What does Brexit mean… ?

This is the question on everyone's lips. I had delayed writing this in the event that some clarity emerged but in day 5 of Brexit that clarity and certainty is proving elusive – indeed uncertainty seems to characterise the whole affair. This has been a discussion within the European team (thanks to Jamie and Nicolas) for some time and this post will briefly concentrate on the impact of the events so far on insurers with operations and interests in Europe. This will not discuss the UK governments response thus far.

The only certain thing about Brexit as it stands is uncertainty. Will Brexit really happen? When will the process start? Who is negotiating? What is the opening position? What we can say with some confidence there will be little regulatory and legal change in the short term and some unknown quantity of regulatory and legal change in the medium term.

The key unknown is the continuing participation in the single market and the other institutions in Europe, particularly the passporting. This more than Brexit itself, will define how strongly businesses with operations in the UK will respond.  Those with headquarters and staff in the UK to be present in the EU will need to reconsider this position if Britain leaves the single market as well as the EU – or indeed if any of the agreements reached put this position in jeopardy.

Uncertainty breeds volatility in the markets, a depressed investment environment and bond rates will hit the market further, particularly life insurers. This could well impact sales of investment products across the EU and UK until some certainty is restored. Existing products would not be safe either, with some investors looking to cash out.

The outlook for technology investment is trickier. If anything the pressures for reducing costs, agility and flexibility will be exacerbated. In the short term it is reasonable to assume reduced investment with alternate investments and clarity increases. It is plausible that this will affect the InsureTech market as well – particularly in London.

For UK insurers, It is likely that the FCA will engage with insurers and the ABI as the UK seeks to set out how it differentiate itself from the EU which will require agility and flexibility from the insurers to adapt to the new opportunities. A similar process may occur within the EU.

As is probably clear above, the one thing needed is clarity.

Do follow our Brexit posts from the wealth management team as well

Thoughts from Insurance Technology Congress 2013, London

Insurers and vendors met in London to discuss insurance technology on the 24th and 25th of September this year. The audience mostly consisted of those with an interest in the London market and Lloyds although there were representatives from general insurers in the UK too. I was glad to see that the tone of the meeting had shifted. In years past there has been a theme of technology and modernisation being necessary but too difficult. This is a market that has seen some high profile and expensive failures in IT along with successes. This week I heard again the call to action, the need to modernise but there was a much clearer sense of optimism, a way forward. There are still very large, expensive projects in the market with Jim Sadler, CIO of XChanging giving a colourful view of the latest deployment on behalf of the market. Alongside these are independent initiatives, demonstrating the value of standards and cooperation amongst competitors in the market. A panel discussing the eAccounting initiative, Ruschlikon, led by XL Group’s Simon Squires, gave a surprising engaging and transparent story of how a group of insurers and brokers collaborated and delivered to market technology that fundamentally improved their operations and speed of response to the insured. Genesis offered another example of a group of insurers coming together and collaborating to fix an issue that again, slowed down the market and affected customer service. In the course of the proceedings the architect of Genesis mentioned the best thing for the project would be that it is superseded by something that worked better, but that wasn’t a reason not to do it. Throughout the discussions there was a theme of automating where human interaction didn’t add value, but not automating for the sake of automation. There were discussions about delivering smaller projects, doing it quicker, collaborating and adopting standards where this didn’t affect competitive advantage and not doing so harmed customer service. Themes I expect we’ll see repeated at next weeks Celent event in San Francisco. As before and for the last few decades, there was a sense of a need to modernise, to attract new talent, to move the market forward. This year there was a real sense of optimism, sample projects that have moved quickly and gained adoption, a way forward.

EU wins Nobel Prize but it's a tough time for European insurers

A lot has been said and written about the political and economic situation in Europe. Interesting news came from Oslo last week with the Nobel Committee awarding the Peace Nobel Prize to the European Union. While I reckon that some may be right to believe that the 70-year period of peaceful time we have been experiencing in Europe since the end of World War II could have been the fruit of the European Union construction, I have my doubts that what has been true in the past decades can be verified in the future. Being Swiss and therefore not part of the European Union, I think it would be worth providing my thoughts on the topic and what it means for insurers who are about to invest in Europe today and in the near future.

Obviously there is a “BEFORE” and an “AFTER” the financial crisis and I think it is important to analyse what has changed since 2008 and the collapse of US subprime bubble, the bailout of major financial institutions including banks and insurers and the downturn in the economy experienced immediately after that.

