1. Industry analysis
This section provides a summary firstly, of the insurance industry including its long history and secondly, what is insurance and why do we need it. Thirdly, a description of the insurance industry globally including its size by value, the competitive landscape, challenges the industry faces, the regulatory environment, and the role technology plays and finally, a summary of the insurance industry in New Zealand.
3.1 What is insurance?
3.1.1 An abbreviated history
Literature and indeed history dates the concept of insurance as far back as the early to middle Bronze Age, 3rd millennium BC. Chinese merchants would spread their cargo across a number of ships to limit the loss due to any single ship capsizing. Then about 2250 B.C. Hammurabi the King of Babylon, developed a system called the Code of Hammurabi, where a merchant received a loan to fund his shipment; he would also pay the lender a further amount in exchange for the lender's promise to cancel the loan if his shipment was stolen (C F Trenerry, 1926; King, 2004; Wikipedia, 2009).
Sometime around 600 A.D. the Greeks and Romans introduced the concept of health and life insurance. This was through the establishment of 'benevolent societies' whose purpose was to care for families and funeral expenses of its members on death. In 1688 Edward Lloyd opened a coffee house with the express purpose of providing a reliable source of shipping news. This became later named Lloyd's of London, the place where underwriters wrote insurance policies thereby starting the modern concept that we now understand of insuring risk.
3.1.2 Definition of insurance
Insurance is a form of protection against financial loss which arises from unexpected events. Insurance companies collect premiums to provide for this protection. By paying a sum of money it safeguards you financially from regrettable events. (Getmeinsure, 2008; Investopedia ULC. 2008; My Insurance Guide, 2008; State, 2009)
In New Zealand, the Insurance Council website states that "Insurance hedges against the unknown and random events" (ICNZ, 2009a).
Depending on the company and the type of insurance required, insurance is defined as a contract between insurers (Insurance & Reinsurance companies) who undertake in exchange for premiums, to pay the insured (Insurance companies and their customers) a fixed amount of money if certain events happen (Investment Savings & Insurance Association, 2009; Investopedia ULC. 2008). The type of insurance cover required to help protect varies from company to company but may include:
This case study refers to reinsurance as the way in which insurance companies protect or insure themselves with other larger insurance companies against the risk of loss caused by major catastrophes such as hurricanes, earthquakes, class action lawsuits, collisions (significant in size such as between ships or trains), extensive diseases or sickness and death caused by pandemics.(Investment Savings & Insurance Association, 2009; Swiss Re, 2004)
3.2 The insurance industry, globally
3.2.1 Sector size
To measure the enormity of the insurance sector, in 2004, globally insurance premiums totalled in excess of USD$3,300 billion for both life and non-life insurance (Figure 7: Global multi-line insurance market value). With annual growth rates ranging between 2 and 10% (Stanley St Labs. 2009). Multi-line insurers, those with diversified interests in life, health, property & medical insurance, in 2008 accounted for premiums of USD$3,888.6 billion making insurance one of the largest financial sectors (Figure 8: Global multi-line insurance market).
The major insurance markets are in the US, Europe, Japan, and South Korea with a growing number of emerging markets that include India, China, and Latin America. As a result, the four major markets, comprising 7% of the world's population, accounted for almost two-thirds of premiums for 2004, while remaining or emerging markets, 85% of the world's population, accounted for only 10% of all premiums (Figure 9: Global multi-line insurance market) (Insurance Information Institute, 2008).
3.2.2 Competitive landscape
Most industrialised countries recognise that markets operate best under competitive conditions. When markets are left to their own destiny, failure may occur due to personal interest and personal advantage, as much as diverse market conditions. In the United States the Sherman Act of 1890 was enacted to enhance antitrust laws. This has been amended over the last 120 year but still maintains the principles it was founded on. Most countries are now reproducing the United States law and developing similar antitrust legislation to prevent monopolistic practices, though attitudes differ in East Asia where it is well known that Hong Kong and Singapore support monopolies (Nissan, 2003; Round, 2002).
The number of products and services on offer has never been better for consumers whether they are 'mum and dad' protecting what they have built up during their lifetime to shareholders wanting to preserve their investments. Each has its own risk but isn't that what insurance is about; managing risk.
The insurance information is consumed not only by the consumers wanting to understand their risk but includes industry advisors, strategists, business owners, governance boards and shareholders, who all have a need for information or facts to support decisions they take.
Since the end of 2007 the world economy has suffered from a recession; recession being a fall in Gross Domestic Product (GDP) for at least two consecutive quarters (Amadeo, 2009; BBC News, 2008).
