We have entered another year of macroeconomic and geopolitical volatility affecting all sectors in the UK markets. The insurance industry is no exception, suffering from the pressures of inflationary pressures, regulatory changes and the looming recession. While 2023 will be a challenging year, the latest data from the UK and US suggest inflation is stabilizing and a recession may not be as deep as we thought. Regardless of the strength of the headwinds, high interest rates in some parts of the market mean insurers have reason to be cautiously optimistic, and while growth will be more difficult to achieve, positive lessons have been learned over the past three years.
Since the outbreak of Covid in 2020, many insurers have fared well during incredibly difficult times, showing a surprising amount of flexibility and resilience. That’s something you don’t typically see in an industry that’s often seen as in need of modernization. It is this adaptability that is needed in the turbulent year ahead. We look at some of the trends we expect to be prioritized through 2023:
Environment, Social and Governance
ESG is ubiquitous in every boardroom and boardroom of the insurance market and will continue to gain momentum and evolve into 2023. Net-zero targets, investment strategies and advancing data-driven sustainability amid mounting risk exposure headwinds will put this high on the corporate agenda and very heavily in the regulators’ spotlight. Some insurers may find the need to disclose plans in annual sustainability reports burdensome; the smart, on the other hand, sees ESG as an opportunity and as a fundamental necessity. We will likely launch new products and services with a focus on sustainability alongside innovative carbon footprint reduction initiatives. Social and governance are likely to catch up with the environmental aspect of ESG as companies build more operational resilience in their infrastructures to ensure good governance. The fixed income sector is likely to increase its visible reporting to regulators to ensure they are aligned with their clients’ expectations for sustainability. This is a crucial time for companies to prioritize concrete and progressive plans.
Inextricably linked to ESG are equity, diversity and inclusion, and how to increase transparency and accountability in organizational governance structures. These are led by boards and management teams to ensure insurers diversify their workforces and create inclusive, purpose-driven cultures that represent the societies and shareholders they serve. Major gaps remain across the sector, particularly at the higher tiers, which will sharpen focus on I&D agendas.
operational efficiency
Many insurers suffer from operational inefficiencies, mainly due to historical under-investment and the profit-driven nature of the industry, which means systems and processes are not harmonized and business units often use disparate methodologies, creating silos. Mutual life and annuity companies will seek to review and transform their processes to reduce costs, improve productivity and ways of working, which will drive employee engagement and ultimately ensure competitiveness and customer service. Already in the first weeks of the year we received client briefings for interim operations professionals and business architects who are able to continue to drive cost-efficient and scalable operations, aligning costs and revenues and embedding continuous improvement disciplines. Doing more with less will likely be a plan for some, investing more to get better.
Changing regulatory landscape
Non-life insurers are still grappling with the effects of the pricing reforms that came into effect around this time last year. The reforms have redesigned in-person queues, protected loyal customers and largely eradicated ‘price walking’, i.e. customers who shop for a lower price at renewal time, hitting the PCWs as much as the carriers. There could be a race to the bottom, particularly in the badly hit motor vehicle insurance market.
Pricing reforms may be overshadowed in 2023 by the FCA’s consumer responsibility principle, which further ensures insurers act in the best interests of their customers and not just for profit, putting customer centricity at the heart of the industry’s standard operating model. It will not only affect freight forwarders, but all companies along the distribution value chain, including brokers. As the July deadline approaches, we will see increased transformation to ensure regulatory compliance and avoid fines.
Finally, we may see changes to the EU’s and then the UK’s Solvency II requirements in 2023. As with inflation, any changes will affect insurers’ investment strategies, leading to sweeping changes.
PE, Consolidation and Insurtechs
The insurance market has seen a large infusion of private equity capital since 2021, but looking ahead, inflated valuations are unattractive and funding is a challenge, meaning deals are harder to find, especially in the already consolidated brokerage market. PE firms investing in insurtechs may well turn up the heat and demand demonstrable value rather than accepting promises of long-term returns. 2023 could be a year of “up or shut up” for Insurtech. PE or otherwise, we expect less insurance M&A activity in 2023 and a greater commitment to driving value from existing assets through digital and customer transformation and organizational restructuring.
technology and innovation
With a possible slowdown in insurtech growth, insurers with legacy systems may have more time in 2023 to innovate and experiment with new products, such as those that are more sustainable, app-based and provide real-time data to customers. It is possible for insurers to narrow the gap between themselves and consumer finance firms that have set the bar for customers, digital and innovation. EIS, the cloud-based digital insurance platform, could see real customer growth by 2023 as companies seek to automate, leverage data and analytics, and operate a more cost-effective tech park. In particular, with the implementation of the Consumer Duty and Pensions Dashboard, investments continue to be made in digital channels to enable businesses to stay close to customers to build trust and loyalty. A real-time, personalized digital channel is likely to be the recipe for success for customers through 2023, driven by the rise of embedded insurance and customers buying insurance through non-insurance companies. This requires forming new partnerships, making better use of data, and playing an active role in the broader ecosystems in the race to attract and retain customers.
war for talent
There always seems to be a war for talent, which may be the case, but it’s becoming more evident in insurance. Many leaders across the industry with decades of tacit knowledge and expertise are nearing retirement, and the assembly line for the next generation of leaders is looking easy. Add to this the regulator’s focus on purpose, culture and diversity and it becomes a smaller pond to fish in. Insurers need to reinvent workplaces to lure candidates back into the office and attract much-needed talent from outside the industry into roles like marketing, technology and clients. Chief People Officers and Heads of Talent Acquisition must challenge internal sponsors and external recruitment firms to attract, appoint and retain diverse talent from outside the industry on either a permanent or interim/project basis. The pandemic has fundamentally changed people’s attitudes towards work and expectations, turning traditional working models upside down. Therefore, finding the nirvana of labor power will be the greatest challenge.
The year 2023 will surely continue to challenge us for the better.
