Markets and financial institutions have proven remarkably resilient despite pandemic impacts – helped by the enhanced expectations introduced after the global financial crisis, and government support to tackle the health crisis and its economic impacts.
The shape of the recovery and the global geopolitical outlook, including regulatory equivalence decisions remain key uncertainties, as does the see-through impact of Brexit as the fog of the pandemic eases. Consumer Duty presents a key regulatory lens for insurers and brokers to respond to – although the direction of travel here has been clear for some time.
Choices around participation and business models – and the investment required to execute successfully upon these – pervade the market. Lessons do appear to have been learnt from the first phase of the race to digital, and closer examination of outputs are being sought. M&A continues to be highly active as scale and capability remain scarce commodities to drive investment.
These stresses have presented increased opportunity for some carriers, and intensified the pressure on others.
Here are 10 key themes that will impact the market over the next 12 months:
Coronavirus continues to cause uncertainty at a global level, but financial markets appear optimistic, although subject to short term fluctuation as seen in the response to Omicron. Headwinds remain as the new administration in the United States struggles to pass budgetary policy, political instability causes tension in Europe, and the UK considers a response to inflationary pressure and a near-term significant growth in the size of the state.
The impact of Brexit, shaded by the pandemic, will become transparent with potential political and economic impacts. Trade deal flow will be key to the UK’s growth.
Leveraging areas of strength will be critical to retain competitive advantage in the evolving geopolitical landscape. The continuing discussions – particularly in lieu of the social care levy – of the role that an efficient and effective insurance industry can play in dealing with the structural issues presented by the changing demography of the UK – and the inherent tensions of the distribution of wealth across that demography – present an opportunity to insurance entities to demonstrate purpose and grow concurrently.
Insurtech adoption continues to mature, with incumbents increasingly realising the value and potential of insurtech. The pandemic period acted as a catalyst for insurers to look toward insurtech as a means of tackling the challenges posed by the new working environment. This period has not only enabled incumbents to increasingly understand the importance of digitising their business, but also given insurtech businesses to gain even greater insight into the complexities of insurance businesses and processes.
Despite this period of realisation, the insurtech sector remains underinvested in comparison to the overall fintech sector, with only a select group of firms attracting large sums of investment. This is due to a number of insurer’s strategic approach being that of 'invest and build' rather than 'buy'. This is epitomised by reinsurers who have been active in the space through their own VC arms. Due to their risk profiles, insurers and reinsurers must ensure that any insurtech solution fully meets their needs and so many see value in early-stage investment to be a part of the journey.
A key trend we expect to see in 2022 is the leveraging of insurtech solutions to support insurers with their ESG initiatives. Insurtech enables firms to achieve their ambitions across the ESG spectrum, including:
Environmental
Enabling the creation of new products and services that minimise the impact of the business’ activities across the value chain on the environment
Social
Support the provision of a platform upon which fairness and accessibility can be ensured, both for employees and underserved customers
Governance
Achieve greater levels of data and insight into the business’ activities, ensuring inefficiencies are identified and resolved promptly
The UN’s climate change agenda has accelerated the insurance markets response to sustainability. In December 2021, 26 countries signed up to UN's climate change policies at the COP 26 conference in Glasgow, with many industries and corporations, including insurance, pledging sustainable strategy commitments.
The insurance sector faces challenges in sustainability through collective agreement of corporate purpose, value creation and responding to climate change factors. Not only within their own trading environments of accounting for natural capital and resource management, and balancing social sustainability responsibilities, but with their wider responsibilities of achieving a ‘net zero’ managed circular economy with a range of stakeholders. For example, consumers and investors are increasing prioritizing sustainability factors on their selection criteria, with many requiring transparencies of resource traceability, which insurers will need to capital invest into, to remain competitive.
Presently, insurers have varying maturity on ensuring their ESG responsibilities through their governance, risk and reporting systems and their agility to leverage their levers of change. As the pathfinding to the harmonisation of ESG reporting standards crystalises, insurers will find competitive advantages to proactively managing their sustainability and climate change strategy.
How can insurance firms manage climate risk?
