2015 megatrends - building a better working world - ey ... · 2013 2014 2015 2016 2017 2018 ... smb...

2015 megatrendsImplications for the global insurance industryJuly 2015

Global insurers face a number of economic, demographic andregulatory issues which are affecting both top-line growth andprofitability

Latin America► Expansion of middle class and high net

worth populations► Uneven growth of nonlife and life products

within markets driven by disparateeconomic conditions across the region

► Differing timetables to implement capitalsolvency and risk management regulationscreating challenges for insurers operatingacross the region

Europe► Ongoing slowdown in nonlife

pricing momentum► Continued uncertainty concerning

Solvency II implementation details► Intense price competition within

the UK personal lines market► Limited bank competition and

recent product innovations (hybridproducts) driving sales growth

North America

► Nonlife underwriting profitability impacted bynegative pressure on premium rates

► Reduction in reserve releases limiting abilityto smooth earnings volatility

► Continued regulatory uncertainty (Own Riskand Solvency Assessment or ORSA, capitalreserves, systemically important financialinstitution) impacting strategic decision-making

► Share repurchases and dividends signalinglimited reinvestment opportunities in nonlife

► Continued downward trend in ownership oflife insurance

► Persistent low interest rates andstrengthening dollar pressure earnings

Asia-Pacific► Growth of the middle class and high

net worth populations fueling demandfor insurance

► Rapid urbanization creatingopportunities (increased demand)and challenges (high-loss costs) fordomestic and foreign players

► Growth of newly emerging markets inSoutheast Asia driven by newentrants (Japanese insurers)

► Increased regulatory activitiesaddressing solvency, capital and riskmanagement and market-basedissues

Middle East and Africa► Strong growth of Takaful,

particularly in Saudi Arabia,Malaysia and the UAE

► Large population and current lowpenetration suggesting significantupside potential

► Political turmoil and lower oilprices constraining economicdevelopment

2015 megatrends: implications for the global insurance industry | July 2015

Overall, the global insurance industry is currently experiencing aperiod of historically slow growth

0

1

2

3

4

5

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Life Nonlife

2.8%96–01 CAGR

8.6%01–06 CAGR

4.3%06–11 CAGR

2.4%11–16 CAGR

Worldwide insurance industrydirect premiums written by line

(US$ trillion, percent)

Worldwide insurance industrydirect premiums written by region

(US$ billion, percent)

37%

30%

29%

4%

Region CAGRn EMEA 2.3n North America 3.0n Asia-Pacific 1.7n Latin America 5.0

n *CAGR = compoundannual growth rate

2011–16

Select drivers of top-line growth► Reduced consumer demand across mature markets driven by demographic (aging) and macroeconomic trends► Soft market pricing as a result of price sensitivity (competition, household income) and excess industry capacity► Product portfolio de-risking (less spread-based business)► Divestitures and runoff of non-core or underperforming businesses

Source: Swiss Re; Business Monitor International; EY analysis, 2015.


The slowdown in premium growth across advanced economies hasbeen offset by significant expansion across emerging markets

5 18

70%

75%

80%

85%

90%

95%

100%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Advanced Emerging

Worldwide insurancedirect premiums written – all lines

share of world advanced versus emerging(percent)

Emerging marketsdirect premiums written – all lines

share of world by region(percent)

2941

59

2418

1232 22

20

15 199

1996 2006 2016



EmergingAsia

Middle East& Africa

Latin America

Central &Eastern Europe 14.7% 1.1%

7.6% 8.9%

8.6% 5.1%

16.1% 13.7%

96-06 06-16

Several emerging trends will reshape the future of the globalinsurance landscape

More interactive

Less interactive

12

34

5

6Digitalfuture

Entrepreneurshiprising

Globalmarketplace

Urbanworld

Resourcefulplanet

Healthreimagined Several key

megatrends areconverging toshape the futureof the globalinsurancemarketplace.

Select future predictions

Adoption of sensor-based technologies willbecome widespread across personal lines(auto and home).

Implementation of new underwritingtechniques in life insurance will reduceor eliminate the requirement for medicalexams for all but the largest cases.

