A positive note for Brazil: A few insurance market developments to follow with interest

The world seems convulsed these days. No matter where you live, something significant is developing around you or about to burst.

Brazil has not been the exception. Economic slowdown and corruption allegations involving high officers in government and the private sector, have led to massive social protests. The Panama Papers only to continue to build a lack of trust on things changing easily. But Brazil is a huge economy, with very talented people and industries that can compete at world-class level. Some things need to change for sure; with a trusted leadership is just a matter of time for Brazil to come back to the right path.

On a specific note about insurance, some positive insurance market developments in Brazil were top news this week and I thought it was worth sharing with you:

  • SUSEP – Superintendência de Seguros Privados of Brazil approves use of Digital Certificates for regulatory purposes
  • SUSEP resolution establishes new rules and criteria for Vehicle Popular Insurance
  • Project of creating a Regional Hub of Reinsurance to be sent to the Finance Ministry

Brazil writes ~45% of the direct premium of the region and more than triples the Mexican insurance industry premium, the second largest insurance market.; so anything happening in Brazil will have an impact in the Latin American insurance market as a whole.

SUSEP, responsible for the control and supervision of insurance markets, private pensions, capitalization and reinsurance, published in the Diário Oficial da União, Instrução n° 79 which regulates about the use of digital certificates in the standard public key infrastructure of Brazil (ICP-Brasil).

Electronic signatures produced with ICP-Brazil certificates become mandatory for decision-making content documents with external circulation, for regulatory acts of the supervised and for other procedures that require proof of authorship and integrity in an external environment to SUSEP. Electronic files produced within the scope of practice of SUSEP will have authorship guarantee, authenticity and integrity ensured in accordance with the law.

“Insurers have a strong interest in digitization based on their planned budget increases between 2015 and 2016. The increase between insurers’ 2015 and 2016 budgets is reflective of the fact that most insurers are at the basic stage of digitization with much room for growth and innovation” said my colleague Colleen Risk in her recent report: You’ve Got Mail: Two Decades Later, Why Are We Still Talking About E-Delivery Rather Than Doing It?. The research shows that challenges related to e-Signature include compliance, legal, risk management, agency, IT and insurance operations. SUSEP support to the use of digital certificates will have a positive impact in the industry enabling higher levels of digitization and efficiency.

Continuing with SUSEP, its resolution establishing new rules and criteria for the operation of the Vehicle Popular Insurance was well received by the National Confederation of General Insurance, Private Pension, Life, Health and Capitalization companies (CNseg) and the CNSP. The National Council of private insurance (CNSP) adopted, in a meeting held on March 30 2016, the provisions for vehicle popular insurance that will have as primary market the owners of vehicles with more than five years of use. The new insurance policy will primarily feature the use of parts from disposed vehicles at auto salvage yards for vehicle repair, which will be possible thanks to law 12977 of May 2014, which regulated the disassembly of vehicles across the country.

Despite aimed to cars manufactured more than five years ago, the popular insurance will not be restricted to that segment. Any insured can opt for the new product, provided it is advised that the repairs will be made with parts used or second-hand. The rules also provide that these pieces cannot be used when involving the safety of passengers, such as the braking system, suspension, seat belts, among others. The minimum coverage should guarantee compensation for damages caused to the vehicle by collision.

While there are some points that can be enhanced, so as to make possible a greater penetration of the product this comes very handy in order to offset the effects of the country's economic moment by expanding insurance market and protecting the assets of the people that see their purchasing power affected. Some suggested enhancements to the rule could be allowing the use of generic parts, non-original parts, but certified by the manufacturer. Also looking to the effect in cost that working with out of network repair shops could have. Market estimates indicate a potential reduction of up to 10%-30% in value compared to traditional products depending on the age of the vehicle.

In the same line of looking to expand the insurance market, the President of the National Federation of Reinsurers (Fenaber), Paulo Pereira, announced on April 5th at a news conference during the 5th Reinsurance Meeting of Rio de Janeiro, the project of creating a Regional Hub of Reinsurance that must be sent to the Finance Ministry before early June. If the hub is implemented, he said, could help double the size of the Brazilian reinsurance market. "We are creating conditions for reinsurers to settle in Brazil to sign out-of-country risks, mainly from Latin America. The Brazilian reinsurance market today is $ 2.5 billion, and that of Latin America, of $ 21 billion. So if we can attract 10% of this market, we will be doubling in size" he estimated.

Pereira pointed out, however, that it will be necessary to provide a good reason to appeal to great players to the country. He believes changes need to be made to the labor environment, to regulation and to taxes so they become an important incentive for bringing the world's largest reinsurance companies to the hub.

Efficiency and market growth are two underlying principles in these market developments. It’s good to see that from the insurance perspective, Brazil does not stay arms crossed waiting to see what happens. This is a positive note for Brazil, at a time where the good news does not abound.

