2017 EY Canadian life insurance outlook

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Executive summary

The Canadian life insurance landscape continues to face numerous changes as it heads into 2017. The digital revolution, in particular, continues to be a major disruptor, affecting how insurers innovate their operations and how they reach their customers. Adding to that are ongoing regulatory pressures, a change in the capital regime, tax changes for policyholders, political and economic uncertainty and a widening talent gap, all of which will combine to influence how insurers tackle the year ahead.

Insurers need to adapt to the new solvency standard, which will likely be ready for implementation in Q1 2018. Canada’s Office of the Superintendent of Financial Institutions (OSFI) has issued the final version of its Life Insurance Capital Adequacy Test (LICAT) for federally regulated life insurance companies. Effective 1 January 2018, the LICAT will replace the Minimum Continuing Capital and Surplus Requirements (MCCSR), which have been in place since 1992. LICAT not only results in a new capital ratio, but also changes the sensitivity of that ratio to changes in the business and economic environment.

The focus of technological innovation continues to shift from cost reduction to reinventing products and business models. Insurers will need to look deeper into game-changing technologies, such as artificial intelligence, blockchain and behavioral analytics.

Data, and how it’s managed, is also a major driver of technological advancement. Insurers have been working to organize high volumes of scattered data into accessible, consistent formats to help them not only meet regulatory and customer demands, but also to develop a framework for the next stage of digital transformation and the next wave of changes in the accounting framework.

On the InsurTech front, insurers will build on the progress they made in 2016 and take further steps to cultivate their capabilities. Some are integrating InsurTech into their business models through acquisitions and partnerships, while others will create internal innovation labs to weave InsurTech into the fabric of their businesses over the longer term.

Global economic weakness and volatility will continue to affect life insurers in 2017. Emerging markets are seeing slower growth than in recent years, and financial volatility is increasing. With the handover of the US presidency to Donald Trump, a political outsider, the future course of the US economy, which greatly affects Canada, is uncertain.

With a large percentage of the workforce retiring in the years ahead and digital transformation accelerating, insurers will need to assess and address their talent needs. They’ll want to focus on areas that could be handled through robotics or artificial intelligence, but also on what strategic, interpersonal and analytical tasks they’ll need to be done by people. They will need more digital expertise, such as cyber security, social media and blockchain specialists, and digital marketing and customer care executives. They’ll also need to understand the mindset of millennials, who are fast becoming a major part of the workforce.

In all, 2017 will be a year of disruption. Those insurers who view it as an opportunity and seize its potential will be positioned to succeed in the years ahead.

Impact of external factors on the Canadian life insurance market in 2017

(1 = low impact, 10 = high impact)

 
Regulations

Regulations

Ever-increasing regulations and new accounting standards will present significant challenges as well as opportunities to insurers in 2017 and beyond. The insurers who will rethink their business model to unlock value from the new environment will be the industry leaders of the future.

 
Technology

Technology

Insurers will continue to drive cost savings and innovation through core technologies, such as robotics and analytics, while exploring new tools such as artificial intelligence and blockchain. Incumbents will be keeping a close eye on InsurTechs, which now have US$4.6 billion in funding.

 
Economy

Economy

Stubbornly low interest rates, combined with mediocre Canadian growth, will put continued pressure on insurers‘ margins, investment returns and credit fundamentals. A new Trump Administration in the US as well as the Brexit in the EU add greater economic uncertainty, with economists divided on the potential impacts.

 
Customer expectations

Customer expectations

The convergence of demographic, regulatory and technological change will raise expectations for a more digital, personalized and seamless customer experience. Simpler products and a holistic financial orientation will become prerequisites as insurers strive for true customer centricity.

 
Talent

Talent

With insurance professionals retiring, and digital transformation accelerating, insurers will face a wider talent shortfall in 2017. Forward-looking insurers will focus on attracting and retaining data scientists, cyber risk specialists and other talent to capture their future.

Strategic priorities for 2017

Political turmoil, economic pressure and disruptive innovation will continue to redefine the 2017 business environment for insurers. The impact of these changes will be felt across organizations — from compliance, risk and asset management to product development, back-office operations and advisor roles. To navigate through this uncertainty, life insurance executives should set the following strategic course for their firms:

Specifically, leading insurers will focus on the following path to change:

 

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2017 EY Canadian life insurance outlook
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