By Sam Barrett
No one could have predicted how COVID-19 would shape the world in 2020 but with it influencing everything from the economy to customer expectations,
it will dominate many forecasts for 2021. Although 2021 is set to be a challenging year, there are plenty of opportunities too.
While the announcement of COVID-19 vaccines and a potential return to normality in 2021 has buoyed the market, there will still be challenges as the economy recovers from the deepest recession in modern history.
In the insurance profession, many expect this economic background will fuel an already hardening market. Peter Allen, partner and co-head of financial services at RSM, describes it as the hardest market in his 40-year working lifetime and does not expect to see this change during the next 12 months.
“People are already talking about claims of about $100bn (£74bn) from COVID-19 and we’re only really at the start of the recession,” he says. “Insurers experience larger claims in recessions, whether it’s due to an increase in fraud or more claims being lodged against advisers and directors.”
Although there’s evidence of hardening across all areas of business, market forces may help to limit it across personal lines. Rodney Bonnard, partner and head of UK insurance at EY, explains: “The Financial Conduct Authority’s (FCA) market study into general insurance pricing practices, fewer claims in motor as a result of the pandemic, and greater competition in the market will all help to keep personal lines premiums more stable in 2021.”
With such a challenging market ahead, it’s reassuring that very little regulatory change is expected. The FCA is due to publish its final rules on fair pricing early in the year, although few anticipate this will result in anything that deviates greatly from the reforms proposed in September 2020.
Martyn Mathews, senior director of vertical markets, telematics and motor at LexisNexis Risk Solutions, says that depending on detail, insurers may have to operate differently. “It will lead to a greater need for price sophistication,” he explains. “We’re already seeing brokers looking to reinvent themselves in light of the proposals, but the insurance market is used to adapting.”
There may also be further action following the FCA’s business interruption (BI) test case. This did little to improve the public’s trust in the sector, and highlighted the need for clearer wordings.
The end of the European Union transition period could also kickstart regulatory change as the UK embraces the ability to set its own rules. Solvency II is widely seen as a potential target for overhaul, especially as the government launched a review into the regime in October 2020.
Mr Allen is pleased the government is looking at this. “It’s good that it’s asking the question and I think it will come up with something that’s better suited to our needs,” he says. “I don’t think it will be in any rush to rewrite the rules though.”
The next year will also see the insurance sector adapting the way it operates, following its COVID-19 experience. This taught many organisations that rather than fearing remote working, embracing this agility could deliver significant benefits.
As well as potentially cutting the amount – and cost – of office space, it has the potential to open up the insurance sector to new talent attracted by the opportunity to work more flexibly.
Achieving this will require insurers to be bold, especially as other sectors will also be pushing the hybrid working model. Alex Bertolotti, UK insurance leader at PWC, says insurers are already assessing management skills in preparation for this switch. “Insurers are asking whether managers have the right skillset to drive a business forward in this environment and we may see more upskilling in 2021,” he says. “Leadership and culture will be key.”
As well as adapting to the requirements of the post-COVID-19 workforce, the insurance sector will also need to be alive to the needs of its customers. While needs are evolving, there are some positives, as Mr Bertolotti explains: “COVID-19 has highlighted the importance of insurance. I do think customer attitudes will change but they are more aware of risk and the need for protection.”
Mr Allen agrees. He believes the heightened awareness of risk and resilience that both individuals and businesses experienced during the pandemic will lead to a more informed buying public.
The lockdowns also prompted plenty of discussion around the types of products consumers wanted.
For instance, with motorists forced to leave their cars on the drive, many predicted a shift towards mileage-based motor policies.
But, with motorists back in the driving seat again, Mr Bonnard says there is no evidence of such a shift. Instead, he says customers are being more demanding about the experience they get when dealing with insurers. “They want more digital, in line with the service they receive from other sectors,” he says. “Insurers are investing in this area now and we
will see more innovation over the next couple of years, but they’re not quite at the point of constantly improving that is common for firms such as Uber and Spotify.”
As well as delivering a digital experience, Mr Mathews says insurers must also look at ways to build more of a relationship with their customers. “Society has changed and people expect much more of a relationship with the companies they deal with,” he says. “The days when an insurer could contact a policyholder a month before renewal date are gone. It’s all about creating more touchpoints with policyholders now.”
Data will have a key role to play in creating these opportunities. “Consumers are increasingly seeking more personalised purchase experiences relevant to their lifestyles rather than a one-size-fits-all approach,” says Tavaziva Madzinga, CEO of Swiss Re, UK and Ireland. “New analytical capabilities, for instance artificial intelligence powered by data from sources such as Internet of Things sensors, social media and digital handheld devices, can help insurers offer this more personalised and effective customer service.”
Harnessing data in this way will also enable insurers to gain more accurate insights into risk. Mr Madzinga says that with more intricate analysis, insurers will be able to develop solutions that proactively mitigate losses before they occur. “Today’s market environment is more volatile and competitive than ever,” he adds. “Insurers should be taking steps to develop tailored products to support customers looking for more efficient risk protection.”
Shape of the market
Given all these pressures and the heightened focus on balance sheets, many expect to see some consolidation across the insurance market in 2021. Although the regulatory environment has helped to keep the market stable, Mr Allen says there could be some areas of distress in specialist areas such as the managing general agents sector. “We are already seeing capacity being withdrawn, which puts pressure on these businesses,” he adds.
There’s also appetite for consolidation, with cash available from private equity firms and some of the insurers, according to Mr Bertolotti. “A crisis is seen as an opportunity to move forward,” he adds.
But whether or not they are looking to acquire another business, 2021 is set to be a challenging one for the insurance profession. Adapting to new ways of working and evolving customer expectations will be difficult, especially with balance sheets under pressure.
“It will be a tough year but there will be plenty of opportunities too,” says Mr Bonnard. “Those insurers that prove themselves will be able to open up a lead on their competitors.”