Asian insurers will account for a largershare of the North Americaninsurance market.

China and Brazil will be classifiedmature, as new emerging markets comeinto focus.

Evolution of new funding models willprovide opportunities for new entrantsinto the health insurance market.

21345


Digital future

Global insurance industryIT spending on information management software

2013–18(US$ million)

779 835 903 970 1,039 1,118

725 778 836 894 9541,006173

191214

237261

282

2013 2014 2015 2016 2017 2018

Enterprise Content Management Business IntelligenceData Management

► The digital universe is doubling in size everytwo years.► By 2020, the digital universe will equal 44

zettabytes.► The volume of data derived from embedded

systems is approaching the level oftraditionally generated data.

► The level of data that has the potential to beanalyzed to generate insights is expected togrow from 22% of all data generated today to37% by 2020.

► Innovations in digital technologies are havinga significant impact on the insurance industry.► Traditional risks (e.g., frequency of auto

accidents) are steadily declining.► New risks are emerging that present both

opportunities (new coverages) and threats(cyber crime, liability).

► Business models are evolving, from productdevelopment (micro-insurance) to distribution(mobile and web) to pricing(micro-segmentation and telematics).


Source: Ovum; EY analysis, 2015

1,6771,804

1,9532,101

2,2542,406

Entrepreneurship rising

US commercial lines by account size2007 versus 2009

(US$ billion, percent)

93.8 70.4

77.068.4

69.762.4

2007 2009

(39%)

(32%)

(29%)

240.5 201.2

(35%)

(34%)

(31%)

Large(1,000+ employees)

Medium(50–999 employees)

Small(<50 employees)

SMB69%

UK commercial SME market*gross written premium: 2012–16F

(£ billion)

5.5 5.6 5.8 5.9 6.1

-

2.0

4.0

6.0

8.0

2012 2013 2014 2015 2016

Total

*SMEs defined as those with fewer than 250 employees

Source: Conning & Co.; Datamonitor; EY analysis, 2015.

► Small to medium-sized enterprises (SMEs) aroundthe world are growing in both numbersand diversity.► SMEs account for 97% of businesses worldwide,

employ 61% of the workforce and generate nearlyhalf of the world’s economic output.

► These organizations are likely to be led by youngprofessionals – nearly 50% of the world’sentrepreneurs are between the ages of 25 and 44.

► In the US, women-owned SMEs are expanding atmore than double the rate of all other companies.

► Growth in this sector presents significantopportunities and challenges for commercialnonlife carriers.► In the US, small to medium-sized businesses (SMB)

account for more than two-thirds of the commerciallines market.

► SME customers are increasingly researching andshopping online and through social media channels.

► SMEs are growing more price sensitive, particularlyamong start-ups.


Global marketplace

76%57%

24%43%

1998 2013

Worldwide insurance marketall lines direct premiums written

share of top five countries 1998–2013(percent of world total)

Rest of the world

Top five markets

Worldwide insurance marketall lines direct premiums writtenmature versus emerging markets

2008–13(percent of world total)

88% 83%

12% 17%

1998 2013

Emerging

Mature

► Favorable demographics and improving macro-economic conditions are driving growth inemerging markets and shrinking the dividebetween mature and developing countries.► By 2030, rapid-growth markets will comprise 63%

of global gross domestic product or GDP (US$223trillion), up from 38% today.

► By 2030, rapid-growth markets will account for47% of gross capital inflow, up from 23% in 2010.

► By 2030, residents of Asia-Pacific countries willaccount for two-thirds of the global middle class,an increase from one-third in 2009.

► The pace of globalization, particularly acrossemerging markets, is a significant contributor toinsurance industry growth.► The share of worldwide premium income

concentrated among emerging market countrieshas grown from 12% in 2008 to 17% in 2013.

► Within Asia, China was the primary driver ofemerging market growth, improving its globalranking from sixth in 2008 to fourth in 2012.

► In Latin America, Brazil rose from 17th in 2008 to12th in 2013 and now accounts for nearly half of allpremium generated in Latin America.

