Insurance Outlook: Trends for 2023

We have once again entered a year with macroeconomic and geopolitical volatility, which is impacting all industries in the UK markets. Insurance is no exception and is feeling the squeeze of inflationary pressure, regulatory changes, and the looming recession. Whilst 2023 will be a challenging year, recent data from the UK and US suggests inflation is steadying and a recession may not be as deep as we thought. Whatever the strength of the headwinds, high interest rates mean in some parts of the market, insurers have reason to be cautiously optimistic and whilst growth will be harder to achieve, positive lessons have been learned over the last three years.

Since the outbreak of Covid in 2020, many insurers have fared well during incredibly difficult times, demonstrating surprising amounts of flexibility and resilience. This is something that is not usually seen in a sector often regarded as requiring modernisation. It is this adaptive nature that will be needed through the coming turbulent year.  We look at some of the trends we expect to see prioritised through 2023:

Environmental, Social and Governance

Ubiquitous in every board room and executive committee across the insurance market, ESG will continue to gather momentum and evolve through 2023. Net zero targets, investment strategy and the progress of data-driven sustainability with growing headwinds in risk exposure will put this at the very top of the corporate agenda and very much under the regulators spotlight. Some insurers will arguably view the need to publish plans in annual sustainability reports as onerous; the smart however will see ESG as an opportunity and a fundamental necessity. We will likely see new products and services focussed on sustainability introduced to the market in parallel with innovative initiatives to reduce carbon footprints. The social and governance will likely catch up to the Environmental aspect of ESG as businesses build more operational resilience across their infrastructures to ensure good governance. The pensions sector is likely to increase its visible reporting to regulators to ensure they are aligned to their customers’ expectations regarding sustainability. This is a pivotal time for businesses to prioritise tangible and progressive plans.

Intrinsically linked to ESG, is equity, diversity, and inclusion, and how to increase transparency and accountability in organisations’ governance structures. These will be governed by boards and management teams to ensure insurers are diversifying their workforces and creating inclusive, purpose-driven cultures that represent the societies and shareholders they serve. Large gaps remain across the sector, especially at the more senior levels, which will sharpen the focus on I&D agendas.

Operational Efficiency

Many insurers suffer from operational inefficiency largely through historic lack of investment and the acquisitive nature of the industry, meaning systems and processes aren’t harmonised and often business units use different methodologies, creating siloes. Life and Pensions mutuals will look to review and reengineer their processes to bring down costs, improve productivity and ways of working, which helps staff engagement and ultimately ensure competitiveness and customer service. Already in the first few weeks of the year we have received client briefs for interim operational experts and business architects who are able to continue driving cost efficient and scalable operations, aligning cost and revenue, and embed continuous improvement disciplines. Do more with less will likely be a plan for some, invest to improve more likely.

Changing Regulatory Landscape

General insurers are still dealing with the impacts of the pricing reforms that came into effect this time last year. The reforms have reshaped personal lines, protecting loyal customers and largely stamped out ‘price walking’, i.e. customers who will shop around at renewal time for a lower price, hitting the PCWs as much as the carriers. A race to the bottom could be on the cards especially in the heavily hit motor insurance market.

The pricing reforms will quite possibly be overshadowed in 2023 by the FCA’s Consumer Duty principle, further ensuring insurers act in their customers’ best interest and not of the sole benefit of profit, making customer-centricity the focal point of the industry’s standard operating model. It will not only impact the carriers but all businesses along the distribution value chain including brokers. As the July deadline looms, we will see increased transformation to ensure regulatory compliance and avoid any fines. 

Finally, we may possibly see amendments to Solvency II requirements from the EU and then the UK in 2023. As with inflation, any amendments will impact the investment strategies of insurers meaning wholesale change.

PE, Consolidation and Insurtechs

The insurance market has seen a large injection of private equity capital since 2021 however, looking ahead, inflated valuations are not attractive and funding is a challenge meaning deals are harder to find, especially in the, already consolidated, broker market. PE firms with investments in insurtechs may well turn the heat up to demand demonstrable value rather than accept long term promises of returns. 2023 could be a year of “put up or shut up” for insurtech. Whether PE or otherwise, we expect to see less M&A activity in insurance in 2023 and more onus on driving value creation from existing assets through digital and customer transformation and organisational restructuring.

Technology and Innovation

With a potential slowdown of insurtech growth, insurers with legacy systems may have more time in 2023 to innovate and experiment with new products, for example those that are more sustainable, app-based and provide customers with real-time data. It is possible insurers will reduce the gap between themselves and consumer finance companies that have set the bar on customer, digital and innovation. EIS, the cloud-based digital insurance platform could see a real surge in customers through 2023 as businesses seek to automate, embrace data and analytics, and run a more cost-effective technology estate. Digital channels will continue to be invested in especially with the implementation of Consumer Duty and Pensions Dashboard so that businesses can remain close to the customer to build trust and loyalty. A personalised, real-time digital channel is likely to be the winning formula with customers through 2023, cue the rise in embedded insurance and customers buying insurance through non-insurance companies. This will require the formation of new partnerships, better use of data and an active role in the wider ecosystems in the race to win and retain customers.

War for Talent

There always seems to be a war for talent, which may be the case, but in insurance it’s increasingly apparent. Many leaders across the sector, with decades of tacit knowledge and expertise, are close to retirement and the conveyor belt of next generational leadership is looking light. Add to this the regulator’s focus on purpose, culture and diversity and it becomes a smaller pond in which to fish. Insurers will need to reinvent workplaces to attract candidates back into the office and lure much needed talent from outside of the industry, in functions such as marketing, technology and customer. Chief People Officers and Heads of Talent Acquisition will need to challenge internal sponsors and external recruitment firms in order to attract, appoint and retain diverse talent from outside of the industry, either permanently or on an interim / project basis. The pandemic has fundamentally changed peoples outlook on work and expectations, upending traditional workforce models and so finding the workforce nirvana will be the major challenge.

2023 will certainly keep challenging us for the better.