Risk, reward and cyber-scurity

Risk, reward and cyber-scurity
For most people the amount of time, skill and effort required to get access to our family photos far outweighs the possible value someone would find there in. Thus, security measures based on making it really quite difficult to get to the data while at the same time not too hard to use have become increasingly popular. I would file username and password security in here. Occasionally, the digital assets on the other side are valuable to the right group. Banks use 2 factor authentication and a variety of non-digital schemes to ensure security. Even World of Warcraft where rare digital swords and armour carry their own value offer broader measures of security to protect accounts. The recent leak of a number of celebrities private photos shows that there are other assets worth the time and effort required to break this level of security. The risk associated with the data insurers hold has to date been quite minimal. There are health, specialty lines and large commercial lines where this isn’t the case, but for most people the data held by insurers and available through portals is largely innocuous and available through other means. As insurers start to tap into wider data sources and the Internet of Things it is imperative that the industry considers how it protects it’s customers. A simple example from products available today: some insurers likely hold the real-time location of the car driven by celebrities and millionaires children, thanks to the increasing popularity of telematics based car insurance. This brings with it increased security, the opportunity to recover the car if stolen and the opportunity to bring much needed assistance swiftly if the car and driver suffer an  accident. In the wrong hands this data is sadly highly valuable and thus worth the time, effort and risk to assault and try to recover. Whilst the details around the leak are still emerging it is clear that it is incumbent on the providers of these services to offer sufficient security in the first place and to educate it’s users on appropriate use. To insurers looking at cloud and portals, I say consider the edge cases – the celebrities using your security for instance, those for whom there are organised groups who would be rewarded for getting the data. Take into account the type of data available through various security schemes and portals, some information is naturally less sensitive. No one will read a story about a film star’s driving score and premium due next month, but where they drove and when – well maybe that’s a headline you don’t want your name associated with.

2014 Latin America Outlook

2014 Latin America Outlook
The following text was published today in Inter-American Dialogue’s Financial Services Advisor under the title: “What is driving the insurance market in Latin America?” I provided my view to FSA in advance, and now that it is out there I thought it made sense to share it with you through our blog. Growth continues to be a common theme throughout the region, though not at the same pace that before and not equally in all countries. The Pacific Alliance countries have been growing faster than Mercosur countries, for example. Insurance in Latin America has its own dynamics and has been growing year over year, even beyond GDP increase, and is expected to continue this trend through 2014. A growing middle class is driving insurance buoyance in the region, with Brazil much setting the tone. Estimates indicate that 40M people have gone from living in poverty to the middle class in the past decade in Brazil. Nevertheless, there is a large number of people in the base of the pyramid (BoP) which is also of interest of insurers. Infrastructure investments, trade, and group life and benefits to attract employees are key drivers for commercial insurance growth. We are seeing moves towards consolidation in certain countries which are imposing stronger capital requirements and also acquisitions and new entrants into high growth potential markets, such as Brazil, Colombia and Peru. Competition is increasing and new segments are being targeted with more focus. All this is driving higher investments from insurers as well as competition for qualified talent in the marketplace. Some countries are moving towards a stricter risk-based capital measurement, and the rest should move in the same direction as part of a global and regional trend. In many countries sales practices are far from innovative and what customers expect to be. There is a need to evolve in the use of distribution channels and provide a better customer experience. Most insurers are still tied to legacy systems that impose a burden to become more competitive, efficient and smart. Rising inflation, weakening of financial market due to lower quality of loans (as they compete for the raising middle class); lower demand of products from China (mostly commodities), Europe and USA, and risk aversion from foreign investors are some of the concerns shadowing the region’s potential.

Customer segmentation, fad or future?