Source: Swiss Re; EY analysis, 2015.


Urban world

R² = 0.2483

0%

5%

10%

15%

20%

25%

30%

-2% 0% 2% 4% 6% 8% 10% 12%

Gro

ssw

ritte

npr

emiu

m–

alll

ines

2004

–14

(per

cent

CAG

R)

UAEChina

Malaysia

Growth of urban population versus gross written premiumTop 50 worldwide insurance markets

2004–14(percent CAGR)

► More than half of the world’s population (54%)lives in an urban area versus 44% in 1994.► Urbanization is more characteristic of

developed economies – 78% of residentsversus 48% for less-developed countries.

► Emerging markets have seen their urbanpopulations grow from 37% just 20 years ago.

► By 2034, urban residents will make up 58% ofthe emerging market population and 61% of theworld.

► Urbanization presents both opportunities andchallenges to global insurers.► Urbanization can be correlated to increased

growth of premium (higher insured values,increased productivity/output, higher rate ofvehicle ownership).

► Many of the world’s fastest growing urbancenters are near coastal areas or other flood-prone geographies.

► Increased density and socioeconomic issuesassociated with urbanization present increasedrisk for higher claims costs

Growth of urban population2004–14 (percent CAGR)



Resourceful planet

0

1,000

2,000

3,000

2012 2014 2016 2018 2020

Low Range High Range

US$

Mill

ions

Estimated risk management services spend*renewable energy sector

2012–20

*Includes traditional insurance and alternative risk-funding mechanisms**Allianz Risk Barometer***Karen Clark & CoSource: Bloomberg New Energy Finance; Swiss Re; Munich Re, NatCatSERVICE; EY analysis, 2015.

Worldwide weather-related loss eventseconomic and insured losses

1980–20132013 US$ billion

100

200

300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

► Population growth, economic development and moremiddle-class consumers will drive global demand fornatural resources.► Unconventional sources of oil will contribute to 70% of

oil supply growth, while unconventional sources of gaswill account for almost 50% of the increase in globalgas production.

► The cost of adapting to climate change for developingcountries will be US$70 billion–US$100 billion per yearthrough 2050.

► Business interruption and supply chain lossesaccounted for 50%–70% of all insured property lossesin 2014.**

► Global insurers are experiencing the impact of bothshifting weather patterns and the response toclimate change.► In 2014, there were 980 natural catastrophe events

worldwide, resulting in more than US$31 billion ininsurance claims.

► Global warming has the potential to increase peakhurricane wind speeds 2%–5% over the next 20 years,resulting in a 30%–40% increase in property insurancelosses.***

► Alternative energy solutions are producing significantrevenue potential for the industry while also increasingpossible new risks.


Overall Losses Insured Losses

Health reimagined

642 669 697 726 756 788

184 195 205 214 226 24078 81

8998

108116

2012 2013 2014 2015 2016 2017

North America EMEA APAC LatAm

Global health insurance market split by region(gross written premiums in US$ billion)

► Health care, which accounts for 10% of global GDP,faces significant transformation, driven byincreasing cost pressure faced by both healthsystems and payers.► Expenditures are placing pressure on public

programs and compelling governments around theworld to seek alternative funding mechanisms.

► Government expenditures on health care haveincreased 7.2% annually over the past 10 years.

► From 2010 to 2013, the growth of privateexpenditures, including insurance and out-of-pocketcosts, has grown 5.2%.

► The combination of rising costs, increasedregulation and volatile economic conditions willreshape the future health insurance landscape.► The burden of legacy operations and structures will

inhibit the ability of incumbent health insurers torespond to these changes.

► New models are emerging based on various formsof outcome-based payments, including rewards orpenalties to providers.

► Adoption of mobile health (m-health) technologies,social media and advanced data and analyticscapabilities will enable insurers to improveunderwriting accuracy and better manage costs.

Source: Business Monitor International; EY analysis, 2015.


