The insurance sector encountered significant challenges in 2023. However, there is an expectation of improvements in combined ratios and overall profitability for insurers in 2024, despite facing persistent issues from recent years.
Numerous leading insurance companies underwent several waves of layoffs and incentivized early retirements, resulting in a reduced workforce to achieve their operational objectives.
Within the property and casualty (P&C) insurance space, companies are dealing with escalating loss ratios. There's an uptick in claims costs, fuelled by a combination of rising repair and replacement expenses due to inflationary pressures, increased litigation and settlement costs referred to as social inflation, and a spike in natural disasters. These factors, especially the increase in natural catastrophes, have pushed property reinsurance rates to rise by up to 50% in the United States.
These factors have prompted numerous property and casualty (P&C) insurance providers to either cease offering new policies or withdraw from specific markets entirely in 2023. In contrast, the life insurance and annuity industry has experienced more stability. Increasing interest rates have enhanced net yields, and the sector has maintained strong balance sheets while experiencing positive premium trends, thanks to a growing demand for savings and retirement solutions. Nonetheless, challenges persist, such as the impact of inflation and the complexities of risk transfer within the annuity and pension sectors.
To effectively maneuver through the current complex and evolving market landscape, it's crucial for insurers to innovate swiftly, and this innovation must be built upon a solid technological base. We have pinpointed six key trends that are poised to influence the insurance sector throughout this year.
1 .It is essential to accelerate product launch timelines by integrating systems and utilizing tools that require minimal coding.
The continued selling off of important markets is not a viable strategy for enduring success. Insurance companies must overhaul their pricing strategies, product offerings, and overall business operations to prosper in the current climate. In recent years, new insurance products that focus on increased relevance and ease of access have been introduced and are expected to gain more traction in 2024. These products include on-demand insurance tailored for gig economy workers and insurance policies that are priced based on usage, which are adjusted according to data from telematics and sensors, promoting pricing that reflects individual behavior.
Insurance providers are also aiming to broaden their portfolio of value-added services for their clients. For example, property and casualty (P&C) insurers are now offering additional health and wellness management services, while life and annuity insurers are providing specialized options for retirement planning.
Furthermore, insurance companies are forming alliances with financial institutions to present home purchasing or refinancing solutions, and even home security systems that can lead to lower home insurance premiums. There is also an increasing market interest in niche areas like excess and surplus lines insurance, as well as in the cyber insurance sector.
2 .The industry is undergoing a cultural transformation, with a growing emphasis on the importance of risk prevention rather than focusing solely on risk transfer.
To launch these new services promptly and efficiently, insurers must adopt flexible business practices and ensure they have a robust technological infrastructure. Maintaining and updating antiquated legacy systems is costly and time-consuming, resulting in subpar experiences for both customers and employees.
It's crucial for companies to shift from traditional on-site legacy systems to more modern cloud-based solutions. So far, only a small percentage have made this transition, with just 38% of life and health (L&AH) only insurers and 33% of P&C only insurers having upgraded or replaced their outdated or modern on-premises core systems.
As insurers reconsider their technological infrastructure, they can also begin to bridge the gap between current operations and future aspirations by utilizing low-code or no-code platforms. These tools enable insurance firms to swiftly create customized solutions.
3 .Channels for distributing products are growing and undergoing changes.
The way insurance is sold has transformed markedly in the recent past. Initially, the emergence of insurtech companies such as Lemonade, Hippo, and Policygenius modernized the industry by introducing digital and more consumer-friendly methods for acquiring personal insurance policies.
The latest development in this transformation is the concept of embedded insurance. This approach integrates insurance offerings at the point where another product or service is sold. Embedded insurance is becoming increasingly popular, especially for property and casualty (P&C) insurers who are finding innovative ways to connect with their customers at relevant touchpoints.
This trend is evident in various scenarios, such as providing home insurance seamlessly during real estate deals, selling pet insurance directly at vet clinics, and offering car insurance at the time of vehicle purchase from dealerships. Nationwide, for instance, has embraced this trend and notably expanded its range of products in 2023 through a collaboration with Rivian.
