The future of the Insurance scenario in 2022 and beyond

THE FUTURE OF INSURANCE

?On September 20-22, thousands of insurance carrier executives, insurtech leaders, and private-equity partners will convene in Las Vegas for InsureTech Connect to address topics including innovation, productivity, sustainability, and the future of the industry. Broadening the industry’s relevance in turbulent times: Shaping the industry’s response to climate change with data and analytics, From living longer to living better: Tracking devices to predictive analytics, Touchless claims processing: Why insurers should embrace this, We also will have short presentations at our booth about digital trust, AI in insurance, data science and customer impact, climate opportunity in insurance, and more. carriers are preparing for a net-zero future. Decarbonization means a new risk landscape and new strategic skill sets for insurers. Its shift's future saw the road ahead.

The insurance industry has had to?rethink its business strategies to prepare for more ambitious decarbonization initiatives across sectors.?how insurers across the globe are preparing for a net-zero future and how they can gain a competitive advantage. ?Climate impacts in Asia are expected to be some of the most challenging globally. Carriers in the region have started to act in response, but progress is in its early stages.?shareholders and boards are key drivers of climate-related actions. Second, as a result of these shifting priorities, the starting point for most carriers has been to assess exposures and develop plans to transition to net-zero investment portfolios.

Third, insurers have seen real near-term impacts on profitability: it is expected that there would be a material impact from climate risk on their books of business. Last, and most challenging, was that only about 20 percent of carriers thought they had a robust and adequate view of climate risk and were using quantitative measures to stress-test portfolios. There’s a real imbalance between recognizing these challenges and then feeling prepared enough to respond. Underwriters have had to understand the physical risk of their books much better. Rather than using today’s catastrophe models to understand present risk, they’ve had to take a more forward-looking view based on different climate scenarios.

The leaders are understanding where the risk will be in five to ten years and think about how to steer the portfolio proactively so that they are identifying pockets of opportunity that will sustain the business. Then they’re taking a much more granular view of areas that are challenged and that are likely to suffer from major losses and a potential lack of affordability.

?We’ve seen a clear shift in sentiment in the boardroom. The initial agenda for many players here in Europe was based on creating sector transparency—considering where companies should place their exclusions in their asset and underwriting portfolio. In the last six to 12 months, companies have instead been systematically thinking about how they can capture the business opportunities that are arising. So, insurers must consider how they can support this transition and try to ensure a significant part of this investment in the next five to ten years, which could translate to multibillion dollars of revenue. Over the last year and a half, companies have moved from thinking mostly about risk or regulatory requirements to looking at underwriting and understanding where there’s an opportunity for new growth during the net-zero transition, as well as better opportunities to serve customers and be more credible in our current environment.

?We typically see insurers invest in three capabilities. Number one is systematic portfolio transparency. Number two is underwriting expertise and understanding how to assess risk for new technologies. Number three is the go-to-market strategy and how companies can fit into the broader ecosystem. The last point is a key success factor for insurers: how they partner with various parts of the value chain to stay on the cutting edge of delivering and underwriting emerging risks from the net-zero and climate transition. It is also being observed a recognition that there is a scarcity of talent within the industry to underwrite these new technologies. Traditional risk capital will probably not be able to fulfill all that demand—and the scale of investment is massive. So, the carriers and industry players who are approaching this most proactively are looking at more lucrative partnerships: for example, working with managing-general-agent structures, facilities, or even directly with asset owners or investors. By doing this, insurers are gaining expertise and access to opportunities in areas like solar, wind, hydrogen, carbon capture and storage, and other newer technologies that they may not currently have enough expertise on to be able to underwrite. That’s also an obstacle that the insurance industry needs to overcome to capture this opportunity. The industry is quite comfortable in its ways, and this is uncharted territory. For companies to recognize this new risk landscape and understand what they need to do to better underwrite these risks, they need to be willing to innovate. That’s how they’ll stay relevant in a net-zero environment.

It is also a matter of leadership in the sector, figuring out some areas that are not too far from their risk appetite, deploying the right capital in a prudent way, and supporting the other sectors in the transition. The question is also which insurers have the most work to do regarding sustainability??In Asia, life insurers have been leading the charge in terms of understanding exposures in their portfolios. So quite a bit of work has been done on the investment side to understand exposures and develop plans for the transition. But there’s much more work to do on the underwriting side. :?In the United States, insurers still struggle to commit to a clear aspiration around climate and then put the required resources and investment capabilities behind it. It’s important to recognize the goal, but the only way to gain a real foothold is to be incredibly proactive and invest resources ahead of demand, which hasn’t been done at scale.?Many insurers have progressed on the investment side, but they need to accelerate the business side. The players who will have the advantage will invest in better partnerships and use that knowledge to bring about new business opportunities.

