Distribution Trends and Market Conduct - KPMG...of insurers’ activities In our view, the key to...
Transcript of Distribution Trends and Market Conduct - KPMG...of insurers’ activities In our view, the key to...
24th Annual Insurance Issues ConferenceMonday, November 30, 2015
Distribution Trends and
Market Conduct Review
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
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Market Conduct in a rapidly changing world
Technology is changing rapidly and the impacts are being felt across many aspects of insurers’ activities
In our view, the key to success will be the organization’s agility to respond to change.
Distribution and marketing
Pricing and risk selection
Product design Claims handling in a social
media world
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
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UK regulatory response: Big Data
In November 2015, the FCA published a Call for Inputs on Big Data in retail general insurance
Help the FCA form a balanced view of the impact of Big Data in relation to:
1. Does the use of Big Data affect consumer outcomes?
2. Does the use of Big Data foster or constrain competition?
3. Does the FCA’s regulatory framework affect developments in Big Data in retail GI?
Areas for ConsiderationObjective
■ Could big data and micro segmentation result in some customers no longer being able to buy insurance?
■ Could Big Data result in more differential pricing based on risk exposure?
■ Use of Big Data in areas like telematics may result in better outcomes for certain consumers
■ Customers who are less happy about using the internet and social media may lose out
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UK regulatory response: regulatory sandbox
In November 2015, the FCA published its plans to implement a regulatory sandbox to promote competition by supporting disruptive innovation
A ‘safe space’ in which businesses can:
■ Test innovative products, services and business models
■ Deliver mechanisms without immediately incurring normal regulatory consequences
What is it? Potential Benefits
■ Reduced time to market at potentially lower cost
■ Better access to finance
■ More innovative products reaching the market
■ Allowing FCA to work with innovators to ensure appropriate consumer safeguards are built into new products and services
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Distribution Trends
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Distribution trends centre around digital & data
These two themes are pervasive, even in the distribution of insurance products
Don’t forget: not all predictions come true!
Understanding the customer
Reaching out to a new generation of customers
Machines are taking over!
Brokers are going digital
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Understanding the customer
Map behaviors across channels
Mapping customer behavior with carriers and brokers…
… creates a deeper understanding of the whole customer
Profile
PrioritiesNeeds
Preferences
Expectations
Goals
Understanding goes beyond just knowing your customer –it’s about truly understanding their needs and preferences
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Acting on that customer understanding
The industry can tailor its approach and offering to individual customers, by…
Segmenting the customer base Educating the customer Collaborating with
distribution channels
■ Creating a 360 degree view of the customer
■ Focussing on individuals not risks
■ Layering in growth and profitability
■ Creating opportunities to educate customers on products, risks, benefits…
■ Providing guidance if not advice, in real time
■ Working with brokers to get the full benefit of customer intelligence
■ Creating value for all parties, even the customer!
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
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All generations point to the insurance professional as the most valuable source of information
There are lessons to be learned in reaching a
new generation of customers
Insurance needs to be sold through multiple channels to reach the consumer where they are
Source: LIMRA, 2015
■ While 65% of Canadian consumers seek information on insurance products online, only 25% view the Internet as the MOST valuable source of information
■ Only 12% of Canadians bought in the online channel, but it is still being limited by availability (as compared to 21% in the U.S.); those who buy online seek convenience and simplicity, ahead of lower prices
33%27%
20%
38%
24%
15%
44%
24%
8%
FinancialProfessional
Internet Friends, Family, Co-workers
Gen Y Gen X Baby Boomers
Newer generations of customers are shifting channel preferences when looking for insurance products
The online channel is increasingly viewed as part of a mix, rather than in isolation
Single Most Valuable Information Source
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The machines are taking over!
Insurers are increasingly using data to guide their customers
Self-service models
Predictive modelling
Simplified products
Robo-advising
■ Artificial Intelligence driven advice
■ Digital wealth models now prevalent – Canada & U.S.
■ Low cost products meeting specific needs
■ Making insurance easier to comprehend – articulating the value
■ Anticipate needs
■ “Next Best Offer”
■ Feed scenario planning
■ Automating underwriting – such as “top-ups” & other simple products
■ DIY – using scenario planning to determine needs
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
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Brokers are going digital
Most brokers realize that their customers come in many shapes and sizes, so are adapting their offering to specific segments
Brokers are looking to differentiate through advice and a deeper understanding of the customer
• Driver safety• Risk• Fuel usage• Vehicle location• Vehicle repair
IBRI offers a commercial telematics solution geared towards fleet managers. The solution consists of tools and dashboards to help manage:
Gore Mutual and eight brokers partnered to launch a customizable online product targeting home-based business owners looking for specific types of insurance.
