The Current State of the Insurance Industry and its Potential Future
by Rohan Gupta – Business Development Intern
The insurance industry, a critical pillar of economic stability and personal security, is undergoing rapid transformation driven by technological advancements, changing consumer expectations, and evolving regulatory landscapes. In Canada, prominent insurers like Desjardins, Manulife, and Intact are at the forefront of this change, leveraging technology to enhance operational efficiency, improve customer experience, and innovate product offerings. However, in some parts of the world, insurance is still a niche market. A 2018 study by Lloyd’s and the Centre for Economics and Business Research estimates that $163B worth of global assets are underinsured, leaving a big gap yet filled. This article delves into the current market trends, challenges and opportunities, and innovative solutions reshaping the insurance landscape.
The Current Market Trends
A Widespread Adoption of Cloud Technology
Digital transformation is a dominant trend in the insurance industry, with companies increasingly adopting digital tools to streamline processes and offer better customer service. According to a report by McKinsey, digital adoption in insurance has accelerated by five to ten years due to the COVID-19 pandemic. Insurers are leveraging technologies such as artificial intelligence (AI), machine learning (ML), cloud computing, and big data analytics to enhance underwriting accuracy, predict customer behavior, and automate claims & data retrieval/profiling processes.
Desjardins, in attempting to modernize its systems, turned to EIS and Microsoft. Desjardins executed what would be one of the largest industry-wide deployments of its insurance core systems on the cloud. Deployed, was EIS’ fully cloud-native CustomerCore module onto Microsoft’s Azure. The objective was for the cloud to be the endpoint for data from multiple policy, billing, and claims information systems. Furthermore, it supported Desjardins’ new mobile app and allowed agents & customers up-to-date views of their insurance portfolios.
The CustomerCore module gives insurers a clear window into customer needs and can enable custom automation. The open architecture of the module allows access to third-party data sources, which informs carriers and providers of major life events such as marriages, big purchases like those of properties & vehicles, etc. Insurers can then create workflows to generate relevant upsell and cross-sell offers. Amongst a host of other features, the module allows insurers for a searchable and filterable timeline of events, a handy feature that allows workers & customers to keep track of important dates such as when they made a certain claim, or when they first got approved for a policy.
Intact received gold partnership status from Microsoft, shortly following the greenlighting of their development-as-a-service partnership. Microsoft provided its Azure platform and resources to help Intact build its new apps for customers on a subscription base. This was through Microsoft’s one commercial partner program, where only a handful of companies in the program get access to premium solutions and advisories.
Manulife took a slightly different route, partnering with healthcare technology company, League. Manulife fully integrated its group health benefits ecosystem with League’s personalized and digital health care model, making the platform available for Manulife Health customers. This allows for real-time cost breakdowns in emergency situations, and early over-the-counter recommendations for medication in specific situations.
With technology and cloud adoption being at the forefront of insurance innovation, companies have ensured that the older customer demographic group still has the option of traditional broker and agent interaction for all their policy, billing, and insurance needs.
Opportunities
Growth in the Developing Market: The Relationship between Economics and Insurance
An array of factors contributes to insurers’ low exposure in developing countries. These include high risk, limited market depth, tight regulations, a lack of investment opportunities, and simply a lack of consumer education. The result is that insurance is seemingly a niche concept in the developing world. However, the low exposure coupled with higher expected growth in GDP compared to the developed markets presents substantial business opportunity.
There is strong evidence of a positive relationship between GDP growth and insurance market growth, as concluded by a World Bank study. Figure 1, which lists the countries with the highest predicted GDP growth, is dominated by countries in Africa and Asia. Figure 2 is a graphic made by Deloitte which uses a prediction made by Swiss Re regarding the fastest growing non-life insurance markets. The prediction is that the African and Asian (both emerging and advanced, excluding China) markets will grow the fastest in the 2024 fiscal year. The conclusion is that the fastest growing economies in the world, most of which are tourism, agriculture, and export-based economies, are starting to see a slow but strong uptrend in the insurance industry, and the service sector wholly, as the concept of insurance continues to penetrate the developing countries and become a norm.