Though polarization is seen that there are some carriers who are, to some extent, free riding. They wait for regulation, they will let all the sectors decarbonize, and they will benefit from this indirectly. But playing more on the offense—being proactive, taking action, and supporting the transition proactively—will be more beneficial for the industry in the long term. And having good underwriting and investment skills will offer companies a competitive advantage.

CAPTURING THE CLIMATE OPPORTUNITY IN INSURANCE

The world’s transition to net-zero emissions will cost trillions of dollars and present new kinds of risks. In this environment, there is a vital role of insurance. The world is at an inflection point?in its climate transition efforts. As governments and companies worldwide pledge to achieve net-zero greenhouse gas emissions, the transition is poised to spark the greatest capital reallocation in a century, requiring an estimated annual investment of more than $9.2 trillion?in energy and land-use systems. It’s a transformational moment for insurers, with significant climate-related risks and opportunities on both sides of the balance sheet. Taking an offensive approach will be critical for insurance carriers to unlock growth and remain relevant in a net-zero future. As the net-zero transition unfolds, new forms of volatility are emerging. Capital reallocation to low-carbon technologies is rapidly reshaping industries. New technologies face business cases with uncertain economic viability and scalability. Companies face increasing demands for transparency on climate risk and emissions, driven by regulatory requirements and investor and consumer advocacy. The risk of litigation for climate inaction is also growing. And against this backdrop, the rising physical risk continues to affect communities and economies.

Insurers have a once-in-a-generation opportunity to address these new forms of volatility—and help catalyze an orderly transition to net-zero emissions—through product and solution innovation. Yet in our experience, climate aspirations are often disconnected from commercial strategies, leading to a lack of a cohesive approach on two fronts: identifying and prioritizing climate-focused commercial opportunities, and taking a go-to-market approach to better source, underwrite, and share new types of risks. Identifying and prioritizing climate-focused commercial opportunities. Insurers have opportunities to identify and develop climate-focused solutions in three major areas: ensuring the net-zero transition, creating new risk transfer solutions for rising physical risks, and providing adaptation and resilience services. Within each area, there is room to offer traditional property and casualty coverage as well as to develop new and innovative products to meet emerging market demand.

Ensuring the net-zero transition

Across high-emitting sectors, technology is a crucial decarbonization lever alongside demand reduction and business model changes. As an estimate, annual global capital expenditures in the top climate technologies could account for more than $800 billion by?2030, corresponding to roughly $10 billion to $15 billion in insurance premiums on capital expenditures alone. Based on current technology maturity, supporting infrastructure and favorable policies, and projected investment flows, the highest potential near-term target markets for insurers are likely in proven renewable-power assets and established green technologies including solar, on- and off-shore wind, electric-vehicle (EV) batteries, and EV charging infrastructure (EVCI).?In the next several years, emissions-intensive asset transformations will also become a major market,?along with various emerging technologies that catalyze the decarbonization of emissions-intensive assets—such as heat pump retrofitting; carbon capture, utilization, and storage (CCUS); and green hydrogen and electrolyzes. In addition, insurers could play an important role in catalyzing new markets that are not yet proven. For example, insurers could accelerate the development of voluntary carbon markets (which could reach up to $430 billion by 2030 by providing protection to both buyers (for example, should an offset become invalid) and sellers (for example, should a nature-based solution such as a forest experience loss from pest infestation or wildfire).

Demand for insurance will grow in line with investment in these technologies. In addition to standard coverages—such as construction, surety, and liability—new opportunities will emerge for insurance to support derisking along the value chain, from manufacturing to deployment to production. For example, a hydrogen developer may be more likely to pursue a project if there is protection in the event the offtake becomes insolvent.?Likewise, the offtake may benefit from coverage in the event of reduced production from a green asset (for example, due to grid traffic).

Creating new risk transfer solutions for rising physical risks

Parametric solutions for adverse weather events are well established.?We anticipate greater demand as extreme weather increases in both frequency and severity—making indemnity coverage less affordable—and because many climate-related assets (such as solar and wind) are built in climate-exposed areas. In addition to coverage for natural catastrophes, parametric policies can be used for income loss on renewable assets (for example, cloud-cover protection for solar fields) as well as to address the impacts of chronic weather shifts on climate-exposed sectors (such as heat stress on power grids and drought leading to crop loss in the energy and agriculture sectors). The development of multiyear parametric policies could be a mechanism to provide more predictable, affordable coverage while also pricing in a way that considers rising physical risk. Unlocking the parametric opportunity at scale will require an industry-wide effort to develop simple, standardized parametric coverages; reduce basis risk through improved risk modeling, and build awareness and interest among insured clients. Rising physical risk will continue to affect communities and will require collaborative innovation from the public and private sectors to address protection gaps and ensure affordable coverage. Even in moderate warming scenarios, in the coming decades, more than 50 percent of the global population will be exposed to climate hazards such as heat stress, drought, riverine and coastal flooding, and water stress.?A growing number of public-private partnerships are emerging to provide protection for communities and ecosystems. That said, the pace and scale of this challenge are enormous, and insurers need to increase their focus if they are to play a more significant role in protecting the populations most vulnerable to climate risk.

