insurance and we've seen that with the recent review of the application of Consumer Duty and PROD, and looking at the definitions of where that applies and narrowing that in the commercial environment. We are also though seeing that renewed focus on leveraging the rules that exist around Consumer Duty product governance in individual firm interventions or individual firm focus where the regulator has concerns. Whilst I do think we are going to see a regulator working differently with the industry, perhaps working to find solutions with the industry, that's something we're seeing, for example, in the space of bereavement claims in the life sector. I don't think we're transitioning to a completely light-touch regulatory regime. What we're seeing is more use of the existing toolkit, as was put forward when Consumer Duty came in, with a focus on growth but I don't think we're going into light-touch regulation.

Alex: Tessa, if I can just add something to that. It's interesting, Sam, talking about the government's desire for growth, the insurance sector, huge amounts of assets, impacts a huge amount of people, it employs a lot of people as well. I had a question at the beginning of all this which is are they serious about growth and how is the regulator going to play its part? And is it just going to be lip service or are they going to implement something that encourages growth? I must admit, talking to our clients over the past six to twelve months, I have felt quite a shift in terms of how they view the regulator and the government as being firmly on the growth agenda, and I hadn't expected that.

Sam: It's a really interesting point, Alex, and as I say, we're not shifting to light-touch regulation because I think even governments who were focused on growth, we've been burnt by very light-touch regulation before. However, we are seeing much more focus in what the regulations are. Instead of the answer always being new regulations when an issue is identified, it's how can we better use the regulations that we already have to achieve the right goal? How can we work with firms to overcome challenges that might not be fully in their control but might be impacting customers, and that shift is absolutely things that we're starting to see coming out of the regulator and it is positive. I think we are on the start of that journey and there's still a little way to go to see what will this mean in practice over the coming years, but it is that balance between them. It's a balance any regulator has to tread between how do you encourage that growth, but how do you also protect consumers at the same time?

Tessa: Absolutely, thank you both. And Sam, I definitely agree with you that we're not seeing a quiet regulator at the moment, it's been very busy particularly in the GI sector over the last few years, but it would be great if you could give us a bit more detail on where exactly the FCA has been focusing its attentions, both across GI and across the life sector?

Sam: Happy to Tessa. I think we've obviously just had the summer period, which is traditionally a quieter period in regulation, although I'm not sure the past few years have always been consistent with that. But just prior to the summer holidays we had a bit of a bumper day of publications at the end of July in the GI sector, and there were some immediate actions for firms coming out of those but picking up on the sentiment point that Alex just mentioned, I think the industry were really pleased with what came out of the regulator. We had the interim report on the Premium Finance Market Study and what became clear is the FCA had taken account of all the information that had been provided to it about the complexities of that market. That doesn't mean that all of their concerns have been addressed, but the FCA has ruled out some quite significant market changes, which the industry has on the whole appreciated, although recognising that there are still some challenges to be addressed.

We had the review on claims handling and there were definitely a few things coming out of that around governance and oversight of third parties, but again, it was very practical. It came out with some interesting thoughts that certainly the organisations I'm speaking to have found helpful, and the firms I speak to really like the good and poor practice approach that the FCA takes because it's tangible.

There were some other publications that came out around motor premiums, for example, and it was positive that the FCA was able to drill down and understand the drivers of those higher premiums in recent years and share that with the industry and other groups. Outside of GI, we've got activity getting busier in the life sector, we've got the Protection Market Study going on at the moment which is, again, looking at how the market is operating, it's looking at value in that market. We're seeing a regulator that's engaged and willing to talk to the industry and understand how the sector works, and work with the industry to avoid increasing that protection gap in the market, which would be a bad outcome for consumers, for growth, for lots of things. That's also important. We're obviously at the early stage of that, although the FCA is working quite quickly, there is still a way to see where that's going to go, but certainly the sentiment of the dialogue has been welcomed. We've got work on bereavement claims, the FCA did find some concerns about how long it takes to process claims at the bereavement stage in life insurance, but as I mentioned earlier, the thing that's positive there is the FCA is working with the industry to try and find a solution, which is a different way of working for a regulator but is hopefully a positive sign of things to come. We also know that there's a unit-linked fund thematic review which will be coming out as well, as we get nearer to the end of the year. When you take all of that into account, as we said, we've not got a quiet regulator, there's still a lot of activity going on and there is still a degree of regulatory apprehension among some firms. Part of that is some firms have found that they have had to undertake activity to change their processes, to improve outcomes for customers, and because a lot of that's happening on a firm-by-firm basis, that naturally can create a little bit of apprehension of not knowing necessarily if every firm is up to the same standards across the board, because inevitably not all of the processes are public but the good and poor practice is clearly helping to support firms to get up to those standards, that's the kind of focus areas that we're seeing at the moment.

