2015 Canada property- casualty insurance outlook

Market summary

Current econom ic and m arketplace dev elopm ents in Canada sug g est a continuation of th e ch alleng ing and h ig h ly com petitiv e property-casualty insurance conditions. H istoric low interest rates, v olatile inv estm ent returns and low g ross dom estic product ( G D P ) g row th are f orecasted to persist in 2015, adv ersely af f ecting th e industry’ s profit margins and premium growth. Many property-casualty insurers are also making significant investments in infrastructure that will further erode profit margins.

R eg ulatory and accounting ch ang es continue to ch alleng e insurers. T h ese include th e need to im plem ent risk m anag em ent processes and increased control f unctions org aniz ationally. I n 2014 , O ntario passed leg islation req uiring reductions in autom ob ile insurance rates f urth er pressuring th e b ottom line.

2015 Canada property- casualty insurance outlook2

A t th e sam e tim e, sev eral larg e catastroph es have taken a financial toll on the country’s insurers. T h ese run th e g am ut f rom sev ere flooding in Calgary and the Greater Toronto A rea and ice storm s in O ntario and Q ueb ec, to increasing ly h arsh w inters across th e country and dev astating tornadoes in S outh w estern O ntario. H um an-caused disasters include an ex plosion in L ac-Mégantic, Quebec, train derailments and oil pipeline ruptures.

I ndustry consolidation is occurring ag ainst this backdrop. In each of the past five years, th e m arket h as ex perienced at least one m aj or transaction, th e larg est transaction in 2014 b eing D esj ardins acq uisition of S tate F arm ’ s Canadian operations. A s of year-end 2014, the market share of the top five Canadian property-casualty insurers h ad increased to 4 5% of prem ium v olum e. A s the difficult economic conditions continue in 2015, f urth er consolidation is anticipated.

A long th e insurance v alue ch ain, m aj or transactions also w ere recorded b etw een independent b rokers and serv ice prov iders. N ot only are insurers g etting b ig g er, so are the firms that deal with them.

I n 2015, to ach iev e g row th and reliev e pressures on costs and profit margins, successf ul property-casualty insurers in Canada w ill need to undertake th e f ollow ing strateg ies:

• I m prov e custom er connectiv ity

• E x pand distrib ution and custom er serv ice

• T ransf orm operations to m eet f uture needs

• B uild an enterprise data ex cellence inf rastructure

• P roactiv ely address reg ulatory ch ang es

• I m prov e cyb ersecurity

I m prov e custom er connectiv ity

B ased on E Y ’ s 2014 Global Insurance CFO Survey, th e top th ree b usiness driv ers f or insurers around th e w orld ov er th e nex t f ew years w ill b e th e need to ach iev e g row th , reliev e pressures on costs and m arg in to improve profits and respond to regulatory ch ang e ( as sh ow n in F ig ure 1) . T h ese g oals are th e f ocus of Canada’ s property-casualty insurance m arket f or 2015.

I n th is reg ard, a strateg ic im perativ e f or insurers across all product classifications, g eog raph ies and operating m odels is th e need to streng th en custom er relationsh ips, putting custom ers at th e core of operations.

E nh ancing custom er ex perience is a key priority in 2015 to ensure th at custom ers are inf orm ed, connected and em pow ered b y th e v ariety of w ays in w h ich th ey can sh op f or insurance. W eb sites, b log s and social m edia need to assist custom ers w ith com paring insurers and th eir respectiv e products and serv ice. T h ese tools increasing ly m ust b e m ob ile and accessib le on a constant b asis.

S tudies indicate th at custom ers consult 11 inf orm ation sources on av erag e b ef ore purch asing an insurance policy. T h is puts th e com petitiv e onus on insurers’ need to present a clear and dif f erentiated b rand im ag e,

in addition to transparent pricing term s, custom er serv ice, claim s settlem ent, b illing options, product of f ering and ch annel of f ering .