Providing adaptation and resilience services

Insurers and industry players may offer advisory and risk-engineering services to manage and reduce clients’ exposure to climate risks and enable more effective responses to climate-related losses. Examples of such services include risk assessments and engineering for natural hazards, preconstruction risk advisory, and post-loss incentives to rebuild with improved resilience or in less vulnerable locations. We believe the industry could play a much more significant role in reducing risk and losses and that climate-focused risk engineering is an attractive entry point for insurers to increase their relevance and promote continued affordability and access. Partnerships with third-party data and analytics providers and value-added services (such as forward-looking risk modeling for physical assets) can strengthen and differentiate carrier offerings. While the impact of climate change and the net-zero transition will unfold over a period of decades, insurers must act now if they wish to make tangible progress. Establishing a concrete growth aspiration underpinned by a prioritized set of opportunities can create clarity on the scale of the opportunity and what will be required to get there—such as hiring new underwriting talent or adopting new go-to-market approaches.

?Establishing go-to-market approaches to better source, underwrite, and diversify

Despite the enormous growth opportunity that the net-zero transition represents, insurers may find market entry challenging due to a lack of underwriting data, loss history, and pattern recognition among underwriting teams. In addition, well-established technologies may have mixed track records. These are understandable hurdles, but they’re not insurmountable. Rather than taking an incremental, wait-and-see approach, we encourage insurers to proactively build climate capabilities (such as forward-looking climate risk modeling) and to explore new approaches to establish a foothold in emerging opportunity areas. Partnerships are a promising avenue to address challenges and accelerate learning and opportunities. Such partnerships may include the following:

?Upstream partnerships with asset owners.

?Partnerships with infrastructure funds, private equity funds, and other institutional investors can diversify insurers’ risks while providing access to data and technical expertise. Given that many new technologies carry less loss history but demand near-term investment and protection, investors and insurers could explore diversification through a pooling of green assets with different risk characteristics (such as different geographies, underlying technologies, or asset operators). These partnerships may also give insurers access to the technical data and expertise of asset owners, enhancing the ability to underwrite new technologies. Brokers can play an important role in establishing partnerships and bringing insurance carriers to the table.

Marketplace partnerships that enable portfolio underwriting

?Portfolio underwriting may reduce the idiosyncratic nature of transferring individual risks and enable the exploration of new opportunities without costly infrastructure and capability development. Managing general agents (MGAs) and managing general underwriters (MGUs) enable this; they are high-value potential partners because they allow insurance carriers to enter new markets without building new internal infrastructure and capabilities. MGAs and MGUs can provide underwriting sophistication and expertise (for example, in artificial intelligence and machine learning) for new lines of climate-related business and unlock access to new clients and geographies an insurer may otherwise be unable to reach. The success of this approach rests on partnering with MGAs and MGUs that have a distinctive ability to assess and originate climate-related insurance products based on their track records and data or technology sources.

Some other partnership approaches to consider include forming syndicates with other insurers and tapping alternative sources of capital (via capital markets) for reinsurance. The former allows insurers to lower costs by collaboratively sourcing, underwriting, and insuring climate-related risks on newer technologies with risks that are difficult to diversify or effectively price. The latter enables insurers to expand their capital optimization and risk-sharing options, though this approach is likely viable only for established green technologies and insurance products with short-tail or parametric (limit-defined) risks. In addition, insurers could strive to partner with developers, venture-capital funds, and start-up companies at the front line of the climate transition to build innovative solutions to emerging risks. The momentum toward net-zero emissions is undeniable. It will shift value pools, creating new winners and losers in the process. We believe there is a significant first-mover advantage for insurers that establish themselves in the ecosystem early. While insurers should always be prudent in approaching unfamiliar markets and risks, those that wish to lead in the net-zero transition should act now to accelerate green growth and build a resilient portfolio for the future.

