Insurance Article, The Insurance Times 2022, The Insurance Times January 2022

NON-LIFE INSURANCE INDUSTRY SLIPS FURTHER IN EMERGING MARKETS LEAGUE

The non-life insurance industry is witnessing shifting trends across the front office, policy administration, and claims—the three core functions of the insurance value chain.  Between now and 2021, more than half the growth of the global economy is expected to come from emerging markets. Non-life insurance premiums in emerging markets are foreseen to grow more than twice as fast as in industrialized countries. Life premiums are also expected to outpace those in industrialized countries. Even though they face strong competition from domestic insurers, many international insurers plan to actively pursue opportunities in the rapidly growing emerging markets. Banks are also likely to leverage their branch networks to further penetrate these markets. However, with interest rates expected to remain at low levels for an extended period of time in both developed and emerging markets, insurers will find it increasingly difficult to achieve profitable growth. The healthy economic environment with low inflation has had a positive effect on insurance premium growth in Emerging Asia and Latin America. In addition, in an attempt to encourage healthy competition, certain markets have reduced state involvement and taken insurance-enabling regulatory measures. Product innovation has also driven fast-paced growth in certain insurance segments, including micro insurance and takaful. The use of multiple distribution channels has also helped insurance to reach a broader audience in emerging markets. Insurance in emerging markets has experienced strong growth over the past decade and the outlook for the next decade remains promising. Nonetheless, given the expectation of persistent low interest rates at least in the near future, achieving profitable growth will become increasingly challenging in emerging markets.

Although insurers in emerging markets have seen stellar premium expansion, achieving profitable growth is far from the norm. For example, out of around 174 life insurers from a sample of Emerging Asian and Latin American markets, 46% of insurers failed to report consistent profits between 2006 and 2009, and only 20% registered profit margins (net profits divided by direct premiums) in excess of 10%. In non-life markets, 49% of all non-life insurers in the sample emerging markets recorded negative underwriting margins (underwriting results divided by direct premiums), with around 36% of non-life insurers reporting margins in the range of 0% to 10%.  Low profitability may indicate an overly aggressive focus by insurers on top-line growth rather than profitable growth. The sigma study examines profitability in emerging markets, and explores whether ownership structure, affiliation with financial conglomerates, or economies of scale can tilt profitability upward. Insurance premiums in emerging markets have expanded robustly by 11.0% per annum in real terms over the last decade, compared with 1.3% growth in industrialized economies. Emerging markets’ outperformance is expected to continue in the next decade and is attracting the attention of global insurers, who look to emerging markets for profitable growth beyond more saturated mature markets.

Insurance industry trends and outlook

The pace of the global economic recovery will shape the outlook for the insurance market across regions. Advanced Asia Pacific regions and the US are expected to outperform Advanced EMEA countries in the next two years, with an expected 6% growth across 8 of the largest markets in commercial property and liability lines. China is set to be the world’s fastest growing country given quicker adoption of digital distribution channels across both non-life insurance and life insurance markets. While life products are predicted to grow at 8.5%, in non-life, double-digit growth is expected in 2021 and 2022. In other emerging markets, growth is expected to be weaker for non-life insurance products, with an estimated growth rate of 6.9% for life insurance products in the next two years. The global insurance premium market, in 2019, reached USD 6.3 trillion with an estimated contraction of -1.4% in 2020 and forecasted recovery growth rate of over 3% between 2021 and 2022. Global non-life insurance premium growth is expected to see a 3.6% annual improvement over the next two years, with the core driving factor in the non-life insurance market stated to be rate hardening in commercial insurance (i.e. where the market is less competitive and underwriters adhere to stricter standards).

