The insurance sector has faced unprecedented challenges during 2020, adding to the ongoing demands of a rapidly changing business environment.
All insurers are seeking greater product and organisational simplification with a view to achieving increased efficiency and lower ratios of expenses to claims. They are dealing with the implications of lower investment returns, capital constraints and pressures on profitability. In addition, they are endeavouring to make optimal use of emerging insurtech opportunities, enabling improved granularity of risk assessment. Many are struggling to come to grips with the revolutionary developments in governance, culture, remuneration and accountability arising in the context of heightened media and regulatory focus and the activities of newly resourced and energised regulators.
Some product lines have been withdrawn or substantially reduced, especially in the area of consumer credit. With the increasing prevalence of class actions and regulatory activity, D&O cover is becoming harder to obtain and premiums are reaching unsustainable levels. Remediation and enforcement activities are placing enormous pressure on subject matter experts within insurers and high levels of staff turnover are being experienced.
In the case of private health insurance, the viability of the industry (or at least the great majority of smaller-scale insurers) is at risk from increases in chronic disease, an ageing population, perceived unaffordability of cover, greater rates of increase in costs than premiums and lower participation rates.
However, in spite these challenges, it is important to view this period as a time for resetting the balance between the interests of shareholders and the expectations and interests of consumers. Positive factors and opportunities exist for the medium and longer-term for the industry.
For example - insurance is fundamentally about the identification and management of risk and, particularly in the case of general insurance, the categories of risk are changing and expanding. Climate change, cyber-related issues, developments in nanotechnology and artificial intelligence, COVID-related recognition of limitations in international supply chains and changing approaches to renewable energy policy and investment are all areas which present fertile opportunities for insurers over the medium term.
The need to comply with new statutory design and distribution obligations should be seen as an opportunity, especially for life insurers, to focus on innovative product redesign and pricing that is sustainable for the industry and better tailored to meet the needs of customers.
It is critical that the industry does its best to develop products that will be 'bought' rather than needing to be 'sold'.”
Central to the prospects for taking advantage of these opportunities is the necessity of taking further steps down the long-identified path to better collection and usage of data. This will to facilitate better informed product development and pricing, a better experience for customers and advisers and better risk governance within the organisation. The need for transformational investment remains.
As the industry begins to emerge from the debilitating period of remediation and investment in improved systems of risk management, internal controls and compliance, there will be more and more investment in insurtech to improve efficiencies and granularity in risk assessment. There will also be greater investment more generally in design and implementation of better systems for data collection, analysis and product design.
This reflects changes in the experience around catastrophes and the emerging recognition that historical data may no longer be an accurate predictor of events. It also is a result of the increased level of focus from regulators and investors, the increased level of exposure of insurers to class action liability (and of boards to personal liability) and the need to reassess risk appetite around exposure to fossil-fuel related projects and investments.
There will be an increasing appetite for reinsurance.
This will be critical to their future viability.
As the industry emerges from the COVID-19 period, there will be a need to re-set behavioural expectations. What concessions introduced during the crisis will be given longer existence? What methods of doing business introduced during the crisis will become permanent?
In the medium to longer-term, insurers and other financial services institutions will seek to achieve a return to greater levels of regulatory certainty. It is axiomatic that institutions should both comply with the law and treat their customers fairly. However, it is not in the best interests of a sustainable industry that there otherwise be a divergence between, on the one hand, the requirements of the law and, on the other, political, media or regulatory perceptions of community standards and expectations.
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