The COVID-19 situation has created challenges for the real economy and financial services, yet markets have proven resilient. Financial institutions were bolstered through effective regulatory measures introduced after the global financial crisis and supported by government and central bank stimulus 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, although the inherent long-term outlook of insurers and expertise in risk management versus banks may yet again lead to the sector proving more resilient.
Coronavirus continues to cause uncertainty, but financial markets remain resilient, and equity capital markets have risen in response to successful vaccine developments, as well as the changed outlook in US politics, shrugging off chaos during the transfer of power.
The Brexit transition period ended with a late deal, that moved exchange rates favourably. It signalled some goodwill that may be beneficial, as bilateral negotiations critical to protect UK financial services are continuing. Two months in, the stresses and strains of this deal are presenting headwinds to sectors of the UK economy.
There might be light at the end of the tunnel, but the economic recovery after coronavirus will have challenges, which are likely to affect business activity, debt burden and employment in some sectors more than others.
Restoring government finances is expected to involve significant tax rises, while the post-Brexit economic impacts have only started to manifest. Leveraging areas of strength will be critical to retain a competitive advantage in the evolving geopolitical landscape.
Global temperatures have risen by a record amount in 2020, and this is increasing risks to the global economy and human health. Insurance will continue to face threats from physical risks in the form of extreme weather conditions that lead to record payouts and continue to challenge the profitability of insurers.
Insurers that evaluate the exposure of their investment and underwriting portfolios will have more opportunities for bringing new and innovative products that are priced appropriately for their growing customer needs.
Nutmeg’s Socially Responsible Investment (SRI) portfolio is an example of the type of ethical investing now accessible to consumers, and we expect activity in this market to grow.
Insurers must protect investments, especially as we transition to a low-carbon world. However, financial markets can quickly reprice assets that are under threat from climate change and, therefore, insurers will need to be mindful of this risk to their balance sheets.
Some effort has already been made in this space with a number of top-10 European property and casualty insurers restricting insurance coverage of coal-related assets.
Simply standing still on these issues will not be enough, especially with increased focus from the UK government and regulators. The insurance industry must showcase that it is committed to its environmental, social and governance (ESG) footprint.
The appeal of post-Brexit deregulation has been constrained by the need for regulatory equivalence to retain market access.
The Financial Services Bill gives UK regulators new powers, and their aim for the UK’s future legislative and regulatory framework remains to protect markets and consumers.
UK regulators have been leading on climate risk and sustainability, and coronavirus has increased focus in those areas further. Green tax credits can open new opportunities, incentivising innovation and attracting firms from the increasing number of global jurisdictions aligned to the same objectives.
In general insurance, we have clear regulatory guidance, much trailed, around pricing practices and the treatment of new versus existing customers in home and motor insurance and effectively bans front and back book pricing.
This will present an execution challenge for insurers and brokers, and will significantly challenge the aggregator distribution model that has been dominant in UK personal lines insurers.
This challenge augments the ongoing focus on fair and appropriate treatment of vulnerable customers, which brings an enduring need for simple, transparent messaging and consideration of an omni-channel approach.
In driving towards encouraging insurers to demonstrate the features and benefits of cover and meeting their needs, the regulator has effectively concluded that other softer measures, such as price transparency, have been insufficient to change profound and widely communicated concerns that it has about the operation of the personal lines market in the UK. The industry cannot say it hasn't been warned.
The impact of coronavirus has driven a need to adopt greater agility and better resilience in insurance operating models, to flex and meet changing service-delivery requirements.
The industry has demonstrated a wide variety of responses to the shift away from office working, reflecting a varying level of investment in technology estates.
This has emphasised the increased focus on operational resilience and has reinforced a narrative in the industry as to what offshoring and outsourcing version 2.0 should look like, with the clear consensus that this needs to be more than labour arbitrage savings and focus on overall customer experience.
General insurers have been forced to ask questions of their supply chains, and digitisation of the claims handling process has accelerated with an increase in ‘once and done’ settlement.
An example of this is Lloyds Blueprint 2.0, which looks to focus on how previous disparate workstreams can be brought into delivery focus by delivering end-to-end digital journeys for market participants.
The move towards remote working will likely endure as employees seek to retain some of the benefits obtained by recent circumstances, although regulatory expectations that home working and office arrangements should be equivalent in terms of market abuse controls, as well as the need for social contact in offices, will still drive a switch back to office working.
Prior to the unforeseen events of 2020, we were beginning to see the decline of the traditional insurance business model, as firms became increasingly aware of the need to change to both stay competitive and meet shifting customer demands.
Insurers were making clear choices as to product and distribution participation based on their existing assets and appetite for expenditure combined with future views of the market. Coronavirus expedited this process and provided a platform upon which significant change programmes can be set in place.
The technologies that are now readily available to insurers offer an opportunity to reshape their operations, providing greater efficiency and reducing costs. However, the ability of firms to capitalise upon this opportunity is limited by their legacy systems and ability to evolve at speed.
It's this situation that is attracting the attention of outside investors into the industry, especially those with the knowledge of implementing radical cost reduction and process improvement initiatives.
This is epitomised by the recent agreement between Bain Capital and LV= for the acquisition of the firm’s savings, retirement and protection businesses for a sum of £530 million. Private equity groups are seeing significant opportunities in the insurance market to purchase and consolidate several businesses to create efficiencies that allow for improved means of managing investment portfolios.
