"The future ain't what it used to be," according to Yogi Berra, best known as the Hall of Fame catcher for baseball's New York Yankees, but also one of the most widely quoted "philosophers" of our time. Yogi's words of wisdom are likely to resonate with insurers over the next few years as they struggle to adapt to some of the game-changing developments impacting the industry.
Annual outlooks tend to focus on the short-term effects of passing macroeconomic trends or cyclical insurance market conditions. This year, however, the Deloitte Center for Financial Services focused its outlook on bigger picture concerns. We suggested that insurers should start tackling a quartet of long-term challenges likely to prompt major changes in how the property and casualty industry does business, both internally and externally.
These challenges are interconnected, meaning carriers probably cannot afford the luxury of addressing them one at a time. Instead, many will likely have to launch a multi-pronged effort to reshape their operations so they are positioned to succeed over the long haul.
For 2015, Deloitte's outlook focused on four pillars of transformation that should rank high on insurer strategic agendas:
• Achieving Information Fluency: Many insurers are struggling to fully leverage the vast amount of data they already have, and are therefore likely unprepared to process and monetize the increasing volume of information being generated through new outlets such as auto telematics and the emerging Internet of Things. A more integrated data management infrastructure and governance architecture could help many carriers break free of outdated, siloed systems, while turning proprietary information into a competitive advantage.
• Overcoming Regulatory Challenges: The pace of regulatory change is unlikely to slacken anytime soon, not with multiple overseers — state, federal, and international — battling to sort out new standards and rules on capital, reserving, and other critical areas. Therefore, the time may be ripe for insurers to consider compliance transformation. This could range from enterprise-wide aggregation of core regulatory change activities, to the formation of rapid response implementation teams. Such a proactive approach may also allow insurers to create differentiating competitive value from mandatory regulatory exercises.
• Upgrading Capital Management: To start, insurers will need better information, frameworks, and models to meet the increasing demands of various stakeholders for more robust stress testing and scenario planning. Over time, carriers will likely have to up their games in terms of understanding the capital consumption of different products to facilitate deployment decisions and assess risk-adjusted returns on a consistent basis. A growing number of insurers will probably transition to a capital adequacy framework that accounts for economic as well as regulatory factors under one comprehensive capital management system.
• Getting Ahead of Climate Change: P&C insurers have long been on the front lines when it comes to compensating policyholders for the damages caused by increasingly frequent and more severe weather-related events — including tornadoes, hail storms, flooding, droughts and wildfires — across wider regions of the country. While some major European carriers have enthusiastically promoted efforts to improve sustainability and limit global warming, U.S. insurers have generally been slow to follow suit, perhaps given the overheated political climate on the subject here at home. However, American insurers are likely to become more engaged sooner rather than later, if only because of greater regulatory and rating agency scrutiny. Indeed, a number of joint industry efforts to address climate change are already underway. But there is also a more positive motivation as insurers explore the potential to capitalize on a growing market for sustainability-related products and services.
The speed and agility with which carriers take on these challenges and convert them into opportunities for growth and performance enhancement will potentially determine which companies are most effectively positioned to lead the industry. There's no time like the present to get started on such transformations. As Yogi Berra once said, "It gets late early out there."
For more details about each of these long-term challenges, download Deloitte's "2015 Property & Casualty Insurance Outlook: Focusing on the Big Picture," and register here for the archived version of Deloitte's Jan. 20 Insurance Outlook webcast.
Sam J. Friedman (samfriedman@deloitte.com) is the research team leader at Deloitte's Center for Financial Services in New York. These opinions are his own. For many years, he was the Editor in Chief of National Underwriter's P&C edition. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.
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