As the March 2022 operational resilience deadline approaches, insurers are focused on finalising their important business services, impact tolerances and self-assessments, and associated justifications to gain Board approval before the deadline. After the deadline we expect to see a shift in focus away from project-based activity towards bedding in new ways of working across business areas.
Activity will be the most intense in three areas: firstly, the remediation of vulnerabilities identified during initial mapping and testing. Secondly, a ramping up of stressed scenario testing and continuous improvement activity, with tests of increasing breadth, duration and severity, designed to improve understanding of whether tolerances can be met. Finally, a revision and re-alignment of crisis management, business continuity and disaster recovery playbooks to ensure that tolerances can be fully met by March 2025.
Many challenges still remain. The focus on operational resilience within the insurance sector over the past year has in many cases uncovered material gaps in customer understanding, or unearthed significant vulnerabilities across cyber security, technology, and third-party management, some of which will require significant levels of management focus, resource, and investment to address. However, we have observed that the new regulation is already driving a change in mindset among our clients, and we're optimistic that the sector will emerge in a far stronger position by Mach 2025.
Operational resilience can be complex to implement, what should firms do now?
M&A activity has been a predictable market over the last decade, with the only major variation being caused by the 2008 financial crisis. Since 2008 there has been steady growth, helped by the hardening insurance market. Considering this market, it became ever more challenging for insurers and Intermediaries to drive impressive organic growth figures and as such insurers in many cases, looked to acquire third parties to grow their books of business.
Both before and after the financial crises, the factors for encouraging acquisition have been relatively consistent. Factors include insurers wanting to break into new markets and new geographies, defending their market position, growing market share and the need and desire to grow digitisation capabilities.
2021 was a good year for M&A in insurance with many legal and advisory firms expecting a bumper year in 2022, partly driven by companies’ recovery/growth plans being put into effect but also the buoyant technology sector looking to assist insurers drive and fulfil their digital goals and aspirations.
The role of consultants or project managers is ever more important in M&A, as insurers adopt new ways of working, increased utilisation of digitisation, innovation, and merging different working cultures. A key trend will be the design of enduring, fully integrated business models which resolve common issues around disintegrated legacy platforms with ensuing costs resulting from simplification and remediation programmes.
The benefits and challenges and challenges of closed book sales have been known in the life insurance Industry for years. The uncharacteristically long length of time between when a policy is sold and when a claim may be made produces a unique set of challenges from both an operational and IT perspective.
Technology and other associated IT challenges pose a fundamental challenge to insurers, as Insurer’s systems develop and practices evolve many closed books often run on what becomes a legacy system, incurring additional cost to the insurer as well as, in many cases, slowing the processing of policies and claims. Over time, the Insurer typically must decide whether to upgrade the system, implement another or maintain the existing system to run the book of business. Of course, this decision is often made based on the profitability of the book as well as the Insurer’s ability to effectively manage IT transformation projects.
Policy management costs are also a great concern for insurers when assessing their closed book business, over time the amount of policies reduces as more renewals are lapsed, thus increasing the ratio of cost per policy the Insurer Incurs while managing the book. In recent years closed books of business have become increasingly in focus for the FCA, who became concerned that policyholders within closed books of business were not being given the same level of customer service as those within open books of business. Insurers must now validate this is not the case.
While the above has articulated some of the main challenges of closed books of business, these books can hold great benefit to insurers. They can offer a reliable book of business over a set amount of time, and as such are often viewed as a good acquisition tool for insurers to drive growth.
Selling closed books also can bring great relief to insurers where they can offload the heavy admin processes, attributed to maintaining a book of business onto a third party.
Following the widespread uncertainty that characterised 2021, the new year now presents an opportunity for insurers to bring security and peace-of-mind to both their customers and employees. While many criticised the sector's slow initial response to coronavirus, a redoubled focus on improving customer and employee experiences will help to restore faith in the industry going forward.
From a customer perspective, the insurance industry can struggle to present value as experiences are not defined by an exchange of physical products. As a result, differentiation stems from the provision of a quick and highly personalised service, underpinned by seamless technological connectivity. Not only does this frame digital transformation as a vital tool for the future, but it also helps to explain why regulatory pressure continues to be placed on understanding the needs of the customer.