Technology transformation in the insurance sector may have moved at a relatively glacial pace in the past 30 years, even relative to other financial services sectors, but insurance executives have long recognised the competitive threats from technology advances for their distribution models, while continued prevalence of legacy administration systems remains a key cost issue for the majority of long-established players, compounded for some by layers of added complexity through acquisitions.
The pace of change is accelerating though, and firms need to adapt quickly, and create a technology infrastructure to underpin a faster evolution. Customer expectations of digital offerings are becoming ever more demanding, and even the experience of the past 12 months has shown how new players can leverage technology to grow new services and disrupt long-established markets. Zoom is just one of a number of new tech-related words entering the Oxford English Dictionary in 2020.
'Phygital' services – recognising the importance of human contact at moments of truth and the focus on trust that in insurance that has been emphasised over the past 12 months – will come to the fore.
Big tech is also getting increasingly involved in a market that remains ripe for disruption, alongside growing presence through provision of cloud services, all the big tech firms have a developing presence, whether in health plans, insurance partnering on wearables, property and casualty, or entry into motor insurance.
Insurers need to embrace the new technologies available, to underpin a drive towards simplification, greater agility and improved resilience. Utilising cloud service scalability, leveraging enhanced data analytics, robotics and AI capabilities, and exploring insurtech and fintech partnerships should become the new norm, so that firms are ready to compete with the disruptors, as well as current market peers.
Coronavirus has encouraged new types of coverage. For example, there has been an upturn in launching parametric policies (paying out on the occurrence of a covered event, rather than claiming a specific insured property loss).
This trend had already been seen in property-catastrophe lines and may play an important role in any future viral outbreaks. Tokio Marine Kiln has recently started offering small- and medium-sized firms a parametric business interruption policy to cover IT disruptions.
There may also be more innovation opportunities in personal lines insurance following coronavirus-induced behaviour changes in work environments and driving habits. There's been a move towards consumers indicating a preference for greater customisation.
Younger consumers have shown interest in a more-personalised outlook on insurance, especially as personal and professional lives become more entwined, with 'freedom to move' policies (covering the policyholder, no matter what type of vehicle they use) gaining popularity.
There's also an emerging trend towards propositions that offer a holistic view of health and wellness, with a particular focus on this in the workplace channel as insurers and employers consider the paradigm shift that home-working and the various stresses on work-life balance that lockdown has brought into focus.
There will be increased focus and demand from businesses on insurance products that cover both company data and the potential loss of customer data. Insurers are looking toward partnering with cyber security vendors.
This will provide not only a means to objectively understand the customer’s network resilience and, therefore, the associated risk, but also a joint go-to-market strategy whereby cyber security products and advice can be incorporated into the product.
The Lloyd versus Google data protection case also has potentially profound implications in terms of responsibility for personal data and could create the opportunity for a new line of insurance.
2020 showcased that there still is appetite for M&A across both insurers and brokers alike, and we anticipate this continuing in 2021.
In the insurer market, coronavirus has highlighted the need for structural and systemic changes, and M&A activity will play some role in this reinvention. Bidders will be looking for insurers that put technology at the heart of the agenda to address emerging risks with new innovative products.
We saw evidence of this in the Aon-Willis Towers Watson merger in 2020, with the former highlighting the need to better serve customer needs through technology.
The agent and broker market has seen a number of consolidators in recent years and, with the emergence of digital transformation, many brokers will be considering partnerships as a key route to market, especially for firms that have not been able to adapt effectively to the new challenges presented by 2020.
The mid-tier has seen a significant level of activity with transactions, such as Aston Lark’s sale to Goldman Sachs and GRP’s acquisition of the Marsh network business.
The last few years have seen innovation in ‘open banking’, whereby financial information in respect of customers, with their permission, can be shared securely between organisations via application programming interfaces (APIs) – thereby allowing better, simpler and more convenient services to be offered to the end customer.
As the issues with pension dashboard implementation illustrate, insurance has some way to go here, but equally, the opportunity to host more of a customer’s protection needs, while not necessarily manufacturing all of them, and having a greater understanding of that customer has to be worthwhile for insurers to embrace.
This would assist with the perennial holy grail of cross-selling and to build intimacy with and understanding of the needs of the customer, which are an enduring regulatory focus, as illustrated with the pricing reforms referenced above.
2020 didn't show parts of the insurance industry in a great light. In response to a national emergency, many insurers were slow to respond to the needs of customers, sought recourse in the courts and poorly written contracts to avoid obligations, invited further scrutiny from the regulator and communicated poorly via the industry body.
For an industry that does much to support the nation, this was a somewhat spectacular own-goal. The hard market rate rises and rewriting of conditions commented on in the industry press suggests further shots into the industry’s own net may be coming.
Consumer surveys suggest that, despite coronavirus presenting financial challenges to large swathes of the population, few have been proactively contacted by insurers with guidance or suggestions as to how cover can help.
Those insurers that have done this are likely to benefit from consumers who are now more aware of their financial exposure and will be more disposed to considering protection.
The industry needs to reflect on its role in society and its communication of the same. Ultimately, the actions taken by many insurers in respect of travel and SME customers were rooted in the desire to protect the common pool and control costs.
Many customers made claims for which they were not covered. Yet, the industry retreated, as it often does, into a technical shell and didn't consider that the vast majority of the UK population is not an actuary or an underwriter.
As an example, according to the Association of British Insurers, in 2019, UK insurers paid 98.3% of protection claims. Insurers do some great things and play an essential role in society. The industry needs to enter the 21st century in terms of how it communicates and engages in respect of its purpose.
