Showing posts with label Insurance. Show all posts
Showing posts with label Insurance. Show all posts

Thursday, 11 August 2016

The unstoppable rise of robo-advisors

The Financial Times estimates that the market for funds advised by hybrid robo-human services will grow to $16.3 trillion worldwide in the next nine years. According to Swiss financial research company, Myprivatebanking.com, pure robo-advice has jumped from $19 billion in 2015 to $43 billion in 2016. The rise of the robo-advisor appears to be unstoppable and is key to the opening up of wealth management to the mass market. There are a number of reasons why this is happening and why now.
·         Low interest rates
With interest rates at record lows, virtually zero or negative in many parts of the world, savers are looking for places where they can get a return on their money as an alternative to putting it under their mattresses and seeing rising inflation eat away at the value of it faster than the moths.
With cheap funding available from the central banks the high street banks, who have traditionally used savings accounts to fund their lending activities, are no longer interested in competing for consumer savings. The days when the likes of ING Direct were fighting for savings at attractive rates have gone.
·         The disappearance of affordable investment advice
Governments have introduced legislation such as the UK’s Retail Distribution Review that was designed to raise the quality of the advice that customers received from their financial advisors and to make the charges paid to advisors far clearer. This well intentioned regulation has resulted in the disappearance of affordable wealth advice for the mass market from the high street. The banks, many insurance companies and Independent Financial Advisors (IFAs) deciding that the cost involved in training the staff to meet the new standards for the significant reduction in the revenue from selling investment products (as both upfront and trailing commission, largely invisible to customers, was banned and replaced with explicit upfront fees) was simply not worth it.
·         The demise of the star active fund manager
In a rising market it is relatively easy to appear to be a successful fund manager, particularly when your low risk investment strategy is largely to shadow the indices in the markets you are focused on. Even the star performers who have been hugely successful in the past have been seen to be human – the challenges that Antony Bolton had with his Fidelity China Special Situations trust and Neil Woodford has with his Patient Capital Trust illustrate how difficult it is for active funds to consistently perform. Increasingly and particularly during periods of economic uncertainty and turbulence in the markets it has become evident that the majority of active fund managers fail to outperform passive index trackers, even more so when the charges for these funds are taken into account.
·         The emergence of Exchange Traded Funds
In 1993 the first Exchange Traded Fund was launched and there are now several thousand of them. An ETF is a marketable security that tracks an index, a commodity, bonds or a basket of securities like an index fund and because it is traded on a market is priced throughout the day unlike mutual funds. Amongst the reasons that the emergence of ETFs is influencing the rise of robo-advisors is that they generally have very low costs, they have a low entry price (buying one share is possible) and because they operate like an index it is very easy to automate the management of the fund.
All robo-advisors have been built around ETFs as the core funds in the portfolios that they recommend to their customers.
·         Increasing trust in computer generated recommendations
With consumers increasingly trusting personalised recommendations from the likes of Netflix, Spotify and Amazon there is far more acceptance that artificial intelligence can be relied upon. This is further boosted by the considerable loss of trust by consumers in the people within the Financial Services industry following scandals such as the mis-selling of Payment Protection Insurance (PPI), fixing of the LIBOR and FX markets and the 2008 market crash.
·         The low cost and availability of supercomputing and the cloud
Without the dramatic drop in the cost of supercomputing and the ability to deliver it over the cloud the sort of services that robo-advisors can offer would not be possible. The Independent Financial Advisor used to have the advantage of having information superiority and exclusive access to financial models – this has been taken away by the pervasiveness of information and the ability to deliver supercomputing to mobile devices. Algorithms that used to require a Cray to process can now be delivered via the cloud to an iPhone, tablet or android device. This allows the ordinary person through their robo-advisor to take advantage of sophisticated tools such as algorithmic trading.
·         The ability to process structured and unstructured data in real time
With high volatility in the markets and with 24x7 newsfeeds then the ability to process both structured and unstructured data, including sentiment analysis, all in real time reduces the risk involved in investing in the market. This provides the robo-advisor firms using AI to flex the recommendations and portfolios in real time.
Who are the key players?
The market was started in the US with the likes of Vanguard, Betterment www.betterment.com/, BlackRock’s FutureAdvisor www.futureadvisor.com, Charles Schwab’s Intelligent Portfolio https://intelligent.schwab.com/ and Wealthfront www.wealthfront.com/
In Europe the key players are currently MoneyFarm www.moneyfarm.com, Nutmeg www.nutmeg.com, Swanest www.swanest.com (still in Beta) and Yomoni www.yomoni.fr
With the potential size of the market it is likely that not only will the large US players bring their offerings to Europe but others from within Europe will enter the market. This will be thorough a combination of three ways:
·         Banks and asset managers building their own robo-advisors using platforms that can manage structured and unstructured data in real time such as SAP’s HANA, advanced analytics tools, AI and cognitive computing
·         Partnering with an established robo-advisor platform provider. This could either be on a white labelled basis or leveraging the robo-advisor brand. Fidelity originally did this with Betterment until it decided to build its own solution. In the USA BBVA and RBC are both partnering with Backrock’s FutureAdvisor.
·         Fintechs entering the market in a similar way to Moneyfarm or just like Solarisbank www.solarisbank.de has done for banks offer robo-advise as a service to business both within and outside financial services e.g. retailers
 
