Moving forward, technological advancements, changing consumer expectations, and the drive towards sustainability are all critical for insurers. The theme for this year will revolve around how firms can mobilise around these issues and utilise them to improve their processes.
Last year, insurers showed a substantial interest in the capabilities of AI and Insurtech, mainly around internal adoption. That focus will continue this year, with eyes on how AI can be used to offer improved areas of customer engagement, as well as how AI and insurtech can be used in predictive analytics, customer experience, and fraud prevention. While there is a clear acceptance of adopting these technologies, the maturing of use cases, SME talent, and operating models is still evolving.
However, despite the positive intent of adopting AI and insurtech, the insurance sector still struggles with data quality and legacy issues. Although new insurtech startups have shown how traditional insurance processes and engagement can be turned around, traditional large players still face challenges with legacy systems, data silos, and quality.
The large digital transformation initiatives are yet to fully show their results. Therefore, a thorough assessment of current systems will lay the foundations for adopting innovation.
Within the sustainability world, 2024 will be known as the year of accountability and capability. We expect to see new datasets collected from more sources than ever before; all of which can be utilised by insurers to cover risks more accurately across a wide spectrum.
With the increase in AI capability, we’ll expect to see real-time-data-led strategies that could be used in mitigating the most uncertain of risks that would more likely lead to a just and fair adaption plan.
Looking at COP28's key outcomes, we believe that more emphasis will be placed on stringent climate action focusing on nature-related and climate-related financial disclosures. This synergy reinforces the need for enhanced environmental risk assessments in the insurance sector, potentially leading to significant changes in underwriting practices and risk management strategies for insurance companies.
We expect the Transition Plan Taskforce (TPT) to be pivotal for companies that are looking to take real action to mitigate the effects of climate change. It guides firms in developing low-carbon strategies, crucial for environmental sustainability.
The FCA’s Consumer Duty rules move the financial services industry from a world where it was arguably enough to demonstrate fair treatment and the avoidance of poor customer outcomes, to one in which detailed rules require firms to proactively demonstrate good customer outcomes. Transitioning project work smoothly into ‘business as usual’ practices is key to demonstrating that good outcomes are now being achieved, consistently, for all retail customer groups and all in-scope products and services.
The deadline for implementing equivalent infrastructure for closed products in July 2024 will arrive quickly, and for some firms, complying with the rules for closed products may be an even greater challenge than that already negotiated for open products. Balancing the need to meet this deadline with embedding the changes already made will be challenging.
As the cost of living crisis continues in 2024, it is fair to assume that the buying behaviour of consumers will be affected. As the pressure on consumers’ disposable income has pressure applied to it, many will have to make difficult decisions when it comes to deciding on which insurance coverage is a requirement and which is a luxury.
Insurers will face a challenging situation into 2024 as they look to balance competitive pricing, increased expectations from their customers, and buoyant claims costs. However, there will be opportunities for them throughout this. For example, if they focus on more customisable coverages, this could help them retain more customers and win new business.
These customisable coverages would allow consumers to build their own products and allow them to purchase what them deem a necessity. This is not new in the marketplace, with some insurers making good headway in these enhancements, however for many, this will require capability development across people, processes, and technology.
The 2023 Bulk Purchase Annuity Market (BPA) did not disappoint. The largest single transaction by premium and members was announced by Legal and General in December, and the overall all market volume exceed those previously seen in 2022 (£29.5 billion) by some margin. While the precise volume is yet to be confirmed the BPA market has led to an overall growth in the UK Life Insurance Market.
The PRA remains supportive of this growing market and the much-anticipated Solvency UK, which is expected to be fully embedded by the end of 2024. Solvency UK will give insurers greater investment flexibility and hopefully address the problem of asset availability that was reported in 2023. We have already seen recalibration of the risk margin, which acts to increase solvency levels and insurers' capacity to write such business.
However, the PRA still remains cautious of the risk that comes with such a large and complex market. They are vocal about the need for robust risk management and even more so when they consider current risk management practices to be inadequate. There are certainly exciting times ahead in the BPA space, but not without change, and it is clear that the role of the regulator will be felt in the near term at least.
The FRC’s consultation on corporate governance has increased the awareness by insurance firms of the need for a more robust approach to capturing and assessing internal control frameworks. This has led to a subsequent increase in this area, which for some has focused on actuarial and financial controls, but for others it has led to a more holistically look at their control frameworks.
There is also a renewed drive towards a higher quality and more accurate suite of risk and controls maps. This requires a strategy of 'progress not perfection'. With this, there is also a renewed focus on the linkage between risk and controls through the formally defined risk taxonomy of the firm. Only then will we see a push for more inclusion of Key Control Indicators alongside Key Risk Indicators in the risk reporting, expanding the insight available from this increasingly important MI.