Commercial General Liability
Coverage
Home Office Content
Coverage
Legal Expense Insurance
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Some projected trends have simply not come to pass
Over the years we have looked to other jurisdictions or adjacent sectors for guidance in terms of the future, but many of these predictions have not come to pass
The rise of the aggregator
The dominance of the banks in insurance
The disappearance of the broker
The rise of online selling
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Market Conduct Review
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The changing focus on Market Conduct: how
times have changed?
■ Life co’s - no. 5 of top 10 opportunities
■ P&C insurers – no. 9 of top 10 opportunities
Source: Second Annual Canadian Insurance Industry Risks & Opportunities Survey - 2015
■ Life co’s - no. 2 of top 10 risks
■ P&C insurers – no. 1 of top 10 risks
“Treating customers fairly” initiatives to reduce market conduct risks and
strengthen customer loyalty
Regulatory and compliance burden
Survey Response Selection Ranking
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What is Conduct Risk?
There is no authoritative definition of Conduct Risk
Conduct of Business Risk "can be described as the risk tocustomers, insurers, the insurance sector or the insurancemarket that arises from insurers and/or intermediariesconducting their business in a way that does not ensure fairtreatment of customers”
IAIS 2015
This definition includes the risks to which insurers, the insurance sector or the insurance market may be exposed as a result of their poor business conduct, as well as the risks to which such conduct exposes their
customers
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Why is Conduct Risk important for insurers?
If Conduct Risk is not managed effectively it could result in the following:
Firms have a poor reputation
Products are sold to customers they were not intended for
Customers do not understand products in the market
Customers do not get a fair deal
Regulators have to use more intrusive powers to intervene
Customers face barriers to complaining or making claims
Customers are generally discontented with the
financial services industry
Conduct Risk
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Illustrative areas of Conduct Risk for insurers
Insurers
“Not understanding the elements of Conduct Risk
and mitigating the risks with a robust Control Risk Management System, can
put the insurer at great risk of conduct failures”
Source: Financial Conduct Authority
1. Business model
2. Product design and governance
3. Claims management
4. Business structure – use of third party service providers
5. Conduct Management Information (MI)
6. Culture/trust
7. Sales incentives
8. Renewal pricing
9. Companion products/add-ons
10.Conflicts of interest
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■ Product designed to competitive advantage rather than identified customer interests and needs or investment strategy and strengths
■ Products designed to address commercial opportunities rather than identified customer interest or needs
■ Input rather than outcomes focused
■ Limited (if any) consumer testing for understanding of features and risks as well as how the fund might best be used, particularly for more complex / innovative strategies
■ Variable approaches to stress testing (pre and post launch)
■ Variable quality and quantity of management information from distributors to evidence that products are being sold in line with the identified target market
■ Reliance on distributor regulator status to demonstrate financial capability and sophistication
■ Disconnect between product approval and channel used
■ Limited identification and articulation of ‘target market’ and how the product meets their needs
■ Appropriate balance between commercial and customer interests
■ Product development research focused onfeedback from distributors rather than end investors
Conduct Risk in action: common issues in
product governance
Unclear approval process against risk appetite
ProductDesign
ProductTesting
ProductMonitoring
Market Identification
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2015 - 2016 FCA risk outlook
Technology may outstrip firms’ investment, consumer capabilities and regulatory response.
FCA’s forward-looking areas of focus include:
Poor culture and control continues to threaten market integrity, including conflicts of interest
Large back-books may lead firms to act against their existing customers’ best interests.
Pensions, retirement income products and distribution methods may deliver poor consumer outcomes.
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.
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2015 - 2016 FCA risk outlook
Sector Market study / thematic work carried over from 2014/15
New market study / thematic work for 2015/16
■ Inducements and conflicts of interest
■ Emerging distribution models (non-advised sales)
General Insurance and Protection
Retail Investments
■ Role of Appointed Representatives in the distribution of general insurance products
■ How insurance firms use Big Data
■ General insurance add-ons (consultation on remedies)
■ Commercial claims for SME customers
■ Controls and effectiveness of distribution chains where authority is delegated
■ Due diligence of financial advisors
■ Contracts for different products
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European Insurance and Occupational Pensions
Authority (“EIOPA”)
Speech of Katja Wurtz, Head of Cross-Sectorial and Consumer Protection Unit, The future of European market conduct regulation, 12 March 2015
■ Spoke about the potential impacts of the growing digitalisation of financial services on how insurance products are sold.