A significant threat to the relationship with mass affluent and wealth management customers
The low cost to consumers of buying a funds portfolio using robo-advisor technology is significantly increasing the market size for what has traditionally been seen as wealth management. With many banks and insurance companies abandoning the provision of financial advice to the      mass affluent it is also providing a significant opportunity for new technology enabled players to enter the market. This is a significant competitive threat to established players who persist in only using traditional channels. It also threatens the relationship banks have with mass affluent customers and risks relegating banks to simply providing low margin transactional services.
Now is the time to act.

Wednesday, 17 December 2014

Life isn't all about migrating books

Why is it that acquisitions of Life & Pensions companies and books don’t realise the benefits that are stated at the time of the deal?

On the face of it bringing L&P companies and books together should be a sure fire way to make a lot of money from rationalising the systems, reducing the staff employed in back offices and closing head office functions.

However time over time the benefits realised are far less than expected. You only have to look at the TCS acquisition of the Pearl’s business in their Diligenta vehicle or the Resolution acquisition of Lloyds Banking Group’s closed book L&P business to see that these acquisitions are not simple.

Why is this and what can Aviva do to learn from the past to ensure that they are more successful than others, including Friends Provident, have been at maximising the benefits of bringing Life & Pensions books and IT together?

Pragmatism is key to realising the benefits

By taking an altogether more pragmatic approach than their predecessors and taking more pain early Aviva has the opportunity to gain far greater benefits in the longer term than previous integrators.

One of the principal reasons that previous deals have proved to be more difficult is that they have looked at the consolidation of the L&P books as an IT Programme rather than a business programme. They have tried to answer the question how do I bend my existing systems to cope with the new products that I want to migrate onto my platforms?

However the question that they should be asking is a commercial one and that is what is the case for migrating any of the books onto the target platforms?

Pensions are different from other products

The problem is specific to the closed book Life & Pensions industry.

There is a big difference between pensions and other types of products. Most products have a shelf life that can be measured in months or at best a few years. The life of a pension product is measured in decades, theoretically for as long as the last customer is still alive. To add to this there are also lots of different variations of products. The reason for this is that pensions products are designed by actuaries. Actuaries are incredibly smart people who love to create complex mathematics models to calculate when customers are likely to die and therefore how to ensure that a product makes a profit by paying out less than it takes in contributions. The character of actuaries has led to them designing pension products that are esoterically pleasing to them, incredibly difficult to understand for the average consumer and highly complex which has resulted in nothing such as a standard pension. The low boredom threshold that actuaries have has resulted in lots of different products rather than sticking to a product that worked for most customers. This means that any Life & Pensions company that has been around for even a few years will have a large number of pension products and often (particularly for products that were created many years ago and where most of the customers have subsequently died) low volumes of customers.

