The road ahead for insurance organizations

Insurance board members play an important role in charting the course for the organizations they oversee. Several drivers account for the shift in focus and Canadian insurance organizations and board members should be seeking information to understand both the opportunities and the risks as they anticipate forthcoming change.

To start, the regulatory environment has continued to intensify this year with new legislation focused on ESG requirements and with many companies still working to ensure compliance with the International Financial Reporting Standard (IFRS) 17, which came into effect in January 2023. As part of the adaptation to IFRS 17, insurers have concentrated on automating many business processes and reducing the burden on employees, clients, and partners. Now, in the return to business as usual, they’re taking lessons from that experience and assessing their success in these areas and where else this can be applied to their business.

Insurance board members are therefore surveying the landscape to identify new strengths, address gaps, and leverage transformational opportunities. Until more clarity is available on the regulatory situation as it relates to the banking and insurance sector, board members are focusing their energy on issues such as customer experience, Generative AI, equity, diversity, inclusion (EDI) and ESG.

In embracing ESG, boards – more specifically Audit Committees – will have a responsibility to oversee their organization’s climate risk and ESG reporting. As such, they need to ensure that management teams are closely monitoring regulatory developments and updating the board in a timely manner. However, this is only half of the equation. ESG innovation can drive value creation and help organizations to become more resilient in the face of rising ESG related uncertainty.

The global tax environment is also having an impact on insurance board priorities and outlooks. Canadian insurance organizations are looking specifically at BEPS 2.0, the OECD and G20-sponsored joint initiative on Base Erosion and Profit Shifting. They’re focused on what impact the Canadian application of BEPS 2.0 may have on dividends, given its proposal of a minimum tax rate for multinational corporations. As a result, many organizations are contemplating restructuring plans that will maximize returns under BEPS-related tax treatments.

Given this context, here are the most pressing challenges insurance organizations face in the days ahead, and ways that board members can seize the moment to ensure they stay ahead of the curve.

The past few years saw employment and learning shift to digital channels overnight. While digital transformation was already taking shape in many industries, including insurance, the speed of the digital shift took some companies by surprise. Consumers took to digital touchpoints easily and now expect seamless digital interactions from service providers across sectors.

The shift to remote work also had a profound impact on travel patterns and travel behaviours, leaving automobile insurers in a challenging position. People and businesses used their vehicles much less frequently and the rate of accidents dropped to an all-time low during the peak of the pandemic. Now, the rate of cars on the road is back to pre-pandemic levels, however, hybrid work continues to impact the time of day that cars are on the streets. These shifts have an impact on premiums and driving behaviors of customers. As a result, an increase in the use of telematics or a focus on usage-based insurance provides insurers with an opportunity provide more personalized and niche coverage to their customers. With these changes, the focus on data and analytics, pricing, accurate reserving, and benchmarking insights remain priorities for high performing insurers.

Alongside changes in customer behaviour, it’s important to remember that customer acquisition costs are nine times higher than customer retention costs.¹ To maximize revenue while keeping costs in check, insurance organizations need to enhance the retail customer experience. The best way to do that is by meeting customers’ digital service expectations and offering products that reflect their circumstances and suit their needs.

Board members should ask:

• Is the organization planning to make investments needed to align with customer's digital preferences?
• Is our overall business strategy aligned with the products, services and experiences customers expect?
• Are we monitoring the right key performance indicators (KPIs) to ensure our business priorities and strategic vision is aligned with customer expectations?

High performing boards are focused on and embracing AI as a pillar of their digital activities. As insurance boards review their strategic plans, digital transformation and regulatory changes must be on the CEO's agenda. Boards need to be up to speed with risks, ethics and innovation associated with AI to ensure they are in a position to help manage adoption with agility and safety in mind.

It’s not enough for board members to talk about leveraging Generative AI, machine learning (ML), and other advanced technologies. They need to practice what they preach, become digitally literate, and bring innovation to the top levels of the organization.

For example, AI- and ML-enabled predictive analytics are revolutionizing core insurance applications, from risk assessment to Customer Lifetime Value (CLV) prediction, actuarial modeling, and fraud detection. ML algorithms are helping insurers collect and analyze vast amounts of data to make more accurate risk assessments and proactive decisions. Those deep insights are also helping to enhance product and service offerings, and lower costs.

Leveraging these opportunities is a crucial differentiator in a changing insurance sector. Advanced technologies are helping identify and build products for emerging niche market segments, such as non-life insurance, travel, and protection against cyber threats or climate change, and are helping organizations settle claims faster and provide more targeted products. While many insurance leaders are already using or planning to use Generative AI, there are two ways board members can think about it: first is how it can be applied in practice to drive business value and the second relates to the roles the various functions need to play in the adoption and acquisition of Generative AI tools and services.

The goal of any AI or product innovation strategy should be to create a competitive advantage in the marketplace. It requires doing something differently at a pace that suits the strategy. As board members, the priority should be to emphasize balanced risk-taking without smothering innovation. Management needs enough leash to feel supported in their interest in and capability to innovate.

Board members should consider:

• What does Generative AI mean for strategy and risk planning?
• How can we ensure that emerging technologies like Generative AI do not create biases?
• Is the organization ready to adapt their ways of working to fully leverage advanced technology and create value?
• Have you considered the importance of a solid data foundation to support decision-making?
• Has the business properly assessed the data and training requirements to embrace and implement Generative AI?
• How will the business manage the life cycle of an idea from origination to decommissioning?
• Does the organization have a framework to assess business value of new technologies using metrics that go beyond traditional metrics of cost and speed?
  