Customer segmentation, fad or future?
Traditionally insurers have been structured by line of business and some have grouped those around personal lines and commercial lines to differentiate businesses from people. With the opportunities of varied distribution channels and more sophisticated technologies insurers are starting to be much more granular in their view of the customers. Insurers have now the chance to move from their traditional top notch markets and be able to create an offering to attract the different segments. Some of these moves include Microinsurance targeting people in the base of the pyramid and Small and Medium Business (SMB) insurance products. Microinsurance products are being launched almost every month in different parts of Latin America. Most recently it was announced that Asomi and Redcamif will be launching an initiative in El Salvador with life insurance policies written by Pan American Life Insurance Group (Palig) with premiums as low as $0,68 per month. Some brokers, large ones, are moving into the SMB market but using its affinity platforms instead of their commercial platforms to support this business. While originally SMB should have fallen into commercial, they realize that it requires processes and the agility expected also in their affinity business. In another interesting move, Metlife Mexico announced yesterday the creation of a new division that will sell to socio economic segments C and D and to young people, those that are not the usual target of insurers. According to the classifications developed by AMAI, a Mexican association, the country’s population is divided into five segments: AB (people with high purchasing power and income), C+ (people with higher-than-average incomes, whose families are headed by someone with a college degree and have at least two cars), C (people with middle incomes, whose families are headed by someone with a high school degree and have both a car and the ability to take one trip per year), D+ (people with incomes slightly below average, some secondary education and no family vehicle), D (people with low income levels and a fairly austere way of existence, who have a primary school education and who lack access to traditional banking services). Metlife Mexico will be offering simple and flexible products while also developing better distribution channels, with emphasis in the use of technology. Software vendors are coming in also to provide solutions towards being more granular. Solutions around analytics to better understand your customer, digital to better serve them and master the points of contact, core processing and BPM to adjust your products and processes accordingly, just to mention a few. Last year Guidewire presented its vision on how a core system will be able to support customer segmentation already delivering some required functionality. Core systems are just another gear in the engine and it’s important that vendors acknowledge how they need to integrate into other solutions for the insurer to be able to deliver a customer segmented value proposition. While I believe customer segmentation is where the industry needs to go, it is not without huge challenges. Insurers need to address the differences and purchase attitudes of those different segments.  Omni-channel is one of the aspects, but also dealing with channel conflicts and regulation. Products need to be tailored in a way that can be flexible but capable of scaling massively, and this means looking into pricing, packaging, marketing, distribution and servicing. Processes need to be adjusted in order to provide the correct value to each segment. At the end of the day you don’t want to be perceived as under-performing and not providing the required value, but neither you want to over deliver if this means excess of cost and important cuts in your margins. My final thoughts for you. How will your structure look as you move into serving segments? How will this affect reporting and statistics by the way, which today is seen by line of business (even by regulators)? Are you ready? Are we ready?

Healthcare.gov: Centralized chaos vs. States right of way?

Healthcare.gov: Centralized chaos vs. States right of way?
It’s not surprising that consumers wonder why we can’t trust in an Apple or Google to deal with the technical intricacies of the US public health exchange, as my colleague Donald Light points out in the previous blog post. I also agree with him that they are not necessarily the best choices for high transaction throughput regulated systems, but do set a higher standard for consumer service than our government. What I find fascinating is that we (the American people), had any expectation that the federal government could be successful. Celent did a survey of consumer expectation of services for various vertical industries including government and the findings show consumers felt that the only industry that had a poorer potential to provide on-line service than insurance was…government. This reflects well on insurer’s pleas to be allowed to circumvent the healthcare.gov site and get direct access to subsidy data to enable direct enrollment on insurer’s web portals. Of course, that does take the competitive, free market aspect of the exchanges out of the equation, creating a huge advantage for larger carriers with strong brand and consumer mindshare.  However, people would have insurance coverage. The federal public health exchange is a frightening intersection of a regulation-driven, massive one-time usage spike; tied to a complex process and IT project requiring huge scalability, under tight timeframes and limited supervision. Arguably, the better approach was the federally funded, state exchange that reduced both scalability issues and complexity for this initiative. The 12 state exchanges (soon to be 15) that are currently enrolling citizens have their issues but nothing on the scale we see with healthcare.gov. Also, the 15 or so private independent exchanges run by commercial brokers are enrolling customers as well. Thinking like a risk manager instead of a politician, perhaps distributed deployment at the state level should not be an option but a requirement, mirroring the US state-based insurance regulatory model. This would meet the needs of the consumer in creating a neutral exchange that would enable transparent price competition, reduce the size and complexity of any one exchange, and allow the federal government to declare victory and move on to help somewhere else. Please.    

