Emma McWilliam, life and financial services leader and partner at Hymans Robertson LLP, talks about how risk management in insurers is evolving.
How well are firms doing at understanding and managing the key risks they are facing today?
Better than ever, but more can be done. The Solvency II regime has forced firms to consider, quantify and manage their key risks. Yet, there is no scope to rest on laurels. While many key risks have now been tamed, either through greater understanding or enhanced risk mitigation, this can re-expose different priorities. For example, firms who have hedged significant volumes of longevity risk may now face the challenge of more closely managing credit and market risks. And of course, the social, political and economic environment never stands still – so nor can firms.
What kinds of information should firms be looking at to better understand their longevity risks?
Keeping on top of longevity trends is the biggest issue. This has always been a challenge, but is now compounded by higher annual volatility, the shift to higher deaths in recent years, and the differences seen between socio-economic groups. Firms need up to date and relevant longevity data analyses – focused on the top socio-economic groups to which most of their liabilities relate. The key here is to source insights based on data that directly relates to the business being written and to ensure that it enables a high degree of reliable segmentation (e.g. by socio-economic group).
How will advances in the use and modelling of data help firms to better understand the risks and opportunities they are facing?
Data is an asset. Clever use of data to gain insight for competitive advantage is a bigger asset still. Yet, it's not all about data, because sometimes it simply doesn't exist, or isn't applicable to the future. Expert judgement must always play a role in managing risk.
Another area is understanding and modelling how risks behave together in extremes. This is challenging because there is by definition very little reliable data, and important because it affects capital requirements, potentially significantly. Firms are forced to make significant judgements about what could happen in the future. In a rapidly changing landscape, the art is in efficiently combining expert perspectives alongside data insights to design robust models that help firms picture the full range of risks and opportunities, thus enabling defensive or first mover action to take advantage of these.
What are the key regulatory challenges for 2018?
Brexit, and in particular ensuring firms can still service the needs of their non-UK policyholders. We expect a continued lack of clarity on the final outcome, and the resulting changes for the regulatory landscape. Nevertheless, insurers are moving ahead to get their houses in order. The clock is ticking, and changes to corporate structures, for example, take time to implement.
Industry players should be preparing themselves for the continuous stream of consultation and activity from the PRA as they look to re-establish themselves and their role following recent developments with the Treasury Committee.
Another key challenge is IFRS 17. This is expected to present a significant modelling implementation challenge ahead of 2021, as systems and models will need to be re-engineered. Insurers are now working through the wider implications for their business. For example, how insurers approach hedging or pricing and reinsuring their products.
What should firms be focusing on to grow their business over the coming year?
Technology is going to be a key catalyst for growth. Technology is often seen as a way for insurers to do the same things, just more efficiently and at a lower cost. Consequently, it will play an increasingly important role in changing what insurers offer customers, and the way they do it. It will be an enabler to offer brand new products, perhaps to those that are currently underserved by the market. Examples include customers with pre-existing conditions, or working in the gig economy who have relatively low levels of protection cover in place.
What is your one key prediction for the industry for 2018?
We firmly believe the life insurance market is set for growth in 2018. We are working with both existing players and potential new entrants on new opportunities and products, and we see the bulk annuity and retirement markets as particular bright spots for new business volumes.