923 9651,013

1,0621,115

1,170

The ability to respond to the challenges and opportunitiesgenerated by these megatrends will depend on investments in corecapabilities across the business model

High-level insurance capability map

CustomerManage marketing

Manage policyoperations

Manageunderwritingand pricing

Manage billingand collections

Manage enterprise data

Manage distribution Manage accountsand service delivery

Manage claims

Reinsurance and risk transfer

Manageinformationtechnology

Managestrategy and

businessplanning

Managefinance Manage capital

Manage legaland regulatory

affairs

Manage riskand

governance

Managehuman capital

Managesourcing

Productdevelopment

andmanagement

Fron

tof

fice

Mid

dle

and

back

offic

eE

nter

pris

e

Enterprise data excellence

Operational excellence(underwriting,

policy administration,billing and claims)

Technology-enabledtransformation

Finance risk and actuarial change

Broader EY advisory solutions(sourcing, human capital, etc.)

EY insurance solutions


Digital future: focus on analytics and business intelligence

Insurance capability imperatives► Expand multichannel strategies (web/mobile/social media) to

include sales and service capabilities► Implement analytics-based marketing campaigns supported by

advanced data management and analysis► Provide real-time collaboration and document delivery capabilities

across customer and agent portals► Implement sensor-based technologies to improve risk selection

and pricing and reduce claims costs► Leverage sophisticated risk analytics to optimize capital and

enhance economic value► Develop cyber risk products, including risk management services

(assessment, testing and remediation) and insurance cover

Leading carrier examples► Liberty Mutual’s Onboard Advisor combines commercial auto

insurance with telematics to provide information on driverbehavior to reduce accidents and improve fuel efficiency.1

► BNP Paribas’ Habit@t, a cloud-based telematics offering, utilizessensors to detect hazards and dispatch the appropriateresponse, including repair services.2

► AIG’s CyberEdge combines insurance with digital security riskmanagement services.3







Manage claims



Managestrategy and

businessplanning

Managefinance

Managecapital


affairs

Manage riskand

governance

Managehuman capital

Managesourcing

Productdevelopment

andmanagement

Fron

toffi

ceM

iddl

ean

dba

ckof

fice

Ente

rpris

e

Manage marketing Manage distribution Manage accountsand service delivery

Entrepreneurship rising: growth of small business

Insurance capability imperatives► Online quoting, informational portals and special services (e.g.,

consulting and risk management, group administration)► Automated underwriting, pricing and processing systems► Focus on rapid response to underwriting and service questions

and support for self-service capabilities► Predictive analytics for greater insights in underwriting► Direct-to-insurer digital distribution► Integration of third-party data within the insurance application,

offering prefilled questions to speed application submission

Leading carrier examples► ACE Fast Track quotes and issues small business and specialty

policies in less than five minutes.4► Hiscox provides online direct, professional liability coverages to

small businesses with less than 10 employees and provides real-time online quote-and-buy offerings.5

► Hartford provides commercial auto combined with a fleetmanagement program that includes telematics and dataanalysis.6







Manage claims



Managestrategy and

businessplanning

Managefinance

Managecapital


affairs

Manage riskand

governance

Managehuman capital

Managesourcing

Productdevelopment

andmanagement

Fron

toffi

ceM

iddl

ean

dba

ckof

fice

Ente

rpris

e


Global marketplace: international expansion and emerging marketopportunities

Insurance capability imperatives► Specialization across customer segments and/or within

product/service categories► Expense management as a competitive differentiator► Business model rationalization of global/regional/local, balancing

the need for localized capabilities and the availability of best-of-breed solutions

► Strategic alliance and vendor management capabilities focusedon the identification, deployment and management of third-parties, including domestic insurance partners, IT vendors andbusiness service providers

► Robust and adaptable financial reporting and regulatorycompliance platform to comply with multiple, overlappingprudential regulatory and accounting requirements

► Pre- and post-merger acquisition capabilities, includingidentification, integration and value realization

Leading carrier examples► Zurich’s successful acquisition history is supported by a

disciplined merger and acquisition approach, including strategicfit, well-defined measures of success, rigorous timeline for dealclose and integration and a willingness to walk away.7

► A top 20 global multi-line carrier supports business units with anIT platform that leverages group-wide governance standards,project prioritization methodologies and common enterpriseprocess applications, including procurement and HR.