60 weeks to the RDR deadline – but who's counting….

60 weeks to the RDR deadline – but who's counting….

This week, Celent hosted a London event on the UK regulatory topic of Retail Distribution Review (RDR) that will impact the entire life insurance industry. As Jamie Macgregor, pointed out, there are a little over 50 planning weeks until the deadline for implementation.

Matt Browne from the FSA covered key points and intentions of the regulations, and reminded the audience that this is the time to take action, not to debate. The essence of RDR is to fix the retail long term savings and investment market which many consider is not working for the mass market customer.

Jamie Macgregor presented key points from Celent’s recent research. Insurers that were interviewed for this paper highlighted that 2012 will be a “horrible year” with the barrage of regulatory deadlines including Solvency II, EU gender directive and RDR whilst continuing to focus on new propositions for growth and profitability. The level of change and effort in Q2 and Q3 will be massive. Even with the delay in Solvency II regulations, many organisations are still committed to the same level of project effort to meet the revised deadline.

It is Celent’s view that the biggest risk facing product providers is around orchestrating the end-to-end delivery of the change program across multiple partners both upstream and downstream. This risk is then made worse by dependency on outsourced relationships within product providers and the visibility of their readiness. Effective communication across all parties involved will be a critical success factor of many programmes.

Martin McKenna from Focus solutions presented a view from a distribution perspective. He noted that IFAs had originally seen the regulation as a threat but that there was a shift in views. IFAs are starting to see this as an opportunity to de-risk the business model. It’s clear that IFAs don’t have the capacity to serve HNW, the mass affluent and the mass market . IFAs will refocus their businesses towards what they see as high value clients and this may result in orphaned clients . This is a great chance for new players to enter the market, particularly those with strong brands. New distribution opportunities become available like online only, retail outlets , and mobile. Martin went on to note that whilst the appetite for advice will still be there, consumers will want to choose companies they know and trust. This creates a space for larger brands like banks and insurers to offer products directly to the customer. His view was that the winners would be those companies who could understand the cost of servicing the customer, and who had the scale and brand to respond to the market opportunities.

Kevin Okell from Altus discussed the view of the product provider. Kevin noted that RDR was considerably more than just switching off commissions. Rather, it meant and required a change in the provider operating model. In the new RDR world, advice and a product transaction are two distinct, and potentially unrelated, entities. The rules that allow providers to facilitate the payment of advice between customer and adviser only adds to the complexity of the processes and supporting systems that must be changed. Ultimately, the cost associated with this complexity needs to be covered from somewhere, and it is likely that the consumer will end up paying through increased product administration charges.

And so with the views from the FSA, Celent, IFA and provider, the delegates left with much to think about. Celent will continue to monitor and write on this topic as we count down to 31st December 2012 .

Count down to RDR – Are you having pre-exam jitters?

Count down to RDR – Are you having pre-exam jitters?

We are now in the final stages of our report on the opportunities and challenges facing the Life & Pensions industry resulting from the UK’s Retail Distribution Review (RDR – see my June blog entry ) and will publish shortly. In total, we have conducted 22 interviews from across both the industry and technology partners supporting the implementation of RDR and surveyed 5 of the top product providers to understand their level of readiness.