?CONNECTED REVOLUTION: THE FUTURE OF US AUTO INSURANCE

Autonomous mobility has the potential to dramatically transform the automotive insurance market, from underwriting to claims and beyond. Most consumers are?used to buying a car and insurance separately—and the latter can be a laborious process. Consider a hypothetical US consumer of the future, Jane, who acquires her first semiautonomous car, attracted by its connected technology and advanced safety capabilities. Crucially, it comes with insurance that calculates her premium payments by automatically assessing her driving in real-time through the wireless connectivity feature incorporated into such vehicles. As she drives her new car, the vehicle’s system senses risk both when she is driving manually and when she is in autonomous mode. Jane receives helpful feedback on how to drive efficiently to conserve energy and manage insurance costs, and she has access to a wealth of real-time information, including current per-mile insurance costs and energy usage rates.

During one particular drive, Jane receives an important call and switches on the autonomous-driving option so she can focus on her conversation. After the call, she switches back to manual driving—and both her car and her insurance adjust in real-time. While she’s driving the car, insurance liability lies with her. But while the autonomous mode is engaged, liability shifts seamlessly to the manufacturer. As Jane continues on her journey, software engineers monitor the driving effectiveness of her vehicle and vehicles like hers. Based on the performance data they receive, engineers release software updates to improve the performance of Jane’s vehicle. Essentially, her vehicle adapts and improves continuously, improving safety performance over time and reducing overall insurance costs.

Suddenly, she is rear-ended by another vehicle. Onboard sensors, cameras, and telematics capture the collision and convey this data in real-time to the insurer’s claims system, which is built on artificial intelligence (AI). The system determines that although the accident was minor, the car cannot be used safely. AI immediately begins determining the best way to handle claims and researching nearby Robo-taxi, towing, and vehicle-repair companies. Shortly afterward, Jane receives a call from an insurance associate who checks on her and lets her know that a Robo-taxi will be there within minutes. She can leave her car, and roadside assistance will take it from there. When Jane arrives home, she checks the status of her vehicle and any repairs through a mobile app—which also gives her the status of her claim. While not all of the technology illustrated in Jane’s journey is currently in every car, all of it exists today. And as mobile technology and automotive and insurance AI reach critical mass, a new era will be ushered in, promising not only a radically new experience for consumers but also new commercial opportunities for insurance carriers and automotive OEMs. These opportunities are likely to be keenly contested as disruptive technology enters the long-established automotive and insurance ecosystem.

Three technologies that will shape the future of mobility

Three technologies will shape the future of mobility and global auto insurance: autonomous driving, connectivity, embedded telematics, and vehicle electrification. But these technologies will also shape an exciting new business dynamic for OEMs and insurance carriers. On the one hand, the introduction of the connected car and embedded telematics means OEMs will have more access to customer and vehicle data than ever. It also means OEMs will be in an advantageous position to disintermediate insurers. Moreover, Future Mobility expects connected cars to account for 90 percent of new US vehicle sales by 2025.

On the other hand, insurers may be able to take advantage of the technology and mobility trends described in Jane’s journey to capitalize on the insurance that is based on vehicle usage in real-time, combined with an automated-claims process—creating opportunities to improve both loss and expense ratios. Such advanced-mobility technologies are developing quickly and will usher in three phases of the overall evolution of auto insurance.

AUTONOMOUS DRIVING

?Autonomous driving could be the most disruptive influence on the insurance market for a simple reason: it promises to significantly reduce the frequency of accidents, resulting in improved safety and the means to shift auto insurance to a “predict and prevent” product. Significantly, the burden of insurance liability will shift from the human operator to the commercial party associated with the autonomous vehicle (AV) technology and capabilities. Commercial-trucking applications will be the principal driver of autonomous-vehicle technological development, and industry experts express confidence that autonomous trucking (L4 and above) will be on highways within the next five years. In the meantime, technology for autonomous passenger vehicles is likely to receive a boost from investment in commercial applications. By the middle of this decade, our analysis suggests that sales of new L2 and L3 vehicles will reach 60 percent and 3 percent, respectively. By contrast, capabilities at or above the L4 level are unlikely to materialize significantly in personal vehicles in this decade.

Connectivity and embedded telematics

Connected vehicles use wireless technology to communicate with external entities, sending and receiving data as part of services that are provided to the driver or vehicle’s owner. Unlike today’s mobile apps and aftermarket devices, which require customer engagement and installation to facilitate limited connectivity, the embedded technology in this new era of connected telematics will yield a seamless and passive customer experience, ensuring a high-quality, continuous, bidirectional flow of information. The quality of data available will also exceed the quality and amount of mileage, GPS, and accelerometer data available today. Added insights may include collision warnings, steering wheel position, seat belt use, tire pressure, and the camera captures. While connectivity is crucial for autonomy, its potential value far exceeds market application. With connectivity, OEMs can envision an array of services, insights, and customer engagement opportunities that extend well beyond today’s limited new vehicle purchasing experience. As profit margins on new vehicles continue to shrink, the potential for new recurring revenues unlocked by connectivity and “vehicle as a platform” innovations will ensure that this capability gains traction.

