Looking at the remainder of 2023, it's important to observe the balance between long-term systemic changes and financial shocks caused by ongoing situations in the macro-economic and geopolitical environment. The abilities to think ahead, maintain robust governance structures, and horizon-scan effectively will all be useful factors to help insurance firms support their customers and identify new opportunities for long-term growth.
1 ESG/climate risk
It’s been almost four years since the PRA outlined its expectations for climate-related financial risk management. Since then, we’ve seen significant natural disasters, including earthquakes in Turkey and Syria, floods in Eastern Australia, and Europe's worst drought in 500 years. These aren't only devastating on a human level, but also reflect the physical effects of climate change, which are driving systemic climate risk across the financial system.
Over the last 20-plus years, ESG sustainability programmes have grown from voluntary and free-form corporate social responsibility initiatives to more mandatory, regulated, and structured frameworks across a growing number of global jurisdictions.
Looking beyond climate risk, these programmes are moving ahead in leaps and bounds with new requirements for firms. As such, insurers need to demonstrate how their climate risk and ESG programmes reflect concerns and increase customer trust, build business resilience, and protect against reputational damage. Firms that are capable of capturing ESG issues within their wider risk management will be well-placed to embed reliable strategies and controls to mitigate ESG risks.
2 Underwriting transformation
Underwriting, like many areas within the insurance sector, has seen profound change in recent years, with COVID-19 being an obvious instigator of rapid change within practices and processes, particularly in the Lloyd’s market. Underwriters, like many insurance professionals, were left asking how they were going to maintain their risks and broker relationships.
Much like the sector as a whole, underwriters will continue to focus their attention on costs this year, and managing this with the increased reliance on digital processes. As insurers look to push their bottom line, data will play a key role in the way underwriters work with profit in mind. By using accurate and relevant data, underwriters will be better placed than ever before to take on calculated risk.
In light of a troubled economy and drastic change in the way some businesses operate, there's huge potential for new bespoke products to be slowed across the insurance market. Underwriters must be switched onto this, and understand the direct risk any aggregate exposure they're taking on board. By doing this, they can improve their data management and use their resources more effectively.
3 Cost-of-living crisis
While there are global factors driving near-term inflationary pressures, the insurance industry and the actuarial profession need to look beyond the hype and examine and understand the impact of this crisis on all stakeholders with long-term thinking as a core capability.
As with any crisis, those with agility and strategic options will be better placed to respond, as was the case with Brexit and the banking crisis of 2008/2009. For personal lines' insurers there are short-term opportunities to help customers, mainly by focusing product cover on key risks, but balancing this with helping customers understand the implications of cost cutting decisions. Appropriate conversations with commercial customers will also be beneficial, and it will be interesting to see if the industry can be seen to learn the lessons of the pandemic around effective and impactful communication with, in particular, SMEs.
4 Consumer Duty
Following the FCA’s publication of their final rules and guidance in 2022, the coming months will see a ramping up of activity by firms and the regulator with the Duty coming into force on 31 July 2023 for new and existing products and services that are open to sale or renewal.
Dear CEO letters issued by the FCA to general and life insurance firms in February sent out a strong message that the Consumer Duty is its key priority, and it has a low appetite for firms missing the mark. The regulator also made it clear that Consumer Duty should be CEOs’ ‘top priority’ and said that they'll monitor firms’ progress, via surveys, proactive engagement, and further multi-firm reviews in the coming year.
The FCA recognises that a key risk to the life Insurance sector’s ability to achieve on-time compliance with the Duty arises from their dependency on a small number of outsourced service providers (OSPs). Early and clear engagement between insurers and OSPs is therefore essential. Distributors may also be a significant third-party for both life and general insurers. Again, early engagement will be important.
5 Attracting and retaining talent
Employee experience remains a high priority for 2023, with an added focus turning to attracting talent. In general, there's consensus that the insurance industry needs to become younger and more diverse to achieve these targets, which can be achieved by broadening the talent pool. The driving force to accomplish this is by improving the overall employee experience through development and growth incentives.
Additionally, the industry is increasingly struggling with developing their employees ability to utilise digital skills and advance their understanding of new technologies. This presents a challenge for insurers, who need these skills to utilise big data and for Insurtech developments, as they compete against more 'cutting-edge' industries. Finding talent and digitally skilled individuals to enhance business operations will be a continued focus in the coming year to meet increasing demands.
6 A focus on data
In recent years, using data effectively has been a growing trend and opportunity for insurers. The insurance industry now has more access to volumes of useful, structured, and unstructured data which in turn translates to new possibilities for customer centric business models that provide seamless, personalised, and richer experiences.
