EY

Q: How do you view the current global insurance landscape and the challenges facing the sector?

A: Following the global pandemic, the insurance sector is facing greater macroeconomic uncertainty and geopolitical volatility. The growing protection and savings gap clearly demonstrates that more people need insurance against a range of complex and proliferating threats.

Climate and cyber risks top the list. And worldwide, customers are concerned about the global economic downturn, the ongoing Russia and Ukraine war, and simmering conflicts between global and regional powers.

Customer needs have changed and insurers that move most swiftly to satisfy them will be in the best position to navigate the recession.

Traditional insurance companies, ‘insurtechs,’ startups and nontraditional players are delivering unique solutions that combine conventional protection with risk prevention and other high value services. Firms that innovate with urgency optimise operations across the value chain and build new partnerships will make a meaningful impact.

The insurance market has gone from low inflation and interest rates, and integrated global markets, to rising inflation, higher interest rates and increased protectionism. Inflation will have varying impacts across the sector. Life insurance companies are cautiously optimistic as higher interest rates today fuel future profitability and seem to outweigh the impact of inflation.

While inflation and recession will hurt insurers in the form of higher claims costs and reduced demand, higher interest rates may provide an earnings tailwind, thanks to improved investment returns. But those returns will require brave decision making, careful hedging, and timely refinements to asset and liability management policies.

Marine, aviation and transit lines of business will likely feel the greatest impacts in terms of price increases. Underwriting for political risk and trade credit insurance will also get much more cautious. Increasing volumes of state sponsored cyberattacks are another major risk vector.

Insurance firms that focus on the protection gap can do well by doing good. The recessionary environment is not helping the huge and steadily growing worldwide protection gap. In fact, the gap – incorporating climate and cyber protection, as well as retirement savings, and life and health insurance – is only going to widen.

Demographic trends – especially increased longevity – also point to increasing gaps.

And insurance providers must introduce novel approaches to launching new products and services, employing innovative underwriting models and exploring alternative distribution channels. These fresh avenues of revenue have the potential to bridge the significant protection gap.

Q: What business case would you make for new business models and value propositions?

A: Even if there were no such thing as a protection gap, insurers would have ample reason to develop new value propositions to execute their growth strategies.

These reasons encompass shifting customer needs in every line of business; increased awareness of unexpected risks and threats; intensifying competition from nontraditional players; ongoing industry convergence within financial services; regulatory developments including increased emphasis on open insurance; the rise of embedded insurance; and the expectations of capital markets.

All these factors should provide motivation for insurers to develop new solutions, many of which will be designed to reduce the protection gap. But innovation in the coming era of insurance will not merely be about what products insurers sell but rather the value they provide and business models they adopt to create that value.

Q: So what are the concerns about the huge cyber coverage gap and what can insurers do to bridge it?

A: Researchers are challenged to quantify the coverage gap for cyber risks, given the lack of historical claims data and difficulties in calculating the costs of cyber incidents. But there is widespread consensus that current policies cover only a small fraction of the potential risks.

Remote and hybrid working have opened up new vulnerabilities. Many small and midsize enterprises (SMEs) do not have cyber insurance because they don’t think they’re likely targets for cyberattacks. High cost is another barrier to adoption.

In life insurance, financial wellbeing is what customers want, which means insurers must serve as advisors, providing credible guidance and options to help the insured meet their goals.

As for non-life lines, with more protection being delivered automatically through embedded and usage-based offerings, the quality of service and overall experience becomes much more important than the risk transfer itself.

Certainly, some insurers will look to optimise their asset allocations and diversify portfolios for lower risk and stronger returns. Investment teams will need to strike a fine balance as asset mismatches and suboptimal hedging will be exposed to interest rate movements, which could impact profit margins and – if the cost of guarantees moves in an unexpected manner – capital reserves.

Non-life insurers will realise the positive effects on investment income more quickly since they maintain relatively short duration portfolios.

But if interest rates remain high, long-term returns will also improve as bond portfolios gradually roll over into higher yields. Some insurers will look to take advantage of high interest rates by moving to high yield bonds.

Rising rates will also improve returns on in force business and provide flexibility in underwriting new business.

Q: And finally, what are some imperatives for insurers going ahead?

A: Given the threats from inflation, insurers need to model the impact of inflation and recession using a range of metrics (for example, claims and labour costs, customer demand, consumer prices, demand led factors, systemic indicators and stock prices).

Furthermore, multiple macroeconomic and geopolitical scenarios should be developed for 2023/24, incorporating China and all major global markets, with a broad range of assumptions to get ahead of unexpected developments and unintended consequences.

In addition, insurers need to monitor liquidity and asset valuations to inform hedging strategies and refinements to anti-money laundering policies while being vigilant in tracking leading indicators of further economic deterioration, and prepare to move quickly in response – particularly in adjusting underwriting approaches.

There is also the need to rebalance and diversify the investment portfolio with the goal of moving to higher yielding assets, and track the potential impact of worsening geopolitics.

The valuation of assets based on rising costs and reset policy limits should be reevaluated to reflect higher replacement and labour costs.

Finally, more attractive product terms for life and annuities products need to be developed, while evaluating partnership and acquisition opportunities based on declining valuations for insurtechs and currency fluctuations that may create a buyer’s market in some regions.

– Compiled by Yamini Sequeira

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