Vehicle electrification

While electric vehicles (EVs) will introduce some near-term changes to insurance, including miscellaneous new coverages and consequences for claims handling, we see EVs as an enabling platform for autonomous driving and connectivity, with more potential for disruption coming from its direct-to-consumer sales model. Combined with state and federal policy objectives that encourage adoption—such as direct-sales legislation and rulings, charging-infrastructure subsidies, and the Biden administration’s 2030 target of 50 percent electrification—the push toward EVs will accelerate market change.

THESE TRENDS WILL DISRUPT AUTO INSURANCE

About $260 billion US auto insurance market is on notice. The conventional US insurance market, currently dominated by internal-combustion-engine (ICE) vehicles, will likely stop growing by the middle of this decade. Conventional ICE vehicles will be steadily displaced by EVs. If current conditions remain, the value of direct written premiums in the market will reach about $390 billion by 2030, compared with $260 billion in 2021. But with connected technology accelerating, the size and composition of the insurance risk pool may change significantly. By 2030, two-thirds of the auto insurance market will be L0 or L1 vehicles requiring “status quo” insurance products. The rest of the market will be disrupted in three ways:

Loss of market size.?

The proliferation of safety technology as a result of the greater adoption of connected EVs will reduce accidents, but it will also exert downward pressure on premiums. At the same time, distance traveled is expected to decrease as the availability and cost-effectiveness of shared mobility take a larger share of mileage. Together, these shifts will lead to up to 10 percent ($26 billion) in lost premiums that will completely leave the insurance market.

?New personal-line insurance products will be required.?

About 25 percent ($100 billion) of overall premiums will still require personal-lines coverage, but they will have substantially different approaches to distribution, product and pricing, and claims. OEMs have the potential to be a major influence in this area because they will have the ability to unlock access to customers and demand an “OEM-certified” repair process as a prerequisite for maintaining product warranties and in relation to where liability would fall in the case of a malfunction.

Some liability will shift to commercial-lines products.?

About 1 percent ($5 billion) in annual premiums will shift to commercial insurance as conditionally autonomous L3 vehicles penetrate the US fleet of personal passenger vehicles. As the autonomous-driving system takes on more responsibility with an increasing number of L3 vehicles in the fleet, liability will partially shift from human drivers to OEMs and autonomous-vehicle software providers. As the number of connected vehicles grows, so too will in-vehicle services and products, including insurance.

The true impact of EVs on the insurance industry

Several key business areas across the insurance ecosystem are likely to be affected.?

Distribution.?

As the number of connected vehicles grows, so too will in-vehicle services and products, including insurance. Insurance carriers are accustomed to selling and distributing bundled products to households indirectly through agencies and brokers, as well as directly through digital and “captive agent” channels, which requires significant investment in marketing and commissions. In fact, the top three property and casualty (P&C) insurance carriers collectively spent more than $5 billion on advertising in 2020.OEMs have participated in this largely by acting as a lead-referral partner to a range of insurance providers. But the growth of both connected vehicles and digital direct-to-consumer distribution of EVs holds out the prospect of a new channel through which consumers can directly buy insurance: the OEM. Consumers will be able to buy auto insurance through a simplified or “no quote” purchase process when they buy their vehicle online. Access to customer data and direct-to-consumer vehicle sales will open up the insurance market to OEMs, allowing them to overcome longstanding operational challenges to their ability to capture recurring insurance revenue beyond the point of sale.

Product and pricing.?

The way auto insurance is underwritten and priced will also undergo a fundamental shift. With increasing connectivity, “pay how you drive” and usage-based insurance (UBI) will emerge as natural complements to EVs. Gone will be mobile apps, aftermarket devices, and the actuarial challenges of surfacing underwriting insights after selection. Instead, we will see insurance shifting with the help of the proliferation of connected data from self-reported, loss-correlated information about things such as marital status, gender, and age to independently observed, loss-causing information such as braking, acceleration, and speed—making the assessment and pricing of risk more accurate and convenient. Entities with access to these data will be the winners. Moreover, the narrowing divide between personal and commercial auto insurance and the adoption of liability that moves between the human operator and the commercial manufacturer, contingent on usage, at the flip of a switch will spur the rollout of UBI. The market will favor insurance providers that are able to navigate this shifting liability landscape and handle claims seamlessly across commercial- and personal-product exposures.

Claims.

