Five issues affecting insurance that aren’t COVID-19

By William Girling
For over a year, COVID-19 has been one of insurance’s main pain points, but it hasn’t been the only one. We explore five others that shouldn't be ig...

For over a year, COVID-19 has been one of insurance’s main pain points, but it hasn’t been the only one. We explore five others that shouldn't be ignored.

05: Ecosystems

Insurance is arguably one of the most vulnerable industries to disruption from ecosystems, so much so that we recently investigated the issue in-depth.

Partner ecosystems present some of the most exciting opportunities for business in the digital era. However, keeping up with the developments is essential and those who fail to do so risk falling into obsolescence.”

In fact, the encroaching threat of ecosystems is so great that Accenture reports 67% of insurers intend to overhaul their business model by 2025. Part of this could feature a spin-off of Open Finance: Open Insurance. Based on similar principles to the former, it would mean greater data sharing with collaborators and therefore more potential for innovation.

Following through on this concept will require holistic digital transformation, from the adoption of API-powered tech infrastructure to migrating data to the cloud. 

Accenture’s poll of 3,000 insurers found that 82% agreed such changes would unlock previously inaccessible growth opportunities, with 75% forecasting that half of their revenue would come via ecosystems.

As with most technological trends, the longer one neglects to engage with a successful idea the greater the risk of falling perilously behind. Insurers must act fast and join the change, or else face potential obsolescence from more tech-savvy competitors.

04: Data security

The pandemic created the perfect conditions for companies to explore digital transformation’s possibilities. Perhaps the most overt development has been the vindication of remote working, yet it has also introduced an enhanced threat: data security.

This is because, instead of siloed systems that conveniently house all of a company’s activities, employees can now operate from anywhere with an internet connection. Threats to data integrity, therefore, arise from a lack of homogenous security and potentially insecure routers. 

As such, the cyber insurance market’s value is set to increase 161.5% from US$7.8bn in 2020 to $20.4bn by 2025. However, despite this encouraging forecast, it’s possible that the market remains undervalued relative to its merit. This could be because its relatively high expense - the by-product of several high-profile payouts - is turning away potential customers.

Additionally, customers appear to be confused about the extent of its coverage and lack familiarity with cyber insurance policies generally.

Nonetheless, the insurance industry is likely to be very different by 2030 than its present incarnation. McKinsey & Co posit that technology will become the central element of business, with insurance simply being a sectoral division. Therefore, the importance of data security in this digital renaissance will be vital. 

03: Social unrest

The socio-political landscape of 2020 was one punctuated by riots, strikes, and economic destabilisation. All of these factors existed before the pandemic; some have been exacerbated to lesser or greater extents, but once COVID-19 begins to resolve, they will remain the key challenges insurance must overcome.

These factors are often not just damaging in and of themselves, but also highly disruptive to business continuity, particularly in large cities. Furthermore, many forms of property insurance could actually feature exclusions for many forms of civil unrest, including:

  • Terrorism
  • Revolution
  • Insurrection

While the latter might previously have caused little concern in North America, for instance, the Capitol Riots in January 2021 will have given business leaders pause for thought.

There has never been a more crucial time for companies to review their insurance policies, learn what is and isn’t covered, and take action appropriately. Similarly, insurers must reevaluate their product offerings in an era of encroaching societal instability.

02: AI

There’s little doubt that AI (artificial intelligence) is set to be one of the most significant evolutions in industry thinking ever conceived. Its benefits, for both customers and businesses, are relatively well understood. But what about its risks?

Primarily, the challenge comes from an increasingly complex regulatory environment for digital technology and the developmental disparity between the two.

Data is the fuel that allows AI to drive vital insurance processes like underwriting, payments, and claims management; gathering it in ways that comply with strict regulatory standards, such as GDPR in the EU, is becoming much more difficult.

Previously the reaction from the industry, typically conservative in terms of embracing tech innovation, might have been to retreat to more traditional approaches. However, the COVID-19 pandemic has made digital transformation an unavoidable necessity and highlighted the long-term value of a progressive approach.

Therefore, insurers must walk a tightrope and win the ‘war on talent’ that will enable them to negotiate the difficult and shifting terrain.

01: Climate change

Arguably the greatest existential threat facing insurance today is climate change. In 2020, natural disasters caused over US$76bn worth of industry losses, a 40% year-on-year increase, and circumstances only appear to be getting worse.

The US alone recorded 94 natural catastrophe events last year, with total economic losses of $119bn. Furthermore, this worrying trend is not showing signs of dissipating; Martin Bertogg, Head of Cat Perils, Swiss Re, believes it could just be the beginning:

”Large-scale climate conditions in the North Atlantic suggest elevated hurricane activity for 2021 and likely beyond. This increases the probability of a catastrophic landfall. Combined with the loss impact of secondary perils accelerated by climate change, insured catastrophe losses will only rise in the future.”

The future long-term viability of insurance in such an increasingly volatile market is called into question. Worryingly, research into a possible solution has found a distinct lack of planning among regulators.

Still others believe that insurance can play/is playing an important role, although there is always more that can be done. Whether through reputational concerns, ESG investment opportunities, or willingness to go beyond a focus on short-term profit, insurers have many options available to them. 

Ultimately, the fight against climate change might be predicated on an industry culture change.

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