Last week we rounded up the insurtech sector Predictions for next year, but in this one we take a more general view. Another conflict like Ukraine, or maybe a peace treaty easing supply chain problems and energy price rises? There’s the reforms to Solvency II in the UK, which is kind of a big deal.
How about the rapid growth of Net Zero and climate change regulations in every aspect of insurance, from pension investments to claims supplier chains? That seems a certainty and it’s bound to add costs because people need to be employed for this green compliance, not just automated software packages.
Let’s dive in and see what the mood is across the insurance industry;
SOLVENCY II
The changes free up insurer capital but the UK government has made it clear that it wants to see that cash spent on climate change and Net Zero agenda projects.
Gregory Marchat, Head of UK Financial Services at Mazars comments;
“Next year will see Solvency II reforms take shape, as confirmed by the Chancellor. With regards to Risk Margin and Matching Adjustment, life insurance market participants have expressed a positive sentiment on the proposed reduction of the Risk Margin. The 65% reduction will unlock a substantial amount of funds to be invested in green assets and infrastructure projects, particularly when combined with the reforms proposed on broadening asset eligibility rules for the Matching Adjustment.
“This flexibility on the Matching Adjustment does not detract from the fact that the consultation response suggests an increasing onus on life insurers to design and maintain sufficient risk management processes to monitor the increased risks arising from inclusion of these asset classes. These requirements will require significant investment and effort and may ultimately deter insurers from expanding too far in their Matching Adjustment Portfolios.
“2023 will also see preparation continue for Consumer Duty, which introduces a higher standard of care towards retail consumers and reflects a shift in the FCA’s approach, with the next milestone being the 30th April 2023 deadline for manufacturers to have completed all the reviews necessary to meet the outcome rules for their existing open products and services”
SOLVENCY CASH DEPLOYED
So let’s assume that capital is released next year, how should it be spent to meet the regulatory challenges posed by the EU, FCA and others? Suhas Sethi, Head of the Global Insurance Business Unit, at WNS, has some ideas;
“When it comes to ESG maturity, insurance carriers stand currently at different stages — from incorporating ESG factors in their underwriting principles to building sustainable claims-response models. We are seeing emerging trends in how the industry is embracing these changes:
- Commitment to ‘Net Zero’ outcomes: A Dec 2021 Globaldata poll for the insurance industry found that 21.6 percent of respondents believed that climate change risk was the main driver for adopting ESG practices. To minimize this looming challenge, insurance carriers’ decision criteria will integrate more nuanced underwriting exclusions and divestment policies into decarbonization strategies.
- Data digitization — Reducing Carbon Footprint is an emerging need! Real time data through IOT and digitization will enable carriers to re-engineer products, ensure accurate risk-profiling to provide advantageous policy pricing, and reduce claims occurrences to bring down the carbon footprint.
- New Market Push while Building social trust — We have seen Commercial Insurance companies specifically focus on businesses that are driving ESG changes as their clients, this trend is likely to increase. In addition, we feel there will be far more increased partnership with business to address social issues through a product portfolio of innovative coverage for underserved populations, thereby creating a dividend of social trust and well-being.”
MANDATORY PARAMETRIC PAYMENTS?
Another interesting development could well be using parametric products to pay out much quicker on climate related weather events, says Sid Jha, founder and CEO of Arbol, an insurtech company and global climate risk solutions platform:
“Parametric insurance will continue to grow to address major coverage gaps that are growing in the insurance industry. The damage caused by Hurricane Ian in Florida will take years to settle and lead to considerable litigation to settle claims, which is becoming a persistent pattern in the aftermath of disasters. Parametric insurance offers an alternative to traditional claims settlement that relies on subjective loss assessment and increasingly expensive disasters will keep highlighting the need for parametric solutions in both insurance and reinsurance.
Pressure on financial institutions such as banks and asset managers will continue to increase regarding climate risk disclosures and action. Stress tests on bank balance sheets due to climate risk by central banks will keep broadening and lead to the need for solutions to offset large scale climate risks that sit in loan portfolios, ranging from mortgages to farm loans. Such portfolios are nearly impossible to insure using traditional methods and parametric insurance will be a key part of the solutions in addressing climate risk for financial institutions.”
Rapid hurricane/storm payouts would certainly fit the globalist climate agenda and act as a kind of reparations too, so Sid could be right on the money with that one.
LOSS RATIOS
There’s no doubt that we are entering a global economic recssion and that poses a challenge for insurance brands; how can they reconfigure their loss ratios as inflation and increasing claims volumes hit harder next year?