In terms of political stability we have to admit that the situation has been pretty shaky in certain EU member countries. Actually there is a rule that applies in a majority of them: governing politicians or political parties have lost power following the financial crisis. Examples include: Spain with the defeat of the Socialist party of prime minister Zapatero, Italy with the forced resignation of Silvio Berlusconi, France with the defeat of the UMP party and president Nicolas Sarkozy, Greece with the emergence of the fragile coalition following this year’s elections. This is without saying claims from regions asking for more independence like Catalonia in Spain or Flanders in Belgium.

With regard to the economic situation, some countries parts of the Euro-zone are cause of worries. With more than 25% unemployment, Spain and Greece top this list. But what is still more worrying is not the state of their economy but its dynamic. Indeed, not only the number of unemployed people is high in these countries but the increase in unemployment is very fast. For instance the unemployment rate in Greece has been increasing at a 1% pace over the past few months. More than a debt issue, the problem faced by countries such as Spain, Greece, Portugal, Italy and to certain extend France is a lack of competitiveness and with the recession looming I fear the situation could not improve.

It is in this tough environment that insurers are planning new investments in Europe. What we have already predicted in terms of investment in new core insurance systems in the life insurance sector seems to materialize. Uncertainty seems to hit less severely the general insurance sector (property and casualty) but the industry has still to generate underwriting profits in key lines of business for instance motor insurance in France and United Kingdom. I personally think that identifying and investing in innovative business models is key to grow and generate profit in the long term in this difficult market environment and I encourage insurance companies to challenge their traditional business model.

The State of Europe

I have frequently provided my personal view in this forum about the economic situation insurance companies have been facing since the emergence of the financial crisis back in the end of 2007. I published a post in November last year titled “Time is passing, uncertainty remains“, in which I exposed my view on 3 important lessons that manifestly are proving to become reality as time passes: nations are here to stay, democracy always wins, and we cannot solve a credit problem with more credit. But today I would like to get back to an interesting figure published yesterday demonstrating that the financial industry in Europe is in a deep transformation phase that could take more years before the industry gets back to a better shape. This figure is the recent estimation of the jobs lost in the City of London published by the Centre for Economics and Business Research (CEBR), who said that City roles were down by almost 100,000 since the recession so it means we are talking about one-in-three City jobs axed since recession (more from The Telegraph). This impressive number is among others the consequence of a fierce competition that is currently happening between the main international financial cities. On the UK life insurance side, we have seen big changes too as shown in the following chart, demonstrating that the life market has gone through difficult time over the past five years:

In France, the growing uncertainty surrounding financial markets has had an impact recently on how life insurance is perceived within the French population, explaining why life and pension product withdrawal (buyback of insurance policies) increased in 2011. Without saying that insurance ROEs have dropped across the board in comparison to the pre-crisis times penalizing the main bancassurance groups in 2011: In summary, uncertainty remains and getting back to the three key lessons explained in November 2011, I think the near future will remain tough for financial institutions and insurers. Indeed, the recent presidential elections in France and the parlamentary elections in Greece have demonstrated that: 1) There is a gap between what the European Union institutions think about the future of nations and what specific populations think is good for them. This is without saying that more integration between State members part of the EU forms part of the solution to the sovereign debt crisis but populations seem to be against this idea. 2) While austerity is needed, policy makers are now talking about growth programmes triggering confusion if not conflicts with the country producing the effort to keep the whole Euro-zone construction afloat (Germany) and without saying that austerity has not really been even tried as it is brilliantly demonstrated by Veronique de Rugy:

In the light of what I observe day by day I can only repeat what I have written last year. I think that we have reached a point where the magnitude of the Euro-zone problem is too big for policy makers ability to find a successful plan. To me the time has come to plan the end of the Euro-currency under its current form and the more we wait the more difficult it will be. For insurers, there is more uncertainty ahead and I would encourage them to prepare contingency plans as Zurich Financial Services is doing.

Understanding the EMEA life and pension Policy Administration System market dynamics

My colleague Jamie Macgregor and I have published the Celent’s regular report profiling policy administration system (PAS) vendors in the life and pension space in Europe Middle East and Africa (EMEA) back in November 2011. This report profiles 34 systems offered to EMEA insurers on the market. Beside this research we thought it would be valuable for our subscribers to understand our view of this market. To do so we have decided to add three other pieces of research, whose objective is to explain the dynamics of the life and pension PAS market in EMEA:

1. Deal trends: First of all we have tried to have a deeper look at past life and pension PAS deals in EMEA and to evaluate how this market might evolve in terms of size going forward. In the frame of this analysis, we have identified which vendors were having good traction in the recent past and evaluated PAS provider’s market shares. The EMEA life and pension PAS market is highly fragmented with a downward trend in terms of new deals. Therefore we expect the market to rationalize going forward.