Despite the diversification of distribution channels, traditional agents and brokers continue to play a significant role in the industry. The use of technology is crucial for enhancing customer satisfaction and can often lead to increased sales, especially since consumers are showing a preference for engaging with agents when looking to acquire new insurance policies.
As insurance companies broaden their strategic alliances, it is vital for them to consider the best ways to integrate new partners effectively and maintain transparent understanding of these partnerships. Additionally, ongoing investment in improving the agent experience is essential. Developing systems and processes that simplify transactions for agents will help maintain their ability to conduct business efficiently.
4 .The standard for delivering an exceptional customer experience is at an all-time high.
The expectations of today's insurance customers extend beyond the desire for innovative products and a wider range of access points; they also seek enhanced experiences that simplify the process of purchasing insurance and interacting with insurance companies, aiming for speed and minimal hassle.
As customers shift their preference from the ease of bundled insurance packages to actively comparing and selecting the best offers from various providers, a seamless digital experience becomes increasingly critical. J.D. Power reports that the proportion of customers who have been with their home insurance provider for less than a year and opt to combine their home and auto insurance has decreased from 76% in 2022 to 66% in 2023.
The necessity of a multi-channel strategy is evident, with the use of digital channels for claims processing and routine communications on the rise. A survey by J.D. Power indicates that half of the participants have reached out to their insurance company via email, 36% have utilized text messaging, and 30% have engaged through the insurer's website or mobile application. Nevertheless, despite the frequent use of these channels, over 30% of customers remain dissatisfied with the current digital offerings, highlighting a significant opportunity for enhancement.
Insurance companies must ensure that every phase of the customer journey — including policy purchase, signing agreements, providing disclosures, filing claims, and requesting services — is smoothly executable and signable across various digital platforms. This integration enables specialized personnel, such as call center workers, agents, and claims adjusters, to concentrate on addressing the most intricate inquiries and managing claims efficiently, thereby delivering an optimal experience for policyholders.
5 .Breakthroughs in artificial intelligence and data analytics are hastening the potential for transformative change.
The year 2023 will be notably marked as the time when generative AI became a significant topic of conversation among the general public. The insurance industry is also part of this trend, and we anticipate that discussions about AI, data, and analytics will gain momentum throughout the year.
Insurance companies are well-positioned to deploy analytics and artificial intelligence in a variety of applications. AI holds the promise of enhancing risk evaluation processes for actuaries and underwriters, streamlining the First Notice of Loss (FNOL) and claim resolution processes, identifying fraudulent activities, and facilitating customer self-service through automated chat systems.
In the context of the numerous contracts and agreements that form the foundation of insurance operations, AI has the potential to significantly assist insurers in identifying risks, improving operational efficiencies, and extracting maximum value from their contractual agreements. AI can specifically aid teams in extracting and comprehending contract terms, searching and analyzing their vast repository of agreements, and assisting in the creation and drafting of new contracts.
6 .Addressing security concerns and ensuring compliance with regulations continue to be of paramount importance.
Fraudulent activities cost American consumers a staggering $308.6 billion annually, accounting for about 10% of all property and casualty losses. This statistic underscores the significant challenge that fraud presents to both insurance providers and their policyholders.
As digital transactions become increasingly prevalent, it's crucial for insurers to prioritize fraud prevention and security measures. This involves integrating robust identity verification and authentication processes throughout the entire customer journey and at every point of interaction, including during the agreement process, to verify the legitimacy of all parties involved.
Moreover, insurers need to adopt a comprehensive approach to information and data security. A rising number of states are beginning to implement the NAIC’s Data Security Model Law, and certain aspects of the New York State Department of Financial Services (NYDFS) Part 500 Cybersecurity Regulation are set to take effect in 2024. In accordance with these regulatory frameworks, insurance organizations must have effective systems in place to detect and report suspicious activities and to implement stringent user access protocols. Given the sensitive nature of customer data contained in agreements, it is particularly crucial for these entities to adhere to all applicable data security regulations and best practices.