Post-COVID-19, remote hybrid models have emerged and are changing the way insurers engage with customers and intermediaries. This has put emphasis on providing virtual personalised data driven experiences that match and exceed previous face to face models, be it in lead generation, servicing, and/or claims. There's a new data ecosystem sharing model that insurers will need to collaboratively build upon and shape to match client expectations and be market-relevant.
While there's a surge to build on the data opportunities, there continues to be the need to strengthen the foundations for long term success. Insurers continue to face the data sanctity challenges from acquisitions, legacy systems, and segregated expired product lines. Therefore, there's an urgent need to improve the data quality, to have a single customer identity across product lines and accurately map out all data and transactions related to that identity.
7 Finance transformation
The evolution in accounting for social responsibility; geopolitical and landscape shifts; increasing transparency through governance and reporting; constraints on capital and liquidity; and technological and data changes offering new insights and challenges; are all impacting how businesses need to manage their finances. The importance of sustainable finance opens an array of new factors to be incorporated in financial allocations and decision making. This is combined with increasingly sophisticated customers and tough economic conditions, challenging insurers to be innovative and reduce costs to survive.
Finance needs to provide more forward-looking management information, deliver against the regulatory requirements and at the same time reduce its own costs. The combination of these pressures creates a high bar for finance functions and requires a significant shift in capabilities.
A transformed finance function needs to be forward-looking through strategic decision making and financial planning and analysis a reflective perspective embodied by transparent and compliant financial reporting and effective and efficient finance operations – the enabling function. All this needs to be underpinned by finance leadership to provide the necessary adaptability and support to the people affected; and chart a course that will take the team through multiple financial resilience challenges.
8 Bulk Purchase Annuities
Over the last decade, the BPA market has grown significantly as more DB-pension schemes look to de-risk. In 2019, the market saw a record £43.8 billion of liabilities transferred via BPAs. This trend in grow is set to continue and it’s expected that the value of transactions in 2023 may surpass the record level set in 2019. This is expected because of several factors.
Rising gilt yields
DB-pension schemes have traditionally valued their liabilities using a discount rate based upon gilt yields. The rise in gilt yields seen over 2022 led to a fall in liabilities that exceeded the offsetting reduction in asset values, resulting in an improved funding position. BPA transactions are more attractive for better funded schemes increasing the likelihood of more transactions.
Solvency II reforms
Though early days, it's believed the reforms resulting from Brexit will lead to a reduction in the capital required by insurers to write BPAs, leading to a reduction in pricing and increased activity.
The new DB pensions funding code
The Pensions Regulator (TPR) has published its draft revised funding code of practice for DB pension schemes set to become effective in October 2023. The draft revised funding code requires trustees to adopt a long-term, low-risk strategy for their DB schemes. This may encourage more DB pension scheme to consider BPA solutions sooner than expected.
The above, along with the traditional reasons for de-risking (ie, longevity improvements and a desire to free up company time and finances) all show positive signs for the BPA market in 2023 and beyond.
9 Reinsurance – January 1 renewals
For many insurers, 1 January 2023 was the most challenging reinsurance renewal season for years. This was driven by the current high inflation environment, a significant erosion of reinsurer equity due to the recent increases in interest rates, poor recent results for underwriters in some classes and, for property business, and limited availability of retrocession capacity following Hurricane Ian in late September 2022.
As a result of these pressures, reinsurers sought to implement a combination of price rises and more restrictive terms and conditions across many classes of business. This resulted in many cedants either being unable or unwilling to place their full programmes, with some choosing not to renew elements at the prices available. These issues were particularly acute in the property market.
Among the actions that we have seen, cedants following the bruising renewal season are revisiting their risk appetites, revising both their regulatory and economic capital requirements, undertaking an ad hoc ORSA to reflect the new reinsurance programme, updating their policy wordings for business they write to reflect the new terms and conditions that they're subject to and, in the most extreme cases, exiting some classes of business.
10 Navigating the icebergs
The last half decade has seen insurers needing to consider the wholesale re-imagining of trade with our nearer neighbours, a generational pandemic and war on mainland Europe – all overlaid upon instability in the government throughout 2022, which continues to have consequences (not least in terms of tax treatment) for individuals and corporates – including insurers – both near and longer-term.
While these individual events have – to some extent or other – not been predictable – they do talk to the need for insurers to consider their resilience, planning, risk management, and strategy processes to ensure they operate with a level of robustness and thinking. While insurers can and do perform these activities well, what is often lacking is a ‘joining of the dots’ so that executives can see the aggregation of all these issues and respond holistically.
As all of these themes require collective navigation, those insurers that do will out-compete. This will only happen if the information is clear, consistent and, as with icebergs, there's a full understanding of what lurks beneath the water.