Digitalization transforming the insurance value chain

The insurance industry is rapidly adapting to these seamless virtual operations. With the adoption of AI, RPA, cloud computing, Internet of Things, and blockchain, digitalization is set to transform the insurance value chain. Currently, about 68% insurance companies are either in the process of testing or adopting AI. By 2025, the insurance industry has the potential to automate 25% of its processes (especially manual processes like claim processing, underwriting, customer service, and policy administration) using AI and machine learning. Certain use cases for RPA (Robotic Process Automation) include claim settlement, fraud detection, real-time data analytics, customer experience, and product personalization. On combining RPA with AI tools, bots can help collect data from internal and external sites, extract information, analyze customer history and further identify and verify fraudulent claims. Digital advancements working to provide seamless consumer experiences will further provide customized pricing and smaller risk pools based on customer requirements. An integrated engagement platform will allow data, insights and transactions across multiple industries to be used among entities. This will lead to an increased adoption of usage-based insurance products tailored to individual needs.

Investment trends

An analysis of approximately 2,000 global insurtechs focusing on life, property and casualty (P&C), and health insurance found that from 2010 to 2020, about one-third of them secured funding, and a handful established strategic partnerships with at least one incumbent. Insurtech funding peaked in 2020 with €6 billion in deals. In terms of product categories, 66 percent of insurtechs operate within P&C lines of business (led by auto insurance), while 18 percent and 16 percent focus on health insurance and life insurance, respectively. Around 47 percent of insurtechs launched between 2000 and 2020 focused on personal lines, with the number that operate in commercial lines increasing in recent years. The increased funding, coupled with the mounting focus on commercial lines, may push insurtechs to explore new, exciting opportunities, especially in serving small and midsize enterprises (SMEs). The SME segment’s need for customization, experience, and lower complexity of products makes this space ripe for insurtech interest.

Key Trends

Some of the key trends and factors that marked the insurance industry over the past year or so are illustrated here to assess what each means for insurance professionals this year:

1: Unpredictable natural disasters

Year 2020 was the most active hurricane season on record, meaning losses were generally below reinsurance retentions and primary markets were left to bear the brunt of claims. Carriers also took a hit in profitability from wildfires, convective storms and attritional losses, with several reporting combined ratios over 100%. The onset of 2021 saw single-digit rate increases, a significant drop from preceding years when rates were increasing by 15% to 20%. This meant high capacity and peaking rates, driving property markets to build larger budgets. With the industry already set up for plateaus, when Winter Storm Uri hit Texas in February of 2021 and caused nearly $15 billion in impact, it took the market by storm. The impact was significant, giving markets low expectations for profitability before even considering the impact of a quake or the approaching storm and wildfire season among other seasonal events. The market remains competitive as carriers remain selective in the risks that they write while trying to retain their current portfolio. However, they continue to push rates, which contribute to a choppy property market.

2: Lifestyle changes and emerging threats

Over the past year, drastic lifestyle changes have had a direct impact on the cyber security market — leading to an uptick in ransomware and targeted attacks. For example, the shift to a remote workforce has significantly heightened the risk of network security threats for businesses. Even the insurance space has been significantly affected by ransomware attacks. For insurance professionals, loss ratios on cyberattacks are running high due to an increase in severity and claims. The magnitude of its impact on profitability means insurers cannot afford to ignore it. Not only are carriers increasing rates, but they also are more careful about managing capacity by layering programs and increasing retentions, while tightening up the underwriting guidelines and shortening quote expiration dates on cyber insurance proposals.

3: Excessive litigation

The key change in the market is increased policyholder retentions. Many large plans are having trouble finding adequate and affordable fiduciary coverage, whereas it was once a more routine renewal process. What does this mean? Ultimately, today’s plan sponsors cannot rely exclusively on fiduciary insurance to fund and absorb these losses. Instead, plan committees need to learn from this loss trend and take steps to mitigate risk.

4: Opportunity in offshore wind infrastructure

The growth of the industry is bringing business sectors together to make offshore wind farms a reality. More workers are needed to maintain and repair these facilities along with loading and moving, transportation hubs and construction. Even shipbuilding is seeing an uptick in demand for crew and services as laws require specialized ships for crew, supply, maintenance, service, installation and construction of wind farms. The growth of the industry translates into a growing need for infrastructure and liability protection as a result of the Longshore and Harbor The challenge is making sure the right insurance is in place for the unique exposures that exist.