Once the foundations are laid, downstream processes will require attention. First and second line control testing is becoming increasingly the norm. Yet skills in this area are still under development and demand outstrips supply. This will remain a challenge for 2024 and beyond, and firms should expect a solution in the form of training rather than external acquisition of them.
While the volume of M&A undertaken by insurers in 2023 is expected to have fallen, a level of activity did remain. Looking forward to the rest of 2024, further M&A is expected to be a key enabler for insurers’ strategies, particularly where they look to add strategically important supplementary capabilities (including technology) to their portfolios and enter new markets, or to refocus their existing portfolio through the divestment of non-core assets.
Both acquisitions and divestments are typically taking longer to achieve with due diligence, enhanced board-level scrutiny, and a challenging macroeconomic environment all contributing to it being harder to get deals done. This makes realising all possible value from M&A activity even more critical than it was before.
For acquirers, considering the synergies which integration will enable is becoming key in a competitive market for acquisitions. Being able to factor these into a target’s valuation enables a greater level of competitiveness in bids. To do so realistically, firms must consider how integration will actually take place across all areas of the operating model.
The Future at Lloyd’s programme sets out a vision for transforming the Lloyd’s market and a strategic programme of activities and deliverables for achieving that vision.
Lloyd’s of London released Blueprint Two in November 2020, an update on its Blueprint One (May 2019), as the defining document underlying its Future at Lloyd’s programme. Blueprint Two updated the focus of the programme to defining clear market-wide data standards, a new Lloyd’s marketplace gateway and super-fast processing capability, and a more streamlined claims process.
With this defined data and exchange standards, market participants can innovate on their own strategic digital journey while maintaining interoperability with the rest of the market. Common information exchange standards are essential to reducing the effort required to rekey and reformat information exchanged between market participants, even across different platforms. If the market adopts these effectively, brokers, delegated partners and insurers can effectively automate information inputs on their own platforms.
As we head into the new year, the insurance sector will continue in witnessing transformative changes driven by data trends. These shifts will continue to shape how insurers understand risk, customise offerings, engage with customers, and streamline operations.
As the insurance industry becomes more data driven, they increasingly need to ensure that their data represents the true reality of their businesses, and provides a reliable basis for any prediction models. This will bring data quality and governance into sharp focus, which will be essential for building trust and credibility in it. Insurers will need to address the data challenges arising from legacy systems, acquisitions and product diversification, which often result in inconsistent, incomplete, and inaccurate data.
Another trend to watch is the use of data to personalise insurance offerings, predict future claims more accurately and tailor products to specific customer segments. Data-driven customisation is allowing insurers to offer policies that are tailored to individual needs and risk profiles of their clients. Insurers needs to ensure they are prepared to analyse vast datasets from diverse sources, including social media and traditional historical records to gain deeper insights into risk patterns and customer behaviour to drive personalisation.
A key challenge for insurers will be to establish clear standards and agreements on data sharing, ownership, and usage, as well as to ensure data security and privacy. Insurers will need to adopt a transparent approach to data governance. They will also need to invest in data integration and interoperability solutions to enable seamless and efficient data exchange and analysis across the ecosystem.
At the end of 2023, the emergent view was that 2024 would see the UK economy possibly enter a recession and see modest reductions in inflation, with a potential knock on both to interest rates and taxation as we enter a major year for global politics. With these predictions unfolding before us, insurers need to consider the inherent long-term nature of their business.
Scenario planning and quarterly reviews of trading across the portfolio (including an external lens) will be vital, as will the willingness to ‘turn on and off the taps’ depending on how performance in specific business lines trades to budget. Agility here will be key, as it will in managing the supplier and broader ecosystem. Cost rises need to be passed on, but in a transparent manner which reflects the strategic importance of the end-to-end value chain of all insurance businesses.
Most importantly this transparency needs to be reflected in conversations with customers; both individual and corporate. While insurance professionals recognise the complexity of managing an insurance business consumers view our collective roles as to make risk straightforward for them, and in cost straightened times shopping around is increasingly the norm. Those that make clear the impacts of the economic turbulence will gain loyalty and those that do not will lose custom.
The insurance industry is moving forward at a rapid speed. With technological advancements, customer-centric strategies, and resilience in the face of ongoing risks at the centre of industry, firms need to be ready. In 2024, insurers will need to embrace sustainability and digital transformations to succeed. Getting ahead of the curve is crucial in meeting regulatory expectations and ensure you are prepared for long-term changes in the industry.
To learn more about key themes, trends, and challenges for insurers, contact Rob Benson.
