What Awaits Commercial Insurance in 2023? This New Deloitte Report Looks Ahead
Deloitte Insights’ 2023 Insurance Outlook offers a sweeping overview of the issues the Deloitte Center for Financial Services deems most likely to reshape the insurance industry over the coming year — including challenges it’s already facing, threats still looming over the horizon and, happily, areas of potential opportunity and growth.
Intended to provide guidance to senior-level decision makers in the risk management industry, the report explores everything from “macroeconomic and geopolitical challenges” to the finer points of building out cloud infrastructure.
Threats and Challenges
Several of the hazards that Deloitte anticipates will be a factor in 2023 are all too familiar: the volatility of the global economy, the Russia-Ukraine conflict and its effects on the supply chain, and the long-term effects of the COVID-19 pandemic, not to mention climate change and the resulting uptick in catastrophic weather events.
Other emerging risks are accelerating. Cybercrime, for instance, is still a growing concern: “Ransomware frequency was up 235% in 2021 compared to 2019,” the report said, and “average ransom payments skyrocketed 370% over the same two-year period.”
Inflation, now the highest it’s been in three decades, will continue to worsen some matters (like labor, operational and other costs) while barely tempering others (like more favorable investment yields and annuity spreads).
Recent increases in P&C rates have shielded many insurers from the worst impacts of inflation, especially commercial lines, and growth has returned to the European and North American markets. But inflation is driving up loss costs at least as quickly, quelling profitability (as of May 2022, “average replacement costs were up 16.3%,” the report notes — nearly double the increase in the consumer price index.)
Further, premium growth may be waning.
Global life insurance premium growth is actually predicted to contract slightly in 2022 — by -0.2%, the report suggests — which coincides with demographic trends: Younger potential customers are now less familiar with the features and value of life insurance, while older potential customers are less likely to feel comfortable purchasing coverage online, as is quickly becoming the norm.
Rising rates associated with inflation may also make it more difficult for insureds to obtain or renew coverage, or compel them to reduce their spending or even allow coverage to lapse entirely.
Traditional insurers may also face new competition in the rise of Insurtechs (investment in Insurtechs ballooned to a record $17 billion in 2021, a figure just shy of the combined investments of the previous four years), and even “noninsurance entities such as e-tailers and manufacturers.”
Finally, the insurance industry (like many others) faces a shortage of experienced personnel as its most seasoned employees near retirement age and a restricted talent pipeline struggles to fill the void.
As many risk and insurance executives recognize, where there’s change, there’s opportunity.
Although inflation is hardening the market, there’s still potential for “organic growth,” the report says — most notably in the small-business insurance market, where the businesses surveyed by Deloitte are seeking “new types of policies”; “greater flexibility in terms, pricing and payment”; and “more holistic loss control services” in addition to more cyber coverage.
Speaking of cyber: While the NFT bubble may have burst, at least as far as high-priced digital art is concerned, the potential of crypto and NFTs tied to virtual activities set in the metaverse has yet to be fully realized, and what digital assets exist are as yet largely uninsured.
It remains to be seen how much coverage consumers will expect or demand for their digital assets, but as offline activities slowly migrate into the digital space, we should expect to see people look for more security.
Green energy is another area ripe for growth, according to the report; globally, buyers are expected to spend an additional $125 billion in insurance costs related to the transition to green energy by 2030.
Per the London & International Insurance Brokers’ Association, “The London insurance market could double in size just by covering the global transition to green energy for policyholders looking to achieve net zero on carbon emissions.”
Similarly (though operating on a longer timetable), autonomous cars will eventually divert billions of dollars in premiums away from personal auto insurance and into “product and professional liability coverages” as culpability shifts away from drivers to the makers of the technology and software operating their vehicles.
While this transition will take time, it behooves insurers to plan ahead, perhaps by designing hybrid policies capable of accommodating vehicles that switch back and forth between autonomous and human-operated modes.
Opportunities for Insurers
Some areas where Deloitte anticipates growth are specific to risk management.
Embedded insurance — that is, coverage purchased at the point of sale of a product or service, such as travel insurance, rental car insurance and extended product warrantees — is expected to grow sixfold by 2030, to a total of $722 billion, as purchasers come to expect these services as part of a more seamless customer journey; China and North America are predicted to capture about two-thirds of that growth.
While loss-of-life and short-term disability ratios are still elevated as a result of the global pandemic, they are slowly trending back toward the expected baseline (dental claims, by contrast, dropped off during the pandemic but are now on the rise).
As these long-term fluctuations settle back into a more predictable pattern, “more holistic employee benefits packages” may hold appeal for insurers looking for long-term organic growth, perhaps working in concert with third-party vendors. Paid family and medical leave in employee benefits packages is now required in some states, which can pose a challenge to smaller employers but may spell opportunity for insurers able to cater to their needs.
To wit: Some Insurtech platforms constitute a direct competitor to traditional insurers, but others may present valuable opportunities for collaboration — especially in developing new services and ways for customers to interact with them, or in leveraging the data at their disposal.
As Deloitte’s report notes, “Many carriers still too often treat data as an infrastructure expense to be managed, rather than as a strategic asset that can help them learn more about customer needs and preferences.”
Recreating your legacy offline infrastructure in the cloud is a wasted opportunity; instead, a move to the cloud should “be the beginning of an ongoing transition encompassing more data, systems and processes.”
Emerging third-party providers of scalable “industry cloud” solutions with preconfigured capabilities tailored to users’ needs make it possible to “plug and play segment-specific functionality onto a more general cloud formation” — that is, decentralizing your data architecture and adding an interface layer can allow potential clients to reach new, more user-centric services in new, more function-oriented ways.
Deloitte’s report also includes a more general set of priorities and principles to keep in mind as we approach 2023.
It notes that the industry has been remarkably successful in adapting to the pandemic — made possible by investments in technology and talent already underway before the pandemic began, and fully realized only because the pandemic proved their value to stakeholders — and that this momentum is a precious resource.
Insurers, it says, should continue to invest in more virtual and distributed ways of engaging consumers, in order to fully capitalize on the “more agile digital infrastructure” necessitated by the early days of the pandemic — to “pivot from having laid the foundation … to fully realizing the value and benefits of infrastructure and technological upgrades.”
This need to “prioritize greater levels of experimentation and risk-taking” extends beyond infrastructure to including the proactive introduction of new products, services and distribution options that center the customer — and even to cultural changes that impact the recruitment, (re)training and retention of top talent.
In fact, the hunt for both customers and talent underscores the growing importance of DEI and ESG, the report says. A company’s position on diversity, equity and inclusion, and environmental, social and corporate governance is increasingly likely to be a determiner in the fight for talent, investors and market share.
One shortcoming of many ESG measures is that it’s difficult to prove they’re working, especially since they tend to be reactive — responding to regulations or other external pressures — rather than proactive in a way that would demonstrate true leadership.
To that end, groups such as the World Economic Forum publish metrics insurers can use to evaluate their successes against a wide range of ESG benchmarks.
Fortunately, risk managers are in a unique position to facilitate the transition to low- and no-carbon energy.
As Deloitte’s report notes, insurers can help reduce climate exposures via incentives to use electric vehicles or retrofit properties. They may also offer new coverages that bear the risks of transitioning to more sustainable sources of energy — both to emerging suppliers of renewables and to legacy producers looking to lessen their environmental impact. &