After a 2010s decade of near constant change in the insurance industry, 2020 brought the added challenge of a global pandemic. With the economic after-effects of that likely to last for some time, adding to the continuing ripple effects of technology and regulation, what may shape how insurers achieve growth yet maintain resilience in the coming decade?
Over the course of the coming weeks and months, we’ll be examining a whole range of salient issues in three areas under an umbrella theme of ‘Powering growth; strengthening resilience’. Articles will address:
To kick our analysis and article series off, we asked several of our senior leaders and subject experts to share some high-level thoughts on the short and medium-term challenges facing insurers.
Colin Forrest, EMEA Insurance Consulting and Technology Leader, on regulation and reporting
“For those of us in Europe, the 2010s might be described from a regulatory point of view as the decade of Solvency II. The 2020s equivalent, although on a bigger geographic scale, is the new international insurance accounting standard, IFRS 17 – now due to come into effect on 1 January 2023. Aside from the preparatory work involved, what we’ve been at pains to make clear to our clients and the market in general is that dealing effectively and efficiently with both the before and after of the actual implementation date involves a harmonious marriage of the accounting and actuarial worlds.
The global regulatory and reporting issue of the times, as we see it, is climate. We’ve already seen many state, national, supra-national and international institutions introduce climate risk quantification and reporting obligations on insurers, or initiate consultations. Perhaps the best international indicator of the direction of travel on this issue is the movement to make TCFD (Taskforce for Climate-related Financial Disclosures) reporting mandatory in several insurance jurisdictions. Many insurers obviously have a track record in assessing natural catastrophe risks, but what we’re talking about here is a completely different animal, with the need to potentially develop risk scenarios and impacts going out 20 or 30 years.”
Ralph Cagnetta, (Senior Director, Willis Re) and Mike Wilkinson (Senior Director, Insurance Consulting and Technology), on emerging risks
“Up to just before the COVID-19 pandemic hit, our most recent survey of the risks that insurers perceived as the most dangerous to their business were led by cybercrime and the effects of disruptive technology. Those won’t have dissipated, but they are likely to have been joined and indeed coloured by the lessons we’ve learned and are still learning from the impacts of the pandemic on public health, economies, ways of working and buying patterns.
The two biggest jumpers in that same survey though were natural catastrophe and climate risks. This demonstrates insurers’ concerns about the rising frequency and severity of natural catastrophes but also an appreciation of how climate change and the growing volume of calls for a just and orderly transition to a lower carbon economy may affect every part of an insurance business, be it underwriting, investment and reputation, to cite just a selection.”
David Hoile, Senior Director – Investment, on the economic environment and investment conditions
“COVID-19 is amplifying one of the biggest economic policy shifts in recent years. Pre-global financial crisis we were used to interest rates being cut to stimulate economies. Now that interest rates are already so low, the post-COVID emphasis is on a longer-term trend of fiscal stimulus from governments to support economic activity. While this is likely to create a good growth environment over the next 12 to 24 months, longer-term it may create higher economic volatility.
For example, the policy shift raises the possibility of higher inflation – something the market has virtually forgotten about. Our central outlook is that high inflation is unlikely to be a problem for advanced economies, but it is certainly a plausible risk that insurers will need to consider for both the resilience of investment portfolios and as a driver of liabilities. Another aspect of government spending becoming a more important economic policy tool is that there should be good investment opportunities in real assets, such as infrastructure, including green infrastructure and other areas of innovation.”
Rowan Douglas, Head of the Climate and Resilience Hub, on climate change
Insurers are increasingly in the front line of addressing the physical, transition and liability risks associated with a warming planet and climate change.”Rowan Douglas
Head of the Climate and Resilience Hub
“Insurers are increasingly in the front line of addressing the physical, transition and liability risks associated with a warming planet and climate change. Willis Towers Watson takes its social and planetary responsibility seriously and is actively contributing to how organisations adapt to climate hazards, vulnerability and exposure, and how they advance risk mitigation and enhanced resilience measures through our Climate Quantified™ offering.
