Firms in the insurance industry are increasingly being judged by consumers – and society – for their achievements or shortcomings in non-insurance areas such as climate risk; diversity, equity and inclusion (DEI); environmental, social and governance (ESG) factors; and transparent governance.
“An insurer’s performance on these and other metrics has become critical and an important competitive differentiator in the battle for insurance talent, investors’ capital and market share,” said Katlego Thaba, associate director, actuarial and insurance solutions at Deloitte.
Mr Thaba made this observation during a presentation to the Insurance Institute of Gauteng (IIG) 2023 Industry Outlook webinar, held 22 March 2023. He expanded on key themes affecting global insurers and reinsurers, as highlighted in Deloitte’s 2023 Insurance Outlook publication.
“Insurers are facing a host of geopolitical and macroeconomic challenges, including the well-advertised threat of recession; the continued fallout from Russia’s invasion of Ukraine; lingering concerns around Covid-19; and some specific economic factors,” he said, referring to growth, inflation, interest rates and unemployment, among others. Each challenge poses immediate threats to insurer and reinsurer growth and profitability while having long-term implications for the industry’s resilience and sustainability.
Agility, dynamism and innovation were mentioned as crucial features for modern-day insurers’ success. “Insurers that effectively transitioned to remote working during the pandemic – and that were able to engage with customers and distributors virtually – are now better positioned to capitalise on the agile infrastructures that they put into place to prosper in that environment,” Mr Thaba said. He noted that firms that leveraged technology to gain an advantage in everyday insurance functions such as risk selection and pricing would have an edge in the increasingly competitive environment, and trade more profitably.
Insurers’ responses to climate change and rising inflation and interest rates piqued this writer’s interest, with the result that comment on these responses will be prioritised in this piece, ahead of the many worthwhile references to technology and transformation made during the 45-minute talk.
It turns out that inflation – and central banks’ responses to inflation by raising interest rates – present major economic challenges to both insurers and reinsurers. “There has been a sharp and notable rise in inflation [which has] triggered numerous reactions and fears,” Mr Thaba said, including concerns that the resulting global interest rate hiking cycle will push the world into recession.
The impact of inflation and interest rates on the insurance industry is complex. On one hand, high inflation seems to lower consumers’ resistance to steep non-life insurance premium increases; on the other, it creates an environment where non-life insurers pay far more to indemnify consumers against property losses. Some insurers have improved top-line revenues on the back of high inflation. “Notwithstanding that – and even in the context of top-line revenue growth – we are seeing many non-life insurers come under significant profitability pressure owing to inflationary effects,” Mr Thaba said.
The inflation and interest rate “effect” varies from one country market to the next, and across classes of non-life insurance business. For example, during 2022, Europe and North America took over from Asia as the principal drivers of global non-life premium growth. Overall, the increases in insurance premiums are far outstripping and outpacing what has been seen from a general inflationary environment standpoint. According to Mr Thaba, global insurance prices are up by 9%; financial and professional lines by 16%; and cyber insurance rates up by 68% in the UK and 79% in the US. He added that insurers were also bearing the brunt of hardening reinsurance rates, with Q1 2022 reinsurance premiums up 27% in the US and around 11% globally.
Reinsurers are also insisting that insurers take on higher retentions and reducing coverage. This trend has been particularly evident in the South African market during the January 2023 renewals, as reinsurers remove “grid failures” from the list of perils on cover.
Aside from hardening reinsurance rates, reinsurers are also “shrinking coverage availability [in response to] reductions in the retrocession market”. The contraction in the retrocession market is in part due to the shift in the risk-free rate of return caused by higher interest rates and resulting higher yields in financial markets. Allocators of capital are less keen on risky investments in the insurance and reinsurance sector because they can get more return on relatively “safer” Treasuries, as just one example.
Global reinsurers’ appetite for “all perils” CAT cover is on the decline too, on the back of the rising frequency and severity of natural catastrophe loss events. “Pressures from a climate risk and climate change standpoint are becoming a challenge both from physical risks (being the occurrence of insured events as a result of climate change) and in terms of the opportunities and challenges from climate transition and climate liability risks,” said Mr Thaba. He added that “climate risk mitigation was an important consideration in the current marketplace globally”.
In fact, the Deloitte Insurance Outlook report offers three “focuses” for insurers to integrate heightened climate risk mitigations across their businesses, including creating awareness; providing incentives; and expanding risk mitigation services. Under awareness, insurers should promote climate mitigation products and risk management services through the marketing efforts and distribution forces; explore transition changes; and train staff on climate literacy. As for providing incentives, insurers were encouraged to offer reduced premiums to reward policyholders that were making headway on their decarbonisation plans as well as investing in low-carbon technologies and/or start-ups that offer customised climate coverages.
According to Mr Thaba, there is a need for insurers to take a closer look at the entities that they underwrite, and to then use incentives to assist these businesses in becoming “greener” over time. It makes sense for these types of incentives to be rolled out with help from the brokers and corporate risk advisers who work hand-in-hand with insurers to place large firms on cover; hence Deloitte’s reference to distribution in its solution set.
It is critical that insurers adapt to (and innovate quickly and effectively) whatever headwinds and challenges they face,” concluded Mr Thaba. “Insurers of the future must adopt, embrace and maintain the entrepreneurial ‘can do’ mindsets that developed out of the Covid-19 environment.” The long-term resilience and sustainability of the insurance and reinsurance industry hinges on company-level reinvention and the widespread adoption of the “doing things differently” mantra.