The reason that these products are highly profitable is because they were designed to be complicated so that no normal customer would be able to understand how the products work, particularly how the charges are calculated and how much of the pension contributions that the insurance company retains.

The result of this is that in order to maximise the benefits from integrating the Friend’s Provident books Aviva should classify the books into three groups.

Books need to treated in one of three ways

The first group is those books which are either too small and/or too different from Aviva’s existing systems and requiring too much manual work to support to justify migrations. For the customers of these books Aviva should consider buying them out of the products or offering to swap them into a modern product. While this will cost Aviva in the short term it will both save them in the longer term and potentially buy them goodwill from those migrated customers.

The second group is those books which are too different from Aviva’s existing books but still have sufficient volume and generate sufficient cash. These books they should resign themselves to keeping on the Friends Provident systems and find ways to reduce the cost of running those systems through renegotiating terms with outsourcers or looking at alternative ways of supporting those systems such as in the cloud or paying on a process as a service (PaaS) basis.

The third group is those books which are sufficiently similar to Aviva’s existing books that the changes to the existing platforms will be minimal and the benefits of migrating them onto the Aviva systems significantly outweighs the cost of the migration.

Can Aviva learn the lessons of the past?

Of course the reduction in platforms and the rationalisation of back offices and call centres are only two of the primary drivers of benefits for the integration of Aviva and Friends Provident. There is also the rationalisation of Head Office functions which should release further costs.

However the primary reason that Aviva wants to acquire Friends Provident is the reduction of capital that will be required as a result of all the cash that the closed books of Friends Provident throws off. This will not be realised unless Aviva learns the lessons from the past and takes a very pragmatic, commercial approach to the integration accepting the financial pain in the short term will be worth it in the long term.

Thursday, 22 November 2012

A Change of Strategy for Aviva?

The announcement of the appointment of Mark Wilson, the former CEO of the largest Insurance company (excluding China) in Asia, AIA, as CEO of Aviva from January 1st 2013 has been greeted positively by the industry. Mark Wilson, born in New Zealand, has spent most his career in South-East Asia both with AIA and AXA.

John McFarlane, the former CEO of ANZ Bank, will resume his role as Non-Executive Chairman. McFarlane spent most of his career with ANZ Bank and Standard Chartered Bank. At ANZ he set a strategy for the Melbourne-based bank of expanding into South-East Asia and it is today the Australian bank with the largest footprint in Asia. Standard Chartered whilst Head Officed in London has Asia as its biggest market.

Back in November 2010 Andrew Moss, the CEO of Aviva at that time, announced that Aviva was withdrawing from Asia to focus on the mature Western European markets (see http://www.itsafinancialworld.net/2010/11/aviva-to-exit-asia.html ), a move that was seen at the time very much as swimming against the tide as the likes of HSBC and Prudential were rapidly expanding there.

One has only to look at the difference in growth between the Prudential (once the target of a hostile takeover by Aviva, which the then Prudential CEO Mark Woods rapidly rejected) and the Aviva to see who had the better strategy.

The new CEO will inherit a clear strategy that John McFarlane in his time as Executive Chairman has laid out that is focused on the exiting of 16 non-performing business segments, including their US business. With challenges in their Spanish, French and Italian businesses and the increasing demand for capital from new regulation such as Solvency II, in the short term there is little opportunity for Aviva to reverse the exit and rapidly expand in Asia. There is an inherent danger that Aviva could end up following the restructuring, including the inevitable significant write down on exiting or disposing of their US business, becoming effectively a UK only insurance business at a time when the UK insurance sector is looking increasingly unattractive given the impact of RDR (the Retail Distribution Review legislation) and the slow growth in the economy.

However it is highly unlikely that an executive of Mark Wilson's calibre would have taken the role at Aviva to run a UK only business. With Wilson's track record of transforming AIA and the combined Asian experience that the Chairman and the Chief Executive have there is little doubt that they will both be looking East for the future growth of Aviva.