Stan Smith, CEO, and founder of Gradient AI offers these insights;
“In a tightening economic environment (or should we say “With a looming recession”?), insurers are searching for ways to maintain profitable loss ratios. To do so, they will use AI to assess and analyze millions of data points so that they can gain visibility into the most relevant risk factors for any given client. This will ultimately increase efficiency, maximize price competitiveness, reduce quote turnaround times, enable Straight Through Processing, and optimize claims processing. Most important, AI combined with skilled professionals improves customer experiences which can often lead to new business opportunities.”
EMBEDDED COVER
More growth ahead as tighter budgets forces sonsumers to look carefully at every monthly direct debit.
Paul Webster, Insurance Pre-Sales Director at FintechOS says the squeeze provides an opportunity;
“Insurance cover has remained the same for hundreds of years and customers still need the same service that insurance providers have always offered. Yet, entering 2023, consumer insurance needs are much more dynamic than a single annual policy can accommodate. Working from home is normal, travel is more affordable, pet ownership is on the rise, and expensive consumer electronics have become essential products. Consumers can already insure all these things with traditional insurance, but through multiple, inflexible annual policies, often with different providers.
Over the next 12 months, the winners will be the insurance providers offering tailored bundles of specialist cover to meet each customer’s specific needs. Insurers already have all these policies available, they just need to start combining the right products together in a way that makes sense to individual customers. In the future, rather than insurance being a boring admin chore a customer completes annually and then doesn’t think about until the next renewal; they will soon be able to manage personalized bundles of micro-insurance through an app they use every day, turning cover like travel insurance on and off with a tap of their phone screen.”
RETAILER COVER
The growth of online retailing also offers an opportunity for insurers to sell business cover, or perhaps a hybrid home/work policy for online traders. Guy Salame, Co-foudner and CEO of Spott has these observations;
“Major eCommerce players and marketplaces, like Amazon and Shopify, already recognize the proliferation of risk – which is why they require various insurance policies for their merchants. In 2023, we are likely to see this trend accelerate, with more businesses looking to limit their risk exposure, and more marketplaces and eCommerce platforms requiring that vendors have some sort of protection in place.
While these risks cannot be avoided entirely, they can be mitigated via data-powered insurance models that take into account the unique properties of eCommerce businesses. This is achieved by using consumer and business data online to analyze the digital retail landscape, build risk assessment models, and create tailor-made insurance products to suit merchants’ real-time needs.”
FIGHTING CLAIMS INFLATION
Alex Zukerman, CSO at Sapiens sees admin cost reduction and streamlining systems as being the key to combatting claims inflation;
“In 2023, cost reduction will be paramount – where is the fastest ROI? What insurtech services add immediate value? Accordingly, insurers will strategize ways to automate claims and supplier management processes amid inflationary pressure. In the commercial space, insurers will seek opportunities to disrupt traditional insurer-customer-broker relationships and reduce distribution costs.
Technological adoption will also proliferate. The benefits of insurtechs will span the value chain, as insurers pursue the self-sufficiency of no-code tools, which enable them to configure products, add data sources, accelerate API’s, and inject insurtech into the workflow. Tools like tri-party arrangements, which address customer, insurtech, and digital core policy administration, will move digital services from IT developers into the hands of the business users. Speed to market, customer service personalization, and new product launches will all increase in turn.”
CYBER
Mike Karbassi, Chief Underwriting Officer at Corvus sees more advances on data analytics: In light of rising premiums, insurance underwriting will be forced to adapt in 2023
“Forward-thinking cyber underwriters are already using data analytics to inform their underwriting decisions. However, these tools and datasets must keep improving to keep pace with dynamic cyber risks. By enhancing risk selection through threat intelligence expertise and encouraging proactive policyholder engagement, underwriters and their teams can help policyholders mitigate cyber threats. The current challenge for cyber underwriters will continue in 2023: to stay ahead of cyber criminals looking to exploit their targets’ vulnerabilities. In order to be successful at risk mitigation, this challenge requires a multifaceted strategy with input from data scientists, cybersecurity experts, and breach response specialists.”
Meanwhile Lawrence Perret-Hall, Director, CYFOR Secure sees the SME cyber challenge being a tough one next year;
“Rising cyber insurance premiums will be an ongoing issue for the cyber insurance industry in 2023. The combination of sophisticated cyber threats and the challenging economic climate means some SMEs may be priced out of insurance cover completely. It is clear that the industry will eventually reach some level of stability – finding a happy medium between making profit, supporting business risk and staying affordable – but it is going to take time.