A tight labour market and cultural and generational shifts have put work and work-life balance under the microscope. That altered perspective has changed the way many organizations view talent, support employees, and develop leadership. While hiring and career discussions used to focus on compensation and succession planning, they’ve broadened to include learning paths, diversity, inclusion, mental health, as well as child and elder care obligations.

Recent employee and organizational experiences have provided the right set of circumstances to bring more benefits and opportunities to various talent groups by evaluating hiring and recruitment processes and adapting to hybrid and/or remote work opportunities to better serve their workforce. Board members of insurance organizations need to ensure that the progress made on diversity and inclusion doesn’t fade and is factored into their hiring strategies going forward.

To build a culture of success, boards need to recognize biases and tackle them head on. It’s no longer sufficient for boards to talk about diversity across the organization. Boards should assess their own diversity and inclusivity and address any gaps - this could include diversity in board recruitment and HR processes. The Chair should take steps to ensure that every person has an opportunity to share ideas and opinions at every meeting. As a voice of the organization, the board should live the same culture they work to promote within the organization.

Board members should ask:

• What KPIs should the organization embed to ensure hiring and talent attraction are free of organizational biases?
• What can we do from a strategic perspective to ensure our organization is attractive to top talent?
• What can we do as a board to ensure that progress made in diversity won’t be lost?
• What concrete steps are we taking as an organization to support diversity and inclusion in all areas of our business?

Insurers have a unique role to play in the fight against climate change. They have the capacity to make meaningful investments in infrastructure to support climate change mitigation and resilience, and their risk management expertise can help governments, companies and communities adapt and evolve.

However, it is in their role as an underwriter – particularly paying out claims when customers suffer climate- and severe-weather-related losses – where they are most affected by the risks associated with climate change.

In fact, the global Taskforce on Climate-related Financial Disclosure (TCFD) has identified the financial sector – including insurers – as one of the sectors expected to be the most impacted by climate related risks, not to mention the downstream impact that exists more broadly through re-insurance.

As a result, insurers are reconsidering their tolerance around insuring certain types of business activities or within certain markets or geographic areas while increasing their focus on developing innovative products that better protect customers and tangibly address a broad scope of environmental, social and governance factors.

This refocusing necessitates increased dialogue between management and the board to discuss matters of value creation and risk management. Boards need to ensure organizations are moving toward action, and there are several considerations to weigh.

Board members should be comfortable that management has a firm grasp of the changing regulatory landscape on ESG matters both today and down the line. For example, OSFI B-15 requires insurers of a certain size to demonstrate and disclose details on governance, strategy, risk management and metrics and targets regarding climate risk. In addition, the first two IFRS® Sustainability Disclosure Standards have been published and become effective on January 1, 2024 (however are still considered voluntary until mandated by jurisdictional regulators in Canada). It is important for board members to understand the requirements and related timelines for implementation of these new standards which are an important part of the emerging suite of sustainability reporting requirements.

And while voluntary reports may have previously received some Board-level review, the increased scrutiny of these new mandatory disclosures will require more formal governance and oversight. ESG disclosure needs to be considered alongside the organization’s existing reporting governance and control programs.

The board’s guidance and support of management are critical as insurers work to integrate climate initiatives into business strategy, governance, risk management, investment and underwriting decision-making, product design, claims handling and operations. In order to maintain this level of support and oversight, board members can ask:

• How can we focus on ESG in ways that are relevant to our organization, that matter to our stakeholders, and that we can measure and operationalize?
• How can we help ensure our sustainability-related information is of the same quality and provided at the same time as our financial statements?
• How are climate initiatives and related risk management being managed throughout the organization?
• Are we supporting and advocating for the development of new products and services in a similar manner to how we would for any other business investment?
• Are we as the board being exposed to climate perspectives from across the organization or are we only hearing from one person (e.g., the CFO or CSO)?
• Do we as the board and management understand and agree on the expected timeframes around climate change investments?
• Does the board or management need to undergo any upskilling or training to fully understand the regulatory environment surrounding climate mitigation and disclosure?

Going forward, boards need to prioritize agility, stay abreast of risk, embrace innovation, and invest in business resiliency. On one hand, that means balancing the lessons learned from the past few years on customer, supply chain, talent, and ESG challenges, while also governing during times of uncertainty. On the other hand, boards need to continue to transform in new directions by exploring the use of new technology to help monitor risks and execute on their roles. Board members occupy key positions as internal advisors with broad experience who work for change inside an organization.

The best way to vitalize that interior is by bringing in new lessons and best practices from beyond the boardroom, for example through external risk advisors, and inspiring management to do things differently when it comes to internal audit plans and strategy. Board members should consider whether these issues are already being addressed by existing committees, or if new committees need to be formed.

KPMG in Canada’s advisory, audit and tax professionals can help insurance organizations lead the way in today’s challenges with confidence and creativity. Our professionals work side by side with all levels of the organization to help explore the use of technology and monitor risks in order to maintain oversight and governance. Our risk advisors help design and implement innovative technology, hiring, and internal audit, ESG and management strategies that can build resilience and promote growth.

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