Monday, 5 November 2012

Why Sandy could be good for the Insurance industry


There is no doubt that Superstorm Sandy has wreaked damage across both the Caribbean and the east coast of the United States of America. To the layman claims of $15-20bn sounds like a financial disaster for the Insurance industry. However the financial consequences of Sandy may be positive for the London Market and the Commercial Insurance sector in the long term.
It's a financial world (iafw)  talked to Christopher Ling (CL), Commercial Insurance expert and Head of Insurance for BearingPoint in the UK to understand more about why Sandy could have long term benefits for the industry as well as the short term causes. We started by asking him about the size of the loss.
CL: In terms of financial loss this is a medium severity Catastrophe Loss. This makes it large enough for the market to think about buying more reinsurances in the near future without the reinsurers being impacted by a major loss. Rates and hence margins will rise. Sandy should act as a stimulus in encouraging US primary property insurers (more attractive than US liability business) to go out an place orders for more reinsurance business in the London Market. This will lead to an influx of  new risk capital and players creating demand for consultancy services, with the consequential increase in fee income.
People will always need Insurance and losses like this, as sad and as dreadful as they are, serve to remind clients and customers of this.
iafw: So who pays for Sandy and how much?
CL: Catastrophe Modelling Agencies have been busy. Economic total loss estimates have been put at  $30bn-$55bn with some $15bn-$20bn needed to fund estimated insurable indemnity losses.
The consensus is primary US general insurers are likely to bear the brunt of the thousands of small to medium flood, wet damage, denial of access and loss of profits claims. The net written premium of Lloyds of London is currently some £24.8bn ($40.0bn). Whereas economic total loss estimates have been put at  $30bn-$55bn with some $15bn-$20bn needed to fund estimated insurable indemnity losses. US Insurable Cat loss estimates tend to exclude claims under the National Flood Insurance Program as well as the significant parts of the Infrastructure and municipal clear-up costs that are likely  arise. The Queens’ fires could hit Cat treaties, but the biggest unknown is the extent of the Loss of Profits indemnity, which is being driven by clear-up resources and prolonged power outages. It will probably be a couple of months before a level of confidence in the final estimate emerges.
The New York Metro could possibly be led by a major underwriter and reinsured around the market. The Power Plants written on Specialty Risks Energy policies, and there will be some Catastrophe Claims – but generally it is likely that many Reinsurers will have been lucky.
iafw: Whilst there wasn't snow in Manhattan a lot of snow fell elsewhere on the eastern seaboard, Why is it important when the snow melts?
CL: The combination of the two air masses led to intense snowfalls in the Eastern USA. As it is still October, it is likely that as well as disruption, the snow will melt rapidly in the next few days. Depending when it melts will impact the future loss severity. If it melts in 2 weeks’ time,  the tides will be on  Springs again, then it is likely that narrower reaches in urban areas will experience significant localised flooding, which will also impact  lower lying areas of New York.    If it melts in 1 or 3  weeks’ time on  Neaps tides that are not so high, then flooding will be markedly less.
iafw: We've seen a lot of natural disasters over the last few years, how have the  Reinsurance Catastrophe Market been?
CL: The Windstorm Catastrophe Reinsurance market losses in recent years have been benign. The market has broadly been profitable since 2005 (Hurricane Katrina and total Catastrophe Losses estimated at US Insurable losses tend to exclude claims under the National Flood Insurance Program as well as the significant parts of the Infrastructure and municipal clear-up costs that are likely  arise. $118bn).  Even through the Japanese Tsunami, Thai floods and New Zealand earthquakes, the market by and large  managed to fund losses out of cashflow rather than its capital base. The 2011 underwriting year was in fact the second largest Catastrophe loss year on record (to 2005) but the strength of the market and its modelling capabilities has resulted in depressed margins rather than recapitalisation calls.
After the losses of 9/11 (2001), which were comparable in real terms to Hurricane Andrew (1992) a whole new set of investors entered the reinsurance and specialty market as rates rose by 30%  over the subsequent 2 years. This was  the “Class of 2002” – several  major Lloyds capital vehicles created to fund and underwrite Catastrophe and Specialty loss business at these increased rates without the baggage and funding commitments of previous Lloyds involvements and losses.
Since 2002, these capital vehicles have generally made very good returns against their A or A+ paper and the reinsurance market has tended to remain profitable, whilst the primary general insurance market is just coming out of the bottom of a prolonged market cycle dip. However, as with the rest of the economy, there has been nothing to stimulate extra demand for insurance – until 4 days ago.
iafw: This was the first time that we have seen Manhattan hit by such bad weather. Why did this particular storm have such a big effect? 
CL: It must be appreciated that losses of this type are dreadful to the average man in the street or to businesses and some deaths have occurred. However, although winds only gusted at 70-90mph, New York was devastated by a much higher tidal “Storm Surge” of 13’11”  (as opposed to the originally anticipated 11”) caused by wind and negative barometric inversion. The offshore islands acted as limited breakwaters and devastation is likely to be higher here.  Importantly, direct wind-damage losses were not as significant as originally envisaged.
This surge led to severe flooding in Lower Manhattan (much of which is below High Water Springs sea-level) and significant flooding on the Lower East-side from Brooklyn to Queens. Over 375,000 people were evacuated and 650,000 households in the NY  were left without power, including all properties below 42nd Street. Furthermore, a power plant exploded in Queens and there was a major fire burning over a 100 properties. Luckily the New Jersey side of New York harbour has managed to escape the brunt of the flooding due to not being in the path of the travelling flood waters.
Outside of New York,  Atlantic City, Ocean City and parts of Baltimore, Maryland etc. were also  severely hit by flooding and Storm Surges. It should be noted that Levee and flood defence building in the US has not taken priority for many years.
iafw: We've heard a lot about 'Storm Surges' and 'Negative Barometric Inversion' during the coverage of this story as being the loss causes - What are they?  
CL: Sea water piled up into Eastern Seaboard  Estuaries leading to flooding caused by a number of combining  factors;-
·         An intense and highly unstable, humid, anti-clockwise rotating, air-mass; colliding with a cold stable clockwise rotating northerly air mass; led  to extremely rapid condensation (torrential rain),  and the air mass being accelerated in a North Westerly direction to at speeds of 23-28mph (and hence waves) straight up the Eastern Seaboard rivers.
·         Extreme low pressure – sub 940Mb literally “sucked” water-levels up, which were already at a peak due to equinoctial  Spring tides. The average global barometric pressure is 1013.2 Mb. A reduction of 1 Mb results in an INCREASE of just under 1cm in sea-level.
The” bath-tub effect” of water surging  up the Eastern Seaboard  Estuaries caused levels to rise even further when reaching geographic constrictions, such as the Long Island Sound, leading to even higher water levels

