The insurance sector faces ongoing challenges around the cost-of-living crisis, driven by geo-political conflict, post-COVID-19 supply issues, and the high cost of raw materials. Collectively, these factors have led to inflation, high interest rates, and rising energy costs. These elements will all affect consumer behaviour, and the insurance sector must adapt to meet customer and regulatory expectations. Therefore, it is important that firms are up to date with the market and ensure they are able to listen and respond to customer needs.
Under the new Consumer Duty, firms need to put customer outcomes at the heart of everything they do. This covers the entire customer journey, and considers everything from product development, to pricing, to customer communications. The FCA highlighted this higher standard of care through a range of communications including its Dear CEO letter to GI insurers, published in September, and its Dear CEO letter to life insurers from last December.
The regulator’s 2023 consultation on insurance guidance for the support of customers in financial difficulty also highlights the need for greater consumer care throughout the cost-of-living crisis. It includes a repackaged COVID-19 measure to help all customers of non-investment insurance policies who are in financial difficulty to manoeuvre.
As customers continue to feel the financial pressure, they’ll naturally want a policy that offers good value for money. We may see a move towards more basic products, such as an increase in uptake for car insurance offering the statutory minimum cover for third party insurance. On the other hand, some customers may need a more flexible product. With people less able to save, this broader coverage can offer greater protection from the unexpected.
Either way, insurers need to be explicit over what is and isn’t covered to make sure customers fully understand the products and can make an informed choice. A significant portion of customers may be priced out of insurance altogether.
Customers need access to the right information at the right time to make informed decisions. This includes being aware of how short-term decisions may affect their long-term financial outcomes. For example, some customers may decide not to renew or to cancel their insurance policies in a bid to cut household expenditure. Many won’t realise that their premiums may rise for the same amount of cover in the future, and some may not be able to get cover at all.
The FCA is keen for good-quality communications to support pension product customers, particularly those approaching retirement. This is a good opportunity for firms to review their policyholder communications and processes and making sure consumers understand the long-term impact of the decisions they make now.
The cost-of-living crisis is bringing significant uncertainty for consumers, and greater flexibility could help improve their customer journey. This includes offering premiums holidays or temporary suspensions of cover. In turn, this could also lead to better customer outcomes and improved business retention, while not materially altering the firm’s risk profile. Firms often don’t have the agility to offer this kind of flexibility, and administration systems can be too rigid to support them. However, there are still options, such as offering product switches on similar terms, that can help firms through this process.
In tough financial conditions, customers may also need greater protection from fraud. Criminals will prey on financial vulnerability, and during the cost-of-living crisis, customers may be more susceptible to scams and feel the effects more keenly. Regulators will keep a close eye on how insurers respond to fraud, and how they continue to protect vulnerable customers.
On the flip side, insurers are also under increased financial pressure due to the cost-of-living crisis. Claims costs will likely go up in line with premiums and many will see their cost base rise faster than their revenues. Pension providers could see a decline in savings, with higher outflows and a change in business mix from relatively low cost to administer accumulation to higher cost decumulation policies. Therefore, general insurers will need to balance the need for competitive pricing with recent fair pricing reforms. Insurers offering equity release may want to re-appraise the customer value of these policies, and make higher provision for loan losses.
With a recession expected and heightened inflation set to continue in the short-term, the PRA has highlighted the need for appropriate financial resilience. For general insurers, the PRA highlights the reliance on reinsurance. Although external reinsurance is generally well diversified, the PRA will assess reinsurance risks to insurers’ financial and business model stability.
For life insurers, the PRA are particularly focused on credit risk, which was also viewed as a key concern in the Insurance Stress Test feedback. With firms now routinely using internally valued investments to back liabilities, the PRA are keen to see robust stress testing of portfolios and evidence that investments can be liquidated as needed.
Fluctuations in the price of goods and services means general insurers need to act dynamically to ensure pricing remains competitive and profitable. Loss provisions for unexpired risk are also subject to inflationary pressures, bringing further uncertainty for insurance firms. Stress testing and scenario planning is a valuable tool to improve financial resilience and improve stability.
While many insurers will be looking at cost reduction programmes, others will be seeking new opportunities for growth. For example, stagflation of public service funding can be an opportunity by driving demand for private health insurance. Similarly, the proposed Solvency II reforms can release capital. This can help insurers invest in innovative new product lines and embrace emerging digital, data aggregation, artificial intelligence (AI) and InsurTech technologies. Collectively, these tools can improve firms’ ability to respond to customer demand, reduce costs, and revolutionise underwriting and claims.
Weathering the cost-of-living crisis won’t be easy. Success largely depends on insurers’ ability to listen and effectively respond, to customer needs. It may require small tweaks to products or pricing, or more fundamental changes into how the business model operates. In turn, that represents a fine balancing act between cost reduction and long term investment in the future.
For more insight and guidance, get in touch with Stuart Riddell.