The insurance sector has already played a key role in shaping the global regulatory landscape that has now emerged on climate, including leading a revolution in climate data and analytics and supporting the development of a formative framework for climate-related financial risks. There is a strategic opportunity for insurers to continue to lead. But doing so will require the industry to up its game even more and embed a strategic approach.”Back to top
Magda Ramada, EMEA Head of Innovation, on the future of the insurance product
“The actual definition of a product, including an insurance product, should consider the product from a full customer journey perspective, including both pre-sale stages and post-sale stages. There are two reasons for doing this. Firstly, because this increases customer centricity and looks at a policy from the customer’s experience perspective and not from an insurer- or policy-centric perspective. Secondly, because this enables the identification of levers in each stage of the customer journey that can be used to increase the insurance product’s persuasiveness and stickiness, as well as its profitability and customer satisfaction.
In other words, insurance products cannot be considered in a policy-only approach, as many drivers of profitability, conversion, retention and customer satisfaction are customer journey dependent.”
Adhiraj Maitra, Director and EMEA Climate Lead – Insurance Consulting and Technology, on environment, social and governance (ESG) principles and enterprise risk management (ERM)
“As climate change has shifted from being seen as ‘society’s problem’, or perhaps a moral issue, financial services businesses, including insurers, have very quickly found themselves thrust into the role of corporate catalysts for change as part of a wider ESG agenda.
From the types of policies and sectors insurers underwrite, how they make investment returns, how resilient the business itself is to physical, transition and liability risks, how they assess and disclose climate risks, how they reward people, and their attractiveness and fairness as an employer – all increasingly are viewed by stakeholders through a climate lens. And all are becoming crucial factors in the wider ESG rating an insurer can achieve.
Those running ERM programmes at insurers are uniquely placed to ensure their companies are prepared to meet those rising and multi-faceted expectations of investors, regulators, employees, customers, and other stakeholders.”
Stephen Jones, UK Head – Property and Casualty Insurance, on a potential new insurance target operating model
“To me, there’s a logical progression around the idea and benefits of being a data-driven insurance business. Enhancing data capability is a fundamental pre-requisite, but it’s not really sufficient in itself. As companies begin to master data, they have choices about what to do differently - they can do more analytics on different things more quickly and can organise themselves differently to monetise the insights this delivers.
At the heart of the enhanced data asset is claims data, which is the essential source of competitive differentiation in that the more that companies have, the more it allows them to do to improve pricing, underwriting and claims operations. And beyond that, it’s the fuel of reserving and capital modelling.
When you realise that the five core insurance technical functions are essentially fuelled by claims data, the logical thing to do is to align technical functions more closely around a common data and analytical underpin so that all those departments are insight mining in an aligned manner, enabling them to do what they’re there to do far better, in a prioritised, consistent and coherent way. Therefore, the future, as I see it, is an insurance company with its technical functions aligned as the beating heart of deploying analytics to derive insights, to monetise and to outperform.”
George Zarkadakis, Head of the ‘Future of Work’ programme in GB Talent and Reward, on the changing workplace
As customers sought to allay their concerns and reassess their coverage requirements, insurers that had already modernised and initiated digital transformation found themselves at a relative advantage, both operationally and reputationally.”George Zarkadakis
Head of the ‘Future of Work’ programme in GB Talent and Reward
“Among the numerous and still unfolding economic impacts of the COVID-19 pandemic is how it forced businesses to digitalise work over a very short period, and how that in turn has affected how we want to work and live. Certainly, that has been the case for the insurance industry too. As customers sought to allay their concerns and reassess their coverage requirements, insurers that had already modernised and initiated digital transformation found themselves at a relative advantage, both operationally and reputationally.
As the global economy emerges from the pandemic crisis, this is the perfect time for insurance leaders to reflect on what has worked well during lockdown, draw important lessons from the engagement with employees, partners and customers, and factor those lessons into driving positive change and improved performance in the post-pandemic world.”