Today’s claims journeys are fragmented, complex, and manual. Processing claims requires significant input from customers, insurers, repair-shop networks, and rental providers, and it often relies on incomplete data from involved parties. In the new future of mobility, insurers will be able to simplify, streamline, and automate the claims journey through connectivity and telematics technology such as cameras and sensors that provide real-time, accurate data. Artificial intelligence (AI) will interpret these data, allowing for seamless claims handling and enabling the insurer to choose how and when to introduce a human touch. The vehicle repair and rental segments could also undergo their own shift (opening up opportunities for OEMs) because traditional repair shops experience challenges fixing vehicles with highly sophisticated technology. Today, insurers influence vehicle repair and rental, so vehicles are repaired with aftermarket parts while the customer is provided with a rental vehicle from a competitor of an OEM. In the future, because the OEM must accept liability for AV operations and because the connected vehicle will inform the OEM of accidents, the OEM is in a position to strongly influence the parts and rental vehicles the customer receives by making these the terms of continued AV operations. Significant changes are ahead in AV and EV technology, and the US auto insurance market will need to adjust to the resulting disruptions. We have identified three potential scenarios that could reshape the market.

OEMs enter the market with in-house offerings

Some OEMs will choose to enter the insurance market, attracted by new revenue-generating possibilities as well as the ability to generate vehicle sales by leveraging the reduced cost of ownership proposition that comes with their access to data. In this scenario, OEMs may choose to outsource certain noncore activities to third-party claims administrators and capital risk to reinsurers but may otherwise insource much of the insurance operation. An OEM may do this if it determines that the customer’s insurance experience is an integral component of a differentiated mobility product and that its access to ongoing customer engagement and driving data presents a proprietary competitive asset.

OEMs and insurance carriers develop partnerships

Any hesitance or inability on the part of OEMs to assume full responsibility for the future of auto insurance will open up opportunities for insurers to maintain their market share through partnerships with OEMs. Such partnerships could benefit insurers because they would gain access to vehicle owners through the OEM, which in turn could leverage the OEM’s relationship with the insurer to provide insurance that is relatively cheaper, lowering the total cost of ownership and driving more vehicle sales. At the moment, OEMs have significant competing priorities. These include gaining greater customer adoption, adapting their manufacturing lines and supply chains from ICE vehicles to EVs, and resolving emerging dealership channel conflicts as OEMs experiment with direct-to-consumer digital-distribution models. Additionally, some OEMs may be wary of the specialized expertise required to offer insurance and the regulatory environment that comes with it.

As a result, many OEMs will choose to partner with insurers for assistance on insurance offerings, especially in the near term. In this scenario, the OEM acts as an agency and data provider, helping to price and distribute insurance and earning commissions and fees from the insurer. While the OEM will own the distribution journey, the insurer will handle everything else, including underwriting, servicing, and claims. From the customer’s perspective, the OEM is effectively the agent while the insurance carrier is the insurer itself.

OEMs become tech-enabled distribution aggregators and data providers

In what would represent a deeper extension of the affinity partnerships that exist today, OEMs could work with insurance carriers to offer tech-enabled insurance offerings through the car via a connected marketplace. As an aggregator, the OEM would provide data but would otherwise not play a significant role in the insurance customer journey, apart from providing access to the platform for customers and insurers. This market evolution would favor the rise of independent data aggregators that would consolidate, standardize, and distribute underwriting data for insurance applications. OEMs may take this approach if they perceive the insurance experience to be noncore, adjacent, or incidental to their mobility product or otherwise beyond risk appetite or competency.

Defining the path forward: Key questions for insurers and OEMs

We see the potential for one or more OEMs to take the first step beyond the partnerships they have started to capture a significant share of this new, connected automotive market. They have (or can quickly develop or acquire) all the necessary capabilities. But before activating a plan, OEMs have several key questions to consider:

1. What is the size of the opportunity?

2. Are OEMs well positioned to pursue a greater role in the auto insurance customer journey? What is the value proposition for customers?

3. How should OEMs participate in this ecosystem (build, buy, or partner)? How are insurance carriers likely to react?

4. What capabilities are needed to enter the auto insurance market? What are the risks, and how can they be mitigated?

The market is also ripe for insurers to explore, but capitalizing on the opportunity will require the right market alignment. An insurance carrier’s ability to identify and implement the appropriate partnership model with OEMs will be key. Insurers should pursue partnerships early and strategically, asserting themselves in a central role in the auto insurance journey. Providing a differentiated customer experience will help insurers avoid disintermediation in the future, when OEMs may become more comfortable assuming an active role in insurance. As they explore the opportunities, insurance carriers have several key questions to consider:

What is the tipping point for market disruption?

Will drivers embrace embedded insurance and AV technologies?

What is the size of the disrupted personal-mobility insurance market?

As the conventional market shrinks, how should insurers adapt, and what is the cost of doing nothing?