2. Insurer’s perception: It is difficult to comprehend the dynamics of a market for a PAS provider without understanding what customers think and what are the differences of perception across regions. In this report, we identify how customer satisfaction and perception of IT vendors capabilities as well as life and pension PAS has evolved recently in three geographies: UK, Continental and Eastern Europe. Through this analysis it appears clear that PASs are not uniformly used across regions and that a core feature for a specific insurer could just be perceived to be a simple support function for another one conducting business in a different geography.

3. Functionality and technology trends: The last piece of our work around life and pension PAS in EMEA consists in providing our views on solution’s functionality and technology aspects. While the deal trends and insurer’s perception rely mainly on factual data, our view on the future of PAS in terms of functionality and features as well as technology is an extrapolation of what we have been seeing on the market over the past few years based on our discussions with IT vendors and insurers.

Jamie Macgregor and I are going to present a webinar on the functionality and technology trends tomorrow. If you are interested in joining us then do not hesitate to register here: http://www.celent.com/node/29433

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.

About Density and Penetration of Life Insurance in Europe

We are currently looking at the life insurance market in Europe and more specifically saving and retirement solutions involving wealth management by insurance companies. In the frame of our initial work, we have tried to identify the differences between the main European markets comparing each of them in terms of density and penetration: Life insurers have suffered since the financial crisis and the economic downturn and it is difficult to predict what is going to happen to this market in 2010 and maybe in a longer period. But based on this analysis there is at least two observations that can be drawn in today’s context: The unbalanced UK economy: Since the 80s and under Margaret Thatcher, the UK has operated a drastic shift in terms of economic focus neglecting the industry to concentrate on financial services. This explains why life insurance premium represents more than 10% of the UK GDP right now. We believe that the lack of balance of the UK economy has been a major weakness recently as it obliged the UK government to take drastic actions to help financial institutions in difficulty during the financial crisis at an unprecedented level in comparison to other European countries. The level of debt and deficits have worsened and the strong emphasis in financial services remains a threat for the UK economy. The bancassurance model does not bring the same success across geographies: Banks are the most important intermediaries in terms of life insurance distribution in Spain, France and Italy. However, it is important to point out that life insurance density is much higher in France than in Spain and Italy. This difference cannot be only explained by the difference in GDP ranking between these countries. Following our discussions with French insurers, we have noticed that the French bancassurance model remains an example worldwide and it seems that Italian and Spanish insurers have not managed to take full advantage of the banking network to leverage potential synergies. Our objective is to understand the differences between the main European insurance markets and then anticipate how they might fare in the coming years taking into consideration the current macro-economic environment. There are plenty of uncertainties right now but asking the relevant questions is already a good step towards the right direction.

What European Insurers Think

Life insurance companies have different perspectives in terms of policy administration systems (PAS). Expectations are different geographically and IT vendors must adapt to insurers needs if they want to be successful in the long run not only in a dedicated market but on a larger European scale. “Getting The Value from Life Policy Administration Systems: The European Insurer Perspective” is the title of a report Celent is about to publish that provides key information not only for IT vendors but also for insurers desiring to understand what their peers experience on the market.

49 insurers from 20 different European countries have contributed to provide their evaluation of various life policy administration systems offered on the market. Celent has classified the respondents in three geographical categories (UK, Continental Europe and Eastern Europe) and tried to identify what were the main differences in terms of value perceived by companies in each region.

The above chart shows clearly some important differences in terms of new technology adoption between regions. For instance, it seems that UK insurers are in advance in terms of PAS replacement. Indeed, around 80% of them have been using their PAS for more than 3 years. Celent thinks that this figure demonstrates clearly that UK companies are a step ahead in terms of core applications replacement and modernization. In addition, it might also be a good proof that UK insurance companies have a higher acceptance of value of buy over the build approach. This figure also demonstrates that Eastern European insurers are currently adopting new technology. In opposite to insurers based in the UK, the majority of Eastern European companies having contributed to our survey have been using their PAS for less than 12 months. In other words, it seems that Eastern European based insurance companies are currently in the process of upgrading their core applications to new technologies. Finally, there are laggards in Continental Europe. If we trust the sample of our participating companies based in Continental Europe, it seems that there is a clear difference between insurers having already replaced their PAS (almost two thirds of the respondents from this region) and the ones that have just completed this exercise during the last 12 months period.