James Vickers, Chairman of Willis Re International, on capital
“The COVID-19 pandemic has pretty much sealed the fate of ‘lower for even longer’ interest rates. Insurers and reinsurers already familiar with the challenges of, for example, reduced investment returns, asset and liability matching for regulatory purposes and employing capital most effectively face more of the same.
This will inevitably put further onus on strong financial and capital modelling and asset management. On the plus side, the appetite and capacity of reinsurance and insurance-linked securities markets for a broad range of risks remains strong. Similarly, there should be continuing opportunities for acquisitions and divestments given the relative cost of capital and the preference of many companies to focus capital in their core and most profitable business areas.”
Andrew Johnston, Global Head of InsurTech at Willis Re, on innovation
“I think 10 years ago, or even less, there was a real concern among established insurers that InsurTech businesses could, in some cases, make them irrelevant, or certainly less relevant, to customers. Now, we see a whole different picture, with, yes, some new players operating as full-service insurers, but a predominant scene of collaboration and incumbents really picking up the cudgels of developing service offerings and the process mechanics and technology behind them.
What our quarterly analysis of InsurTech funding and deals shows is that there is no shortage of capital ready to invest in promising areas. Perhaps the bigger challenge that many companies face is fostering a culture of innovation that rapidly connects identified business needs and opportunities with technology and solutions. Our involvement as a technology provider and the work being done by Willis Re InsurTech allows us to maintain an up-to-date view on what types of technology, and innovative business models are making a difference to our clients and the market, and where the greatest amounts of value are being added.”Back to top
Marisa Hall, Co-Head of the Thinking Ahead Institute*, on the power of culture
“Despite its centrality to organisational success, culture is still under researched, under measured and widely under rated by business leaders as a differentiation tool. It’s our contention that culture, rigorously measured and managed, will play a leading role in helping organisations emerge with stronger, fairer and more sustainable businesses. And in this process, they will discover that organisational culture is the nexus point for increasingly common conversations about organisational purpose, inclusion and diversity, and ESG and sustainability.”
Duncan Anderson, Global Leader - Insurance Technology, on the increasing power of data and analytics
“The huge increase in the amount and range of data available for insurance analytics has been widely discussed and recognised over recent years. What we’ve seen in parallel over that period is the increasing adoption of more powerful computing hardware, in particular cloud-based resources and related rich analytical services and tools. In insurance this has implications for every step of the customer journey.
Across marketing, underwriting, pricing, policy administration, claims handling, reserving, customer support and financial reporting there are opportunities to improve performance, and we’re working with companies across the insurance spectrum to push the envelope of how they integrate and use data and analytics in their business. In all of these areas we see a clear trend of increasing automation of analytics, and stronger links between insurers’ technical functions. And that’s before we consider the possibilities from as yet unexplored data sources to which many companies already have access.”
Dave Ovenden, Global Head of Pricing, Product, Claims and Underwriting, on the future of pricing / underwriting / claims
“COVID-19 is only going to accelerate what was already happening around the proliferation of digital-first business models. We’ve been talking for some time about the benefits of being an ‘analytical insurer’, by which we mean companies that have embedded three key characteristics in their business: a reliance on data and an intolerance of anecdotes in making decisions; the effective compilation of data to present a single source of the facts; and the ability of all decision makers to access granular insight at the point of making a decision. More granular policy information makes ground up scenario building possible, putting some meaningful number ranges on observed and anticipated trends, and teeing up a whole range of things, such as evaluating what portfolios will suffer most, or even disappear.
While the specifics of how companies set about achieving those attributes will vary between individual personal lines, commercial and life insurers and the specific lines of business they serve, the incentive for pursuing them nearly always boils down to a handful of drivers – greater agility, rapid speed to market, accuracy of decision-making, and all delivered at lower cost. They are reducing the analyse-decide-deploy cycle of decision-making from weeks and months to days, or hours in some cases.”
