When asked once what was the most difficult thing about his job, former British Prime Minister, Harold MacMillan, famously responded by saying: “Events dear boy, events.”
Delegates arriving at our Life 2017 Conference in early June, held in the shadow of the Palace of Westminster, might well have shared that sentiment. A combination of the vote for Brexit and the results of the U.S. presidential and snap UK general elections have increased macro uncertainty.
Equally, the insurance industry has hardly stood still, thanks to the challenges of continuing low interest rates, the steady march of technology, the machinations of Solvency II and, after numerous false starts, the announcement of an implementation date for IFRS17. Despite admitting to calling the UK election result wrong by a significant margin, well-known economic commentator, Roger Bootle, delivered the conference keynote with a fresh perspective on life in what we labelled the ‘fast spin cycle’.
Willis Towers Watson Life 2017 Conference, London.
The remainder of the conference delved deeper into some of the key issues that insurers are likely to be facing in the next 12 months.
Solvency II implications
With the bedding-in of Solvency II still very much work-in-progress at most companies, a pair of presentations approached the challenges from different angles.
Kamran Foroughi, and Autonomous founder and analyst, Andrew Crean, addressed the growing call from investors for more clarity and consistency in the numbers produced by insurers. Following the publication of a joint report (Insurance Solvency II One Year On), based on the analysis of the reporting statements of 31 European insurers, they argued that the insurance sector is at risk of being further marginalised by investors as performance reporting becomes more complicated. In particular, they highlighted how Solvency II falls significantly short as a profit performance and cash generation metric that can replace embedded value (EV), at a time when the publication of useful EV data in Europe is diminishing and IFRS figures are some way off being available. They suggested that a clear explanation of the 'investor story' in cash terms, with a more coherent link between IFRS, EV and Solvency II is essential to sustaining the sector rating.
L-R: Autonomous founder, Andrew Crean joined Willis Towers Watson's Kamran Foroughi and Marcus Bowser on a Solvency II panel discussion.
A second presentation from Richard Waller and Mike Byrne focused on the process of actually producing the numbers and the advantages available from finance transformation.
Many companies, they suggested, have responded to Solvency II by patching up their reporting process to keep pace with day-to-day demands. Underlying issues related to things like the time involved, resource inefficiency, over-reliance on key individuals, lack of controls and governance, limited validation, and rising costs have largely had to take a back seat as being ready for Solvency II took priority. But, with some companies admitting their processes are on the verge of needing life support, and with IFRS17 on the horizon and deadlines shrinking further, they used a case study from a UK life insurer, where Willis Towers Watson has been providing outsourced services, to illustrate how automation can transform reporting needs and timetables.
The conference was taking place about a month after the International Accounting Standards Board published most of the requirements of IFRS17 and a new, supposedly firm, introduction date of 1 January 2021.
The succession of delays over recent years have maybe pushed it further back in the queue of issues to address, but the likelihood, according to Matthew Ford and Neil Chapman in their overview of its implications, is that it will involve more work for many insurers than preparing for Solvency II. The cost could also be significant, with one leading company CFO having recently estimated a total industry bill of £1-2 billion.
The reality is, they noted, that, due to the need for comparatives, companies that report on a calendar year basis will have to be able to produce an IFRS17 balance sheet for 2020. That, together with other IFRS changes taking place and some significant differences in valuation approaches to Solvency II, including the constituents of recognized revenue, the grouping of contracts, and the need to calculate a granular ‘contract service margin’, will put actuarial teams centre stage in the preparations.
All the changes going on in the regulatory and wider business environments are inevitably having an impact on optimal organisational structures and product mixes. Three presentations picked up these themes.
In their session on “New world M&A”, Steve Taylor-Gooby and James Wu discussed how Solvency II and low interest rates have made capital optimisation a key deal driver, particularly for closed funds and increasingly in continental European countries where products with high guarantees have been common.
Consistent with that trend, they explained that sellers of portfolios need to support buyers’ demands for a more comprehensive analysis of a range of potential capital implications arising from a deal, including factors such as the diversification benefits and the likely reaction of regulators. Anecdotal evidence from the market, they said, showed declining confidence in the ‘Direct Approach’ of showing the market value of assets and liabilities separately. Potential buyers instead wanted to be able to understand the available free cash flow after retaining required capital, allowing for natural hedges across the businesses.
Later in the conference, Natasha Naidoo of Old Mutual and secondee, Paul Simmons, contributed a risk perspective on Old Mutual’s ongoing managed separation of the group. Despite legal requirements limiting what they could tell delegates, they outlined the approach being taken following a strategic review that had concluded: there were limited tangible synergies between the businesses; the evolving regulatory environment in Europe and South Africa was adding cost, complexity and constraints; and the Group structure inhibited the efficient funding of growth plans for individual businesses.
Natasha Naidoo from Old Mutual with Willis Tower's Watson's Paul Simmons
Brian Murray of Royal London and Trevor Fannin homed in on the with-profits market and the increasingly compelling case for simplification in light of the contracting market, low interest rates, the changing nature of contracts and the associated governance and management costs. And while simplification had, they believe, become a strategic imperative for smaller funds that typically struggle to provide value to customers, the supporting arguments for simplification now often extend to £1 billion plus funds in their view.
They outlined the various routes to simplification, with some examples from Royal London and others, illustrating that it isn’t just for the company’s benefit. The aim of a good simplification exercise, they said, was to find the ‘sweet spot’ that meets policyholders’ needs for more money and certainty out of their policy, regulators’ concerns about solvency and fair treatment of customers, and shareholders’ requirements for better returns and reduced complexity.
While the industry and individual insurers grapple with all of these issues, the final presentation of the conference from Heloise Rossouw, Colin Forrest and Gary Williams encouraged delegates to look ahead five years to the impact that technology and customer preferences could have on the market.
They were challenged to consider demographic risks, such as that by 2020 around 40% of the UK population will be from Generation Y and, that by 2025, the same generation will make up 75% of the workforce. And leading on from that, how risks and the dependencies between them might be transformed and influenced by technology.
They were also asked to contemplate whether insurers’ responses so far have been to take small steps, creating incremental versions of themselves rather than addressing the challenges head on. And finally, the presentation raised the fundamental question of the future role of insurers in meeting customer preferences that are increasingly less focused on specific products and more on outcomes, such as financial security. How should insurers compete and attempt to position themselves to meet these aspirations and hold their own against a new breed of competitors?
Emerging from the cycle
Inevitably, insurers can’t fully control all the current ‘events’ to which MacMillan was referring over half a century ago. But the conference aimed to stress there is much life insurers can be doing to proactively confront them and overcome the dizzying and disorienting effects of the fast spin cycle they’re currently in. Opening the conference, Marcus Bowser summed it up neatly: “If there has been more a time for effective risk assessment, analysis and management in recent memory, it’s hard to recall.”
Download conference presentations.