At the beginning of this new decade, insurance institutions face significant existing and new challenges to transform their businesses. They need to address the drivers of change in the 2020s, as well as capture the Industry 4.0 benefits to create the insurance markets of the future.
The COVID-19 situation has further exacerbated these challenges. But it has also offered the opportunity to reset, and even reconsider, the purpose of insurance. We consider 10 areas for insurance institutions to focus on:
The regulatory reforms that followed the 2008 global financial crisis have enabled financial institutions to better face the current economic shock by drawing on existing liquidity and capital buffers built up over the intervening period. These reserves have helped to maintain credit flow and intermediation in volatile markets, while managing heightened downturn risks, particularly operational.
Low interest rates, pressures on cost and solvency ratios, cash and liquidity, downgrade implications, and portfolio structuring and hedging have all affected investment income and performance. This extended period of stress has been testing. But it has also yielded important insights, ultimately resulting in improvements to risk-model capabilities, effectiveness of risk management frameworks, and all aspects of policy life-cycle design and analytics.
As firms embark on the journey through macro-economic recovery back to steady-state operations, restoring financial strength will be accelerated by restructuring early and adapting operating models aligned to the post-coronavirus landscape.
Authorities have made concerted efforts to sustain the stability of the global financial system through central bank and fiscal policy measures, while regulators have offered flexibility and operational relief. Delayed implementation deadlines for major regulatory initiatives, such as IFRS 17 'Insurance Contracts', provide an option for firms to reprioritise programmes and allow focus on immediate initiatives in order to strengthen the global financial system.
The broader regulatory agenda has not gone away over this period, however. This includes customer impact and experience, pricing practices, value for money, complex distribution chains, barriers to entry and the use of customer data among others. Complaints and associated premium rebates aligned to regulatory-led customer redress is expected to continue, and potentially accelerate, in the current environment.
The insurance industry will also need to consider the broader inevitable response to the nascent debate surrounding business interruption insurance, and associated political and regulatory consequences. The exceptional demands on operational resilience will re-ignite the focus on governance and conduct. And the trend towards remote working will change the way we protect against cyber risks and also present opportunities for those insurers who can work with clients to mitigate these.
The impact of coronavirus is driving the need for greater agility and better resilience in insurance operating models to help firms flex and meet changing customer service delivery requirements.
This will include improved burst-capacity processing, as well as greater levels of operational resilience. As operating models go through fundamental change in relation to coronavirus and long-term issues, there's also a need for a greater understanding and mitigation of cyber and associated fraud and financial crime risks.
This revised focus will also drive wider stress testing, and updates to recovery resolution and operational resilience plans.
The future workforce is not expected to look the same as it did before COVID-19. Remote working has become core and the future operating model environment will require re-mapping to deal with this, including locations, functions, systems and capabilities.
Outcomes will include a more distributed workforce model with increased staff rotation in physical office workspaces, increased working from home and the associated support model that requires. The requirement for large concentrations of real estate will reduce and more collaborative technologies will be adopted to enable better ways of working.
Given the severe economic impact of coronavirus, rapid in-flight cost optimisation, assurance and restructuring initiatives should be considered. Smarter choices are needed to prioritise capital and resource allocation to core and periphery business lines.
Greater creativity is needed to release capital, potentially leveraging balance sheets of large technology providers or generating revenue by commercialising technology assets to offer industry utilities. This could include immediate and long-term responses with regard to operational model changes, including digital infrastructure reviews and associated transformation programmes. Potential issues in dealing with business run-offs will also need to be addressed, including allocation model cost-per-policy impacts.
Intelligent application of process refinement and automation will be key, which will include honest appraisal of disappointing returns across the industry from these efforts to date.
Insurance technology architectures have not fundamentally changed in the past 25 years. As a result of acquisitions and regulatory demands, many insurance firms have added to their complexity, failing to simplify and reduce costs.
Now is the time to kickstart the transformation, with a focus on simplification of operations and technology. Adoption of fintech and regtech solutions, shared industry utilities and scalable services from cloud providers are to be embraced. These innovations increase operational and technology resilience and agility, and combine with smoother outcomes for customer expectations as we enter a new decade.
The global nature of the coronavirus outbreak has tested, and in certain instances broken, third-party supply chains. These had been designed and built within rigid operating models over the last 20 years to perform near and offshore services.
Firms will need to rethink how best to optimise or collaborate with third-party suppliers, whether new or existing. We need to consider rebuilding and optimising the supply chain, managing a revised property footprint and effective management of third-party suppliers, all aligned to changing operational resilience needs.
Savings generated, for example by a revised property footprint, could be re-invested in a revival of onshore-but-remote activity, with a balance between cost and resilience sought.
Fintechs and ecosystem platforms could potentially offer services with greater business continuity over a more-flexible, disaggregated value chain with associated agility, stability and innovation benefits.
Near- to medium-term operational, cost and regulatory pressures on certain insurance entities could lead to market consolidation; particularly for those that do not have strong enough balance sheets and a clear path to return to positive Return on Equity (ROE).
The speed and scale of change is likely to be further nuanced by the diversification of entities across product classes, regulatory interventions and the structuring of re-insurance arrangements. Scale players in the UK have a clearly identified appetite for certain product class areas. This may drive acquisition in those areas but also test strategic intent to remain within operating parameters designed in a different world.
The pandemic has generated re-insurance market losses, both in terms of the claims environment and the negative impact on the investment markets. However, consensus is emerging over hardening market conditions with momentum expected to carry through to 2021 and beyond. As a result, reinsurers are planning for capital raises to respond to expected growth opportunities arising from harder markets or when pricing strengthens due to capital constraints.
The insurance market infrastructure has so far proven resilient in these challenging financial and operational conditions. Significant questions have arisen, however, around the technical discipline shown in product strategy – both in market participation, pricing and underwriting strategy within segments – and the ability to effectively communicate the scope of cover. Other long-term considerations, such as the implications of climate change and its industry impact, will also need to be considered in line with the above.
Strained investment return is driving a ‘back to basics’ focus on technical price and underwriting performance, which will ultimately accelerate and exacerbate firm investment in the core skills of insurance. This will be technology-driven and may speed the drive to further leverage technology, in particular in actuarial teams where human capital costs remain high and availability scarce.
Unlike the global financial crisis, this crisis is an exogenous shock and insurance is essential to its resolution. Firms can individually and collectively innovate operations, and reset their culture and reputation. They can also renew their purpose by focusing on the customer franchise, and understanding adaptive behaviours and evolving needs of customers across segments.
Lessons can already be learnt. It is apparent that the purpose of insurance is still not clearly understood by the UK population, and the industry needs to be better at communicating and engaging around its contribution and role. Those firms which have taken rapid action aligned to a long-term view of the current challenges, and have not forgotten the customer in the process, will emerge stronger.
Count on our actuarial specialists to develop a transformation plan and increase the growth of your business in the market.
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