■ Issues raised:
– Does digitalisation lead to better consumer decision making, and therefore lessen the need for consumer protection regulation?
– Blurring of the boundaries between advice and self-service
– Amount of responsibility placed on the consumer
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EIOPA, Report on Good Practices on Comparison Websites, 30 January 2014:
■ In some Member States, the initial overview identified the following issues relating to comparison websites:
– Consumers tend to over-rely on the price of products
– Misleading information may be provided to consumers
– Comparison websites may not necessarily be suitable for certain types of insurance products
EIOPA Opinion on sales via the Internet of insurance and pension products, 28 January 2015
European Insurance and Occupational Pensions
Authority (“EIOPA”)
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Recent regulatory initiatives - Canada
Market Conduct Risk:
■ Autorité des marchés financiers (AMF), Internet Insurance Offerings in Quebec: Presentation of Consultation Findings and Orientations, 2 April 2015
– Includes 11 recommendations to insurance providers
■ AMF, Sound Commercial Practices Guideline, June 2013
■ Canadian Council of Insurance Regulators (“CCIR”)
– MoU - operationalization
– Framework for Cooperative Market Conduct Supervision in Canada
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Which approach to Conduct Risk suits me best?
There is not a ‘one-size-fits-all’ approach to addressing Conduct Risk.
Important considerations to bear in mind…
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Controls
Top-down / bottom-up
Principles
Values Broad-based
Other considerations
Overlaps with regulatory
risk
Broader than TCF
Responsibility of lines of defense
Risk appetite, quantification
and articulation
Overlap with Op Risk
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Your Conduct Risk journey
Example Activities
Conduct Risk Stage
Firm Strategy
Conduct Risk
Appetite
Conduct Risk
Framework
Conduct Risk
Register
Process & Controls Mapping
Risk / Controls
Assurance
Policies
Governance Framework
Risk Monitoring
MI & Reporting
• Establish firm Conduct Risk strategy (including definition) and clearly articulate this in a Conduct Risk Strategy document
• Develop Conduct Risk Appetite in line with conduct risk strategy and firm Risk Appetite Statement
• Update RAS
• Identify how Conduct Risk impacts the business
• Develop & document Conduct Risk Framework
• Identify processes and controls
• Map to key risks identified
• Validate risk assessment methodology and scoring
• Establish success factors and metrics against which to measure process and success
• Establish controls and assurance processes (including monitoring)
• Identify Conduct Risks in risk universe
• Risk impact assessment & scoring
• Establish policies
• Determine governance structures
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Lloyd’s minimum standards – July 2014
CR 5: Assessing Product Risk
CR 5.1
The assessment of the Product Risk of a Product shall be made having careful regard to –
■ Customer Risk;
■ Product Complexity;
■ Sales Risk and having particular regard to how the Product will be sold;
■ Service Risk; and
■ any other relevant factors or criteria set by the managing agent’s board…
CR 5.2
■ The assessment of the Customer Risk of a Product shall be made having careful regard to the financial sophistication and expertise of the Lloyd’s Customer to whom it is intended the Product will be sold.
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Lloyd’s minimum standards – July 2014
CR 6: Product Design – General
CR 6.2
A managing agent must give careful consideration, in that context, to –
■ preparing appropriate Product Documentation;
■ determining how the product should be sold and, if appropriate, identifying suitable Distributors; and
■ determining what Product Service will be required and how this will be provided.
CR 6.3
When establishing or agreeing Sale Incentives for Distributors a managing agent must seek to ensure that they will not incentivise the Distributor to sell the Product to Lloyd’s Customers for whom they were not designed or will not meet their needs and expectations.
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Leading edge conduct MI
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Thank you!
ROBERT LEWISPartner, Financial Services Audit416 777 3929 [email protected]
LOUIS RÉGIMBALInsurance Leader, Quebec514 985 1259 [email protected]
ELIZABETH MURPHYPartner416 777 8279 [email protected]
© 2015 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7868
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