Insurance 2021 - A year of adapting

Adam Gates, Head of our Insurance Practice, reflects on the last twelve months in the Insurance sector and highlights how the challenge of adapting to uncertainty is a great opportunity to put the customer back into focus.

We have endured yet another difficult year dominated by Covid. Its unpredictability does not sit well with insurers, an industry built upon its careful calculation of risk. We have not lived through anything like this, and it has dramatically changed the shape of the world, influencing everything from the macro economy, working behaviours, and customer expectations. As we look back and reflect, we did see plenty of opportunities and positive movements in the market, however, as a client recently told me, the Chinese symbol for crisis is made up of two separate symbols: “danger” and “opportunity”.

2021 saw widespread vaccine rollout and in the latter half of the year, easing of restrictions which helped rebuild confidence among people and businesses alike, while fuelling economic recovery. The recent discovery of the Omicron variant, however, has stemmed this recovery, reminding us that the battle with Covid is far from over, and a level of uncertainty will likely persist, perhaps indefinitely. As and when the economy recovers from the worst recession in modern history, and in the insurance market, many expect this economic backdrop will fuel the hardest insurance market in the last 40 years.

Digital, Data and Customer

The pandemic has certainly shone a light on the digital immaturity across the insurance sector. As we have adapted to remote working, many insurers have begun investing in their digital infrastructure to provide customers with a slicker service and reduce cost. As insurers prepare for post pandemic growth, this wave of digital transformation will continue into 2022.

As well as providing a fully digital experience, insurers must adapt the way in which they interact with their customers. Even pre-pandemic, customer expectations have been rapidly changing in line with technological advancements and people now demand more immediacy, more transparency, and more personalised offerings. Covid has heightened the importance of insurance for many customers who are more aware of risk and the need for protection.

Data will have a key role to play in creating these opportunities. For years the insurance market has been relatively poor at using data, but we have seen multiple Chief Data Officers hired in from other, more mature, sectors such as consumer, telecoms, and banking. New analytical capabilities, for instance artificial intelligence powered by data from sources such as IoT sensors, social media, and digital devices, will continue to enable insurers to deliver a more customer centric and personalised service. The way in which personal data is collected and utilised has slowly become more transparent, not only to gain loyalty from customers but also bolster trust among stakeholders to boost retention and profitability.

Talent and Culture

As the recovery started in 2021, there was increased hiring activity at the executive level across finance, HR, technology, digital and risk. We saw the ‘great resignation’ over the summer largely due to inertia caused by the gruelling nature of the pandemic. However, with this increased hiring demand came challenges in attracting and retaining talent in an evolving hybrid working environment, where candidates are scrutinising the culture and purpose of an organisation, especially insurers. The future way of work has also continued to be debated as insurers try to create flexible return-to-office strategies, while also struggling to retain and recruit high-level talent in a competitive job market, particularly for advanced digital, technology and data analytics skills. The challenge over the last year, and ongoing, will be how to maintain a strong culture, and how to balance becoming more digitally advanced whilst maintaining a human touch.

The next year will also see the insurance sector adapting the way it operates, following its Covid experience. Many insurers learned that rather than fearing remote working, this newfound agility could deliver significant benefits. As well as reducing office costs, we have also seen how it can open up the insurance market to new talent attracted by the opportunity to work flexibly, and the sector has become less London-centric, such is the reduction in commuting.

Achieving this will require insurers to be bold, especially as other sectors will also be pushing the hybrid working model. Insurers will need to recalibrate what leadership they require to adapt to this new way of working, with purpose, dignity and ethical behaviours becoming as important as commercial acumen. Leadership and culture will be key.

Purpose

2020 did not show parts of the insurance industry in a great light, in particular firms like Hiscox that were embroiled in the FCA’s Business Interruption (BI) test case. Also, in response to a national emergency, many insurers were slow to respond to customers, sought recourse in the courts and poorly written contracts to avoid obligations, invited further scrutiny from the regulator and communicated poorly via the industry body.

The industry needs to reflect on its role in society and its communication of the same. Ultimately, the actions taken by many insurers in respect of travel and SME customers were rooted in the desire to protect the common pool and control costs. Insurers do some great things and play an essential role in society, but the industry does need to modernise in terms of how it communicates and engages regarding its purpose, and this will ultimately come from its leadership.

Regulation

The major regulatory change in 2021 has been the FCA’s pricing reforms for general insurers which will come into force from January 2022. This represents one of the biggest regulatory changes in the general insurance market. In effect, from next year insurance companies will not be able to charge renewing policyholders any more than they would if they were a new customer. This will significantly impact the aggregators, such as confused.com and GoCompare, as pricing structures will be rebuilt to comply with the regulation but there remains a high degree of uncertainty as to how overall premiums across home and motor will be impacted going forward. This will lead to a greater need for price sophistication and customer retention.  

