Full year review 2017, by Simon McGinn
Posted on: 14 December 2017
As we approach the end of 2017, Simon McGinn, General Manager Commercial & Personal, reflects on key events which have continued to shape the insurance industry over the past 12 months, and considers what’s in store for 2018 and beyond.
The unprecedented rate of change seen in 2016 has continued apace throughout 2017 – culturally, economically and politically. Uncertainties over Brexit, ill-conceived decisions such as the Ogden discount rate announcements, the UK snap election in June and after much to-ing and fro-ing, the change to interest rates have all impacted upon businesses within the UK.
Such developments require stability and agility from insurance companies, which must respond both rapidly and appropriately in an ever-evolving marketplace.
This is no mean feat as it requires a combination of internal dexterity and a strong resource base to provide customers and brokers with that certainty of proposition upon which they rely.
Allianz is no exception, and the events of 2017, from government announcements to developments in InsurTech, have demanded the very best of our skills and resources. We may be pleased with how we have navigated the year so far but we are far from complacent, as, for all of us in the industry, 2018 and beyond looks no more straightforward than the recent past!
Allianz and LV= joint venture
A new joint venture (JV) with LV= was revealed in August of this year which sees Allianz take its first steps back into the direct home and motor market with an initial 49% stake in the JV.
Announcing such a decision at a time when the repercussions of Brexit remain largely speculative may have been met by some with surprise. However, we believe it demonstrates confidence in the continued strength of the UK industry and its sustainable opportunities for growth.
The excitement that this has generated within the business is palpable, despite the uncertainties that this creates for some, as it provides a clear sense of direction and intent for our businesses within the UK market. We have a long way to go and a lot of work to do but are looking forward to beginning our journey with LV=.
Merger and acquisition in the broker world
It seems that we were not alone in restructuring our business in 2017. A study between Willis Towers Watson and Mergermarket found that, whilst fewer insurance broker M&A deals are being completed, the ones which are represent a higher value. In fact, this area saw an increase of 170% in the first half of 2017.
The same survey identified brand value as the driving force behind such activity, as businesses increasingly look to build recognition and reputation through digital channels.
Whilst our industry is becoming increasingly digital, and indeed for some product lines such as private motor it is the dominant channel, I am struck by this research as much of the industry is still hugely inefficient and digitally fragmented. If M&A deals are to be driven by brand value in digital channels, it will be interesting to observe if this changes future decisions for mergers and acquisitions in the broker arena.
Ogden discount rate
A much more severe decrease than expected, this added £7bn to the cost of personal injury claims across the UK market and impacted upon insurance premiums for customers.
Fast forward six months and it’s a slightly different story. Insurers have welcomed revised proposals from the Lord Chancellor for a more realistic framework – under the reworked scheme, there would be a move away from index-linked gilts towards the expected rate of return from ‘low risk’ investments. Currently the government has indicated that this translates to a discount rate of between 0% and 1%. A review of the rate 90 days following its implementation, and subsequently every three years, has also been put forward; a suggestion received positively on the whole by insurers. Focus must now be brought to ensuring that these proposals are enacted via appropriate legislation.
Until the legislation is passed by Parliament, insurers and brokers can only deal with the realities of a -0.75% discount rate, ensuring adequate reserves and advising customers on appropriate limits of indemnity for protecting their financial exposure.
Read about the regulatory changes that have impacted the insurance industry during 2017:
Treating customers fairly should always be a top priority for insurers and on 1 April 2017 new laws were introduced by the Financial Conduct Authority (FCA) to make the renewals process clearer and easier for customers – something we welcomed.
This includes stating the cost of the previous year’s insurance premium alongside the new premium on renewal documentation and the cost of any additional cover, such as legal expenses. For any customers holding insurance with the same insurer for four years or more, wording must now be included encouraging them to compare prices with competitors for the best deal.