It has been debated that either in the United States where higher mortgage rates coupled with declining house prices caught out homeowners (Amadeo, 2009; Stanley St Labs. 2009) or global triple digit oil prices are to blame (Hamilton, 2009; Rubin & Buchanan, 2008; Schneider, 2008).
Higher mortgage rates coupled with declining house prices forced banks to reassess their risks and stopped lending to each other. This in turn led to significant government bailouts, bankruptcies or government nationalisation of Bear Stearns, AIG, Fannie Mae, Freddie Mac, IndyMac Bank, and Washington Mutual. As a result employment in the US was declining faster than in the recession of 2001 (Amadeo, 2009).
On the other side, ongoing crisis in the financial markets are masking what is taking place in the oil industry. Oil stocks have risen uncontrollably, in some case over 500% since 1973, which caused the recession in the 1980's (Rubin & Buchanan, 2008; Schneider, 2008).
Figure 10: US long leading index below is a cyclical indicator of US business cycles. The indicator is used to anticipate and monitor economic consistently. It is made up of by measuring a combination of employment, manufacturing, services, construction, trade balance, imports, exports, and future inflation (Banerji & Hiris, 2001).
Whichever is the cause of the current recession, the world has been suffering two significant problems since 2007; global recession and a global credit crisis.
Given these circumstances, insurance trends are on the increase due in part to greater take-up of high-speed communication between companies and individuals. Consumers of products are now able to purchase insurance and financial products not only through traditional means but online and over the phone from almost anywhere in the world.
"Increasing affluence, especially in developing countries, and a rising understanding of the need to protect wealth and human capital has led to significant growth in the insurance industry."
(Stanley St Labs. 2009)
3.2.3 Challenges for the insurance industry
The insurance industry has faced and continues to faces numerous challenges (Deloitte, 2008, 2009). The share variety of challenges makes it difficult to include all challenges in this case study. The following sections highlight key challenges facing the insurance industry where technology particularly IdM has an impact.
Organised crime is using sophisticated malware attacks to write malicious code on systems to watch and record users' personal information (Huntington, 2006; Seltsikas, 2005). Crime syndicates using elaborate toolkits conduct phishing attacks (identity thief) and keyboard logging attacks using both hardware and software devices at the same time. Huntington recommends nine levels of defence that form a "layered identity strategy" to mitigate risk of attack. Appendix 6: Challenges in insurance.
IdM will be the key to legitimate data access providing, at every point, strong underlying infrastructure (Bosworth, et al. 2005; Seltsikas, 2005).
The Society's Audit Manager indicated that possibly the next big conspiracy in the insurance industry was money laundering. This he bases on the terrorism threat to economies such as New Zealand where it may seem easier in a small country to 'get away' moving money between accounts.
The practice of IdM, in particular identity verification, is one technique used to monitor exactly who is accessing an account and could tell if those on watch lists for suspicious financial activities have assess to your systems. Reports using watch lists provide organisations such as Interpol with information to help monitor the activities of known terrorist.
Preceding and next generations
As new generations enter the work force they bring with it new challenges that are undoubtedly different from previous generations (Nana, 2009). There is also a change in the control of power shifting from employer to employee.
As an example, The Chubb Corporation offered staff flexible work schedules. The outcome was 18% increase in the number of casualty claims, 4% increase in payments processed within 24 hours, 40% decrease in overtime hours. In a number of cases IdM concepts were responsible Chubb's increases. Flexible working arrangements meant that staff were able to work from home, hot desk at a branch or in the Head Office, and link to authorised systems. Chubb's IdM system provisioned/de-provisioned staff, provided role-based access to systems, and provided self management for minor IT issues such as password resets and system lockouts.
Privacy & security
Famous psychologist Abraham Maslow termed the phrase "next to survival comes 'safety and security'" (Vishakeb, 2008).
In 2008 the Lloyd's bank introduced 'follow me' technology which provides the ability for employees to print from any technical device with enhanced security. This was due to Lloyd's Corporation ID pass which released print jobs once their identity was verified (Lloyd's, 2008).
A United States federal law enacted on July 30 2002 as a reaction to a number of major corporate and accounting scandals
As companies exhibit tighter control over their practices, IdM elements play a key role in providing companies with greater auditing capabilities through ensuring security policies are built into the IdM solution, reduce risk through automation, strengthen system access by way of identity verification, and the provisioning and de-provisioning of users' accounts. This last point ensures each identity is provisioned the right access, to the right system, at the right time.
