Like most, we expect to be feeling the lasting effects of the COVID-19 pandemic and the corresponding economic decline for some time. As needs, goals, and trends were dramatically shifted the insurance industry was hit with a variety of obstacles to development and profitability. We saw heavy hits via asset risks in capital market volatility accompanied by weaker premium growth opportunities. Moving into this next stage of operating will prove to be a challenge for companies lacking strong foundations and that have failed to consistently stay up to date with their implementation of technological advancements.
A recent report by Deloitte’s Center for Financial Services showed that 48% of surveyed insurance executives stated they felt that the pandemic showed how unprepared insurance businesses were to handle an outbreak like the COVID-19 crisis. While even more surprising, only 25% felt their firm had a clear and concise action plan for continued financial and operational success throughout the pandemic. Looking to the future, especially as we begin to ease out of the pandemic in the second half of 2021, firms can begin to turn their focus towards reemphasizing growth and more offensive targets. As there is still a long way to go to regain the ground lost throughout 2020, those with strong foundations in operations, technology, service and financials are sure to pull ahead as industry leaders.
It can even be said that the pandemic helped shine a light on a somewhat overlooked industry as consumers were forced to increase their awareness of risk. That’s not to say it’s been an easy road for most firms as many spent much of 2020 battling lapsed policy premiums and slower growth, but what was originally perceived as a threat could now be seen as an opportunity. Consumers who may have previously overlooked certain lines of insurance are now more hypersensitive to risk, insurers can use this opportunity to increase their market penetration. Now coming out of the defensive environment, firms can explore how to recover quicker and ignite future growth.
But how? One obvious way is to manage expenses. Working to offset the added costs caused by the COVID-19 outbreak while also financing opportunities for expansion is something that can help any firm that has been negatively affected. The same previously mentioned Deloitte survey concluded that 61% of executives planned to cut costs between 11-20% over the next 1-2 years. Though we don’t see this being a strategy across the board, separate from cutting costs we do expect to see a heavy reallocation of priorities within firms. Through reductions in nonessential expenses and a reprioritization of investments, firms can free up more capital to be used for recovering any ground lost due to the pandemic.
While noting the negatives of the pandemic it’s important to credit it as one causation for new product development. As a result of the pandemic, insurers have been developing more parametric policies, which mean they pay out upon the occurrence of a specific trigger event rather than specifying a certain type of loss. This line of insurance is already popular for property-catastrophe coverage, but we now see this as a viable opportunity for coverage relating to future epidemics. As we also saw massive shifts in consumer habits relating to work and transportation there are increased opportunities to penetrate additional markets through more personalized products. Facing problems they never saw coming before the pandemic, consumers are eager for more customized offerings such as transportation that encompasses a wider range of methods rather than being associated with one specific vehicle.
Additionally, the increased use of artificial intelligence (AI) and predictive models has also been partially contributed to the pandemic. Firms have begun to leverage it more to augment their underwriting procedures with the hope of increased firm-wide capability for new business lines such as portfolio management and servicing a larger number of clients. Like previously mentioned in NGL Insights, we expect firms that are adopting these new technological advancements to emerge as industry leaders and begin to vastly outpace those who are not incorporating these tools into their day to day operations. The pandemic forced firms to look more closely at their risk analysis procedures which may not have been as robust or efficient as they thought. As a result, we have seen and expect even more investment in alternative data analytics tools and advanced models with the hope of automating outdated procedures.
Like we mentioned, technology has been one of the hottest trends of 2020 and 2021 and not just because increased focus was needed to carry out day to day operations during the pandemic with most of the workforce working remotely. The incorporation of advanced technology has been more of a requirement than a suggestion in the last few years, but even with that in mind more than three fourths of professionals surveyed by Deloitte felt that the pandemic exposed deficiencies within their firms. Working to combat this, 95% of those surveyed said that they were already working to reduce those drawbacks and gain back some of the strides lost to the pandemic. In tandem with the rising focus on technology, data privacy has also emerged as a primary focal point of insurers throughout COVID-19. Cybersecurity has been at the forefront of concerns given more intense regulatory pressure and vulnerabilities associated with the remote work environment.
With the goal of improving client experience and user support products, firms continue to develop stronger applications which are held outside the traditional security umbrella. As these products play right into the needs of clients by providing a more personalized experience with data at their fingertips, it’s imperative that security is built into the applications design from the start. Protecting clients and their information is at the core of what we do in the insurance industry.
Data portal products such as NGLs Insurasphere, are just one example of how the industry is meeting this need head on. Having access to a consolidation tool allowing storage and organization across multiple business lines, allows our clients to work better, faster. A secure cloud-based storage and support network is what we can expect for the future of business even beyond the insurance industry. As clients and consumers we want access to products in the most efficient way possible. So as technology evolves, allowing us to submit claims online and download account documentation on the go, the more likely we are to continuing using products like Insurasphere.
The global sector is in the second year of the pandemic with dramatically less “known and unknowns” on claims arising out of COVID and its impact on the sector’s operation than in the last four quarters. The consensus among global reinsurance analysis is the market is expected to grow between 6%-8% to somewhere in the order us USD $435Billion. The forecast is driven by the increase in RI rates, the cost-cutting measures taken early in the pandemic, and greater business efficiency with the easement of the restrictive containment measures, e.g. work from home, etc., that slowed the renewal and new business, regulation & compliance and claims processes significantly.
For an industry that is geared at protecting their customers from risks both know and unknown, the COVID-19 crisis has proved a massive challenge for insurance companies. Battling increased expenses with little to no growth is something even the top firms were struggling with. However, those with strong foundations in technology and advanced analytics have pulled ahead in these later months of the pandemic to carve out their place in the industry. Moving into this post-crisis era we expect to continue to be met with residual shockwaves; but we are confident that firms who prioritize investment in artificial intelligence and cloud based technology will have the tools they need to weather the storm.