Tessa: Thanks Sam. That's really helpful. I think that as you were speaking there, there's quite a few interesting connections actually that we can make between some of those focus areas and the areas that the FCA is looking at, and some of those, more macro trends and drivers that Alex you talked us through at the beginning. Alex, what are your reflections on some of the connections between the two? Whether that's, focus around cost and cost pressures that firms are dealing with elsewhere, or the market competition studies? Then given those connections, what are the implications for firms?

Alex: Yes, there are quite a few linkages, and as you were talking, Sam, I was thinking cost pressures and, firms trying to drive cost down and then looking at armies of people trying to produce information to give to the regulator to explain why what they're doing is okay. There is definitely cost pressures in the sector, there's definitely an emphasis on fair value for the regulator and being able to demonstrate fair value to customers, which on the flip side of that means how do you justify your costs? If you want to justify your costs, do you know what they are? That ties a little bit to tech transformation and data, and MI and really understanding the fundamentals of what drives profitability in the sector on a product, by line of business and then being able to justify that around fair value. It's all interlinked and you can add it into the broader discussions, you know, the big battleground at the moment for insurance companies is data, what data have you got, is it accurate, how do you use it, how do you plug it into AI and so, big programmes looking at data, looking at MI, looking at transformation, looking at technology, all underpinned by fair value, Consumer Duty. So, Tessa, yes, it is all interconnected and I think when you add AI on top of that, which I'm sure we'll come back to later, it's going to be interesting where that takes us as well.

Tessa: Sam, would you add any further reflections to that?

Sam: Yes, I would. And Alex, I would wholeheartedly agree with how important data is. I would say when we see those firm-by-firm interactions and interventions by the FCA, we often find that at the core, one of the challenges is a gap in data, and therefore leading to blind spots actually in what customer outcomes might be, or blind spots in being able to evidence that those customer outcomes are indeed good. The thing I would add to that is, and I think it comes through in the conversation that we were just having is Consumer Duty and fair value are not just a compliance exercise, they're actually really important to integrate into how you run your business and how you think about your products commercially as well. Often, although not always, we find that the products that do have fair value concerns also have commercial challenges, there might be a very small book, they might have a high expense space, they might be loss-making, and often those products also demonstrate fair value concerns. As I say, not always, but we see that more often than you would sometimes expect. I think thinking about the compliance or the regulatory side of it as a distinct exercise to how do you run your business is not the right way to go about it. When you bring those two things together, you end up with products that not only meet your customer's needs but are also much more commercially viable and stronger from a commercial perspective as well.

Alex: Let me just add to that, Sam. I remember when Consumer Duty first came out, I was really surprised at the level of attention it got from a board perspective, and the attention it got was not, 'Here's another regulation that we need to deal with,' it's a, 'This fundamentally goes to the heart of our business.' 'How are we doing fair value outcomes for customers? How are we making money? Is it the right way? What do we need to change in our business together?' and I was just really surprised at that.

Tessa: Those points around commercial considerations lead us quite nicely into and the next point which I really wanted to focus on which is around changes that we're seeing in competition dynamics. Alex, you talked at the start about some of the activity that we've seen and it would be interesting to get your further reflections on what are the real drivers behind some of that activity that we've seen, and how do you see that evolving over the next few years as well?

Alex: And there is a lot. There's a lot of activity at the moment. You know, I guess why? Drive to scale, look at Athora-PIC, Aviva-DLG, Brookfield-Just, more globally acquisitions of AXA's investment management business and many others. There's a definite drive to scale and drive to complement and grow existing businesses. I think consumer behaviour does drive more competition in the market, whether it's price, service, product, 'We would like this niche product, we want to grow this wealth business, we want to grow into health.' Whatever it would be. But the availability of capital, of cash, private equity has come into the insurance sector in a big way, particularly around brokers, particularly around MGAs and that is driving acquisitions, it's driving deal activity.

Tessa: Thank you and I wanted to spend a bit more time as well talking about transformation and technology. We've touched on it, but I'd be really interested to hear both of your reflections around what are some of the interesting and slightly different technological use cases that you're seeing in the market? Alex, I'll come to you first.

Alex: I guess three legs, if that's the right terminology, to technology. One is technology itself, so availability of product, one is data, the availability of data, and the third is AI. Where we live right now, it's such an amazing time in terms of the sector trying to get its head around AI, how it uses it, what data does it need, how do you scrub up that data to make it worthwhile, how do you avoid getting distracted by loads and loads of AI use cases, and how do you monitor it in the absence of no regulation either? It's massive. If you think about some of our largest insurance companies, if you think about how much they outsource, what does it mean for them? You think about claims handling, do you need claims handlers? Can you use AI to get a better outcome? You think about health, you think about doctors. The sector, if I think about the meetings I'm having now compared to the meetings six months ago, are completely different, compared to a year ago completely different. I question where's that going to be in the next three to four years. I can't stress enough and there's the cost actually as well of cloud, of technology, of data and keeping it going. So significant disruption, Tessa.