Focussing on the experience of employees carries equal importance but offers a different array of benefits. With the ‘Great Resignation’ having now spread from the US to the UK, the insurance sector continues to struggle to overcome its skills and knowledge gaps. If this persists, insurers will be unable to innovate and grow to meet the rising expectations of the market. By improving employee experiences, insurers will become more efficient and adaptable through an enhanced ability to retain diverse and highly skilled talent. This should be a key aim for all insurers as we move into 2022.
Consumer trust in the insurance industry has been gradually eroding in recent years, with insurers narrowing their eligibility criteria and scope of cover. The fact that the FCA had to bring in a recent ban on price walking (the process by which insurance firms increase premiums for existing customers who automatically renew their policy) epitomised some of the unethical practices being adopted in the industry. Furthermore, responses by insurers to the COVID-19 pandemic, and the widespread failure to pay many coronavirus claims, has only exacerbated the perception that the economic interests of consumers and their insurers are at odds.
Without fundamental change, we envisage a hollowing out of the industry, whereby only the healthy and/or wealthy can obtain their desired insurance. Gaps will emerge for the poorer, less healthy, and most vulnerable groups, which will likely result in increased government intervention. This will increase the risk transfer onto the state, something that is already being seen to an extent in the medical and social care sectors. There are however two key developments that provide insurers with the capacity to revert the negative public image that has been adopted in recent times.
Firstly, the adoption of new technologies provides a strong foundation upon which risks can be minimised and premiums reduced. AI, predictive analytics, and Internet of Things (IoT) are examples of just some of the resources available to insurers to gain a holistic view of their customer base and provide fair, affordable coverage. However, the regulation of this is crucial in ensuring that vulnerable customers are not negatively impacted by such technological advances. Should developments advance over the coming year as expected, we envisage the regulators taking swift action to ensure the benefits to consumers are put first.
Secondly, the ESG agenda offers insurers a means by which their public image can significantly improve. The social aspect to ESG, focusing on equality, trust, and welfare in society, as well as privacy and data security, provides a strong foundation upon which insurers can improve public perception. Insurers must seize this opportunity to regain consumer confidence and return to its simplest form of reducing individual risk.
The FCA’s Consumer Duty proposals are the latest step in an ongoing continuum including numerous initiatives on fairness, value, culture, and customer outcomes.
Since its inception, the FCA has striven, through a combination of hard power (policymaking, supervision and enforcement of rules and guidance) and soft power (public statements, consumer campaigns, supervisory relationships with firms and sectors) to significantly improve the extent to which the financial services industry is sustainable from a customer outcomes perspective.
The Consumer Duty proposals are new and will increase the regulatory burden and the FCA’s powers. However, the FCA’s goals are familiar – increased consumer understanding and engagement, ensuring that good products reach those for whom they're suited and perform as expected, improving consumer support and value, and trying to drive consumer protection-orientated competition between firms.
Preparedness and proactivity will influence the way in which FCA supervisors engage with firms on this important topic in which the key tenets should not cause any surprises.
Customer demands continue to evolve to reflect social change, an increased focus on ESG concerns, new engagement channels and a shift in the economic landscape. As such, insurers need to focus on identifying customer needs and ensuring the journey is easily accessible from start to finish. Digital transformation focuses on improving the customer journey, and firms’ agility and responsiveness across the insurance sector.
While this is good for customers, it's also great for insurers – supporting sustained growth and driving future innovation. To achieve these goals, many firms start with assessing the IT function, but it's important to consider the wider implications across the business. A more holistic approach that assesses the organisation’s systems, processes and culture will support an effective digital transformation and help firms maximise the value of their investment.
Data is one of the most valuable assets for any organisation and it supports effective operations, risk management and regulatory reporting. For insurers, poor data can lead to issues around claims management, establishing appropriate premiums and developing new products. There's also increased regulatory focus on governance and controls to ensure the initial data captured can support accurate and appropriate downstream processing.