 

Capital Opportunities

AM Best came out today with a revision for the reinsurance sector from stable to negative as the reinsurance market continues to soften. When it comes to reinsurance, it’s been a buyers’ market. Competition in the global reinsurance industry is fierce as there is significant excess capacity. Reinsurers have experienced lower than anticipated cat losses despite some well publicized events earlier in the year. There’s also been robust use of alternative capital as cat bonds continue to increase.   What this means for carriers is that they have opportunities to take advantage of falling prices and get improved coverage across all lines of business. In addition to low prices, terms and conditions are improving. Carriers are able to purchase increased coverage because of the low prices and lock in multi-year deals for portions of their reinsurance coverage. They’re negotiating more customized reinsurance programs – lasering out specific exposures. And even property cat renewals are getting improved prices and terms. With pressures on growth, carriers who retreated from catastrophe exposed coastal areas in earlier years are reassessing the potential opportunities and looking for tools to help them re-enter a potential growth market.   The question is how long can reinsurers keep this up? Is the bottom of the soft market emerging? Private reinsurance capital is now competing at a level comparable to current government roles in some areas. AM Best isn’t the only rating agency that is posting negative outlooks on the reinsurance market. Primary carriers are starting to look more aggressively to determine if they should consider locking in lower rates and favorable terms for longer periods. Especially as reinsurance becomes even more of a strategic decision since regulators are increasing their use of economic capital modelling. Many carriers find rating agency capital requirements are driving a higher capital constraint and therefore are becoming a leading factor in strategic decisions about how insurers manage capital and make reinsurance decisions.   But reinsurance is a unique area in an insurance carrier typically managed by a small unit with one or two gurus who have the knowledge of the programs preserved in their heads. Although reinsurance programs are becoming increasingly complex, large numbers of carriers rely on excel spreadsheets to manage these programs which are rife for error.     As carriers structure more complex programs because prices and terms are favorable, we’re seeing increased interest in reinsurance software to help manage these complex programs. Modeling potential programs, automating premium and commission calculations, processing complex inurements and improving claims recoveries are helping many find huge returns when investing in these types of systems.

More Q&A following our webinar on the Strategies and Options for Managing Closed Blocks: Life, Pension and Annuity Edition

Since Karen Monks and I held our webinar on the strategies and options for managing closed blocks, we have had a number of follow-up questions. We’ll aim to answer as many as possible in this blog.

If you any further questions, then please do not hesitate to contact us directly.

What regulatory /compliance problems do insurers foresee while migrating to BPOs/TPAs for closed blocks in the US?

When an insurer considers BPO / TPA as a solution, most regulators around the world express a keen desire to stay close to the decision making process. In some countries, there is also a requirement to notify the regulator as well as the policyholder. At the centre of the regulators’ concern is to ensure the fair treatment of the policyholder and, increasingly, to also ensure that their information, as well financial assets, are secure.

In the US, TPAs increasingly are required to follow many of the licensing and record keeping rules that insurers must follow, thus an insurer would do well to understand the guidelines under which TPAs must work in each state. The insurer will want to ensure that the TPA selected is compliant and protecting the security of the insurers data and information.

Another issue that insurers noted as a result of the compliance and regulatory requirements related to notifying policyholders of the use of a TPA was the potential for some sleeping policies to awaken. This may cause an uptick in claims as beneficiaries come forward.

Many insurers that we spoke with recommended engaging the regulator early in the decision process; as this was considered key to obtaining early guidance and also helping to manage their expectations throughout the process.

Do you have a sense as to the number or percentage of insurers who see their closed blocks as a ‘problem’ (i.e. that they can’t manage, are losing staff who can support the product, the costs are escalating etc)?

Not as a number or percentage. Through our interviews, it was clear that economic uncertainty, low investment returns and the availability of capital to support generous product guarantees are behind driving an increased interest in the topic. Unfortunately, only those who have gone public with a decision already or are currently in a distressed state can be identified easily as having a ‘problem’.

In our survey, it was interesting to see that many insurers see expense reduction, releasing capital and avoiding management distraction as three of the main reasons for pursuing a strategy. Additionally, nearly all insurers that we spoke to were actively investigating the issue, although some were clearly further ahead in their thinking than others. Those insurers we spoke to without a burning platform appear to be just entering their strategy definition phase.

What were the roles of the individuals interviewed for this study?

They were all senior managers within their firms (i.e. Head Of, VP, Director), with a responsibility for strategy, operations or IT.

What would an administrative reinsurance strategy be classified according to this study, Divest (sell-off)?

This proposition is a mix of liability offset (via the reinsurance arrangement) together with a BPO arrangement. Many reinsurers use existing BPO players in the market to provide the administrative service for them. Consequently, when considering options and depending upon the business drivers, it may be a good idea to evaluate how a pre-packaged proposition from a reinsurer versus a component solution compares.