Custom er ex pectations are m uch h ig h er in 2015, largely influenced by experiences eng ag ing w ith oth er industries. T h ey w ant m ore personal interactions v ia dig ital ch annels and increasing ly seek such options as w eb ch at, v ideo and m ob ile. Consum ers f urth er ex pect im m ediate access to th eir insurers th roug h th ese m ultiple ch annels. Custom ers ex pect m ore custom iz ation, personalization and flexibility in their sh opping ex periences th an ev er b ef ore. Conseq uently, th e av ailab ility of consistent inf orm ation th roug h m ultiple ch annels is a b aseline req uirem ent f or insurers in 2015.

S ince personal and dig ital custom er experiences are influenced by these direct and indirect insurer interactions, th e key ch alleng e f or insurers is to h arness th e pow er of dig ital to im prov e custom er eng ag em ents w h ile low ering costs. T h e goal in 2015 will be to develop flexible and integ rated m ulti-ch annel capab ilities, driv ing th e rig h t consum ers to th e rig h t ch annels f or th e rig h t interactions at th e rig h t price.

Consum ers w ill com pare th eir ex periences w ith property-casualty insurers ag ainst oth er consum er industries, ex pecting com parab le standards of serv ice and rew ards f or loyalty. D ue to th e increased use of social m edia, ev en inf req uent instances of neg ativ e sentim ent can reach a b roader audience and h av e a neg ativ e ef f ect on an insurer’ s reputation and b rand.

2015 Canada property- casualty insurance outlook 3

need to ex pand th eir distrib ution ch annel and com m unication ch annel m ix to respond to ev olv ing custom er ex pectations and optim iz e th eir g row th . T h e industry h as th e opportunity to ach iev e th ese g oals th roug h dig ital transf orm ation. T op-perf orm ing insurance com panies in 2015 w ill h av e strong er dig ital capabilities, refined metrics, upgraded tools, new skills and reoriented cultures.

S uch tech nolog ies as cloud com puting , sm artph ones and b usiness collab oration sof tw are are ch ang ing th e consum er landscape. I nsurers m ust adopt th ese tools to deliv er and receiv e dig ital inf orm ation on any dev ice — saf ely, securely and w ith f ew er resources.

T h e g oal is to create a consistent custom er ex perience b y integ rating distrib ution and com m unication ch annels and prov iding enh anced transparency of inf orm ation. T h e latter is critical as 56 % of Canadian consum ers trust th eir property-casualty insurance com pany, according to E Y ’ s Global Consumer Insurance Survey 2014 (see figure 2). The industry’s trust level is low er th an th at of b anks, online retailers, superm arkets, autom otiv e m anuf acturers and ph arm aceutical com panies. T h ese results also com pare unf av orab ly to g lob al and U S results, as w ell as Canada’ s lif e insurance industry results.

I n 2015, m any property-casualty insurers

B uyers are looking f or th e v alue of products to b e clearly dem onstrated v ia price, product f eatures and serv ice tailored to th eir needs. S uccessf ul insurers in 2015 w ill lev erag e custom er-centric innov ation to dif f erentiate th em selv es and g ain sustainab le m arket leadersh ip positions.

E x pand distrib ution and custom er serv ice

W ith insurance consum ers dem anding enh anced transparency v ia m ultiple ch annels to sh op and transact, optim iz ing distrib ution ch annels is a key ch alleng e f or m any property-casualty insurers in 2015.

Figure 1: Primary business drivers

Q uestion: P lease rank in order th e f ollow ing b usiness driv ers f acing your org aniz ation th roug h 2020

P ercent of respondents ranking th e driv er am ong th e top th ree

Page 4

While growth is currently the top business driver, regulation and cost pressures are expected to remain as top priorities for the foreseeable future

Global Insurance CFO Survey - 2014September 2014

9%

3%

20%

9%

17%

11%

26%

6%

9%

14%

6%

11%

11%

20%

11%

17%

3%

3%

11%

3%

20%

17%

43%

Order of priority: First Second Third

66%

51%

54%

31%

31%

29%

17%

18%

3%

Primary business drivers

Question 1: Please rank in order the following business drivers facing your organization through 2020.

