4 insurance industry challenges, and four digital solutions

Over the past two years, the property and casualty insurance industry has had to deal with a number of significant challenges: the pandemic, supply chain management issues, inflation and heightened concern over cyber threats.

Insurers have seen changes in customer perception, a workplace transformation with remote working and the ‘great resignation,’ evolving customer expectations like services in digital-only, evolving regulations, as well as climate goals being pushed to the forefront.

Demutualization and an increase in M&A activity are becoming increasingly part of an organization’s strategy. Mutual insurance firms are going public to raise money from capital markets, larger carriers are merging for the benefit of scale, and, in some regions, cross-border carriers are exiting domestic markets due to a change in strategy and are selling to domestic carriers.

Prior to the pandemic, the insurance industry was already experiencing a period of significant change driven by escalating insurance costs, fluctuating investment returns and an increasingly digital and self-service-oriented customer. In the past, some insurers did not respond to these changes because the ‘traditional’ way of conducting business remained acceptable. The pandemic and industry challenges that lie ahead have fast-tracked innovation and a push for much needed modernization in the industry.

Potential challenges ahead:

Inflation – Underlying inflationary trends continue to escalate. Estimates of core inflation in 2022 between six to 10% will put stress on combined ratios, affected by salary increases, higher expenses, increased claims expenses due to vehicles and properties being more expensive to repair. Litigation is lengthy and costly, and health care and medical costs are increasing. Climate change – Weather events continue to increase in frequency and severity, affecting claims settlements as well as reinsurance capacity with rates hardening due to escalating natural catastrophes.Fraud – Although fraud has been a constant challenge for the industry, increased customer access through digital and self-serve channels continues to grow. A larger technology footprint and hardening economic conditions are increasing the type and number of fraudulent activities.Cybersecurity – Remote working, digital channels and an increase in presence on cloud and public networks have widened the security perimeter, providing more entry points for cyber actors and incidents. 

Where should insurers focus

Data and analytics
Insurers should continue to further invest in data and analytics capabilities to better identify risks, improve pricing accuracy and prevent and/or detect fraud. Data-driven risk management is the new normal. Qualitative considerations in underwriting are important, but a more sophisticated and quantitative underwriting process is imperative.

Insurers must improve upon predictive modeling and AI capabilities to address changing risk profiles. Emerging technologies such as telematics and usage-based insurance will require AI/ML capabilities for behavioral policy pricing. Also, climate events require machine learning capabilities to predict weather events and catastrophes to assist in identifying risk-sharing and re-insurance opportunities and to build adaptable price models to deal with a range of emerging risks.

Many insurers have made digital their de facto strategy. Analytics is an important component for the success of the digital insurance experience. Insurers should use data to determine customer value metrics, to better understand customer insurance needs, target high-value customers, and recommend bundling for increased sales and discounts for customers.

Digital has further enabled access points and self-service has opened up more opportunities for fraudulent activities. As drivers return to the road at post-pandemic levels and severe weather events become more common, claims ratios may return to pre-pandemic levels. This will put pressure on combined ratios. Using analytics and AI in preventing detecting, and reducing fraud is a key tool in managing claims losses.

Automation
Insurers should turn their attention to increasing investment in technology projects with a focus on automation. Most insurers are predicting additional growth in 2022, putting on pressure to scale without adding operating expenses. Straight through processing will allow scale and, in some instances, improve customer satisfaction (eg. paying small claims with no interaction with an adjuster). Automating menial tasks allow the workforce to focus on higher value work, improving overall employee and customer engagement. Investing in automation could also offset the long-term impact of inflation on operational expenses.

Talent management 
Competition for talent is becoming heated as the pandemic recedes. Employee needs and preferences around work have changed. Flexible working arrangements are becoming the norm and for some are more important than salary. Numerous employee surveys are telling insurers that employees have little interest in returning to a conventional office setting.

Insurers should continue to focus on providing teams with remote work options after the pandemic, if not, another employer will, resulting in loss of key talent, corporate knowledge and will result in some level of business disruption.

Climate
Embedding climate risk, metrics and targets into how insurers make decisions are becoming increasingly critical. Insurers’ climate plans should cover all aspects of their business from underwriting, products, claims, investments, operations and their supply chain.

The industry can respond by creating new insurance products and solutions that support the transition to renewable energy, using the asset side of the balance sheets to accelerate climate solutions and working with investors to develop financial models to support disaster response.

The P&C insurance industry will continue to be resilient and implement solutions to better manage the changes that lie ahead. As digitization continues, consumer expectations and needs and employee engagement will continue to shape the industry in 2022. Continued investment in insurtech through partnerships, customer experience-led engagements, and automation of back-office functions will be important.

The challenges and opportunities outlined above are forcing P&C insurers into finding better ways to further innovate, automate and use data to remain competitive, relevant and profitable. Insurers who evolve quickly and define greater clarity between acceptable and uninsurable risks, effectively manage their investments (people and product) and address climate issues are the ones who will be better positioned for accelerated growth in 2022 and beyond.