Manage claims



Managestrategy and

businessplanning

Managefinance

Managecapital


affairs

Manage riskand

governance

Managehuman capital

Managesourcing

Productdevelopment

andmanagement

Fron

toffi

ceM

iddl

ean

dba

ckof

fice

Ente

rpris

e


Urban world: opportunities and risk driven by rapid urbanization

Insurance capability imperatives► Develop advanced analytics, including more sophisticated

catastrophe modeling techniques and price segmentation tools tosupport profitable underwriting within riskier geographies

► Use more granular data, including location, type of buildingmaterials utilized and construction techniques followed, toimprove their risk selection and drive down loss costs

► Tailor products, service offerings and/or marketing campaigns toaddress increased diversity driven by greater urbanization

► Develop products positioned for customers located in urbancenters, such as insurance coverage for ride-share programs andcar lending

► Leverage more rigorous underwriting and loss mitigationstrategies to increase pool of profitable business within urbanizedareas

Leading carrier examples► USAA is piloting auto insurance for ride-sharing drivers from the

moment their ride-sharing mobile apps are turned on until theyare assigned a passenger.8

► Allianz provides on-demand insurance coverage and roadsideassistance for cars rented through the Drivy car-sharingplatform.9

► ACE Green Building Restoration provides coverage for theadditional costs incurred in restoring damaged properties to amore environment-friendly standard.10







Manage claims



Managestrategy and

businessplanning

Managefinance

Managecapital


affairs

Manage riskand

governance

Managehuman capital

Managesourcing

Productdevelopment

andmanagement

Fron

toffi

ceM

iddl

ean

dba

ckof

fice

Ente

rpris

e


Resourceful planet: impact of climate change on industryfundamentals

Insurance capability imperatives► Implementation of sophisticated CAT risk modeling capabilities

to address increasing severity of major weather events► Development of new products covering risks related to

alternative energy projects and technologies► Investment in natural resources and infrastructure projects for

long-term investment gain and enhanced brand image throughcorporate social responsibility

► Customized agricultural products for farmers, from small holdersto large commercial, including micro-insurance solutions —providing coverage and collateral for bank loans

Leading carrier examples► ERGO modified its property insurance offerings throughout

Germany to include floods and heavy rain protection, which waspreviously considered uninsurable because of high risk offlooding.11

► Travelers Insurance provides coverages and services that spanthe life cycle of renewable energy from delivery and installationto ongoing operations and maintenance.12

► ARC Ins. Co. (sovereign risk pool) and Swiss Re providedrought insurance through a weather index that uses satellitetechnology to estimate drought-related crop losses in Africa.13







Manage claims



Managestrategy and

businessplanning

Managefinance

Managecapital


affairs

Manage riskand

governance

Managehuman capital

Managesourcing

Productdevelopment

andmanagement

Fron

toffi

ceM

iddl

ean

dba

ckof

fice

Ente

rpris

e


Health reimagined: transformation of health care delivery andfunding mechanisms

Insurance capability imperatives► Implementation of new models based on various forms of

outcome-based payments, including rewards or penalties toproviders

► Leveraging of social media platforms to allow patients andphysicians to share information with each other

► Implementation of mobile apps and sensors to enable individualsto better manage their health and spot potential issues earlier

► Enhanced underwriting and risk selection through the analysis ofdata generated by new technologies (e.g., wearables) and thevast amounts of information currently embedded in insurancedata centers

Leading carrier examples► John Hancock became the first US insurer to offer discounts to

policyholders who wear internet-connected fitness trackers.14

► Oscar Health, a technology-oriented health insurer, offersinnovative approaches to health care, including free access totelemedicine, which connects customers to doctors 24/7 with waittimes less than 10 minutes.15

► Discovery Health (SA) created an ecosystem that combines adynamic underwriting model (utilizing behavioral data) with aninteractive digital portal, health and life insurance alliances, andnetworks of wellness and reward partners.16