5: Markets rely on telematics and loss control

For the transportation industry, buyers are seeing up to 15% rate increases for best-in-class risks as well as premium jumps and scrutiny for distressed risks. On the other hand, capacity to write this insurance continues to grow as more carriers enter the market. The auto space as a whole is heavily composed of distressed risks that can be attributed to a variety of factors including loss history, subpar driver pools, unsatisfactory CABs and sharp industry growth. For companies investing in safety programs and trucking technology, brokers are more receptive to offering significant underwriting consideration, but many markets turn away from high-risk markets. Ultimately, these factors play a role in leading markets to rely on their loss control arm and telematics to determine whether to partner with a potential insured.

Personalize response to immediate needs

Although the full impact of the crisis continues to unfold in many parts of Asia, the pandemic has already led to a broad economic slowdown. As a result, an increase in late premium payments and policy surrenders has pushed many insurers to rush into quick fixes, such as offering refunds on a portion of premiums for all customers. While such broad actions may boost customer retention, a more targeted approach could use analytics to prioritize such offers for customers most in need and proactively reach out. This could be more cost effective and strengthen the insurer’s long-term relationships with those customers. Companies with this capability can also determine the size of the premium relief based on the predicted customer lifetime value. The sudden and visible increase in health and mortality risks has also created an urgent customer desire for relevant insurance coverage. Insurers with established analytics capabilities could gather customer-reaction data during the first month of a new product launch and use it to refresh their campaign analytics model to support more-targeted digital marketing and outbound-call campaigns.

From a technical perspective, insurers that have already deployed data and analytics use cases have observed that some of their analytical models have become less accurate as a result of COVID-19 because changes in underlying customer behaviors have occurred at a much faster pace. For example, segments that were previously deemed safe started to see increasing loss ratios. To address these effects, insurers have focused on increasing their agility to react quickly: if it took months to launch a new analytical model in the past, it might now take less than a week.

Change agent value proposition.

Although financial planning is well established in many developed markets, the concept is relatively nascent in emerging Asia. But, as Asian consumers become wealthier and more sophisticated, they will look for agents who understand their needs (such as retirement planning and investing) and can provide personalized advice. Insurers should tailor their financial-planning approach to the Asian context, where customers not only have less awareness of financial-planning options but also demand more flexibility in their financial-planning journeys.  In many Asian countries, the capacity-led agency model encountered a bottleneck even before COVID-19. Leading insurers in large markets such as mainland China have reported stagnant growth in productivity and capacity due to new-agent attrition and a lack of professional field management, while smaller insurers look for ways to gain market share.

The new digitally enabled hybrid model will result in a gradual, enduring shift of the agent’s role from salesperson to financial adviser, in which he or she has expertise in products and financial planning. While this change will not happen overnight, it is imperative that insurance companies begin revisiting the compensation model to reward agents not only for acquiring new customers but also for providing quality advice to customers. Instead of paying agents solely on commission and overrides, insurers could incorporate fixed salaries and service- or activity-based bonuses into the digitally enabled hybrid model. By adjusting the incentives, insurers will encourage agents to get to know their customers and regularly stay in touch, creating deep and lasting customer relationships.

Behavioral science in insurance

Nudging, a behavioral science approach that uses “subtle interventions to help people make better decisions while respecting the freedom of choice,”1 can be used to redirect such behavior in two steps. First, target behaviors are identified. Second, a better choice architecture is created to make it easier for individuals to choose a better solution. Used successfully in the insurance industry, the benefits of nudging may include increased sales, reduced fraud, or improved customer and employee satisfaction. Many insurers use nudging selectively: some, for example, use it to optimize digital solutions. Others have conducted structured reviews of the biggest business opportunities for nudging and deployed a few discrete use cases. Still others have anchored nudging and behavioral science deeply in their organizational strategies by hiring experts and dedicated teams or by creating management positions devoted to behavioral science. Wellness and prevention models are appealing because they’re fun. People love games and gratification: It’s triply rewarding when, after going to the gym, policyholders know they’ve not only done something good for their health and their wallet, but they can earn more points on their app. A gamified product is also an opportunity for more digital brand touch points. By creating apps and online platforms for tracking wellness behaviors, insurers can create a stronger brand relationship with their policyholders – and ultimately improve the customer experience.

