Insurers can seize opportunities in today’s challenging macroeconomic conditions

Blog -- 28 March 2023

Author: Arun Chaubey, Senior Account Manager, Verisk Specialty Business Solutions

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Macroeconomic conditions, from inflation and interest rates to the threat of recession, the cost-of-living crisis and evolving government policies, are having a major impact on the day-to-day business of insurers and all the sectors they serve. Navigating the associated risks, and emerging opportunities, is vital for any insurer to remain competitive. 

According to Swiss Re’s November 2022 Sigma Report, non-life insurance profitability hit a downturn in 2022 but is projected to improve in 2023 and 2024 as inflation abates and insurance rates continue to harden. However, with ‘inflationary recessions’ on the horizon and the collapse of Silicon Valley Bank exposing rising financial stability risk, the delicately poised macroeconomic environment contains several threats to growth and margins.

Macroeconomic pressures for (re)insurance

High inflation continues to drag on underwriting performance, for example, as it drives up claims costs and expenses while dampening demand as buyers become more price sensitive. And while Swiss Re projects average global inflation to fall to 5.4% in 2023 and 3.5% in 2024, down from 8.1% in 2022, this remains above historical averages and the volatility is not over yet – particularly in energy crisis-hit Europe.

Interest rates – which are directly correlated to insurers’ fixed income investment performance and, by extension, profitability - are also in a state of flux. Swiss Re said rate rises to combat inflation may provide a silver lining for insurers’ investments in the short term, but it warned central banks are likely to suppress interest rates over the mid- to long-term to prevent public debt spiralling further after two decades of crisis responses, which would dampen returns for long-term investors.

Meanwhile, the regulatory environment continues to evolve for insurers. At the start of last year, for example, the Financial Conduct Authority’s reforms on ‘price walking’ prompted a major reset in pricing strategy in the UK, and similar legislation is being developed in Europe.

Data-driven opportunities

In an environment like this, insurers need to optimise efficiency across their operations, from underwriting to managing reserves, to ensure they remain agile, responsive and competitive. To do this, they must harness real-time data on everything from economic indicators and market pricing to live claims, risk, exposure and policy data. With the right end-to-end infrastructure in place, insurers can employ a truly data-driven approach to underwriting which unlocks cost and workflow efficiencies, improves margins and enables transparent reporting to regulators and trading partners.

Crucially, this also provides the springboard from which to seize on the many opportunities emerging in today’s fast-moving world, whether that is responding quicker than competitors to customer pricing needs or opportunistically developing new products or entering new markets to in response to systemic risks like the Ukraine conflict, cybercrime or climate change.

Swiss Re estimates, for example, that the massive uptick in investment in global renewable energy will generate cumulative insurance premiums of $237 billion between 2022 and 2035. Opportunities abound for those who can innovate in this space - and insurers in the UK may soon have a big chunk of reserve capital freed up to take advantage as the PRA plans to slash the risk margin previously mandated under Solvency II.

Insurers must decide how to put this windfall to work, be that in product development, M&A or other growth strategies. Collaborating with trusted data and tech partners is an important part of this process as data and analytics will play an essential role in enabling them to make informed strategic decisions, compete on their strengths, deploy capacity with precision and deliver superior customer experiences.

How Verisk is tackling these challenges

As insurers look to develop new offerings and adapt existing products to the changing world, digital management solutions like Sequel Impact and Rulebook and ecosystems like Whitespace and Sequel Hub are bringing new levels of transactional speed and efficiency to the marketplace and enabling participating firms to price risk more accurately based on reliable real-time data. This gives insurers the agility to respond quickly to the needs of the market, and the confidence to offer competitive rates and gain advantage over the competition.

“At Verisk, we support a data-driven approach at every step of the insurance process, which is why most of the world’s leading managing agents work with us and Verisk data and analytics is being used by all major insurers, reinsurers and brokers directly or indirectly,” says Tim Rayner, Chief Executive Officer, Specialty Business Solutions.

Simon Gutteridge, Chief Experience Officer, says “we are constantly working to enhance our products and solutions to manage emerging risks and new markets, particularly ESG and Renewables.”

This is a unique time for insurance, full of challenges but also ripe with opportunity. We understand the landscape and can help you tap into the opportunities that exist.