What stages of the insurance value chain are at risk? And in what stages of the value chain are insurance carriers well positioned to compete?

How will the regulatory environment, OEMs’ strategies, and customer sentiment affect insurers’ position in the new market?

While the EV revolution may appear to be at a relatively early stage, one thing is clear: the status quo in the market structure of the US auto insurance sector is set to experience far-reaching disruption. The auto insurance profit pool is about to be realigned as autonomous-vehicle technology redraws the lines that have for decades defined how the opportunity is distributed between OEMs and insurers. The advantage will accrue to players on both sides of the marketplace that act early enough to carefully assess and then capitalize on what promises to be a radically new landscape for auto insurance.

.MAKING VALUE, IDENTIFYING FOCUS at ?GLOBAL INSURANCE in ?2022

The insurance industry struggles to create economic profit. But amid COVID-19’s enduring changes, opportunities await. The past two years?may have been the most unique recession and recuperating in living memory. In 2020, the human tragedy of the COVID-19 pandemic prompted a global economic downturn that was initially sharper than the Great Depression. As government aid programs took form, the recession speedily bottomed out, leading to a strong economic recovery in 2021. Global financial markets took a steep incline and decline ride as well. The influence on the insurance industry was conspicuous: in 2020, premium growth slowed to about 1.2 percent, linked with more than 4 percent per year between 2010 and 2020. Profits decline by about 15 percent from 2019. The decline was sharpest in Asia–Pacific (down 36 percent) and was particularly driven by falling profits in life. Initial data suggest that premium growth and profits rebounded in 2021, especially in regions where strong vaccine rollouts have made many activities possible again, at least periodically.

?Status of the industry

Even before 2020, the insurance industry faced challenges. Now, those issues have taken on even greater urgency:

Headwinds on revenue growth.?

Three basic factors are stimulating industry growth.:?persistently low interest rates, which pressure spread-based businesses such as life insurance;?pricing pressures?driven by fee transparency, digital attackers, and lower-cost options—pressures that in some markets are aggravated by price comparison websites; and?organic demand?that is growing only slowly in mature markets. The latter is particularly worrying because growth in developed economies is coming mostly from price increases rather than from volume or new risks covered, highlighting a risk that the industry might lose its relevance over time.

An unending ‘fight for the customer.

Insurtechs are?powerful digital innovation and disruption in the industry, with investments in insurtechs worldwide growing from $1 billion in 2004 to $7.2 billion in 2019 to $14.6 billion in 2021. More than 40 percent of insurtechs are focused on the marketing and distribution segments of the insurance value chain enabling them to solve customer pain points through a digitally enhanced client experience that could pose a competitive threat to incumbents. And while some of these players have seen their share price tumble since their IPOs, we believe that a distinctive digital customer experience—from attackers or incumbents—will be a prerequisite for industry-beating growth. And beyond distribution, superior technology and healthy margins in insurance service businesses will challenge the traditional approach of many insurers to own the whole value chain—they will be forced to form partnerships or make outsize investments to keep up.

A value shift toward intermediaries

Over the past five to ten years, brokers have emerged as the clear winners of the industry, with both public and private investors recognizing their position of strength in the insurance value chain. Total shareholder returns are much higher for brokers than for other industry segments, and private-equity firms are investing. In 2019, for example, CVC Capital Partners invested in April, and GTCR invested in Assured Partners. PE-backed brokerage deals completed in the United States accounted for roughly three-quarters of all insurance transactions from 2016 to 2019. Because insurers do not control their distribution channels as tightly as other financial sectors, they might run an even greater risk of becoming pure balance-sheet providers, while intermediaries keep an asset-light client relationship model. The shift toward digital is perhaps the last chance for insurers to regain the upper hand in this “fight for the customer.”

Limited productivity improvement

Though many insurers have accepted cost savings programs, the combined results have not been fruitful. Industry-wide, productivity improvements have been limited. Between 2014 and 2019, expense ratios fell for only 45 percent of global P&C carriers, with important variations across regions. For many, ratios did not budge or actually rose. That’s a disappointing outcome for an industry that has communicated so much about the need for productivity improvements. As a result of these longstanding challenges, economic profit—that is, profit after cost of capital—in the insurance industry is practically at a standstill.

Restarting value creation

The challenges run deep. And insurance leaders must also contend with a raft of trends unleashed by COVID-19. It’s a unique moment; insurers now face several fundamental strategic questions. How can they create more value for shareholders? Can they unlock latent demand and improve the customer experience? How can they regain momentum on the long-running quest to improve productivity? Also, what about talent? How can they reimagine the employee proposition to attract and retain the brightest and best after the pandemic? Finally, how can insurers, individually and collectively, reframe the role and purpose of insurance in society?

