Insurers’ growth and profitability will most likely be negatively impacted in 2023 by the current macroeconomic and geopolitical challenges such as the threat of global recession, effects of Russia’s invasion of Ukraine and lingering COVID-19 concerns, according to the Deloitte 2023 insurance outlook. The main challenges on insurers’ resiliency will be rising inflation and interest rates, increasing loss costs, climate change affecting insured goods, but also the entry of new types of competition from InsurTechs. Reinsurance is another factor of pressure for the sector, as a result of the changes in reinsurance cost, terms and overall capacity, which may result in pressure on premium rates, revised underwriting conditions, increasing retention efforts or even reconsidering viability of particular business lines.
But despite the problematic context, there are also opportunities that can contribute to insurers’ growth and enhanced operational efficiencies. Cyber insurance is one of them, as it is in greater demand, although the study advises it should be treated with caution, as ransomware frequency and average ransom payments have registered three-digit growth since 2019. Insurance policies covering transition to green energy for companies looking to achieve net zero carbon emissions represent another niche to the exploited by insurers, according to the study, as policy-buyers around the world are expected to spend annually an additional US$125 billion in insurance-related transition costs by 2030.
Carriers should also explore partnerships to capitalize on the growing embedded insurance market, which refers to coverage purchased at the point of sale of other product or service. Global gross premiums sold this way are forecast to grow six times, to US$ 722 billion by 2030. The world of intangible assets, which are defined as nonphysical properties with monetary value, is also expanding and creating new exposures to cover, from cryptocurrency and NFTs to virtual activities on the metaverse.
According to the study, capitalizing on a digital infrastructure is also an opportunity for carriers to meet expectations for customized products, channels, and services. Accelerating technology transformation initiatives backed by efforts to enhance staff capabilities can bring benefits not only in the product innovation area, but it can also upgrade operational efficiency, pricing accuracy, claims management and customer experience. As of 2023, new international financial reporting standards IFRS 17 went into effect, a game changer in respect of the way insurance contracts assets and liabilities are measured and presented in balance sheets. The new standard increased collaboration between actuaries, accountants and financial planning and analysists.
“Insurers now focus on understanding and explaining to their stakeholders the impact of the new IFRS 17 accounting rules, which goes beyond simply changing the way of reporting. While this is currently a significant challenge for all insurance companies, it’s equally also an opportunity for the industry to increase efficiency by adjusting their operating models and enhancing their data management”, said Claudiu Ghiurluc, Audit and Assurance Partner, Deloitte Romania.
Most of nonlife insurers reported raising revenue due to the strong increase in the property-casualty rate, although not all product lines and individual country markets experienced the same growth levels. Commercial lines generally saw more robust growth than personal lines, while homeowners’ premiums usually rose faster and higher than for personal auto, trends that are likely to continue into 2023 given ongoing competitive, macroeconomic, and geopolitical conditions. Despite the fact that price hikes have driven increases in premium volumes, insurers’ profitability is undermined by a series of factors, such as inflation, which has been driving increase in loss costs in most markets, elevated insurance claims costs, because of increased litigation frequency, broader liability definitions, and legal decisions trending more in favor of plaintiffs. Negative factors also include rising reinsurance rates and increasing impact of catastrophic weather events and cyber risk, and their effects are likely to linger into 2023. Insurers also face the prospect of coverage reductions by commercial and personal insurance customers, who may cut their spending on insurance in response to cost-of-living increases.
For life insurers, the pandemic-driven surge in premium growth since 2020 appears to be decreasing, primarily due to inflation-driven disposable income pressure and financial market volatility.
Many insurers have taken steps to build an organizational infrastructure addressing the challenges posed by environmental, social, and governance concerns (ESG), which include appointing chief sustainability officers to spearhead reporting, compliance, and mitigation initiatives, according to the study. But, while most insurers have a reactive approach on ESG, focusing on regulatory compliance, on gathering and reporting specific data and on strengthening risk management, the report suggests they should grasp the benefits of a pro-active approach, which implies differentiating themselves among competitors by making ESG initiatives a part of their go-to-market strategy and corporate culture. The industry can play a crucial role in the transition to a low carbon economy, as carriers are underwriters of carbon-intensive industries and also institutional investors in these fields, the report highlights.
Insurers should expect to be increasingly judged by stakeholders on their response to broader sustainability priorities such as climate risk, diversity and inclusion, social equity, and transparent governance, and each of this area could become a competitive differentiator in the battle for talent, investors, and market share, according to the study.