Post pandemic - what does the future hold for global insurance?

The Covid-19 pandemic and its associated worldwide lockdowns had a significant impact on the insurance sector. As with previous recessions, personal lines were less vulnerable than commercial lines to the global disruption, and although initial data shows some positive growth, long-term growth is expected to remain low. How does the insurance industry not only recover, but boldly move forward, from this setback?

Slow growth trajectory

According to the McKinsey Global Insurance Report 2022, premium growth rebounded in 2021after slowing down in 2020. This was compared to growth of more than 4% per year between 2010 and 2020. Profits too rebounded in 2021, after falling by 15% between 2019 and 2020.

According to the most recent survey by Swiss Re Institute, real growth will remain below-trend over the next two years. It forecasts 0.8% growth in global non-life premiums this year in real terms, and 2.2% growth for 2023, based on the ongoing rate hardening, most notably in commercial lines. Regionally speaking, Middle East and Africa looks promising compared to other regions, with stable non-life premium growth predicted.

Global life premiums, the institute forecasts, will contract by 0.2% in real terms in 2022, and increase by 1.9% in 2023 due to increased risk awareness in all markets

Barriers to growth

The key factors challenging industry growth are low interest rates, pricing pressures, and slow organic demand in mature markets.

Insurers are also facing mounting regulatory challenges, both related to the pandemic, such as business interruption, worker's compensation and solvency concerns, and unrelated to the pandemic, such as the rise AI, social unrest, climate change, and concerns around cyber security and data privacy.

From a customer perspective, trust, one-size-fits-all solutions, and slow digital adoption are also hampering growth.

Trust in financial institutions is near an all-time low. According to the 2022 Edelman Trust Barometer, only 54% of respondents trust the financial services industry, 10 percentage points lower than the average for other industries in the report. Trust is fundamental in insurance, as insurers have a much bigger role to play in society than just protecting risks.

Further, customers today do not simply want financial protection, they want personalised solutions that fit into the context of their day-to-day lives, whether that be when buying a car, planning for retirement or starting a business. Customers expect insurers to go beyond their risk-transfer obligations, and offer end-to-end solutions that cover risk prediction, prevention and intervention, and to underpin those services with powerful digital and data capabilities.

To that point, automation and AI are already changing the way insurers interact with consumers across the value chain in areas such as product design, underwriting, pricing and claims. Insurers must fully embrace the digital future by leveraging technology to improve product offerings, pricing and customer engagement.

Digital technologies will only reward those companies that can innovate and quickly adapt to consumer need. As such, insurers need to be on the offense with the right strategy, capabilities and urgency needed to win.

A new approach is needed

The past three years called out the clear need to professionalise the business model, and move away from a pure capacity-building focus towards a more customer-oriented one.

Smart players are already making moves in this regard. They are reallocating capital and focusing on areas where they believe they can scale locally, invest for growth and innovation, and make significant improvements to productivity.

This approach is going to be critical if the sector is to overcome the slow growth projections, and maintain pace with other industries that already transforming and reinventing themselves to meet consumers' expectations and changing needs in our swiftly evolving society.

While such an approach would naturally take into account new customer-centric product innovations and digital transformation, the one area it must prioritise is the overhauling of the very character and nature of insurance companies. By this it is meant not what insurance companies offer, but how they intrinsically are - how they exist in the world.

ESG: an imperative for the future of insurance

Environmental, social and governance (ESG) considerations must become a core feature of the insurance industry's business model. Company culture, diversity, and ways of working to attract and retain talent must be totally reimagined, and the productivity imperative must be addressed. CEOs too must be reinvented to become real role models in these pivotal times of change.

Within the broader ESG focus area, the issue of climate change is gaining traction. This presents insurers with an opportunity to work with customers, both to help them better adapt to this risk by investing in more resilient infrastructure and supply chains, and by providing advice to help them address the physical and transition risks associated with climate change.

To successfully do this, insurers will need to develop a deeper understanding of climate risk in portfolios; rebuild their risk models and pricing assumptions; create new climate-related products and services; and work with other partners to mitigate climate risks.

According to Deloitte insurers can actually accelerate climate risk mitigation by promoting climate mitigation products and risk management services, testing the appetite for new products and risk management requirements, and training staff on climate literacy.

Further, they should provide incentives by promoting decarbonisation efforts for policyholders via reduced premiums, and supporting low-carbon technologies and start-ups with customised coverage.

Deloitte also recommends that insurers expand their risk mitigation offerings, by providing risk advisory services to improve clients' risk mitigation understanding and approach; to create new risk-transfer offerings to enable capital flows towards green solutions; to support the sustainable decommissioning of carbon-intensive assets; and to develop solutions for reducing climate liability and environmental litigation.

The pandemic may have sent markets into a spin, but it also brought with it the opportunity to change. In global insurance, that includes the chance to change the way we operate and respond to the most pressing, current risks facing the planet.

Any meaningful change in this regard will require collective action across all sectors of the industry, including public-private partnerships in which insurers collaborate with regulators, local governments and policy makers to effectively mitigate these threats.