What is interesting to me is the seemingly low levels of confidence that some firms have in their own post-RDR business strategy and operating model. Clearly, there is still a lot of uncertainty over what the winning strategies post-RDR might look like and what this could mean for the end consumer. What is clear, however, is that the industry is taking it seriously and that there could ultimately be more than one winning strategy as the market segments further.

Even with all of the good preparatory activity underway across the industry, there is still a feeling of nervousness in the air. It reminds me of taking my exams. You’ve done your homework, you’ve focused on revising the things that you think are important (and probably aligned to what you know best in the hope that it will come up as a question), you have a clear plan in place for sitting the exam…but you haven’t yet sat the exam. Adding to the anxiety, in the case of RDR, the examining body hasn’t yet released all of the chapters in the core reference text from which to revise. Hopefully, the guidance on commission for legacy products and the time-table for cash rebates will be released by the FSA soon.

As we approach the final two months of 2011 and you work through your 2012 budgets and detailed implementation plans, why not join us together with the FSA, Focus Solutions, Altus and AT8 for an additional revision session on the 15th November 2011 at the Barber Surgeon’s Hall?

Follow this link to register Count-down to RDR – Are you ready?

Solvency II delayed

Solvency II delayed

Getting back to December 2008, I wrote a blog post mentioning that Solvency II was under threat and that we could expect some more delays of its effective implementation. Last week the FSA in the UK announced that it is likely that the effective date of the new regulation implementation will have to be delayed by a year and enter into force certainly in January 2014. Actually this decision comes following the request from The Lloyd’s of London insurance market and the Association of British Insurers to obtain more clarity around the Solvency II implementation by FSA.

This is certainly good news for insurance companies as it gives them more time to prepare and take advantage of the Solvency II implementation not only to comply with the new regulation but also to understand the opportunities for risk management process and resources improvements and consequently make the right decision to mitigate their risks. With the change of the Solvency II roadmap I also expect from insurance companies to spend more money on preparation and change programs in order to promote a smooth transition. This delay will also allow insurers to dedicate more time to navigate the Solvency II IT vendor landscape. According to me, the Solvency II application landscape can be difficult to navigate for insurers even though some vendors have managed to bind strategic partnerships recently (acquisition of Algorithmics by IBM for instance). For more information about this market I encourage you to read the following report Celent has published last year: Solvency II IT Vendor Spectrum.

The big question mark going forward is whether the economic situation for the next two to three years will allow the regulator and insurance companies to work in a more stable environment to operate this transition.

Key European GI Policy Admin Report published

Key European GI Policy Admin Report published
The European Insurance team has been working hard over the Spring and Summer to produce one of our key reports Policy Administration Systems for General Insurers in Europe 2011. It’s a topic of great interest to insurers wanting to replace their core underwriting system, and vendors wanting to have a view of the competitive landscape. This report uses Celent’s ABCD vendor view, which is a standard representation of a vendor marketplace designed to show at a glance the relative positions of each vendor in four categories: Advanced technology, Breadth of functionality, Customer base, and Depth of client services. The report also has the first four PAS systems XCelent Awards for Technology, Functionality, Customer Base, and Service. Since the first report in 2005, activity level has remained high among both insurers and policy administration system vendors. In the two years from January 2009 to January 2011, over 130 insurers had licensed a new policy administration system. Since 2007, the UK market has seen seven new entrants primarily from the United States. This adds to an already crowded space. And of these vendors, most (50%) are small with less than 10 clients and under $10 million in annual revenue. So the vendor market remains fragmented and challenging for the insurer buyer to navigate. Recent acquisition announcements of Accenture/Duck Creek and Sapiens and IDIT are not surprising. We can expect further consolidation in a tough market. Look out for the upcoming European PAS deal trends report which will explore this trend in more detail.

Count down to RDR – How ready is the UK Life & Pensions Market?

Count down to RDR – How ready is the UK Life & Pensions Market?

