As we approach the festive break it is the time of year when many of us try to predict the future. During 2016 historic low interest rates, unexpected political upheaval and euro scepticism set a new context for the future (e.g. Brexit, Trump, mass migration and anxiety around forthcoming elections across the Eurozone).
We believe that macro risks will continue to greatly influence the state of the industry and expect the following major developments:
Political uncertainty and populism will continue to undermine economic growth
The surprise win of Trump has already led to increases in inflation and interest rates, and divergent monetary policy in the USA and EU. The EU will achieve modest growth despite protectionist tendencies but the current wave of populism raises uncertainty given upcoming elections in France, Germany and The Netherlands (15 March 2017).
Continuing regulatory complexity and pressure
Regulatory change lies ahead for labour, pensions, healthcare, payments and privacy in NL. The elections will determine whether we pursue more individual or collective structures and this impacts products such as pensions and healthcare. Capital Adequacy, General Data Protection Legislation, the Payment Services Directive 2 and data management regulations will be significant. We foresee continued regulatory focus on integrity risks (SIRA) and the quality of risk management activities including formal assessment of strategic risks including the health and sustainability of the earnings model.
First business models live using blockchain and smart contracts
2017 will see an increased use of artificial intelligence and the first commercial applications of blockchain technology and self-executing smart contracts. This will enhance customer service and improve efficiency but also lead to the loss of administrative jobs and fuel populist dissent. The first applications of blockchain based solutions will emerge to disrupt sub-sectors exploiting new business models for peer to peer or community oriented services.
Consolidation within pension and life insurance sectors forces changes in asset management
Following the announcement of NN and Delta Lloyd and driven by unsustainable earnings models in the new APF, direct contribution and traditional direct benefit products, we will see an acceleration of consolidation across the pension and life insurance sector. The upcoming elections will determine product direction with different political parties favouring the “individual pot” or collective pensions. The viability of captive Asset Management will be challenged – those who claim alpha (or active) or product differentiation but suffer from lack of scale or poor results will be forced into consolidation or outsourcing. The ongoing rise of beta (or passive) models and popularity of fixed income instruments will force a shift in asset management in the favour of large international passive players. Only those players who can achieve scale and demonstrate returns for acceptable cost with excellent risk management practices will succeed in this intense competition.
General accident insurance
The combined ratio for product lines such as auto and home have been above 100% for too long for the industry to remain sustainable. Digitisation, the shift to direct client sales and service, and the disruptive deployment of pay as you drive, sensoring and internet of things technologies is driving change in this market. 2017 will see a number of major consolidation moves (post NN Delta Lloyd) in this static sector and this will have a knock-on effect for brokers and advisors. The regulator is focusing attention on the strategy, agility, cyber risk and viability of the earnings models for insurers.
Human Capital risk, deployability and preventative healthcare
Following the crisis, we have become accustomed to downsizing but growth has returned in multiple sectors, highlighting a mismatch between desired and available human capital. Our digital business models create new requirements for staffing whilst unemployment is skewed towards older resources (45+) with low unemployment among skilled and attractive age bands. As we live longer and work longer we will see four generations on the digital workfloor which will force employers to reconsider productivity and deployability of human capital. This will bring together pension, illness insurance, wellness and deployability from the perspective of employers and new products and services will emerge in 2017 following the Asian model to address this need.
Scenario planning and the Strategic Risk Assessment are essential starting points
Industrial and Financial Institutions are operating in markets that are impacted by factors with a high degree of uncertainty which makes long term planning increasingly difficult. Shorter business cycles require agility and more option oriented approaches. Incumbents need to break out of the conventional thinking based on historically predictable revenue streams, since business and earnings models are under pressure. Strategic (risk) planning is important to react to potential scenarios such as disruption, labour shortage or even the breakup of the European Union.
Not surprisingly, the DNB has announced that, in Q2 2017, it will perform a review of the quality of strategic decision making (mainly in the insurance and pension sectors), looking at for example the process, quality of information and instruments for scenario analysis.
We have spent a significant part of 2016 implementing and executing strategic risk assessments and during the last AXVECO Roundtable CROs and risk managers from insurance companies, asset managers and banks discussed various practices for scenario analysis. We discussed an overview of the trends which are shaping the business environment. Structured strategic risk assessments, it was agreed, could be a good starting point to identify the potential trends and risks that lead to plausible scenarios – financial and non-financial.