Are you aware of any real success in the UK or Europe with the convert/buy-out option?

Conversions and ‘buy-out’s are tough. Ultimately, success depends on gaining agreement of every policyholder sitting in a closed block on a system to agree to the conversion / buy-out prior to being able to decommission the platform. These strategies can also attract a significant amount of regulatory oversight as they aim to ensure that policyholder interests are not being impacted unfairly.

Unfortunately, in our experience, this is not a well-documented area with many success stories that can be referenced. The largest and most notable examples tend to come from distressed insurers or funds where the policyholder is left with the choice of either accepting lower guarantees or investment performance in exchange for financial stability, or have the insurer or fund face bankruptcy.

Are companies considering BPO+ITO as an option to outsource or is it individual BPO and ITO only?

Unfortunately, there is not a ‘one size fits all’ for the market and the solution will depend to a large extent on what agreements the insurer already has in place, such as pre-existing ITO agreements, and how much outsourcing has already occurred. Consequently, insurers are still looking at both options.

From our perspective, there are a growing number of propositions being developed for BPO+ITO in the market, albeit targeted largely at satisfying a specific product type, such as Annuities, Protection, LTC or pensions. The trend is to market these propositions on an ‘as a service’ or outcome based model enabling the insurer to move onto a variable cost base quickly and achieve a degree of certainty over future costs.

Did you find any cases where a company had outsourced to a supplier and then taken it back at end of contract? Is it even feasible to take back a block if supplier and insurer decides it doesn’t work?

No. We did not research this specific issue. However, you are right to raise this as a concern. Any insurer considering a BPO option (especially where replatforming is involved) should consider carefully how they plan to exit the BPO contract should performance not meet expectations or as a result of a change in strategy. We recommend that this question be addressed early as part of an RFP and effective due diligence activity. If replatforming, it’s an essential consideration to understand the approach to migrating off the platform and, where relevant, the transfer of technical IP alongside it.

Does Celent have any example organisations in the UK and US that have successfully reduced costs of back books through technology transformation?

Yes. Please look at Celent’s report entitled ‘Seven lessons from a successful platform transformation’.

Have you seen any examples of successful technology transformations without BPO?

We are writing a Solution Spectrum report for release later this year. In preparation for this report, we have asked consultancies, BPO service providers, system integrators and software vendors to provide us with brief case studies on this topic as we recognise this is an area of interest.

Certainly, there are successful platform transformations and projects involving decommissioning or wrapping systems as we hope that these case studies will show. However, it is often difficult to look at these cases in isolation without considering the wider impact on business strategy and supporting business models.

What are the key differentiators that insurers look for in a vendor when they consider the technology transformation option?

A great question. Unfortunately, we did not ask this question in our research so cannot answer categorically.

However, the primary drivers cited for technology transformation include expense reduction and removal of the technology obsolescence risk. Consequently, based on our other research into related topics, it is reasonable to assume that insurers are likely to be focused on the ability to reduce costs quickly, the ability to reduce the risk of obsolescence, and long-term flexibility.

Is there a business case for technology vendors to invest in creating a standardized methodology for addressing closed blocks of business?

This is a ‘it depends’ answers. There is no ‘cookie cutter’ approach being marketed currently. Some vendors have acquired or are aligning their existing capabilities to address the closed block issue. The more advanced propositions have aligned common insurance frameworks and methods with their technical assets to support the process.

What platforms are you seeing being most used to host closed blocks?

From what we have seen, there is no single platform that is becoming the default for hosting closed block business. Although many BPO providers will standardise on a single platform for their operations, this platform together with all of the dependent systems differs between each competitor. However, there are a few platforms that appear to be at the heart of operations for managing closed blocks. Among others, these include: Accenture’s ALIP; CSC’s product suite of CyberLife, WMA, Integral and AIA; Infosys McCamish; TCS BaNCS; and many more home-grown or inherited solutions.

When selecting a platform for closed blocks, the reality is that BPO providers and insurers still need to take each decision about a closed block individually and evaluate the RoI for moving specific product groups versus retaining them until run-off. Until successful migrations become part of the fabric of normal IT operations, there is likely to be a number of platforms running in concert for a little longer.

You said in the webinar that this was mainly an older mature market problem today. When will we see the same issue arising in younger / emerging markets?

Our view is that it is inevitable that the same issues will be experienced elsewhere in younger and emerging markets unless those markets consider the lifespan of these products from the outset at their design stage and put in place strategies to anticipate product longevity and the run-off. The good news is that these markets have the opportunity to learn from developed markets and not to make the same mistake of focusing too heavily on new product launch without actively managing product retirement.

Also, it is important to note that software and systems integration methods have matured enormously over the last 10-20 years meaning that the technical risk of transformation and large scale data migration is much reduced, although it should be noted that the project risk around poor execution and leadership may still be present.

Successful transformations and migrations are possible and no longer a CIO’s bravest decision.