Percent of respondents ranking the driver among the top three

Source: EY Research, 2014

Other

Achieving growth, expanding into markets and/or expanding through M&A activity

Relieving pressure on costs and margin and improving profit

Responding to regulatory change

Improving capital and liquidity position

Addressing competition from globalization and new market entrants

Establishing risk mitigation and management

Increasing simplification through organizational restructuring

Preparing for leadership change and succession

2015 Canada property- casualty insurance outlook4

• A pproach es th at seg m ent claim s b ased on customer profile, claim type and com plex ity

• Claim s f raud m anag em ent

• I m prov ed ease around m ob ile/ internet claim filing

I nitiativ es to optim iz e operating m odels in oth er f unctional areas like sales and underw riting , b illing and paym ents, are also ex pected in 2015.

B uild an enterprise data ex cellence inf rastructure

A nalytics and b ig data of f er potentially significant opportunities for property-casualty insurers in 2015. Com panies now h av e access to m assiv e v olum es of structured and unstructured data, such as pub lic inf orm ation ab out custom ers’ lif estyles and online ex periences.

S ynth esiz ing th is am ount of data req uires a new approach . P redictiv e analytics and

Many insurers will take a comprehensive approach to im prov ing core operations, such as policy adm inistration ( sales and operational underw riting ) , claim s and b illing , w h ile also seeking to properly m anag e related risks.

A t th e sam e tim e, th ey w ill seek m ore discrete im prov em ents. P artial g ains can b e ach iev ed b y f ocusing im prov em ent ef f orts on one enab ler at a tim e, rath er th an undertaking a larg e-scale transf orm ation aim ed at im prov ing m ultiple enab lers sim ultaneously.

O n th e claim s f ront, f or instance, th e f ollow ing initiativ es in 2015 w ill prov e beneficial:

• I m plem entation of system s to m easure and reduce claim s leakag e

• O ptim iz ation of claim s outcom es b y ensuring appropriate am ounts are paid claim ants

• Claim s strateg ic sourcing strateg ies to optim iz e loss adj ustm ent ex penses and indem nity costs

I nsurers f urth er need to sh are inf orm ation and create consistent ex periences across m ultiple integ rated ch annels. O m ni-ch annel distrib ution optim iz es th e custom er ex perience b y considering client needs across th e v alue ch ain. E nsuring th at b usiness m odels and operating m odels support an om ni-ch annel approach in 2015 w ill h elp position insurers to optim iz e th e custom er ex perience, ach iev e com petitiv e dif f erentiation and accelerate g row th .

T ransf orm operations to m eet f uture needs

A m aj or f ocus f or insurers in 2015 w ill b e core operations im prov em ent, g iv en th e potential to aug m ent custom er ex perience, im prov e operational ag ility, increase speed to m arket and accelerate g row th .

Figure 2: High turnover and low trust signal serious relationship issues

I nitiativ es to optim iz e operating m odels in oth er f unctional areas like sales and underw riting , b illing and paym ents, are also ex pected in 2015.

Supermarkets Banks Online shopping Car Pharmaceutical Insurance sites manufacturers companies companies

Insurers are not as trusted as other types of businesses

87% 73% 70% 68% 56% 59%

2015 Canada property- casualty insurance outlook 5

O R S A process is ex pected to continuously ev olv e, and com panies w ill b e ex pected to further refine their approaches in 2015.

Although Canada’s Office of the S uperintendent of F inancial I nstitutions ( O S F I ) does not approv e an insurer’ s O R S A , th e O R S A g uideline states th at O S F I m ay req uest and rev iew th e assessm ent and supporting docum entation. O S F I also h as req uested th at th e O R S A report to an insurer’ s b oard of directors b e sub j ect to periodic rev iew s b y a skilled, ob j ectiv e and ex perienced internal or ex ternal resource.

R eg ulators also now req uire th at an insurer’ s senior m anag em ent and b oard of directors increase th eir ov ersig h t of th e org aniz ation’ s com pliance and control functions. Many companies have addressed th e new req uirem ents b y m odif ying th eir org aniz ational structures and reporting lines, increasing corporate resources and im prov ing g uidance and docum entation processes.

a “ w ait-and-see” m indset to a m ore action-oriented approach . E arly results indicate th at consum ers are increasing ly ready to em b race usag e-b ased insurance.