We’ve worked closely within our business and with our brokers to ensure everyone is cognisant of the new rules and has all the information to remain compliant. The FCA will, quite rightly, be monitoring insurers closely to confirm they are abiding by renewal transparency guidelines and ensuring that vulnerable customers are correctly supported, and so this will remain an area of focus for next year.
Another key piece of legislation affecting the UK insurance industry is the Insurance Distribution Directive (IDD).
Replacing the existing Insurance Mediation Directive (IMD) created in 2005, the IDD lays out new requirements for anyone who sells, advises on, or concludes insurance contracts. Scope has been further widened to include anyone whose activities consist of assisting in the administration and performance of insurance contracts. It will come into force on 23 February 2018 and apply to insurers, intermediaries, ancillary intermediaries and price comparison websites.
The IDD has a number of aims. First and foremost it seeks to strengthen consumer protection through adding increased transparency around product add-ons and cross–selling, ensuring that customers can make the most informed choice. It also intends to create a level playing field across Europe for insurance distribution, making it easier for firms to trade crossborder but maintaining competition between insurance intermediaries. Finally, it sets out additional knowledge and competency requirements for anyone involved in insurance distribution, including undertaking a minimum of 15 hours professional training or development per year in order to demonstrate appropriate knowledge and ability.
We see this as positive news for both the industry and the customer. Whilst there is a potential delay in the implementation date being considered by the European Commission, at present, we are taking the necessary steps to guarantee compliance by the current deadline of February 2018.
The implementation of one of the most far reaching changes to legislation – the GDPR – is now only five months away and insurance companies will have been preparing busily for its arrival on 25 May 2018.
Replacing the incumbent UK Data Protection Act, GDPR is an EU regulation which will introduce stringent new guidelines on how the personal data of EU citizens is handled, stored and processed. This is no doubt, at least partly in response to the ever-increasing amount of digital information collected and used, not just by insurers but by companies worldwide. GDPR will afford greater protection and security for individuals requiring companies to explain both why their data is collected and how it is managed.
Some of the requirements to consider include appointing data protection officers, clarifying procedures in the event of data breaches and reviewing how consent is sought, gathered and recorded. Whilst the UK is due to leave the EU in March 2019, GDPR will still apply in the UK until that time, and the proposed draft Data Protection Bill is likely to see the same fundamental requirements replicated at a national level post Brexit.
Noticeably absent from the 2017 Autumn Budget announcement was any reference to Insurance Premium Tax (IPT).
This would have been disappointing for many, including the Taxpayer’s Alliance, which had called for a reduction in the current rate of 12%, citing the UK’s level of premium tax as one of the highest in Europe. One criticism levelled at the decision to maintain the tax at its current rate is that of some organisations having to reduce their insurance cover and increase their exposure. This includes charities, which are not exempt from IPT.
Additionally, BIBA and the AA attribute an increased number of motor claims related to uninsured driving to the high cost of IPT.
Whilst it is good news that there has been no increase in the most recent Budget, this will no doubt remain a hot topic for the foreseeable future and something that the industry must continue to work hard at regarding its messaging to government.
In store for 2018
We already know that 2018 will bring new regulation in the form of the IDD and GDPR. What’s less certain is how (but not if) the industry will continue to be shaped by emerging technologies and InsurTech. Robotics and Artificial Intelligence have often featured in the media over the past 12 months and investigations will continue into how automation can add value both to the customer and the insurer.
The trend of new start-ups is unlikely to subside, and established insurers and brokers will undoubtedly see increased competition from these companies, plus from organisations outside the industry. This will drive the need for continual innovation and adaptation.
Whilst the very real threat of cyber-attacks persists, this is still an emerging area and insurance companies have remained fairly cautious up until this point in developing and offering cyber products. 2018 may see insurers investing more in this area to understand and measure the residual risks, which in turn could see an increased offering of products in the market.
Remaining resilient and adaptable will be important as we enter 2018, but with advancements in technology and new customer-focussed legislation, we can be optimistic about the next 12 months.
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