Insurance
Drivers
All industries are being shaped by the global Megatends of Globalisation, changing Demographics, Sustainability and Technology innovation. Shaped by these trends, the pandemic and now the declining economy, the sector is being transformed by five major drivers:
Customer Experience
73% of UK consumers feel that the customer experience for insurance has stood still for the last 5 years [1]. The growing influence of BigTechs, such as Google, Amazon, Facebook and Apple and others has raised the bar for customer service and seamless experience.
Post COVID—19, digital adoption is no longer a function of age but is mainstream across generations. The willingness of policyholders to purchase an insurance from one of the BigTechs has risen from 17% in 2016 to 44% in 2020, with acceleration caused by the COVID-19 pandemic [2].
Risk
Insured losses from natural catastrophes have increased 250% in the last 30 years [1]. Global insurance losses for natural catastrophes are projected to reach $112 billion in 2022, well above the 10-year average of $81 billion [2].
Political short-termism increases risks for insurers, for example rising health care costs is highly political and could impact insurers in some markets. Political uncertainty will also drive increased business insurance as companies seek to manage political risks.
The avalanche of data from connected devices (such as cars, fitness trackers, home assistants, smartphones, smart watches, medical devices, clothing, appliances etc.) will allow insurers to understand their clients more deeply, resulting in new product categories, more personalized pricing, and increasingly real-time service delivery
Innovation
“Banking and even utilities and other industries are just moving faster than insurance,” says J.D. Power. “The ideal experience hasn't happened yet for many people across many carriers.”
Digitisation is already disrupting Insurance (e.g. (price comparison), this will continue driven by customer expectation, new entrants (e.g. BigTech and FinTechs) and regulation. These digital attackers (including aggregators) are reshaping the competitive landscape and altering the cost curve by commoditizing product lines and driving down prices through increased transparency.
IT costs has risen by 24% for P&C and by 12% for life over the past five years, yet legacy IT and a lack of standardization is driving complexity and cost [1].
Access to real-time data could transform underwriting of risk.
Embedding climate risk, metrics and targets into how insurers make decisions are becoming increasingly critical. Insurers’ climate plans should cover all their business - underwriting, products, claims, investments, operations and their supply chain. Many insurers have well developed internal sustainability programmes but they will come under increasing pressure to focus investments on sustainable projects both from a climate and resources perspective (ESG, sustainable or green financing).
Efficiency
Insurance hasn’t increased its overall productivity in the past ten years. Cost ratios have increased 10% from 2014 to 2019 [1]. The gap between leaders and laggards is increasing—cost ratios for bottom-quartile players are 200% higher in life and 45% higher in property-and-casualty insurance than for top-quartile players [2].
The primary culprits are complexity caused by M&A or duplicative products.
Leading insurers have reduced products and standardised systems, resulting in reducing expense ratios by 25% and achieving an 80% automation rate [3].
Profitability
Inflation in 2023 will put stress on combined ratios, affected by salary increases, higher expenses, increased claims expenses due to increased costs.
Insurance industry profits are “practically at a standstill” due to longstanding economic challenges. Profits for insurance companies fell by about 15% from 2019 levels [1] and even before COVID-19 the majority of insurers were not making their cost of capital. Revenue growth is limited; intermediaries are capturing more value; scale economies are proving elusive; and productivity is quite stagnant.
Regulators will continue to focus on the liability exposure of insurers and so the need to maintain solvency ratios may limit investment and innovation.