Transition over the next decade

The rapid transformation during the pandemic has fuelled demand for adequate insurance protection for emerging risks such as cyber attacks. The health crisis has also re-emphasised the need for life insurance. These give rise to the potential to accelerate reinsurance growth and encourage reinsurers to manage comprehensive risk assessment to determine policy coverage, rates and premiums. The increased frequency and severity of natural catastrophes due to climate change highlight the greater role of Asian reinsurers in bridging the region’s protection gap between the economic losses brought about by natural disasters and insured losses. Ten years later, post 2030, the insurance industry would have entirely transitioned to modernized, customer-centric processes. Prescriptive algorithms can be forecasted to be used by agents or digital channels to actively influence customers’ purchases. The implementation of RPA and conversational AI will reduce a majority of manual efforts undertaken, thereby actively optimizing cost and resolution time. The next decade is set to see the use of algorithms for financial planning along with human feedback and advice, with advanced algorithms that match the customer to their most suited channel and advisor.

Indian non-life insurance market

In India, gross premiums written of non-life insurers reached US$ 26.52 billion in FY21 (between April 2020 and March 2021), from US$ 26.49 billion in FY20 (between April 2019 and March 2020), driven by strong growth from general insurance companies. Gross direct premium of non-life insurance companies rose 11.4% on a yearly basis to Rs. 12,316.50 crore (1.6 billion) in May 2021. Six standalone private sector health insurance companies registered a jump of 66.6% in their gross premium at Rs 1,406.64 crore (US$ 191.84 million) in May 2021, as against Rs. 844.13 crore (US$ 115.12 million) earlier. In March 2021, health insurance companies in the non-life insurance sector increased by 41%, driven by rising demand for health insurance products amid COVID-19 surge.

It was a peculiar year for the general insurers as the motor segment, which is the biggest portfolio in a general insurance companies’ book, saw a huge contraction in the initial months of the pandemic due to the strict lockdown in place but has since slowly recovered as the economy opened up. On the other hand, health insurance premiums have seen a huge uptick as demand for health products, especially retail ones’, surged since the onset of the pandemic. Crop insurance, on the other hand, remains a challenge for the industry, going forward.

The recent amendment to the General Insurance Business (Nationalisation) Act, 1972, that allows the central government to hold a stake of less than 51% in state-owned insurance companies, is seen as necessary to keep the three unlisted public sector general insurers afloat and prevent a crisis in the sector. The amendment paves the way for a strategic sale in these insurers to the private sector. However, while the government has stated that the objective of the amendment is to increase public participation in these companies, it may not be easy to make a public offer of the three unlisted public-sector general insurance companies — National Insurance, Oriental Insurance and United India Insurance. This is because these companies are poorly run and have weak financial metrics. Their actuarial skills are not in sync with the competition. The performance of the three general insurers has taken them to the brink of insolvency, with the central government bailing them out in the recent past. The government infused INR124.5bn ($1.7bn) in July last year in these companies to keep them solvent. They could need more funds this year as well. Still, the three unlisted state-owned insurers hold around 25% share in the Indian general insurance market. Private General insurers may be keen on these entities for their large client base and branch network. Union Budget 2021 increased FDI limit in insurance from 49% to 74%. India’s Insurance Regulator (IRDAI) has announced the issuance, through Digilocker, of digital insurance policies by insurance firms.

The Economic Advisory Council has recommended increasing the retirement age saying life expectancy is expected to continue to increase due to better health infrastructure. The retirement age needs to be raised in a phased manner as India is a young nation with a high working population. According to data released by Help Age International, a global network of organisations working with and for older people, over 10% of India’s total population (about 139m people) were aged over 60 in 2019. The proportion of elderly is expected to double to 19.5% by 2050 when one in 5 people is likely to be a senior citizen. Currently, Three out of four Indians retiring over the next 18 months lack adequate health insurance coverage but intend to increase coverage. According to S&P Global Market Intelligence data, India is the second-largest insurance technology market in Asia-Pacific, accounting for 35% of the US$ 3.66 billion insurtech-focused venture investments made in the country. The scope of IoT in Indian insurance market continues to go beyond telematics and customer risk assessment. Currently, there are 110+ InsurTech start-ups operating in India. In February 2021, ICICI Lombard General Insurance, a non-life insurance firm in the private sector, has been authorized by the International Financial Services Centre (IFSC) to establish an IFSC Insurance Office (IIO) in GIFT City in Gandhinagar, Gujarat.