Working within regulatory and compliance frameworks
Insurance for long periods has been self-regulating but negative events over the last 25-30 years, such as fraud, money laundering, and poor standards and ethics, have evoked governments to regulate the industry to the point that the industry must now work within stringent regulatory and compliance frameworks.
Auditors often cannot take into account all aspects to the business, unless significant issues are prevalent, and rely on the
company to be honest and disclose areas of potential risk. IdM plays a significant role in providing Auditors additional reporting tools to examine transaction logging in applications and systems.
3.2.4 Regulatory environment
"There are good reasons that insurance has, historically, been subject to regulation. The most obvious one is that a consumer pays money today for a promise that may not be deliverable for years. That promise must be secured from many threats, including insolvency and dishonesty".
Each country has their own range of regulations, standards and guidelines for insurance companies. International regulations are becoming more commonplace as insurance companies open international subsidiaries to leverage their competitive products and services.
Two recent additions to regulatory compliance within the European Union (EU) over the last 5 years have been Solvency II, an updated regulatory requirement for insurance companies operating in the EU, is designed to facilitate developing a single-market for insurance across Europe. From a United States standpoint, changes to accounting practices through International Financial Reporting Standards (IFRS) are designed to develop international standards for financial reporting (IFRS, 2008a, 2008b).
These two standards have caused insurance companies to question the validity and assumption that the new standards undermine business profitability.
3.2.5 The role of technology
One of the greatest technological impacts and challenges to the insurance industry over the past 15 years has been the adoption of the Internet, and in particular e-commerce. Market forces dictate that every insurance business should an online presence. In the Internets infancy customers accepted that brochureware websites gave all the necessary information without the ability to purchase products or services. That has significantly challenged insurance companies in recent years to the point that if they cannot provide what now are the basics, online forms, calculators, detailed and comparative information, then customers turn to the next company that can support their need for information (Aarabi & Bromideh, 2006; Yao, 2004).
Technologies and innovative approaches to business are moving at such a pace that companies are finding it difficult to keep up with legal implications. For example, nanotechnology and the risks posed by it remains unpredictable (Lloyd's, 2008).
It's not just the use of information that insurance companies find difficult to maintain, but the risks placed on the information technology infrastructure remains key in most company's minds. With the amount of data, companies are moving to leasing or building their own large-scale datacentres and warehouses to support their capacity concerns for storage.
For most insurance companies the industry is very much reliant on manual processes. Automation and expert systems play a significant role for larger companies where premiums can cover the cost of developing these complex systems by relying on statistical accuracy, particularly in the field of underwriting. For small to medium sized companies (SME) automation is less attractive as the returns in most cases do not cover the costs (Kelly, 2002; Whitney, 2001).
The role of technology is not only consumed by companies but in itself can lead to large claims as Lloyd's state in their 2008 report for 2007.
". there was a series of single event losses that were significant in size and frequency. Man-made and technological catastrophes caused around US$7bn in insured losses last year, some 46% higher than the annual average of US$4.8bn. Nineteen events across 11 countries resulted in insured losses ranging from US$80m to nearly US$2bn each".
We've identified a small number of technologies that play a role and have an impact in the insurance industry. This by no means rules out other technologies as each plays their role in defining and providing a competitive edge for insurance companies.
In saying that, employees will not replace technology anytime soon for two reasons. The majority of the market still want some level of human interaction where purchasing a product or service, and secondly, most commercial products, at this time, are too complex to be sold without an advisor or broker (Kelly, 2002).
3.3 The insurance industry, locally
In New Zealand, MED (Ministry of Economic Development, 2009a) depicts the industry as being a small market by world standards dominated by international subsidiaries for life and general, with mainly local companies for health insurance with Southern Cross, the largest of these, holding 70% of the market.
As at October 2007 there were 42 life insurance companies offering policies in New Zealand and 134 registered Non Life Insurance Companies, Brokers and Captives with total gross premiums of nearly $4 billion to October 2007.
These companies are regulated under New Zealand laws and depending on the types of insurances sold comply with a number of acts:
- Life Insurance Act 1908
- Insurance Companies Deposits Act 1953
- Insurance (Ratings & Inspections) Act 1994
- Superannuation Schemes Act 1989
- Accident Insurance Act 1998
- Financial Reporting Act 1993
- Insurance Companies' Deposits Act 1953
- Friendly Societies and Credit Unions Act 1982
- Securities Act 1978
Since 2008, disaster and general insurers offering policies in New Zealand have been required to be rated by one of the following three agencies; AM Best, Standard & Poor's and Fitch Ratings. This rating is designed to provide a measure of a company's ability to meet its claim's payment obligations to customers.
