Continued market consolidation, technology driven disruption and a shift towards behavioural based conduct regulation were the standout themes in the Australian insurance sector over the last 12 months. We take a brief look at the year that was and share our thoughts on what 2016 looks like.
Keep ahead or be left behind: rise of the disruptors
There is no more prescient boardroom theme than the impact of digital innovators and the growing tide of disruption they are causing the industry. The effective use of “Big Data” and data analytics has become a prime target for insurers and intermediaries alike; recent reports that Aon Risk Solutions is investing USD350m annually into data analytics is just one of many examples of the industry’s race to capitalise on the tremendous volume of data they hold.
Traditional distribution strategies are perhaps the most immediate at risk of disruption, with the industry racing to digitalise distribution to create efficiencies and optimise the consumer experience. We have already seen the rise of aggregators and peer to peer platforms, but greater disruption will follow – a recent survey by Accenture has noted that 53% of global insurers expected to have a wholly digital sales process within the next three years.
We expect partnerships with FinTech start-ups to be a theme of 2016, as insurers and intermediaries race to maintain market position through technology based underwriting and distribution strategies. It has the hallmarks of a race that will significantly shape the global insurance industry, with those failing to keep abreast of developments at risk of being quickly left behind.
Consolidation continued apace
2015 was a year that saw a number of significant global transactions in the sector;. XL and Catlin, Brit and Fairfax, and the most significant transaction for many years, ACE and Chubb. In Australia, we saw IAG’s strategic partnership with Berkshire Hathaway, and a range of transactions in the broker space, including Steadfast’s acquisition of Calliden’s agency business. Most commentators are predicting further consolidation next year, as the continued growth in capacity, low investment returns and a soft market cause organisations to drive returns through acquisition in conditions which do not allow for organic growth. The reinsurance sector continues to feel the flow-on effect as insurers favour the retention of premiums to bolster their balance sheets.
2016 has been touted as a year for M&A. It has been well publicised that a number of Australian life insurers may hit the market next year. With the growing pressure caused by the wave of digital disruption, we also expect a significant number of venture transactions with FinTechs in this sector.
Behavioural economics drives a new approach to conduct regulation
The Government’s response to the final report of the Financial System Inquiry (FSI) was released on 19 October 2015 and confirmed that a new approach to conduct regulation would be ushered into Australia over the next 12 – 18 months. Following very closely the path trodden by UK and EU regulators, the focus of conduct regulation will shift from the adequacy of disclosure to the delivery of positive consumer outcomes. Insurers will be expected to adopt a new approach to the oversight and governance of product design and distribution, and ASIC will be granted powers to intervene (without evidence of breach) to ensure significant consumer detriment is avoided.
The scope of these powers, and the extent of the obligations on the industry will be fleshed out through a consultation process in 2016. The industry may also start understanding what ASIC will expect as it drives towards improving organisational culture and creating a consumer-centric and consumer outcomes focused industry. The Insurance Council has already started looking at the implications through the Too Long; Didn’t Read Enhancing General Insurance Disclosure Report of the Effective Disclosure Taskforce.
Already some consumer lobby groups are calling for the impending product intervention powers to be used by ASIC to ban consumer credit insurance and other add-on products, or to strictly control the manner in which they are distributed. It should be expected that these products will attract significant attention from the regulator in 2016 and 2017, and measures such as those adopted in the UK (such as banning opt-out selling, and introducing a compulsory 24 hour delay between the sale of a product and an insurance add-on product) will be given consideration.