To get there, it’s likely we’ll see the way insurers quantify risk change. Instead of looking solely at the sensitive data a business holds, and the financial consequences of a breach, they will also start to take into consideration their level of protection – what they’re doing to improve their security posture and how proactively they’re identifying and mitigating threats. What’s more, how they measure this risk will undoubtedly start focusing less on a lengthy and complex questionnaire and instead begin to utilise solutions like vulnerability scanning to get a more accurate picture of a customer’s cyber hygiene.”
TELEMATICS
Anders Truelsen, Chief Revenue Officer at Otonomo thinks connected vehicles offer more than just driver data, there are revenue streams too;
As connected vehicles go mainstream, new revenue models will emerge
Many businesses are seeking ways to create new services and revenue streams through connected vehicles. As we enter 2023, all new cars will be connected—meaning the amount of vehicle data available is going to increase year over year. This dramatic increase in data will provide companies with not only previously unavailable qualities of data and coverage areas, but also an increasing variety of data, such as distances traveled, weather updates, road friction, road quality, road construction, traffic conditions, and more to open up new revenue streams and spawn new use cases.
Third-party vehicle data hardware will be phased out in vehicles by 2028.
Most vehicles today are already “connected” before they leave the lot, meaning there will be less need for the use of third-party hardware devices to record and share vehicle data. By 2028, I predict car manufacturers will go so far as to prevent the use of third-party hardware devices in their vehicles. This will help to ensure the data being produced and collected by the vehicle is recorded, consumed, and used in a safe and proper manner. Additionally, the move away from third-party hardware will minimize security risks, as well as eliminate device compatibility issues.
PHASING OUT LEGACY DATA?
Matt Mawson, Director at Radius Insurance sees a great unlock of telematics data next year;
“Having been intrinsically involved in the motor fleet sector – in particular HGV – for 35 years, I believe there has been an ongoing underutilisation of telematics data in insurance markets. With a plethora of invaluable data, the ability to assess driver behaviour and an improved FNOL process, there is greater capability than ever to assess and reduce risks and costs in motor fleets.
Insurers have traditionally priced a fleet based on three lines of claims cost over a 3-year period, but there is much more that can be done to price risks effectively. Radius Insurance Solutions are at the forefront of providing telematics solutions to fleet operators alongside insurance, with a focus on improved driver safety and reduction of accidents. Through the tracking of vehicles, plant, and machinery, there is less chance of theft, reducing the risk of claims. Our connected commercial vehicle insurance solutions take advantage of all that telematics-driven data, provided by products like dashcams and vehicle trackers, to supercharge a businesses’ insurance solution.
Could 2023 be the year of change? There are new market entrants, which Radius Insurance uses to provide products to customers, all with telematics and data propositions; some are mileage-based, some not. As composites lose business to more progressive businesses, 2023 could be the year we begin to see them testing the water.
I believe it’s time for this change. Insurers are now seeing the full data value of telematics and will not be left behind. After little change in the market for many years, will 2023 be the year when commercial fleet insurance changes for the better?”
IPT – THAT TAX THAT KEEPS GIVING?
Russell Brown – Senior IPT Consulting Manager at Sovos has these thoughts on the IPT tax, which has proved a nice little earner for HM Govt;
Digitalisation will continue to influence insurance premium tax, but more so in terms of online electronic tax return submission than transactional information reporting. In France, mandatory electronic filing for IPT returns is expected to be introduced in February 2023 for the January 2023 reporting period. Given that this was postponed from 2022, there is a chance that this could be delayed even further. Meanwhile, there is a possibility that Slovenia will follow France and implement mandatory electronic filing of tax returns later in 2023. Aside from that, we are not yet aware of any other EU countries with similar intentions to digitise the compliance process.
Considering changes in IPT in the past have usually been made at short notice without warning, and are often not well publicised by the authorities, organisations will need to make sure that they have the necessary safeguards in place to employ them from both a process and IT perspective. If this isn’t completed quickly and successfully, they could fall vulnerable to financial risk if they are not fully compliant.
What’s more, robust processes should be put in place to ensure that businesses are either monitoring for prospective changes independently using their own internal resources, or that they partner with an advisor to track potential changes on their behalf. With either of these methods, businesses can ensure that continuous compliance is upheld in a seamless and efficient way.
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