Brexit has also played its part in regulatory reform. In October 2020, the UK government launched a review into the Solvency II regime which was an EU directive - “Review of Solvency II: Call for Evidence”. The result of this review could see an overhaul to Solvency II, potentially welcomed by the life insurance market with its long tailwinds and large UK customer base. Commercial insurers, however, with their global client base may suffer from potential changes to capital requirements. This is particularly pertinent considering the number of insurers, as well as Lloyd’s of London, which established European bases in response to Brexit to secure continued access to European markets.

M&A and Consolidation

2021 showcased that there still is appetite for M&A across both insurers and brokers alike, and we anticipate this continuing in 2022. There is also appetite for consolidation, with cash available from private equity firms.

We saw evidence of this in the Aon-Willis Towers Watson merger in 2020, which famously collapsed in the summer, with the former highlighting the need to better serve customer needs through technology, something that investors will increasingly target as a value creation strategy. The mid-tier has seen a significant level of activity with transactions, such as Aston Lark’s sale to Goldman Sachs and then to Howden and GRP’s acquisition of the Marsh network business.

Given all these pressures and the heightened focus on balance sheets, many expect to see continued consolidation across the insurance market in 2022. Although the regulatory environment has helped to keep the market stable, there could be some areas of distress in specialist areas such as the managing general agents (MGAs) sector, seeing capacity being withdrawn, which puts pressure on these businesses.

ESG

With global temperatures continuing to rise by record amounts, there is an increasing risk to the global economy and human health. Insurance has continued to face threats from physical risks in the form of extreme weather conditions such as the flooding in Germany and Canada this year that led to record pay-outs and continue to challenge the profitability of insurers.

Insurers must protect investments, especially as we transition to a low-carbon world. Some effort has already been made in this space with several top-10 European property and casualty insurers restricting insurance coverage of coal-related assets, as an example.

Standing still on these issues will not be enough, especially with increased focus from the UK government and regulators. The insurance industry must showcase that it is committed to its ESG footprint and from a recruitment perspective, we anticipate more hiring at the executive level for Heads of Sustainability or broader Heads of ESG, as with MS Amlin’s first ever Head of Sustainability and ESG appointment.

How insurers choose to run their businesses in the face of these risks will affect their competitive positions, climate related litigation, and reputations in the marketplace. It will also have an impact on the culture of the firm and may affect employee engagement and, ultimately, the ability to attract and retain talent.

Technology, Transformation and Restructuring

The impact of Covid has highlighted the need to adopt greater agility and better resilience in operating models, to flex and meet changing service-delivery requirements demanded by customers. Insurers in the main responded well to the move to remote working but did reflect a varying level of technology debt and years of underinvestment.

This has increased the focus on operational resilience, often resting with the Chief Risk Officer, and has raised the debate as to what offshoring and outsourcing version 2.0 should look like, with a shift from cheap labour to overall customer experience.

The move towards remote working will likely endure as employees seek to retain some of the benefits obtained, although regulatory expectations that home working and office arrangements should be equivalent in terms of market abuse controls, as well as the need for social contact in offices, may still drive a switch back to office working, as we witnessed from September onwards in 2021.

Technology advancements mean insurers have readily available solutions to this changing landscape and, for the first time, provide an opportunity to reshape their operations, providing greater efficiency and reducing costs. However, the ability of firms to capitalise upon this opportunity is limited by their legacy systems and ability to evolve at speed, not something insurers are known for. It is this situation that is attracting the attention of outside investors into the industry, especially those with a track record of implementing cost reduction and process improvement initiatives. This was epitomised by the agreement between Bain Capital and LV= for the acquisition of the firm’s savings, retirement, and protection businesses for £530 million. However, this has only this week been rejected by LV=’s members, and it now looks likely an agreement will be made with long time suitors, Royal London.

Technology transformation in the insurance sector does not move quickly, but executives have long recognised the competitive threats from technology advances for their distribution models, while continued prevalence of legacy administration systems remains a key cost issue for most long-established players, compounded for some by layers of added complexity through acquisitions.

Insurers need to embrace the new technologies available, to underpin a drive towards simplification, greater agility, and improved resilience. Utilising cloud service scalability, leveraging enhanced data analytics, robotics, and AI capabilities, and exploring insurtech partnerships should become the new norm, so that firms are ready to compete with the disruptors, as well as current market peers. Beware the ides of Amazon!

2022 and beyond

Despite ongoing Covid concerns, insurers in general expect more accelerated growth in 2022, although non-pandemic challenges around regulation, talent, sustainability, and evolving consumer preferences may present barriers. A lot will depend on how effectively insurers manage their people and technology. Flexible work models, balancing digital with a human touch and being more proactive in bolstering stakeholders’ trust should be among the industry’s strategic priorities.

Covid has had a significant impact on claims patterns and costs over the last eighteen months and while we are expecting some of this to unwind over the coming months as more people return to the office, no one knows if there will be further lockdowns, how hybrid working will settle in, and how much life really will return to the pre-pandemic ‘normal’. There is also uncertainty around how long the high inflation we’re currently seeing will last and how this will play out in claims data into 2022.

If you would like to have a conversation about anything raised in this article, or find out how interim management can help you address any of the challenges the insurance sector is facing, please get in touch with Adam Gates.