In the upcoming year, insurance companies must pay close attention to both headwinds and tailwinds impacting the industry.
Macroeconomic tailwinds are likely to support strong performance in the insurance sector from a financial and operating ratio perspective. However, insurance companies must identify and address the long-term implications of underlying headwinds for continued success.
Headwinds include macro and micro-economic trends, as well as social and demographic changes that can reduce insurance demand or increase insurance costs. Insurers must anticipate shifts in customer needs—including product preferences, competition levels, regulation compliance, investment returns on assets under management, pricing policies for products offered, distribution models used for product sales, and capital structure optimization.
- Headwind: We predict an actual reduction in premium growth
The insurance industry has been feeling the effects of increasingly uncertain growth projections due to the lower than expected economic performance in 2022. Global GDP forecasts were revised downwards multiple times over the course of the year, and similar trends have been observed in insurance premium growth across both life and non-life insurance sectors. Real non-life insurance premiums are predicted to grow by 2.2% in 2023—down from a 3.3% growth expectation this time last year—largely due to ongoing rate hardening in commercial lines.
This indicates that insurers are boosting rates as they attempt to mitigate risks resulting from market uncertainty. Non-life insurance was hit particularly hard during 2020 when insurance premiums declined by 1%. Non-life premium growth in growing markets will surpass the advanced economies, with estimated real growth of 3% in 2022 and 4.2% in 2023. - Headwind: Talent to become even more difficult to acquire
Insurance companies are facing a systemic risk due to the difficulty of hiring and retaining talent. The insurance industry is in high demand for talent, but there is a dwindling supply as many current employees are reaching retirement age. In order to bridge this gap insurance companies will have to think outside the box and implement AI solutions or articulate their brand purpose in order to attract younger workers that share their vision of creating a safer and healthier world. As we move closer to 2023, insurance companies must act now or face significant consequences if they fail to address this issue. - Headwind: Inflation to continue increasing operation expenses & cost of claims
Inflation is an important factor to consider for insurance businesses. With inflation rates at their highest in decades, insurance companies will face the challenge of managing costs while ensuring customer satisfaction. In particular, insurance firms must monitor changes in customer acquisition costs, claims expenses, and indemnity when planning budgets. Furthermore, they should also anticipate persisting pressures from wages, healthcare, energy, and social inflation. To remain successful amidst these financial challenges requires insurance companies to stay up-to-date with inflation rate trends and be proactive in their cost management strategies. The insurance industry must find effective ways to manage price increases while still providing customers with quality services and products.
In insurance, inflation can have significant impacts on both general operating expenses and claims costs. In 2022, supply chain delays for auto and property insurance caused claims cost increases of up to 40%-60%, which are expected to remain high in an inflationary environment. Insurers must prepare for the decline in purchasing power that may result from prolonged inflation, as well as its potential impact on their bottom line. Careful budgeting and strategic vendor management will be essential for insurers looking to keep pace with rising costs. The insurance sector should also consider adopting new methods of pricing policies to ensure they remain profitable under changing economic conditions. By being proactive and taking steps now to protect against the effects of inflation, insurance companies can position themselves better going forward into a world of high inflation rates. - Tailwind: Inflationary nominal premium growth from high-interest rates is beneficial to performance indicators.
The insurance industry of 2023 is set to witness nominal top-line growth across the board. This is due to insurance carriers repricing their new and renewal business with increased rates. These rate increases are expected to improve insurance companies’ premium growth, operating expense ratios, and claims ratios compared to before inflationary metrics. Moreover, the increasing interest rates in major markets should provide insurers with additional investment income that will help to buffer underwriting results. In addition, insurance companies will also benefit from tailwinds such as technology advances and a favorable macroeconomic climate. All these factors reinforce the insurance industry’s potential for lucrative opportunities in 2023. - Tailwind: Elevated risk awareness will drive convergence & demand
The global pandemic has highlighted the concerns of consumers around their health and wealth security. With extreme weather events having a financial impact on individuals, and continued economic, political, and societal instability, people are increasingly underinsured. Insurers have the opportunity to expand their product offering in 2023, with more focus on health and wealth protection products. This will provide further industry convergence as insurers cater for consumer concerns. Consumers have become more aware of the need for greater financial security and this has created an opening for insurers to provide innovative solutions that meet customer needs. It is important that such products are tailored appropriately so that they can offer meaningful coverage while staying affordable. Insurers must ensure they remain competitive by providing value-added services.
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