How Multilateral Development Banks Can Help the Big Insurers Diversify Business Operations & Aid Economic Development in the Emerging Markets
A 2023 World Investment report by UNCTAD revealed that it would take $4 trillion annually for the developing countries to meet the 2030 Sustainable Development Goals. This is a number that comfortably exceeds the financial resources available to governments or financial institutions in the developing nations. As a result, there has been a growing focus on private capital and the role it can play in addressing the gap. Insurance companies can be part of the solution, while diversifying their business into rapidly growing markets. For years, insurers have stuck to their traditional product offerings which includes life, health, auto, and property insurance. However, with severe inflation over the years, the cost of capital has gone up significantly, making the process of hedging against risk that insurance institutions have, very expensive. As a result, there has been a growing focus on offering products like those of banks, which can ensure a return on, and importantly, a return of the principal itself.
Insuring loans originating from MDBs has become a very popular asset over the years, mainly due to its ability to deliver a high-yield, market-based return on capital which does not intertwine with the traditional business lines.
The International Finance Corporation (IFC), member of the World Bank Group, is the largest global development institution focused on the private sector in emerging markets and developing countries. In fiscal 2023, $43.7B was committed by the IFC to private companies and financial institutions in the developing countries. In September of 2023, as part of the $43.7B commitment, the IFC signed a $3.5B credit insurance policy with 13 global insurance companies under its MCPP, a program aimed at mobilizing the risk capacity of leading insurers to unlock up to a broader $7B in new medium and long-term lending to commercial banks and non-financial institutions. These new institutions would increase access to capital for small & medium enterprises, including women-owned businesses. This marked the third stage in IFC’s new lending plan (see the figure below for the full $7B MCPP roadmap).
The program has gained the participation and support of a plethora of renowned insurers including Aspen, Liberty Specialty Markets, Allianz Trade, and others. As mentioned earlier, the amount of funding needed for the developing countries to meet certain goals is quite high, making it risky for banks to give out hefty loans. Insurance companies can insure portions of MDB loans in emerging markets, which allows banks to lend larger amounts as there is protection against downside risk. Insurers can utilize their underwriting skills of selling insurance, to financial institutions by expanding it to cover portions of lending by MDBs. Pair this, with the defensive attributes of private credit, and it becomes a relatively less risky asset class to be added to the portfolios of big insurance companies. In the unfortunate case of a default on payment, it wouldn’t be the bank, but the insurer who would compensate the holder of the credit insurance with a pro-rated payout, which ends up freeing billions of dollars to bolster the lending capacity of the MDBs.
The prospect of partnerships between MDBs and insurers is a win-win situation. Insurers can expand their business operations, the emerging markets get the funding for their economic development goals, banks are able to raise their lending capacity due to parts of their loans being protected against risk, and a relocation of capital away from the “safe havens” of the developed markets takes place. Ultimately, a big risk gets shared between multiple capable organizations and firms, allowing for greater private sector investment which multiplies the development impact and protects people in underprivileged countries from uninvited disasters and risks.
The Next Big Leap for the Insurance Industry: Cyber-insurance
In 2023, it was estimated that $8T worth of cybercrime had been committed worldwide, a number that has continued to rise significantly over the years. This number would be far greater if it accounted for any outages, network failures, system disruptions, and any other non-criminal events. The point is that the increased reliance on cloud storage, AI, blockchain, and data analytics, plus a slow shift away from physical storage, has created a higher risk of cyber related issues. According to the Munich Re Cyber Risk and Insurance Survey 2024, 87% of global decision makers say their company is currently not adequately protected against cyber-attacks. On July 19th, American cybersecurity company CrowdStrike distributed a faulty update causing widespread problems with Microsoft Windows. This resulted in a worldwide IT outage, one that is considered the largest outage in the history of information technology. The outage disrupted, airlines, airports, banks, hotels, emergency services, caused a stock market sell-off, and more. The impact on Fortune 500 companies is said to be around $5.4B, however, factor in small businesses, the stock market sell-off, many delayed flights, etc., and that figure would be considerably larger. It raises the question of how the concept of cyber-insurance, a seemingly niche concept for now, can protect against this risk.
The cyber insurance market has picked up a lot of fuel over the past few years and is not expected to slow in the coming years, with a projected market of around $30B (in gross written premiums) by 2027. The main reason for such explosive growth has been the government’s support and intent. Naturally, the cyber insurance has limitations to the risk bearing capacity, as cyber-crime/war/outages pose a threat to macroeconomic and societal stability. Hence, the level of government involvement has always been the key.
