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GERMAN RUN-OFF FORUM
Ian Betley
VP FS Sales Europe and ASIA and Not-so-Great-Britain
31st March 2017
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BREXIT BLOCKCHAIN & BAFIN (CHANGE)
• The world has changed rapidly - will the right wing continue to rise
• It could be worse I could be American BREXIT
• Technological advancements changing the way business will be done has accelerated exponentially BLOCKCHAIN
• The insurance industry needs to respond
• The regulator needs to support the response –they can’t just represent stability and certainty they have to represent innovation and change
BAFIN / REGULATOR
Current speed of change
2016 was just unimaginable
The most successful insurance company of this
next generation doesn’t yet exist (McKinsey)
Denial ? What is change ?
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BREXIT
Leave campaign built on fear and lies Remain campaign complacent and disconnected from anywhere outside London
We now have people trying to implement something that they don’t want to do, have no plan how to do it, & where the perceived outcomes are based on fabrication.
It’s a lose / lose scenario. Democracy has failed; the stupid & the racist have divided England (& the UK)
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JUNE 23RD – WHAT HAPPENED
Turnout in London Area 62% Turnout in Rest of UK 80%
Average 72.1%
Voting population in London and surrounding area 14.25m Approximate missing votes to meet average turnout 2.6m
Forecast remain (73%) v leave (27%) 1.90m v 0.7m = c1.2m
Difference in the result c1.2m
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WHY THE LOWER TURNOUT ?
Tony Cross, analyst at Trustnet, says:
There can be little doubting the way that
sentiment has swung round – in the region of
£100bn has been added to London’s blue
chip equities since those lows last Thursday,
and the market is pricing in less than a 25%
chance of the Leave camp now winning
The Met Office - torrential rain and thunderstorms caused widespread flooding in the south-east on the 23rd, coinciding with EU Referendum Day. London Fire Brigade said it had attended more than 400 incidents, including properties hit by lightning, and polling stations in Kingston and Barking had to be closed due to flooding
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WHAT NOW ? – THE INDUSTRY ASK • There is a definitive risk that negotiations may diminish the UK’s global position
• However we want an ideal world of
• Third country status as a foundation for reciprocal authorisation recognition regime and continued access to the EU financial service marketplace under RAR, with a continuation of passporting
• Access to EU skills with no restriction on families
• An implementation date earliest 31st Dec 2020 or minimum 3 years transition post agreement including the provision to service products pre-brexit for the life of those products
• An ability to delegate with individual EU members and visa-versa, but hold the position of a global free trade hub
• A revised visa arrangement for non-eu professionals and their families
• Seen as an attractive domicile for global funds and ‘easy to do business with for EU members for traditional new generation and fintech
• That the key features of the EU directives and regulation will be retained
• Failure to agree the above will be bad for the EU, bad for the UK, and bad for EU Customers
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HOW HAS BREXIT AFFECTED IFDS?
AND A BIT OF BACKGROUND
WHO ARE IFDS • Europe’s largest provider of insurance and investment administration services with 60% market share in the UK -16m
customers across 205 clients. Worldwide 150m accounts.
• No1 Investors in customers for 2015 2016 – NPS 92 the highest ever
• Owned by State Street Bank and DST Systems – until last Monday and is now wholly owned by DST
• Rapid and successful service diversification into Life and Pensions and Wealth Management over the last 5 years
• Completion of multiple next generation outsourcing deals in the last 3 years with 2 more imminent this year
• Brexit has made us, like others, change our operating model and location strategy. On the counter-side the VAT exemption we have for insurance and asset servicing may create UK and Ireland opportunities
AND ME… • 23 years in Financial Services outsourcing – including technology replacement, rationalisation, ITO, BPO, offshore,
transformation
• Working with approximately 30 FS Institutions per year solving their problems or supporting their opportunities
• Current initiatives
• Run-off migration of acquired annuity back books to create ‘run-off annuity acquisition engine’
• Data-Driven (Post GDPR) Life products – major disruptor for UK Market
• Rationalisation of FX function for major bank into a global facility with real-time data driven customer management
• Blockchain and AI next generation platform for asset management
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Some of our clients A diverse group of companies who recognise the value of our shared services
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THE KEY COMPONENTS IN LIFE RUN OFF / CLOSED BOOK
Closed book
potential value
Mortality Risk
Operational Cost
Embedded / Lifetime
Value
Investment Performance Operational
Cost
Processes
Technology
Regulation, Risk and
Compliance
Customer Value
People
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REGULATION IS CRUCIFYING THE UK INSURANCE
SECTOR?