Matt Scott, Senior Director in the Climate and Resilience Hub, on the emerging role for insurers as stewards of a climate resilient transition
“Insurers have played a leading role in managing the financial risks from a changing climate. As regulatory climate stress tests extend time horizons out to 2050 and beyond, and attention turns towards the benefits of an orderly transition, insurers are well placed to work their clients to help lead the way to a net zero and resilient future. Understanding the pathways to, and implications of, the transition to a lower carbon economy is becoming ever more important, particularly when you consider new legal and liability risks that may emerge.”
Max Drannikov, Senior Director – Insurance Consulting and Technology on digital insurers and IT infrastructure
“Traditional lines of thinking about ‘the business’ or ‘technology teams’ as separate things are already becoming blurred and may well in the future be erased.
We believe there are five technical building blocks that will be key to insurers’ success. First, the cloud and getting the most out of your infrastructure. Next comes, connectivity and the ability to plug into an eco-system. Third is automation that could range from simple data collection and monitoring to very complex orchestration of nested workflows involving multiple machines, people, organizations, data sources and processes that may run over a number of weeks. Fourth is insight, meaning both underlying data — be it either structured (e.g., databases and spreadsheets), semi-structured (e.g., documents, logs), or unstructured (e.g., images, voice) — and the business-relevant conclusions you can draw from analyzing that data. And finally, digital business services, covering a wide array of policy administration, customer relationship management, enterprise resource planning and other types of platforms that are built around more granular-level service modules.”
Joe Milicia, Global Proposition Leader – Business Process Excellence, on business and finance transformation
“There are plenty of reasons why greater automation of back-room operations has been on more insurers’ agendas in recent years. Mounting regulatory pressures have typically increased the compliance workload without, in most cases, more time or resources to do it. At the same time, market pressures have created a competitive environment where speed and flexibility are increasingly necessary operating traits. With this these has also come demand for additional, and sometimes real-time, management information (MI) to inform, direct and monitor investments in pricing, underwriting, claims and so on.
The result. Many insurers find that too high a proportion of premium is going to expenses, a situation that many are finding only investment in technology and greater automation and connectivity can significantly alter.”
These comments give a flavour of our view of what lies ahead for insurers in the next decade. What we can say with certainty is that the 2020s have started with a jolt to the global economic system and a challenge to operational norms like nothing we have seen in our lifetimes. So, to reflect on that, we gave the last words to Alice Underwood and James Kent to pick out some take-outs from recent experience.
Alice Underwood, Global Leader – Insurance Consulting and Technology
“The pandemic has really emphasised the interconnected nature of the world, which we see in some of the risks already mentioned in this article. It’s also shown the need to be more attentive to extremes, as it’s easy to have short memories and become complacent.
While we, as a business and an industry, have been able to work through the pandemic much better than we thought, we have to acknowledge there will be lasting effects. For example, in what the work day looks like and how work gets done. But also in how businesses and individuals perceive risk as a result of the severe economic impacts and, in some cases, what they expect insurance to cover. These will clearly impact what clients are looking for from us.”
James Kent, Global CEO of Willis Re
“The economic impacts have provided something of a ‘wake-up’ moment. The pandemic has reminded our industry of the potential for the severity of tail risk and reminded society in general of the protection gap. Insurers and reinsurers haven’t experienced a catastrophe that affected just about every line of business and geography before. It has brought questions to the surface about how the industry itself better manages tail risk and the implications for individual and business insurance solutions needed to address the challenges of the modern world. And, by the way, these aren’t questions insurers and brokers can solve on their own – it will require the insurance industry, advisors and governments to work together, but it would be a terrible failure for our industry not to be leading the way in generating solutions.”
“In general, I see the industry pivoting to become much more heavily involved in helping to mitigate risks, whether climate or other systemic risks.”
*The Thinking Ahead Institute is a global not-for-profit group whose vision is to mobilise capital for a sustainable future. Its members comprise asset owners, asset managers and other groups motivated to influence the investment industry for the good of savers worldwide. It has 48 members with combined responsibility for over US$12 trillion and is an outgrowth of Willis Towers Watson Investments’ Thinking Ahead Group.