With less than 400 working days to go until ‘go live’ for the UK Retail Distribution Review, many Life and Pensions companies are deep in the middle of planning their implementation. Due to start on 31st December 2012, this legislation will introduce major changes to the way that new long-term savings and investment products are sold across the UK.

Its broad aims are to improve professional standards of investment advisors, improve the clarity around how firms describe their services, and to address the potential for commission to influence advice decisions. Practically, this means subscription to a new code of ethics including new definitions for advice, raised levels of professional education, and an end to traditional ways of charging commission for investment related products in favour of transparent fees.

Many industry analysts and commentators are already predicting structural changes within the market once consumers, armed with new information about how much they are being charged for advice, begin to shop around and start to ask tough questions about the value they are receiving from both the advisor for the advice fee paid and the performance of underlying products.

Technology has a critical role to play in helping organisations remain fighting fit in a post-RDR world.

Meeting the basic compliance needs

  • Ensure that underlying systems are able to manage both fee based services as well as commission. Both of these approaches will need to run in parallel post-RDR as the legislation only applies to investment related business transacted after the ‘Go Live’ date.
  • Ensure that only RDR compliant propositions are available for sale post 31st December 2012. Web-sites, other channel systems and channel partners all need to be changed.
  • Ensure that Platforms comply with the final set of rules on charging and rebates due to be released in Q3 this year, and offer essential services such as re-registration.
  • Update internal management reports and operational controls to track performance of business initiated both pre and post RDR.

Demonstrating value and positioning for growth

  • Developing new propositions including new channels to market, such as D2C, and access to new funds.
  • Employing innovative uses of technology to build stickier relationships with the end consumer (such as improved UIs, online tools, mobile apps and social media).
  • Transforming the cost base to compete head-on with new entrants, such as greater use of straight through processing and strategies to isolate or remove the legacy to prevent it becoming a drag on resources.

Navigating the change

  • Balancing competing priorities between now and ‘Go Live’ date – such as Solvency II, the EU Gender Directive and other internal strategic change programmes.
  • Being ready to react once the final set of rules on Platforms are published in Q3 2011.
  • Securing the investment and the team – including the right mix of capabilities to exploit the opportunities for growth.

Over the coming months, Celent will be researching the impact that RDR will have on technology strategy for organisations and evaluating the readiness of the market to implement the change. For more information or inclusion in this research, please feel free to get in contact with me.

And for those of you outside of the UK looking in thinking that this does not apply to me, beware! The European Community is revising its plans for the Insurance Mediation Directive (IMD) and Packaged Retail Investment Products (PRIPs) initiatives, and no doubt will look to see what lessons it can learn from the UK’s RDR. So, watch this space!

Regulation raise IT hackles

Regulation raise IT hackles
The much feared UK emergency budget speech was made yesterday, and amongst a raft of changes impacting every corner of the British society was an increase in the tax on insurance purchases. The rate is to increase to 6%. A new peculiarity to this system is that tax on insurance sales will rise to 17.5% where the insurance is sold by seller of another product e.g. mechanical breakdown insurance (eg on domestic electrical appliances and secondhand cars), travel insurance, and insurance sold with TV and car hire. The challenge for the IT department is to respond in a timely fashion. Older legacy systems will have charges codified in several places and this reflecting this increase is not a simple matter. And once the change is made in the several systems and many places, there is the round of testing that is required. This whole cycle of change can be up to 9 months depending on current workload and dedicated IT test slots. In a conversation with a CIO on a different set of regulations, Solvency II, she raised the prospect of potentially having to replace incumbent legacy systems if they could not capture the additional data elements required in a reasonable cost. Adding new data elements to a core system, and having this reflecting in the appropriate screens is no trivial matter. And once again, requires serious investment of IT staff for testing for production. These real life use cases highlight the need to IT systems to be able to keep up with the change of the business, without a crippling cost. In choosing new systems, IT folk must focus as much on functionality as on the cost of ownership. As this week has shown once more, fleet of foot should be a key mantra in new system investment.