Trending Insurance Themes – 2022/2023

This year brings both problems and possibilities for the insurance industry. Our insurance staff outlines ten critical topics to focus on during the recovery process. Financial markets institutions have shown impressively resilient in the face of pandemic impacts, thanks to increased expectations imposed following the financial crisis and government support to address the health issue and its economic consequences. However, the form of the recovery and the global geopolitical picture, especially regulatory equivalence decisions, remain critical uncertainties, as does the impact of Brexit when the epidemic fog lifts. Consumer Duty is an essential regulatory lens for companies and brokers to answer to – while the path forward has been evident for some time.

Decisions regarding involvement and business strategies and the capital required to execute these saturate the market correctly. Lessons have been learned from the first phase of the digital race, and a deeper look at outputs is being sought. M&A activity is robust as scale and capability remain scarce assets driving investment. The following are the essential themes that will affect the price over the next twelve months:

• Coronavirus is still causing global worry but showing signs of fading away. Still, stock markets appear to be hopeful but prone to short-term fluctuations, as shown in the reaction to Omicron. Headwinds persist as the incoming government in the United States fails to pass budgetary policy, political unrest in Europe produces friction, and the United Kingdom considers a response to inflationary pressures and a significant near-term increase in the size of the state. With substantial political and economic consequences, Brexit’s impact, overshadowed by the pandemic, will become apparent. The flow of trade deals will be critical to the UK’s economy.

To maintain a competitive edge in the changing geopolitical scene – it will be vital to capitalize on areas of strength. The ongoing discussions – particularly in light of the social care levy – about the role that effective and efficient insurance industry can perform in trying to deal with the structural problems presented by the UK’s changing demography – and the inherent tensions of wealth distribution across that demographic trends – offer an opportunity for insurance entities to prove purpose while also growing.

• Insurtech adoption continues to mature as incumbents recognize the value and promise of insurance. The pandemic period prompted insurers to consider inbound to address the issues provided by the new workplace environment. This period has allowed incumbents to realize better the need to digitize their businesses. Still, it has also allowed insurance companies better to understand the intricacies of insurance companies and processes. Despite this realization phase, the insurance sector has remained under-resourced about the wider fintech sector, with only a small number of startups obtaining significant funding. This is because many insurers’ strategic approach is to ‘spend and build’ instead of ‘purchase.’ Reinsurers engaged in the space via their own VC arms are an example of this. Because of their risk profiles, insurers and reinsurers must guarantee that any insurance solution properly fits their requirements. As a result, many see value in early-stage investment as part of the process.
• The United Nations’ global warming agenda has hastened the insurance industry’s reaction to sustainability. At the COP 26 summit in Glasgow in December 2021, 26 countries signed up to the UN’s climate change regulations, with several industries, including corporations including insurance, making sustainable plan commitments. However, the insurance industry has sustainability problems such as collective agreement on company purpose, value generation, and reacting to climate change factors. Not only in their particular trading settings of accounting for environmental capital and resource control, as well as balancing essential sustainability duties but also in their broader responsibilities of attaining a ‘net zero’ controlled recycling industry with a variety of stakeholders.

Consumers and investors, for example, are increasingly valuing sustainability features in their eligibility criteria, with many seeking resource traceability transparency, which insurers will have to capital investment in to remain competitive. At the moment, insurers vary in their maturity in fulfilling their ESG duties through their governance, risk, and reporting systems, as well as their ability to use their levers of change. However, as the path to standardization of ESG reporting standards becomes clear, insurers will discover competitive advantages in managing their sustainability and climate change strategies.

• Of the March 2022 operating resilience deadline looms, insurers are concentrating on finalizing their critical business services, impact tolerances, self-assessments, and associated reasons to obtain Official approval before the deadline. Following the deadline, we anticipate a shift in emphasis away from project-based activities and toward establishing new ways to work across business areas. The most significant activity will be in three sizes: first, correcting vulnerabilities discovered during preliminary mapping and testing. Second, there will be an increase in stress scenario testing and continual improvement activity, with testing of increasing breadth, duration, and severity to improve knowledge of whether tolerances can be fulfilled. Lastly, crisis management, business continuity, and disaster recovery playbooks will be revised and re-aligned to guarantee that tolerances are fully satisfied by March 2025.

Many difficulties remain. Over the last year, the focus on operational resilience in the insurance sector has often revealed material gaps in customer understanding or unearthed significant vulnerabilities in computer security, technology, and 3rd managerial staff, some of which will require substantial management focus on assets and investment to address. However, we’ve noticed that the new rule is already causing a shift in thinking among our clients, and we’re confident that the sector will emerge in a much stronger position by Mach 2025.

• Over the last decade, M&A activity was a predictable market, with the only significant variance induced by the 2008 financial crisis. Since 2008, there has been consistent growth, aided by a toughening insurance market. It became increasingly difficult for insurers and brokers to achieve remarkable organic growth figures in this environment. As a result, insurers often looked to buy third parties to expand their business books. The elements that encouraged acquisition were generally consistent before and after the financial crises. Insurers aim to enter new markets and geographies, defend their market position, and increase market share, but the need and desire to expand digital capabilities are factors.

2021 was a good year for insurance M & M&A, with many legal and advisory firms anticipating a bumper year in 2022, driven partly by companies implementing recovery/growth plans and a buoyant technology sector looking to assist insurers in driving and fulfilling their digital goals and aspirations. As insurers adopt new ways of working, enhance their use of digitization, innovate, and merge diverse working cultures, the job of consultants or project managers is becoming increasingly vital in M&A. A prominent trend will be the development of long-term, fully integrated business models that address common challenges associated with disintegrating legacy platforms, as well as the expenses related to simplification and remediation programs.

• For years, the life insurance industry has acknowledged the opportunities and drawbacks of closed book sales. The unusually long period between how a policy is purchased and when a claim can be filed creates a unique set of operational and IT issues. Technology and other associated IT obstacles present a fundamental challenge to insurers. As insurers’ systems develop and practices evolve, many closed books frequently run on what becomes an even-on, incurring additional to the Insurer and, in many cases, slowing policy and claim processing. To handle the book of business, the Insurer must typically determine whether to improve the system, introduce another, or retain the existing system over time. Of course, this decision is frequently made depending on the book’s profitability and the Insurer’s capacity to manage IT business transformation effectively.

A company’s governance expenses are also a significant concern for insurers when evaluating their closed book business; as more renewals lapse, the number of policies decreases, raising the ratio of the cost per policy that the Insurer incurs while maintaining the book. Closed business books have become highly relevant to the FCA in recent years. It became worried that policyholders in short books of business were not receiving the same quality of customer service as those in open books of business. Insurers must now demonstrate that this is not the case. While the preceding has identified some of the significant issues of sealed business books, closed books can benefit insurers. Companies can provide a consistent business reader over a specified period and, as such, are frequently considered a desirable acquisition tool for insurers looking to promote expansion. Selling closed books can also provide significant relief to insurers by offloading the costly administrative operations of keeping a book of business to a third party.