Transformation continues to be the byword for Canada’s insurance industry – but not all change is self-directed or indeed welcome. We consider some of the key market drivers that are set to shape the industry in 2023, as well as provide some practical tips for managing the change ahead.
1. INWARD FOCUS
Insurance companies will face pressure on several fronts to manage revenue. High inflation and the accompanying economic slowdown are expected to dampen insurance market growth, especially for property and auto insurers. Increase in claim costs – specifically in non-life insurance where policy benefits at inception fail to keep up with the rising replacement costs. They will also likely face pushback from both the government and consumers on further premium increases due to the already increased economic hardship as pressure on disposable incomes arising from cost of living increases.
- Invest in internal assessments to identify efficiencies for introducing new products or services and discovering better ways to achieve business goals.
- Prioritize adding value to existing customers and seek growth through competitive offerings to new customers.
- Rising interest rates can be expected to offer a fillip to insurers, boosting investment returns over the long term as non-life insurers’ bond portfolios gradually roll over into higher yields. As rates harden, premiums may grow.
2. CLIMATE CRUNCH
Heatwaves, droughts, and floods will continue to dominate the headlines. Ongoing increases in extreme weather losses in the coming decade and beyond are expected to drive profound change in Canada’s insurance industry, according to the Insurance Institute. As the Institute notes: “The average annual severe weather claims paid by insurers in Canada could more than double over the next 10 years, increasing from $2.1 billion a year to $5 billion a year, and must be accompanied by an increase in premium income.”1
It is imperative for business leaders to pay closer attention to the realities of climate risk as rightly pointed out by the IIC report, Climate Risks: Implications for the Insurance Industry in Canada: “Over time, climate-related risks may displace auto coverage to become the leading coverage provided by the insurance industry in Canada”.2
- Increase consumer awareness on impacts of climate change to help build safer and more resilient communities.
- Incorporate climate-risk considerations in future products to meet the evolving extreme weather-related risk management needs of consumers. For example, SageSure, a provider of catastrophe-exposed property insurance, introduced a new proprietary residential flood program in November 2022, aiming to distribute flood insurance through its network while also handling all servicing and claims.3
- Purchase and monitor emerging tools and technologies that have the potential to outperform in a high-risk environment.
- Make use of stress tests for projected climate disasters to ensure the system can handle large numbers of claims.
3. SUSTAINABILITY EXPECTATIONS
Embracing Environmental, Social, and Governance (ESG) initiatives and integrating Diversity, Equity, and Inclusion (DEI) practices into business are understandably crucial for the long-term sustainability of any organization. Insurers need to consider not only their own ESG and DEI credentials but also the records of their commercial partners and other businesses to whom they are connected, including those within their investment portfolios.
Strong ESG credentials will also allow firms to attract and engage the next generation of talent who prioritise such credentials in an employer. In addition, it is key insurers recognize and stay abreast of the growing number of international standards and best practices regarding ESG issues, such as the UN Guiding Principles on Business and Human Rights.
- Prioritize ESG risks and opportunities, especially climate related risks, on par with other forms of popular insurance products.
- Renew commitments to sustainable business practices, especially with efforts to move away from heavy polluters.
- Seek to attract and retain the right talent, especially those with ESG domain specific knowledge, and enlist partners with subject matter expertise.
- Diversify workforces and customer bases, create a more inclusive work culture, and increase access to insurance products and services in underserved communities. For example, innovative new products in health insurance can include expansion of sex-specific coverage (e.g. mammogram) for transgender communities.
- Cultivate a deeper understanding of social risks, such as mis-selling investment-oriented products, and mitigate those risks through investment strategies that assess financial impact exhaustively.
- Measure success of ESG initiatives using the correct metrics, including total shareholder returns, brand value, economic net worth and return on capital.
- Adopt approaches towards better governance structures that will address regulatory requirements and stay ahead of any changes, not only prioritizing shareholder returns but also benefitting their employees and customers
4. REAL BENEFITS TO ARTIFICIAL INTELLIGENCE
AI-powered innovations combined with state-of-the-art natural language processing models have the potential to revolutionize communication, collaboration and creativity, transforming a once highly policy-centric industry to one that is customer-centric. However, as with all innovations, regulators can be expected to monitor the impact of AI and big data analytics closely, notably around privacy and negative profiling, and insurers will need to ensure they can demonstrate no detrimental impact to consumers.
- Gain from AI-driven transformation by establishing partnerships with InsurTechs to enhance service levels, increase fraud detection accuracy, and reduce rework in the insurance value chain.
- Lead with hyper-personalization by incorporating AI across domains, like CAPCO’s LifePlus4 offering that integrates insurance with holistic financial wellness.
- Focus on rebranding efforts through better customer experience to connect with savvier and younger user communities. For example, YuLife, a tech-driven UK based insurance company, has started incorporating elements of virtual worlds with its own set of real-life tasks to earn in-game currency called YuCoin that converts to rewards and discounts.5
Consumer expectations around greater personalization of the products and services they are offered are only becoming more heightened, and this presents insurers with a clear opportunity for competitive differentiation. The proliferation of Internet of Things and other connected consumer devices – fitness trackers, home assistants, smartphones, smart watches, monitoring equipment in automobiles – is set to increase rapidly, expanding into areas such as clothing, eyewear, home appliances, and medical devices.
- Digital Hyper-Personalization: establish dynamic self-service to precisely address customer needs through targeted and tailored engagement.
- Smart underwriting: insurers should tap their vast reservoirs of accrued data to carefully create automated ratings, pricing, and distribution to better map risk and tailor to customer.
- Claims: enhance claims segmentation and processing by careful analysis of the claimant, supply chain, and customer insights.
6. CHANGING CONSUMER FOCUS
Generation Z and young Millennials are a major area of focus, as these user segments are very active online and accordingly share a lot of personal data. In 10 years, Gen Z will represent 20-30% of the workforce.6 Gen Zers navigate seamlessly between physical and digital spaces, thus placing an emphasis on insurers to create novel digital experiences in addition to augmented realities and metaverses.
- High level of focus on personalised underwriting, value added services, and authenticity and sincerity in products and services to appeal to this growing segment of customers. For example, California-based health InsurTech Omada Health, provides clients with wearable gadgets to monitor their health and risk of disease, thereby facilitating better calculation of risk and accurate calculation of premiums.7
- Build trust and reassure consumers regarding sharing their information and the level of their premiums. Advise that a product will not undermine their privacy, especially in respect of health information, and indeed serves to reduce their premiums rather than penalising them. South African motor insurer Discovery, for instance, uses a smartphone’s accelerometer and GPS to analyse driving behaviour, providing lower premiums to good drivers along with personalised tips for safe driving.8
- Combine modern technologies to create truly smart virtual assistants that improve customer experience. For example, one developer has integrated GPT-3 (a programme which uses deep learning techniques) to enhance Apple’s Siri voice assistant and allow far more conversational voice commands9.
- Climate change is transforming the insurance industry - Insurance Portal (insurance-portal.ca)
- SageSure announces Private Flood Insurance in Texas
- Life Plus (capco.com)
- YuLife: If a Tree Falls in the Metaverse... | The Fintech Times
- Gen Z don’t want to work for you. Here’s how to fix that | World Economic Forum (weforum.org)
- Omada Health Extends Science of Behavior Change to Musculoskeletal Treatments Through Patented Computer Vision Technology
- Intelligent Technology to keep you safe - Discovery - Discovery
- ChatGPT in an iOS Shortcut — Worlds Smartest HomeKit Voice Assistant | by Mate Marschalko | Jan, 2023 | Medium