• Solvency II Directive
• Auto Enrolment
• RDR • OFT Review
• FCA Retirement Income Study feedback
Pre 2014 2014
Q1 Q2 Q3
2015
Q1 Q2 Q3
2016
• FCA thematic review of treatment of legacy customers
• Workplace pensions fee cap • Budget announcement on annuities • FCA Retirement Income study
• Removal of Life Assurance Premium Relief • New pensions freedoms • FCA thematic review of fair treatment of legacy
customers feedback
Regulation has been the leading driver of change in the industry – Increased focus on closed books
• Solvency II preparation and implementation
GDPR followed by MIFID 2 will further increase the regulatory spend (currently estimated to be in excess of 20% per year
and the biggest industry challenge) – estimate 75% of insurers will fail - £122bn of fines – up to 4% GTO and a new wave
of ambulance chasing
Insurance companies in fear of back dated fines for regulation breach ‘described as easy pickings’ e.g. Standard Life
yesterday set aside £175m for their Annuities back book
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THE OTHER ‘REAL’ CHALLENGES
LEGACY TECHNOLOGY WITH POOR QUALITY DATA SPAGHETTI OF SYSTEMS CAUSED BY MERGERS AND TACTICAL SOLUTIONS PROCESSES EMBEDDED IN PEOPLES HEADS, WITH MANY MANUAL WORKAROUNDS STAGNATION OF THE WORKING POPULATION Poor quality staff – with no design or implementation skills
Lifers in the business – seniority is defined by ‘service length’ not ability
Union protected
Public Sector / Fiefdom culture
SHORT-TERMISM VIEW OF ANY CHANGE OR TRANSFORMATION The conflict of interest between a life policy and an annual executive bonus
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THE PREDICTED CHANGE IN OPERATIONS
0 50
100 150 200 250 300 350 400
Front Office
Middle & Back Office
Support Services
IT Run
IT Change
ASSUMING BOOK SIZE OF 1 MILLION POLICIES
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So what’s happened in a just over 2 years?
•DIGITAL + / DATA DRIVEN EXPERIENCE
•ROBOADVICE
•AS-A-SERVICE
•COLLABORATIVE UTILITY
•RPA
•BLOCKCHAIN AND AI
Example RPA
Nearshore / Offshore €12000
Robot licence and run €4000
3 shifts per day € 1350
Current Administrator €30000 pa
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From this
To This
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BLOCKCHAIN
“A successful company 10 years from now will be the one who has been the quickest to
radically change the operational base it runs under.”
Anne Richards CBE, FRSE, Chief Executive Officer, M&G Investments
“Blockchain is developing much faster than anyone expected. To think the impact to your
industry is many years away is very risky”
Angus Champion de Crespigny Financial Services Blockchain and Distributed Infrastructure
Strategy Leader
Ernst & Young LLP (US
IFDS was the first company to use blockchain for a cross-border payment onto a TA ledger – the cost and people implications of that are a 95% reduction
IFDS are working with Deloitte on the future operating model for TA and Insurance – of the 20 core processes mentioned later13 could be highly impacted (80%+) by blockchain
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BLOCK CHAIN EXAMPLE
BLOCKCHAIN (DLT), HAS CAPTURED THE IMAGINATIONS AND WALLETS OF THE FINANCIAL SERVICES ECOSYSTEM
Global interest
Bank experimentation
Research
Central Banks
Venture Capital
Consortium efforts
BLOCKCHAIN (DLT)
ACTIVITY
24+ countries currently
investing in DLT
2500+ patents filed over the last
3 years
90+ corporations have joined blockchain
consortia
90+ central banks engaged in DLT discussions worldwide
Over US $1.4 billion in investments over the past 3 years
80% of banks predicted to initiate DLT projects in 2017
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CHANNELS: EXISTING V PREFERENCE
-38%
Phone
-35%
+40%
Online
-84%
Post
Source: Consumers, Claims and Key Concerns| © 2016 DST Systems, Inc.