In October of 2024, the Network and Information Security Directive (NIS2) will go into effect, marking a key development in elevating European cybersecurity. The EU-wide legislation provides extended legal measures to boost the level of cybersecurity and imposes stricter obligations to be followed by entities operating in various critical industries.
Tackling Cyber Insurance Growth Obstacles
When it comes to the assessment of cyber risk, enterprise risk management is the primary driver in assessing the depth and presence of cyber risk to a company. Risk prevention services, including post-loss response and recovery support could be offered to improve the attractiveness of purchasing cyber insurance, at the same time strengthening relationships with clients. The latter could be achieved through real-time monitoring of cyber risk factors and offering lower premiums and/or increased limits as incentives for holders of policy who surpass risk management thresholds. For insurers, adopting a risk-management based approach can give them more space to collect data and bolster certain predictive models. Since pricing cyber insurance is quite complicated, this model allows insurers a more trial and error method, where pricing is based on a buyer’s risk-management maturity.
Below is a figure which delineates the reasons behind why cybersecurity is purchased.
Topping the list is the news of losses by other firms, followed by a certain requirement to have cyber insurance and an incident happening to the firm itself. While increased education has a healthy percentage number, it is not the primary factor that drives cyber sales. This reconfirms the point of cyber risk education still being somewhat of a niche.
A big part of the education process of buying a complex policy like this includes the costs that a firm would have to bear in the event of an incident. Not all the costs are well known to the consumer which distorts the importance of having an insurance policy to protect against the downside risk.
Addressing clients of all costs through a more informed sales presentation would make cyber insurance a much more enticing purchase. Another way to boost consumer confidence can be through standardizing policy language, due to the complex nature of the offering. That is, having a standard set of terminology which helps avoid coverage disputes coupled with length & costly litigation. It can also serve as a means by which companies can innovate their product offerings and accelerate their market penetration.
Conclusion: Chances must be taken in this stable industry, with high-growth high-risk products
Considering the highly mature nature of the insurance market, achieving sustainable growth is not easy to come by. Property and casualty insurers are finding organic growth increasingly challenging due to market maturity and overcapacity, especially in the primary and reinsurance sectors. The competitive environment is pressuring prices and limiting profitability, with emerging technologies like driverless vehicles and automation threatening to disrupt and change key lines like auto insurance and workers' compensation. Cyber insurance, however, stands out as a rare growth opportunity, having shown positive initial results with favorable loss ratios compared to other lines. Yet, the future of cyber insurance is uncertain. Concerns exist about a potential catastrophic cyber event that could parallel the impact of 9/11 on terrorism coverage, leading to a sudden market shift. In the end, hackers and cybercriminals are getting smarter too. Additionally, there's worry about the rapid influx of new players, potentially destabilizing the market by having cost leadership rates and expanding coverage imprudently. The industry's success in this area will depend on how well insurers manage this volatile risk. Insurers must also consider alternative risk-transfer options that buyers might turn to if traditional coverage proves inadequate, too costly, or simply too complex, such as captives, risk retention groups, and cyber bonds. The insurance industry, already familiar with the complexities of cyber risk through its own experiences, is cautiously approaching this market, aware of the challenges but also positioned to capitalize on growing demand. To thrive, insurers must enhance their capabilities, possibly through external data and third-party models, while considering standardization in policy language to balance competitiveness with differentiation, and to extract simplicity within a complex offering. The ability to leverage their direct experience with cyber risks could be crucial in developing effective strategies and services for clients. Ultimately, while insurers are naturally cautious, the potential for growth in cyber insurance is significant, provided they can navigate the inherent risks before alternative solutions become more attractive to buyers. If this industry wants to grow continuously, the players must take their chances in a stable market and get out of the comfort zone, with disruptive offerings that are uncertain, volatile, and high-risk, but have the opportunity for unparalleled growth as the world continues to shift digitally at a rapid rate, with no stoppage in sight.
Disclaimer:
The views and opinions expressed in this article are those of the author, Rohan Gupta, a Business Development intern at B4E Insurtech Inc. They do not necessarily reflect the official policy or position of B4E Insurtech Inc., its management, or any of its affiliates. The information provided in this article is for general informational purposes only and should not be construed as professional advice. While every effort has been made to ensure the accuracy and reliability of the information presented, B4E Insurtech Inc. makes no representations or warranties regarding the completeness, accuracy, or reliability of any information contained in this article. Readers are encouraged to seek professional advice before making any decisions based on the content of this article.
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