Tessa: Thank you Sam, how does that compare with the conversations you're having with clients?

Sam: I think technology is much more at the forefront of conversations now and I think people are much more willing to be brave in thinking about, 'Can we try something? Can we do a proof of concept to see if something works?' And, as a result, we are seeing much more innovative use cases coming through. Some that I think are particularly interesting are things like can you use AI to accelerate the analysis of potential product simplification? That's quite exciting and potentially game changing in what is something that's quite a complicated sort of thought process and process to navigate, but one that is certainly in the life sector becoming much more topical, much more necessary to have those conversations. Also, as Alex alluded to in the claims process, using AI to review evidence associated with claims at speed and getting that consistency, and even being able to use that technology and claims remediation exercises. There's some really exciting use cases come out but what's really shift for me over the past year or so is people are more willing to be brave in trying things, doing proof of concepts and seeing if they work, and actually through that we're starting to see some really interesting use cases come through.

Tessa: I think that ties back to the points we were reflecting upon earlier around the growth agenda and how the regulator is responding to that. I think we're certainly seeing a greater appetite from the regulator to work with firms to help them test out some of those ideas, that's really welcome to see as well. Sticking with that theme of how things are changing and how they may well continue to change at that pace over the next few years, I really wanted to touch on the theme of climate change as well, which Alex, again, you mentioned at the beginning. What are your reflections on, sort of, how climate is impacting insurers and, again, how that might change over the next few years?

Alex: It's an interesting one, Tessa. There's no doubt that climate change has had and will have a significant impact on insurance. It's the one area where I talk to my daughter that she gets interested in. I sit there and say, 'How many trillions of assets have my clients got? And imagine if they use those as a force for good in terms of the climate.' From an asset perspective, from an insurer as an entity, as a company in its own right, when is it going to get to net zero and what's its transition plan? And then what insurance does it provide over climate? What impact does it have on house insurance, building on flood plains, storm damage and the like? So, I think as well from a reporting perspective, global stability of reporter requirements, plus consistency, plus proportionality, it's going to be important. It's difficult if you've got different reporting requirements in the US, in Europe, in the UK, internationally, particularly when some are more expensive to implement than others. I don't know, it feels like from all angles it's important. The question, has its importance gone down a bit over the past six to twelve months compared to two years ago because of the broader geopolitical agenda? Something to think about.

Tessa: Brilliant. That definitely ties into your point at the beginning around how much geopolitics needs to be front of mind for industry leaders and just how fast paced the change we're seeing in that respect. We've covered a lot of ground in our conversation today and I'd like to finish our discussion by bringing all of that together and really asking you both to reflect upon, given all these changes and trends that we're seeing across the sector, what do you think will most differentiate the insurers which are set to thrive over the next five years or so? What should firms be focusing on to set themselves up for success? Sam, I'll start with you, if that's okay.

Sam: I think it's the use of data to drive decisions quickly, whether that be decisions around customer outcomes, whether it be using data to better support and access customers, driving commercial decisions. I think access to and the use of data is becoming imperative for successful businesses.

Alex: Yes and for me, I completely agree with Sam. I've said it for a couple of years actually; I think data is the new battleground for insurers. I remember talking to a CEO, quite a scary chap, maybe about five years ago and, he was new in the role and I said, 'Tell me about your strategy.' He goes, 'Alex, I'm going to increase revenue and I'm going to reduce costs.' I thought, 'Yes, brilliant. Okay.' But if you look at that in the context of what's happening now, revenue, what products are you selling? How do you sell them better? What price are you going to get? Can you justify that from a regulatory perspective? What growth markets are out there? Expenses, how do you use data? How do you use tech? How do you get the expense ratio down, and therefore be a more successful business? And I think data is the game changer. Data and AI, the advancements in technology, that's where it's going to be won and lost over the next three to five years.

Tessa: Brilliant. Thank you both. A really interesting note for us to end on there, thank you for that and lots of great takeaways for our listeners. To our listeners, thank you as ever for tuning in. If you enjoyed today's episode, don't forget to subscribe and rate and review the series as it helps other listeners to find us. You can also listen back to the previous episodes in this mini-series, if you’ve enjoyed this episode in particular. We’ve also covered the Banking and Capital Markets and the Asset and Wealth Management sectors. Thank you again and we will speak to you again next month.