The Supreme Court has asked the government to consider withdrawing the exemption from insurance granted to 150,000 buses owned by state road transport corporations (SRTCs) because victims in accidents involving these buses wait for years to receive compensation from the government-run corporations. A small but growing group of insurers have withdrawn in full or partially their products from web aggregators and online third-party brokers. A delay of over two months by the central government to appoint the new IRDAI chairman is hampering regulatory progress and causing business disruptions for India’s insurance sector amid the coronavirus pandemic. The ongoing COVID-19 pandemic in India is likely to exacerbate pressure on the country’s non-life insurers’ underwriting and investment performance, leading AM Best to maintain its negative outlook on this market segment.

Xiaomi, a Chinese smartphone maker, is looking to provide the full spectrum of financial services across insurance, payments, and lending in India. Xiaomi has partnered with ICICI Lombard to curate a health insurance product. This was piloted in July, and will continue to be offered, Xiaomi also has a cyber insurance offering, and more than 25,000 customers have been covered so far. “Going ahead, InsurTech is another proposition that Xiaomi is working on in a curated manner in partnerships. The other financial services will be offered in partnership with organisations like Axis Bank, IDFC Bank, Aditya Birla Finance, Stashfin, Money View, Early Salary and Credit Vidya. 40% of the company’s credit product users are self-employed and the remaining 60% are salaried employees.

Fostering rapid innovations and responding to new trends, regulations, and technology will also require an agile way of working. Insurers will need to shift from targeting large-scale developments while working in organizational silos to working in co-located, cross-functional teams using a flexible, test-and-learn approach. In agile ways of working, product development is done in short iterations (sprints) with tangible results and a focus on continuous improvement. Insurers should act now to plan for recovery from the pandemic and prepare for the shift to a new distribution operating model. Offering remote support to agents to improve customer engagement before and after sales and adopting digital tools to enable activity management and sales are critical to the successful adoption of the new model. Insurers that start early can emerge from the crisis better prepared to provide their customers with the products and services they need as the world moves into the next normal. The global insurance industry faces a truly unique moment in its long history. The fundamental disruption caused by the pandemic equates to an opportunity for the industry to remake itself in line with new societal realities and market needs. Instilling both operational excellence and cost efficiency across the value chain will be a difficult balancing act, but a necessary one to free capital for investment. The decision to use a best-in class or best-in-cost approach will inform sourcing strategies, with options ranging from shared services and centers of excellence, to outsourcing, to value chain disaggregation. Insurers will employ fewer people and access more of the skills they need through external sources.

For insurers across the diverse markets of the Asia-Pacific region, it’s a time of considerable opportunity, though it varies in scope. In many ways, the Asia-Pacific region holds the key to the insurance industry’s future. It is home to nearly one-third of the world’s population, a few of the fastest-growing economies and multiple countries with rapidly expanding middle-class populations. Furthermore, China has rapidly become the second largest economy in the world and is on track to become the largest by 2030. The extremely high expectations of consumers in the region for seamless and personalized digital experiences inspire a great deal of innovation. Firms in mainland China and other markets are experimenting widely — and delivering impressive results — with new products, new distribution models and new technology. The top performers are both capitalizing on near-term opportunities and establishing a strong foundation for long-term success. The Asia-Pacific insurance industry is still riding a strong growth spurt, driven by China but also buoyed by positive performance in South Korea. Both premiums and penetration have risen. However, some mature markets have struggled as their populations age and consumer expectations shift. For years, insurers across the Asia-Pacific region have understandably focused on seizing the growth opportunities that have been presented by healthy economies and a growing middle class. In some markets, the focus on driving growth has left key parts of the value chain — such as underwriting, claims and other internal processes — lagging best-in-class standards. At the same time, digital capabilities have often been built on top of existing operations and without end-to-end digitization plans.

 

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