P roactiv ely address reg ulatory ch ang es

As the global financial crisis emphasized, many financial institutions had relied too h eav ily on th e use of q uantitativ e m odels, ex ternal rating s and industry b ench m arks. A s a result, reg ulators are req uiring insurers to b ecom e m ore disciplined w ith reg ard to risk m anag em ent, capital planning and operational ov ersig h t.

A m aj or reg ulatory initiativ e is th e O w n R isk and S olv ency A ssessm ent ( O R S A ) . O R S A req uires insurers to im plem ent and show evidence of robust risk identification, m easurem ent and analysis, m onitoring and reporting , and m anag em ent ov ersig h t processes. T h e g oal is to ensure th at an insurer’ s ow n assessm ent of its current and f uture solv ency position is w ell understood and m anag ed.

O R S A is not purely a reg ulatory com pliance ex ercise. I t can prov ide b usiness v alue if considered as an integ rated process th at enab les b etter decision-m aking b y senior m anag em ent and th e b oard. A w ell-ex ecuted O R S A process sh ould illum inate th e risks an insurer f aces, th e rob ustness of its ov ersig h t, and th e controls desig ned to m anag e risks.

I n 2014 , insurance com panies w ere req uired to prepare th eir initial O R S A report. T h e

m odeling m eth ods are pow erf ul tools th at can assist insurer growth, profitability and sustainab ility ob j ectiv es.

P ersonal data is now a new econom ic asset class. T h e ab ility to identif y custom er behaviors and personal risk profiles has b ecom e a com petitiv e dif f erentiator, g uiding th e tailoring of serv ices, products and premiums to each customer’s specific situation. D ata analytics also can b e lev erag ed to dev elop strateg ies to retain h ig h -v alue custom ers, em ployees and b rokers, as w ell as to pinpoint h idden rev enue opportunities w ith in th e custom er b ase. I nsurers can identif y new g row th opportunities w h ile protecting and optim iz ing b ottom -line results.

A nalytics deliv er m ore v alue w h en integ rated to all f acets of operations, including seg m entation and m arket acq uisition, risk-b ased pricing , custom er lif etim e v alue, underw riting , distrib ution strateg y, custom er ex perience and claim s optim iz ation.

T o dev elop strong analytical capab ilities that achieve anticipated returns, significant inv estm ents in people, h ardw are, sof tw are and tech nolog y are req uired. N ot surprising ly, th e m ost in-dem and skill set in th e insurance sector is talent w ith seg m entation, custom er data and predictiv e m odeling capab ilities.

T elem atics and usag e-b ased insurance pricing are oth er g row ing tech nolog y trends in th e property-casualty m arket, as th ey are in oth er m arkets. I n th is reg ard, m ost top-tier Canadian insurers h av e sh if ted f rom

T h e m ost in-dem and skill set in th e insurance sector is talent w ith seg m entation, custom er data and predictiv e m odeling capab ilities.

2015 Canada property- casualty insurance outlook6

U nf ortunately, f ew property-casualty insurers in Canada h av e direct insig h t into th eir cyb er liab ilities inv olv ing dig ital assets. There is also a significant gap between th e nature of th e new th reats and th e capab ilities of com panies to m onitor, detect and th w art th ese attacks.

T h e integ rity of electronic data is anoth er key concern. I nsurers need to independently sh ow ev idence of a data b reach and determ ine its im pact to distrib ute th e liab ility. N ew m eth ods are needed to definitively identify the cause of a data security incident, w h en it occurred, th e assets af f ected, and w h eth er or not insured assets w ere ex posed outside th e org aniz ation.

I ncreased reg ulatory ov ersig h t also h as increased th e need f or enh anced data security. D ata sov ereig nty issues h av e arisen f or internationally activ e com panies in Canada. W h ile data m ay b e stored on serv ers ph ysically located in one country, custom ers m ay reside in a dif f erent j urisdiction w ith m ore string ent data security rules. In March 2014, the E uropean P arliam ent ov erw h elm ing ly v oted in f av or of strong er data protection req uirem ents f or indiv iduals, reinf orcing th e req uirem ents f or ex plicit perm ission to transf er certain types of personal data f rom one country to oth er countries. T h ese new data transf ers restrictions ex tend to sub sidiaries and oth er parts of a com pany, th us af f ecting th e insurer’ s internal risk m anag em ent.