Manage claims



Managestrategy and

businessplanning

Managefinance

Managecapital


affairs

Manage riskand

governance

Managehuman capital

Managesourcing

Productdevelopment

andmanagement

Fron

toffi

ceM

iddl

ean

dba

ckof

fice

Ente

rpris

e


Priority focus areas

Cultivate adifferentiatedoperational strategysupported by a robustand flexible processand IT infrastructure,appropriately alignedcompensation andtraining programs anda robust performancemanagement system

1Align the vision fortechnology-driveninnovation to meetstrategic objectivesand keep pace withdisruptive IT forces

2Improve customerexperience and createsustainable growththrough operationaland technologyimprovements acrossthe insurance valuechain

3Harness advancedanalytics capabilitiesand data excellence todrive simplification,cost reduction andrevenue growth

Develop an integratedapproach acrossfinance, risk andactuarial whichenhances strategicdecision-making,enables fasterresponse to regulatorychange and drivesvalue through capitaloptimization and loweroperating costs

54


Endnotes


1Sheena Harrison, “2012 Innovation Awards: Onboard Advisor,” Business Insurance, 3/11/122Anthony R. O’Donnell, “BNP Paribas Cardif and FollowAnalytics Debut Internet-of-Things Insurance Offering,” Insurance

Innovation Reporter, 11/14/143“AIG Enhances Cybersecurity Services for Cyber Risk Management Program,” Insurance Journal, 5/1/154ACE Group, “Online Underwriting Meets Small Business,” press release, 3/30/155Hiscox, “Hiscox Introduces Business Owners Policy for Small Businesses,” press release, 6/1/20116Hartford Insurance. (2015). FleetAhead Fleet Safety. Retrieved from http://www.thehartford.com/commercial-auto-insurance-

fleetahead/7Anita Greil, “Zurich Insurance Avoiding Deal Fever; Insurer Sticks by Tough Criteria When Deciding Whether a Deal is Worth

Doing,” Wall Street Journal, 6/2/12, via Factiva8“USAA to Offer Pilot Ridesharing Coverage in Colorado”, Insurance Journal, 1/7/159“Drivy - A New Hamburg Car Rental,” Hamburg News, 1/29/1510ACE Group. (2015). ACE Green Building Restoration. Retrieved from http://www.acegroup.com/us-en/businesses/ace-green-

building-restoration.aspx11ERGO Group, “ERGO now offers flood protection throughout Germany”, press release, 9/12/1412Travelers. (2015). Renewable Energy. Retrieved from https://www.travelers.com/business-insurance/specialized-

industries/renewable-energy.aspx13Lucy Nyirenda, David Goodman, “From managing crises to managing risks: The African Risk Capacity,” Swiss Re Centre for

Global Dialogue, 1/18/1314Lucas Mearian, “Insurance company now offers discounts -- if you let it track your Fitbit,” Computerworld, 4/17/1515Steven Bertoni, “Obamacare Startup Oscar Health Hits A $1.5 Billion Valuation,” Forbes, 4/20/1516“Innovative behaviour-based model drives global Discovery growth,” PR Newswire, 9/3/14

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisoryservices. The insights and quality services we deliver help buildtrust and confidence in the capital markets and in economies theworld over. We develop outstanding leaders who team to deliveron our promises to all of our stakeholders. In so doing, we play acritical role in building a better working world for our people, forour clients and for our communities.

EY refers to the global organization, and may refer to one or more,of the member firms of Ernst & Young Global Limited, each ofwhich is a separate legal entity. Ernst & Young Global Limited, aUK company limited by guarantee, does not provide services toclients. For more information about our organization,please visit ey.com.

Ernst & Young LLP is a client-serving member firm ofErnst & Young Global Limited operating in the US.

© 2015 Ernst & Young LLP. All Rights Reserved.

EYG No. EG02661505-1454080 (NE)ED none

This material has been prepared for general informationalpurposes only and is not intended to be relied upon asaccounting, tax, or other professional advice. Please refer to youradvisors for specific advice.

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