The insurance industry this year is facing regulatory challenges on a variety of issues including cybersecurity, pricing, and mergers and acquisitions. Deloitte outlines these trends in a report, and experts with the firm take a deeper dive into these topics in an e-mail interview with SmartBrief. In this post, they examine issues affecting the property/casualty sector.
Cyberinsurance and technology
An "inherent informational mismatch" between insurers and cyberinsurance buyers has hindered the cyberinsurance sector's growth somewhat, says John Lucker, a principal in Deloitte Consulting and the global advanced analytics and modeling market leader.
That mismatch is partly the result of customer uncertainty about how to evaluate their cyberexposure in a way that gives insurers the necessary information to accurately price the risk, while insurers are unsure of what questions are most effective at eliciting that information, Lucker says.
The insurance industry is increasingly pursuing solutions for quantifying cyberrisk. The focus is largely on evaluating an organization's risk profile based on the nature of information it handles and its attractiveness as a target, says Richard Godfrey, the leader of Deloitte Advisory's insurance practice.
Further assessment can be conducted through questionnaires, live interviews and other methods, but an organization's exposure can stem from specific characteristics of its "operational security posture that can be very hard to truly discern through a questionnaire or interview process," Godfrey says. Therefore, while organizations are "better equipped today to quantify risks in this area through increased investment in assessment models, capabilities still need to be developed in this area, and continued investment is likely."
"What is needed is more rigorous and accepted standards for evaluating cyberrisk mitigation and vigilance ... But this process will also take time, research and ultimately marketplace acceptance on both sides of the risk problem -- insurer and insured," Lucker says.
Meanwhile, driverless vehicles and automated driver-alert systems are another emerging area of focus for the insurance industry, but one that remains in an early stage as future effects of such technology are under consideration, says Timothy Cercelle, a director with Deloitte Advisory.
"The natural assumption is that premiums would be driven down as accidents would decrease, but in order to get to that point, there will have be significant penetration of these products in the market," he says. Therefore, there is "not much in terms of implementable solutions at this point," he says.
Mergers and acquisitions
Deloitte's report notes that the market factors that have resulted in the rising trend of US insurer acquisitions by foreign companies are still in effect, particularly with regard to Asian firms.
Cross-border mergers and acquisitions "add a dynamic of multiple regulators and foreign jurisdictions," says David Sherwood, a senior manager with Deloitte Advisory. M&A regulation involves a supervisor that "takes the lead in organizing oversight of the overall insurance holding company and driving any supervisory college," he says.
That can create extra burdens in some cases, such as when a US insurer is involved in an acquisition that places it in a group supervisory plan overseen by a foreign regulator, Sherwood says.
"US insurers should, as part of the pre-deal work, assess the new regulatory burden and, post-deal, prepare themselves to meet" that burden, he says.
States are increasingly warning insurers against use of price optimization or blocking the practice outright. Price optimization is described as setting rates based on a customer's likelihood to shop around, with rates being higher for those deemed less likely to seek coverage from other carriers.
In this climate, insurers could be taking more action to gather information on what their competitors charge for risk through the use of comparative raters, quote-and-bind data or approximations from intermediaries, and other sources, says Lucker of Deloitte Consulting.
"Insurers could do a better job of explaining to regulators what price optimization is and who it would impact -- for example, research shows that lower-income insurance buyers shop around more than higher-income insurance buyers, so bans on price optimization [are] protecting the wealthy and having less impact on the lower-income customers," he says.
Nonetheless, "time would be better spent building and deploying decommoditizing features of insurance products so companies can charge more for products and services based on inherent value of the offering versus opportunistic overcharging using optimization techniques," he says.
US and international regulation
State and federal insurance regulators continue to differ on some international regulatory matters, despite efforts "to present a united state/federal front" in a "Team USA" approach at the International Association of Insurance Supervisors, says Howard Mills, the leader of Deloitte's global insurance regulatory team.
One issue dividing the regulators involves insurance collateral for non-US reinsurers. In question is whether the Federal Insurance Office should resolve the issue with a covered agreement ahead of the development of a resolution by the National Association of Insurance Commissioners, Mills says.
Many at the NAIC think an FIO covered agreement would preempt state authority, as state regulators oversee all insurance companies in the US and are the industry's primary regulators, Mills notes.