T h e accounting ch ang es as set f orth in th e ex posure draf ts w ill f undam entally alter th e presentation and m easurem ent of insurance contracts. T h e im pact on b usiness processes and system s w ill b e significant, requiring careful consideration and com preh ensiv e prog ram s to im plem ent I F R S 4 P h ase I I along side I F R S 9 .

I m prov e cyb ersecurity

I n th e w ake of num erous recent data b reach es, cyb ersecurity h as b ecom e a strateg ic issue f or property-casualty insurers in Canada. L ike oth er industries, insurers are increasing ly ex posed to cyb er th iev es and v ulnerab le to corporate espionag e caused b y internal and ex ternal security b reach es. Cyb er crim inals ex ploit enterprise w eaknesses and corporate def enses to steal intellectual property and customers’ personally identifiable inf orm ation, com prom ise corporate strateg y, and pilf er or m anipulate confidential and regulated information.

A s th e insurance industry f urth er em b races th e use of m ob ile and dig ital dev ices and new distrib ution ch annels, th e risk and im pact of cyb er th ef t b ecom es m ore prob lem atic. T h e new er w ays of dev eloping and distrib uting products g enerally req uire new processes, system s, lang uag es and cultures — all inv olv ing v arying deg rees of security risk and th reat aw areness. S ecurity and priv acy m easures are needed to protect com panies as th ey increasing ly adopt dig ital tech nolog ies.

S uccessf ul property-casualty insurers in 2015 w ill increase th eir em ph asis on th eir org aniz ation’ s control f unctions, risk reporting and m anag em ent, and proactiv ely sh ape th eir discussions w ith reg ulators.

A t th e sam e tim e, insurers m ust address th e ev olv ing accounting env ironm ent, w h ich entails th e prov ision of m ore ex tensiv e, precise and detailed disclosures. I n 2015, a property-casualty insurer m ust pay particular attention to th ese ev olv ing I nternational F inancial R eporting S tandards ( I F R S ) rule ch ang es:

• I F R S 4 (Insurance Contracts)

• I F R S 9 (Financial Instruments — effective 1 January 2018)

• I F R S 15 (Revenue from contracts with customers — available for early adoption with mandatory adoption effective 1 January 2017)

D ata sov ereig nty issues h av e arisen f or internationally activ e com panies in Canada.

2015 Canada property- casualty insurance outlook 7

• P rocesses th at assure th at inf orm ation security is an integ ral part of th e risk m anag em ent f unction rath er th an a stand-alone unit

R eg ulators and rating ag encies now v iew cyb er risk as a prim ary th reat to solv ency because of the significant, rapid and unex pected im pact of a security incident and th e inab ility of an insurer to ef f ectiv ely respond to th e ev ent. I n all circum stances, com panies rem ain accountab le f or th e security of priv ate records and data collected f rom custom ers.

• P rocesses th at b etter g aug e w h at is g oing on in th e m arket, understanding inf orm ation security trends and th reats and adj usting risk assessm ent according ly

• P rocesses th at continually reassess th e threat landscape to confirm that new tech nolog ies are addressing th e rig h t priorities

• E x ecutiv e and b oard support th at lev erag es th e ex pertise of partners and v endors to determ ine w h ich security f unctions m ust rem ain on prem ises or b e outsourced to cloud-b ased sof tw are prov iders

S uccessf ul property-casualty insurers in 2015 w ill transf orm and im prov e th eir ex isting security prog ram s and inv est in cutting -edg e security sof tw are and system s.

T h ese insurers w ill incorporate th e f ollow ing practices:

• A prag m atic, risk-b ased inf orm ation security strateg y integ rating solutions th at address b usiness needs, com pliance req uirem ents and enterprise risk m anag em ent ob j ectiv es

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ContactsMarc-Andre GiguerePartner, Canadian Financial Services Insurance Leader+ 1 4 16 9 4 3 3 9 9 4m arcandre. g ig uere@ ca. ey. com

Walter RondinaSenior Manager, Financial Services Insurance+ 1 514 8 7 9 27 6 5w alter. rondina@ ca. ey. com

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