Skyrocketing inflation, rising interest rates, slow economic growth, an ever-worsening climate crisis, and severe geopolitical conflicts are forcing insurers to reimagine every part of their business. As the industry considers how to best adapt to difficult market and environmental changes, technological innovation will be a key player in the industry’s bid to modernize its models and infrastructure – while also ensuring its future relevance.
The global consequences of extreme weather events have already forced the industry to rethink its approach to risk. In addition to drastic impacts from climate change, rising costs across sectors reveal an overwhelmingly difficult insurance market, with insurers struggling to increase premiums in accordance with expenses. In the U.S., car insurance rates are up almost 20% in 2023 – their highest annual increase since 1976. And Deloitte reports that Q1 in 2023 sustained the largest underwriting loss for the insurance industry in 12 years. This kind of inflationary landscape has wide implications for the world economy – impacting the labor market and slowing job growth, raising operating costs for technology and other price-sensitive sectors, and reducing purchasing power for customers, to name just a few
To address some of these issues, particularly its role as society’s “financial safety net,” insurers are looking at ways to invest in technology innovations which can help them maintain profitability while keeping customers at the center. Adopting tech and innovative products that prioritize a personalized approach to pricing can be an important key differentiator in a tight market – putting the needs of individual policyholders front and center in order to deliver a better experience, drive retention and increase customer lifetime value.
In addition, AI and ML-driven technologies can bring important, cost-saving efficiencies to insurer’s business operations and strategic initiatives, giving them a leg up in a cut-throat competitive environment. Insurers should be looking at available technology and think strategically about how automation and other AI-enabled tools and tech can transform business performance. An attendant focus must also be in the recruitment of talent that can support integration of AI tech into insurance products, services and infrastructure. Especially for traditional incumbents who may have faced difficulty recruiting data scientists and engineers in previous labor markets, the current insurtech downsizing may work in their favor – offering a much wider applicant pool.
Reduced valuations and a more cautious investment environment for insurtechs has meant a sharp pivot from growth mode as companies look for ways to increase their runway and conserve cash. However, this could create new opportunities for insurance incumbents willing to move quickly, especially in M&A (looking at strategic divestments or acquisitions) and in reassessing build-or-buy decisions.
Likewise, digital carriers and managing general agents (MGAs) have seen a sizable drop in funding for all operational models (MGAs and digital insurers recorded their largest year over year decline ever in 2022). However, even in a down economy MGAs and digital carriers can continue their reputation as a hotbed of innovation and experimentation in the insurance value chain. Opportunities exist for those able to work on innovative, scalable design solutions and operational models that can address customer concerns and align with industry standards in underwriting.
Modernizing insurance operations and investing in technologies that improve products, services and infrastructure are no longer optional activities for insurers looking to ensure their survival. Though a challenging proposition, insurers should plan for a prolonged inflationary period and adjust business strategies accordingly – protecting profitability by creating more resilient solutions that benefit businesses and customers alike. For those willing to meet the moment, ample opportunity awaits.