3.3.1 Competitive landscape
New Zealand insurance and finance industry, in which the Society operates, are currently experiencing a recession of such enormity not felt since the 'Great Depression' of 1938. Some of the more experienced and long-standing organisations with large customer-bases are finding it difficult to weather the recession if it last much longer as they experience a drop-off in premiums and a surge in claims. As a result reinsures are charging more to cover the affects.
New Zealand companies' role in the insurance industry globally is less significant than with larger nations, but it still plays a major role to support the local market. In the Tower Market Review (2008, p. 1) to the end of Dec 2008 stated that:
"2008 will go down in history as one of the most dramatic years the markets have ever experienced. By the end of the year, turmoil in the credit and equity markets was feeding through to the real economy, with authorities worldwide trying to avert a prolonged recession."
New Zealand faces many of the same challenges as other countries do due to the fact that all major insurance companies operating here are international subsidiaries. The challenges for smaller companies is maintaining their customer base as most smaller companies target specific niche markets such as the Society and medical professionals.
3.3.3 Regulatory environment
Insurance companies are not immune to facing regulations that protect but the cost to comply ends up costing the consumer. New Zealand is one of the less regulated counties in the world when it comes to insurance and finance. This is due in part to the New Zealand Insurance Council and its self-regulatory framework (Table 6: Insurance Council's self-regulatory framework) and self-developed guidelines (ICNZ, 2009b). This seems to work in New Zealand as our cultural differences, compared to most other countries, relies on companies being 'fair' and providing that helping hand due to our small population size and geographic location.
With the work ICNZ undertakes, bear in mind the government acts identified previously.
IFRS (International Financial Reporting Standards) will become a requirement for all New Zealand reporting entities, including insurance companies, with financial years commencing on or after 1 January 2007 (KPMG, 2009). Joanna Perry, KPMG Partner and Chairman of the Financial Reporting Standards Board states that:
"The transition of New Zealand business to International Financial Reporting Standards is without doubt one of the most significant accounting events in our country's history".
The impact of IFRS on New Zealand insurance companies means customers should see transparency in companies reporting results, providing greater levels of confidence. For insurance companies this means increased complexity with greater care to be taken when providing advice and being transparent to customers.
3.3.4 The role of technology
As described in 3.2.5, the role of technology, New Zealand is not immune from those observations. There impact is felt in New Zealand probably more so given our physical remoteness in the world relative to international markets.
New Zealand is strongly dependent on its communication technology links such as the Southern Cross Cable for access to compete with the rest of the world without significant time delay or restrictions that other modes of communication possess.
"New Zealand is more likely to be able to compete successfully in global markets by developing strengths in the weightless economy. the weightless economy includes adding more knowledge-based value. "
As the Internet has developed and expanded globally, New Zealand has attempted to make the most of it by incorporating new business models accorded by the Internet into mainstream business (Skilling, 2007; Skilling & Boven, 2007). This has allowed for greater competition and influence from international insurance companies, which once may have ignored New Zealand due to its remoteness, to deal directly with rather than through 3rd party brokers and advisors.
The government's broadband investment proposal, in which ultra-fast broadband is to be rolled-out to 75% of New Zealanders over the next six years, has been accepted as an extremely positive move (Ministry of Economic Development, 2009b; The New Zealand Institute, 2009). This affords New Zealand insurance companies the ability to compete, be more innovative, and provide technology solutions to customers yet to be discovered. In parts of Asia, Europe and the United States, broadband connectivity is so fast that the time for customers to get the right information to make informed decisions has shortened allowing those insurance companies with innovative solutions to attract the customer before lesser insurance companies.
Technology plays an extremely important role within the insurance industry. The examples contained within this chapter contain a narrow view into what others are doing at this time.
The ability for New Zealand insurance companies to compete in these markets requires them to adapt solutions, business models, technology and to innovate to the point where it still may not make that big a difference to policy holders. What will make the difference is being able to offer targeted products and services to consumers.
New Zealand has the potential to select the best products and services based on experiences from other insurance companies; it can rely to a larger extent on the diversification of global companies to leverage and find the best for its consumers.
This requires knowing the its environment - which markets offer the best rage of solutions (rates, product and technical expertise), regulatory opportunities to ensure New Zealand companies do not suffer from monolithic practices or legal infringements, industry and financial trends that provide realistic views in forecasting for harder times, and the myriad of other challenges that the industry faces.