For those of you who are interested in what life insurers think about policy administration systems and IT vendors on the European market, I invite you to read my report.

Setting up priorities when selecting a Policy Administration System

Celent is publishing two reports reviewing Policy Administration Systems (PAS) and IT vendors in Europe later this year. The first one will profile solutions available in the general insurance sector and the second one in the life and pension sector. For insurers the selection of a PAS requires the analysis of different parameters that have all their importance. Prioritizing decision elements is a crucial task in order to minimize the risk of choosing an inappropriate PAS and to face ultimately time-consuming and expensive customization efforts. In the frame of recent discussions with European insurers, I have noticed that European insurance companies conducting business in multiple countries are also facing difficulties to decide between two strategic alternatives when replacing their existing policy administration systems:

Implement a single application in all geographies where they conduct business, or

Select one specific vendor in each geographical region.

Knowing that insurers have their own specificity and objectives in terms of future expansion and strategy, I recommend them to define and rank priorities around four major key decision elements when reviewing this important question:

Functionality: I recommend insurers to define functionality priorities. To do so and based on our PAS reports, they should be able to build their own functionality matrix. This exercise can particularly support them to identify which functionality elements are more important than others and how they can support their strategic objectives in the long run.

Technology: I consider that technological flexibility is an important factor insurers should clearly assess when making the decision to replace their policy administration systems. Therefore, I encourage insurers to consider technology factors when prioritizing their IT requirements.

Experience: Since replacing a policy administration system can require considerable efforts in terms of customization, choosing an experienced IT vendor is important. Therefore insurers should emphasize factors related to insurance business know-how and expertise when evaluating vendors.

Geographical expertise: The insurance industry in Europe can be very different from one country to another and understanding insurance business drivers and challenges affecting a specific region is a must for IT vendors offering their solutions and services in a dedicated European insurance market. Regardless of their size, I recommend insurers not to neglect local and small IT vendors having specific expertise and knowledge in dedicated geographies.

Choosing the best alternative represents a key challenge for insurers’ CIOs since this decision can strongly impact their company’s ability to achieve strategic goals in the long run and I hope that our PAS reports will be helpful to them.

As expected, Solvency II is under threat

In April 2008, Celent published a report about the new regulatory approach for insurers and reinsurers operating in the European Union called Solvency II.

Surprisingly or not, the draft text submitted to and approved in the beginning of December by the European Council of Economic and Finance Ministers (ECOFIN) does not contain the group supervision provision any longer. With Solvency II, capital requirement is based on a risk-based system as risk is measured on consistent principles. Knowing that, the removal of the group supervision requirement is an important change to the overall Solvency II regulation. Indeed, the idea behind Solvency II is to encourage large and diversified groups because they can pool their capital resources which should in turn benefits to policyholders. This approach is directly derived from the Basel II regulation implemented for the bank industry.

In other words, it seems that some factors have played an important role during the last six-month period and led the policy makers to reconsider the pros and cons of the group supervision provision. First of all, a few internationally diversified banks have nearly collapsed in the recent past demonstrating that the Basel II regulation could not prevent even well-diversified institutions from experiencing solvency problems. In the insurance sector, the American International Group (AIG) has been seriously hit due to its vast financial exposures that were written at the group level. In addition, after the massive interventions of governments to save some of the biggest European financial institutions, political pressures have emerged. France, for instance, seems to be in favor of the deletion of the group support element of the directive. This decision is also due to the fact that mutuals – which are preponderant in France – tend to have lower solvency ratios and capital requirements. Smaller countries in Eastern Europe are also concerned since they fear losing control over some of the entities. According to a report published by FSA in April 2008 (Enhancing group supervision under Solvency II), foreign insurance subsidiaries own 98.6% of market share in the Slovakian life sector and 100% in the non-life. These figures help us better understand the small Eastern European countries concern.

Overall, the immediate consequence of the ECOFIN decision could trigger new rounds of political discussions and delay the effective implementation of the Solvency II directive. In this context, Celent thinks that 2012 might be a too optimistic objective. However, we still encourage insurers to prepare for the Solvency II implementation because the new set of capital requirement regulation means changes and will trigger new investments anyway.