Library: Deloitte – 2023 insurance outlook report

December 2022 featured report:

Insurers have faced a number of macroeconomic and geopolitical challenges that are likely to hit growth and profitability over coming years.

Insurers face uncertainty in 2023

These include global recession, the ongoing implications or consequences from Russia’s invasion of Ukraine, and the unknown potential effects from COVID-19 re-emerging.

However, insurers that effectively transitioned during the pandemic with remote workforces, and virtual customer and distributor engagement, may be better placed to take advantage from a more agile digital infrastructure.

What the authors are really pushing here, is that insurers shouldn’t get comfortable with the implementation they’ve already undertaken. Rather, they should continue upgrading their systems, adapting their culture and becoming far more proactive and innovative in their operational pursuits, primarily by placing the customer at the centre of everything they do.

Reputational risk is also going to be an issue. How insurers respond to broader responsibilities with regard to climate change, diversity and inclusion, and other social and environmental issues, plus transparent governance will be weighed not only by business analysts, shareholders and investors, but consumers, who won’t tolerate organisations that don’t do what they say they will. The court of social media is very powerful on these matters.

Turn that frown upside down

The headwinds that came from obstacles faced during the pandemic are likely to have become tailwinds thrusting insurers towards transformation of both their technology platforms and how they deal with people.

Having been through the pandemic, insurance should make an insurer more resilient to future shocks. But the next few years will challenge all businesses, and those that build on momentum achieved during the pandemic are likely to reap the rewards.

The authors suggest success will be based on how quickly and effectively insurance can:

1. pivot from having laid the foundation for operational transformation to fully realising the value and benefits of infrastructure and technological upgrades;
2. instead of responding to the requirements of regulators and other industry groups, start to set themselves apart, creating competitive advantage by anticipating and fulfilling expectations of consumers and distributors; and
3. broaden their historical focus from risk and cost reduction by raising the importance of experimentation and risk taking that will drive future innovation differentiation and profitable growth.

Just as important is going to be human capital or workforces. Insurers must recruit, retain and optimise talent say the authors, engage with customers in customising products and services and align their values with expectations of the market around matters of ESG.

There are likely to be other matters that present themselves and they will have to adapt to them on the move, but if they have continued to evolve into adaptable and flexible organisations they will suffer less during 2023 and future years.

Everything’s going up…

One of the issues that has started to bite has been inflation.

The second quarter saw price increases over 11% for the UK, 10% for the US, 6% for Continental Europe and 3% for Asia. However, while inflation may push up prices, it also pushes up costs. Average replacement costs were up 16.3% which was nearly twice the consumer price index rise.

Social inflation is also driving up costs because litigation is becoming more frequent. Liabilities are being broadened and many legal decisions are being found in favour of the plaintiff. This is particularly true of the US.

There is no surprise that the demand for cyber is increasing. Ransomware attacks increased 235% in 2021 against 2019 and the average ransom payout jumped by 370% over the same period.  The authors urge caution in this area, for while there are opportunities, the risks are considerable.  Other opportunities arise from those seeking to achieve net zero in carbon emissions and may boost the London market considerably. There is potential within personal lines from the development of autonomous vehicles, growth in embedded insurance and scope for ensuring intangibles – those non physical assets that have a monetary value such as non-fungible tokens (NFTs).

These all offer possibilities, but require continued upgrading of technology to improve operational efficiency, the accuracy of pricing, the management of claims and ultimately customer experience.

Life insurance carriers are expected to have to transform as the way they have managed customers in the past will no longer be tolerated. There’s a hardening of premium growth, so finding new markets or moving into those that have been underserved offer ways to increase opportunities. They must customise existing propositions, while introducing innovation into distribution. This may include finding completely unserved segments in different markets and servicing them.

It’a all about people

Freedoms that many employees experienced through being forced to remove themselves from the workplace during COVID-19, has altered the mindset of many. Having a good job is no longer about the company you work for or how much you get paid. Many employees want flexibility, quality and relevance of work, a career path, financial wellness and inclusion and are using these metrics as benchmarks to not only join, but leave organisations. Unless insurers can be just as flexible as their competitors, they are not going to compete within the sphere of human capital.

Insurers are going to have to strike a balance between having a workforce in the office and deployed virtually. There are some benefits to this, as insurers can seek workers globally for roles that can be done remotely, threreby broadening the talent pool by tapping into under utilised groups, such as stay at home parents, those returning to work, retirees, or even those with mobility or disability issues.

This will require carriers to become more flexible in their own people culture, such as how they evaluate jobs, the ways in which they recruit, how they treat people coming in from outside the industry and also being aware that boundaries are becoming blurred not only between the silos they have traditionally operated, but product lines and even sectors and industries.

While it makes it possible to recruit from different pools of talent, it also suggests that retaining the right people may become attritional.

But it’s also about technology

All of this rests on continued investment in technology and while investment in InsurTech slumped in the first half of 2022, this year is likely to show the second highest funding period on record.  Low code and no code platforms are identified by the authors as a potential means of streamlining development and pointing CIOs and CTOs in that direction as a main way of lowering risks and costs. Cloud should not be seen as a destination, but a facilitator which the authors liken to electricity. It should be helping insurers to improve customer experience and operational efficiency, but is a means to an end, not an end in itself.  This means that cloud native architectures won’t revolve around central core systems, but instead the core becomes part of broader infrastructure, where front and back office is integrated.

This still leaves some questions to be answered, such as where data will be stored, whether there are  sufficient controls in place, whether it is properly protected, who can access it and how?  Sustainability is now no longer just a word and insurers are going to be judged not only on what they say, but what they do.  Merely complying with ESG matters will no longer be sufficient, and reports that outline policies on climate change and environmental risk diversification of leadership, workforce inclusivity of products and services and more transparent governance must demonstrate that the insurers are doing what they say.

New partners, businesses and ways of working

Of course, there is no common language for ESG, and no two reporting agencies assess the metrics in the same way.  The authors say that insurers should do more and take greater steps to collaborate with other sectors to bring about international sustainability standards and a common language that could be applied to all.

Corporate activity – M&A – is likely to be lower because of economic uncertainty and high inflation rates make borrowing unattractive. But there are opportunities for diversification into non-standard lines and insurtechs are likely to remain an attractive proposition and insurers should be looking at the strategic advantage of different markets, products and customers to help them reposition their portfolios.

Those who have dragged their feet over implementation may consider partnerships or acquisitions outside insurance in order to create a platform for their solutions, say the authors, perhaps bringing together insurance incumbents and tech giants with the capabilities of data analytics It is going to be a rough year, perhaps decade, say the authors of this report. If insurers were able to adapt so quickly in response to the COVID 19 crisis, what’s stopping them from doing this on an ongoing basis?

Keep the momentum up

Dealing with strategy on the front foot, as opposed to resting on their laurels, is what the authors recommend insurers do.

Carving out new markets may be one option. And while many steps have been taken to augment operations with technology insurers must fully transform and evolve their culture from a focus on risk reduction to one marked by risk taking innovation and broader reinvention. Those who can “keep pace and maintain a commitment to transformative change will likely be among those best positioned to excel against slower to adapt legacy carriers, as well as new forms of competition that are already here and yet to emerge”. While the future remains uncertain, the authors say there are still plenty of opportunities for the organisation that is prepared to evolve.

For more, see the full report.

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