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THE WAY CUSTOMERS WANT TO ENGAGE WITH YOU
0
10
20
30
40
50
60
70
80
90
100
Age 25 Age 50 Age 70
Primary Digital
Would Research
Would Seek Professional Advice
Visit Bank
Bank Loyalty
Digital Native Digital Adopter Digital Curious
Line of commoditisation
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SUCCESSFULLY EMBRACING DIGITAL
Analytics and digital by design
Digitised business processes
Technology strategy
Business transformation strategy
Corporate culture & organisational DNA
89% of insurers do not use past interactions to support product
recommendations or customer journeys
More than 50% of an insurers costs are embedded within the top
20 core processes
Only 9% of insurers feel they have mastered digital to a point of
differentiation from their competitors
81% of non-life and 48% of life companies believe they will lose
customers if they don’t embrace digital
68% say internal culture or corporate structure is a constraint to
business change
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SUCCESSFULLY EMBRACING DIGITAL
Analytics and digital by design
Digitised business processes
Technology strategy
Business transformation strategy
Corporate culture & organisational DNA
Understand your customer and your decisions on how to engage
Maximise automation - abandonment of front office / back office mentality
Buy partner and ‘adapt’ approach – Two speed IT architecture approach and segregate old from new
Define your vision and overall strategy to transform – it’s not about fixing the old
Ensuring Talent management and organisational behaviour is structured to innovate and support digital
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INVESTMENT: CONFLICTING PRIORITIES?
How can you make real digital transformation happen with so many conflicting priorities?
What Drives
Successful Business?
CEO
Shareholder Value
CFO
Controllable Cost Base
Chief Actuary
Product Design
CTO
Modern Technology
Stack
CIO
Digital / Multi-
Channel
COO
Operational Streamlining
CMO
Distribution
Tactical tinkering?
CUSTOMER
Strategic alignment?
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THE CLOSED BOOK OPPORTUNITY
The Legacy / Closed books
Inforce customer Segmentation
Product swap
Upsell / Cross-sell
Retain and Serve
Lowest Service Cost
Transfer to wealth
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Closed book – release the embedded value
Low Value but potential
Upsell and Cross-sell more products
High Value in Transition
Engage & Transfer to wealth platform
Offer new products for at and post retirement
Low Value
Service at lowest cost of ownership
High Value
Engage protect and provide excellent customer experience
Closed Book
Strategy
Customer Value
Customer Potential
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Focus on asset retention and embedded value
0
200'000
400'000
600'000
800'000
1'000'000
1'200'000
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Lapse 9%
Lapse 11%
Difference in total policy years over 10 years at 9% lapse rate to 11% is just under 1,000,000 =£227m increase in EV based on a £40k per policy premium
Will reduction in operational cost, regulatory risk improve cost certainty and significantly improve embedded value as well ? ….we are certainly looking to eliver
outcome based pricing on improved EV
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CONCLUSIONS
• THE OPERATIONAL COST AND CUSTOMER MANAGEMENT OF RUN-OFF CAN POTENTIALLY BE MORE AND MORE INFLUENTIAL IN MEASURING THE FUTURE VALUE OF CLOSED / RUN OFF BOOKS
• THE INSURANCE INDUSTRY NEEDS TO REALISE THAT IT IS NOT SUSTAINABLE IF IT CONTINUES AS IS
• TRADITIONAL will mean OBSELETE
• CONSERVATIVE will mean CLOSED BOOK
• IGNORANCE will mean FINES AND BRAND DESTRUCTION
• ARROGANCE will mean FAILURE
• CHANGE WILL MEAN SURVIVAL