iafw: Sandy is undoubtedly a human tragedy which will continue to have a devestating impact on people, particularly as the weather gets colder. As was seen after Katrina, it sometimes takes a disaster of this scale to get the investment in infrastructure that could have prevented the worst effects of the storm to be made. For many years it has been obvious that Manhattan was vulnerable to water levels rising and that the equivalent of the Thames Barrier was needed to prevent this. Irrespective of which candidate is elected as President hopefully the lessons will be learnt from Sandy and the necessary investments in infrastructure on the eastern seaboard will be made which will be good for the economy, good for the residents and will be good for the commercial insurance industry. 

Friday, 25 March 2011

RBS to provide insurance to Sainsbury's

Sainsbury's is in talks with RBS  to provide insurance to the supermarket's customers for the next five years. The deal is expected to be announced in June.

This is an interesting move on the part of Sainsbury's since RBS has to dispose of RBS Insurance as part of the price for taking state funding due to the financial crisis. RBS Insurance has been on the market for some time, but there are no indications of a deal any time soon. This is hardly surprising at a time when personal lines insurance, and particularly motor, is proving to be so unprofitable for insurers with the increase in claims for injuries fuelled by the no-win, no fees, ambulance-chasing claims companies. Whilst a few years ago RBS Insurance business, including such well known brands as Direct Line and Churchill, would have sold for a significant premium, now it would be quite the opposite.

Sainsbury's is obviously demonstrating confidence in RBS Insurance being around for at least the next five years, so presumably with so little interest from acquirers RBS must be exploring the idea of a flotation for the business.