We operate in a market steeped in tradition and burdened by a complex legacy of outdated products, systems and business practices. This legacy heightens operational risk and makes it challenging to adapt to the needs of the changing consumer.
I would like to thank the Actuaries Institute for the invitation to speak on the topic – thinking differently about customers.
APRA’s mandate to uphold financial safety – taking into account competition, contestability and competitive neutrality – could not be achieved without the great work of the actuaries. Whatever the future brings, I’m confident that won’t change.
However, the world around us continues to change, not least of which is the growing importance of positive consumer outcomes on entity and broader financial system stability.
We operate in a market steeped in tradition and burdened by a complex legacy of outdated products, systems and business practices. This legacy heightens operational risk and makes it challenging to adapt to the needs of the changing consumer. Operational risk issues can erode consumer confidence and community trust.
We have seen too often how quickly the reputation of a company can be threatened when it fails to meet consumer expectations. Ultimately, this can threaten prudential soundness.
It is for this reason that APRA continues to stress the importance of maintaining a ‘social licence to operate’ – the idea that companies must maintain the trust of the communities in which they operate. Alongside regulation, social licence is an essential element of financial safety and system stability.
Yet, looking ahead, maintaining a social licence and community trust will not be easy without changing the way the current system – and I include APRA, insurers and the actuarial profession in that term – thinks about consumers.
Today, I want to speak to you about the importance of consumer-focused thinking and the need for the industry to resolve the enduring problem of legacy constraints in many insurance businesses.
Legacy and the changing consumer
At its heart, our market is product-centred. Detailed consideration is given to new product features and distribution channels insurers wish to create, and then consumers are fitted into these moulds. But what happens when new risks, such as those presented by the sharing economy, no longer fit traditional moulds?
At a time when insurers need to adapt their business models to meet new challenges and seize new opportunities, legacy directly impedes innovation.
The Oxford Dictionary defines legacy as “something left or handed down by a predecessor”. While there are many positive examples, the less welcome legacies in some parts of the insurance sector are decades of neglected investment in systems, outdated products, poor business processes and ways of working that are not responsive to the challenges of our time.
Today’s new generation of consumers think about themselves and their choices differently. They take pride in their individuality and expect customised services and products to meet their unique lifestyles.
The values of many consumers have changed too. Greater importance is placed on behaviour, transparency and accountability of financial institutions. Corporate social responsibility is not merely appreciated, it’s expected. A global consumer survey conducted by Nielsen found that “nearly three out of four consumers ages 34 and under are willing to pay more for brands that showed commitment to positive social and environmental impact”. 
Companies that have misaligned operational practices with their stated values quickly find out how individuals and groups of consumers react, through social media directly influencing the reputation of a company. For example, consider the US airline industry – and the recent backlash an airline received in traditional and social media over its outdated, legacy policies for handling (literally) customers on oversold flights.
Closer to home, the insurance sector has suffered reputational damage due to operational claims issues in life insurance, add-on insurance practices in general insurance and a lack of disclosure in health insurance policies. These issues are having an adverse impact on the reputation and role the insurance sectors play in our community. A recent PwC survey found that “while 78 per cent of Australians view life insurance as important, only 42 per cent believe their life insurer will be there for them in their time of need”.  There is a trust gap and it needs to be improved.
And so it’s not a question of whether the industry needs to change its thinking about consumers, because consumers have already changed their thinking about the industry. The challenge is how quickly industry responds and keeps pace with these increasing expectations.
Envision a new system
Let’s take a minute and imagine a market where today’s consumers are the starting point. A system that truly puts consumers at the forefront.
How would your company be more consumer focused?
How would today’s products and distributions channels look different? Would they remain fit for purpose? Would you think about bundling them differently?
How would you think about your social licence and what role would technology play in maintaining consumer trust through improved communication and customer experience?
Whole sectors of the economy are being transformed by connecting data with the power of technology to provide insights for leaders to transform business models, markets and customer experiences – think taxi, accommodation, travel and retail.
The insurance industry has the means to shape a system that delivers better outcomes for all participants.
For instance, the emergence of new insurance technology, or InsurTech, provides established companies and new entrants with the means of serving the modern consumer in ways that have not been possible in the past.
Similarly, new data and analytical capabilities mean that insurers can get a better idea of who their customers are and what they need – leading to more personalisation, improvements in process and service delivery, and if done well, ultimately profitability.
There are examples of this innovation in many insurance companies in our market, but as a sector we start from a handicapped position often burdened by legacies of the past in a market where consumers are expecting more and markets are being transformed by non-traditional entrants.
The insurance sector needs to increase its efforts to rationalise the legacy of the past, reduce operational risk and put itself in a position to maximise the potential that the digital revolution presents.
APRA and Innovation
At APRA, we see ourselves as part of the broader system that needs to evolve and innovate. Objectives in the Insurance (and life insurance) Act require us to protect the interest of policyholders in ways that are consistent with the continued development of a viable and innovative insurance industry.
To maintain our social licence, we must continue to meet our mandate and this objective.
In doing so, we recognise that new modes of service provision may not neatly fit the mould in which regulations were originally conceived. If the entities we regulate are changing, then naturally we need to change the way we supervise them.
That is why we are reviewing our licensing framework to see how it can be improved to accommodate both new entrants and existing companies that wish to offer new products and services to consumers.
We are also paying close attention to what other regulators are doing, such as, for example, a sandbox approach being tested overseas and by ASIC.
In addition, APRA continues to invest in new risk and data analytics capability, which will help us become more efficient in our daily operations and enhance our understanding of financial risks facing the system and the entities we supervise. APRA has, for example, expanded the amount of general insurance data that we publish and recently announced initiatives with life insurance claims data.
To conclude, consumers are changing. The industry is faced with two choices – change with them or be forced to change. That’s the lesson we can take from other sectors that have faced this kind of disruption.
Legacy directly impedes innovation. The old structures and systems are no longer able to meet the needs of many of today’s consumers. APRA is looking at this issue through the lens of operational risk and it is an area of increased supervisory focus.
We know that many insurers have work under way to reduce operational risk that comes with organisational legacy. Examples include entity consolidation, core systems rationalisation and business model changes. These efforts by insurers are multi-year undertakings and involve significant investment, however simplifying the legacy of the pass will support the ability of insurers to grasp the opportunities that come with the digital revolution and the changing consumer.
All the actuaries in this room can help the industry overcome challenges in transitioning to a more consumer-centric existence – through innovative thinking and provision of strategic advice to the levers of corporate decision making. I encourage you to play a constructive and proactive role in this important transformation.
Geoff Summerhayes is an executive board member of the Australian Prudential Regulation Authority. This was a speech presented to the Actuaries Summit 2017 in Melbourne on 22 May.
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 March 2017 – PWC “Future of Life Insurance”
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