Leadership teams need to capitalize on these value levers:

Make environmental, social, and governance (ESG) considerations a core feature of the business model.?

ESG issues increasingly affect how all companies do business. Consider climate risk, an area in which?evidence is growing?that P&C insurers will soon need to revisit their business models. However, while many insurers have begun to incorporate climate-risk considerations in their investment processes, new product launches and underwriting processes are mostly unchanged.

Recoup significance through product innovation and coverage of new risks.?While the insurance industry has built financial flexibility recently, some considerable risks have been left uninsured. A fast-changing world is creating many new and evolving risks. In P&C commercial lines, for example, data and cybersecurity risk and machine-learning liability are coming to the fore. New risks call for new products and a reordering of priorities and represent significant opportunities for P&C and life insurers that are willing to innovate.

Enhance and personalize customer meetings and experiences.?

New customer behaviors require a shift in distribution. Consumers are embracing digital channels and have become used to pleasant experiences with leading tech companies. They expect the same when buying insurance both online and offline. A seamless consistent multi-access involvement in every channel is now the gold standard for insurers.

Engage with ecosystems and insurtechs

?The ongoing drive toward digitalization has also put the insurance industry on the verge of a paradigm shift: as traditional industry borders fall away, ecosystems will greatly influence the future of insurers, with insurtechs aiming to play a role in this recomposition of the value chain.?In research, it is found that the ecosystem could encompass $60 trillion in revenue by 2030. Many insurance executives are looking at ways to engage with emerging ecosystems in areas such as mobility, healthcare, and the connected home.

Advance new businesses for the digital age.

?Private investors have spotted the potential for improvement and the not-too-distant prospect of attractive returns in insurance. They are investing heavily in insurtechs, whose attractive talent pools can rapidly create and scale new businesses. In this context, incumbent carriers must reinvent their business models to fulfill the imperative to grow and, ultimately, to deliver stakeholder value.

Scale impact from data and analytics.?

Most insurance executives would agree that data and analytics capabilities are becoming table stakes in the P&C and life sectors in Europe, North America, and Asia. Leaders see enormous potential in best-in-class data and analytics capabilities across the value chain, even for the highest-performing companies. For example, even the leading P&C insurers can see loss ratios improve three to five points, new business premiums increase 10 to 15 percent, and retention in profitable segments jump 5 to 10 percent. However, after years of investing and experimenting, most insurers have not yet seen the return on their investments at the enterprise level.

Modernize core technology platforms

From 2012 to 2020, technology’s average share of operating costs rose by 36 percent (for P&C) and 10 percent (for life). The key driver is increasing digitalization—at both the front end, where technology augments the customer experience, and the back end, where digital drives productivity gains and operational performance. Digitalization is pulling legacy systems, some of which are decades old, and many insurers are considering a replacement of core systems with tech platforms that support the requirements of the digital age.

Address the productivity imperative

?In the present environment,?addressing structural expenses has become an even more important source of value—especially given the limited progress to date. Insurers need more than mere piecemeal attempts at improvements. Only a transformative approach will allow an insurer to survive and thrive in a post-COVID-19 world. Each carrier is unique, but any company can begin the process to improve productivity by establishing the line and full performance budding of the business across the value chain—including sales and distribution, product development, operations, technology, and corporate functions.

Reimagine culture, diversity, and ways of working to attract and retain talent.?

The latest summation is “Once in a generation (if that), we have the opportunity to reimagine how we work. In the 1800s, the Industrial Revolution moved many in Europe and the United States from fields to factories. In the 1940s, World War II brought women into the workforce (if not the C-suite) at unprecedented rates. In the 1990s, the explosion of PCs and email drove a rapid increase in productivity and the speed of decision-making, ushering in the digital age as we know it now. And in 2020, the COVID-19 pandemic drove employees out of offices to work from home. The return to the workplace?is a chance to create a new, more effective operating model that works for companies and people steering a world of increasing uncertainty.” Addressing these nine imperatives will help carriers answer strategic questions about “how to play.” But the challenges and recent trends facing the industry will force some insurers to also think about “where to play” and rebalance their portfolios of businesses and review their capital allocation accordingly.

The present pressing question: ?Where should insurers be active (in terms of geography, lines of business, and position in the value chain) to renew value creation and themselves? Most carriers would benefit by focusing their portfolio grasping more tightly on the businesses of which they are the best natural owners. Strategy, Economy & Society, Organization, People, Technology, Industries, and Spotlight.

?Global insurance industry at a crossroads to shaping long-term success: 2023 insurance outlook

?Past few years, most insurance carriers have established remarkable flexibility and resilience in overcoming a host of impediments, especially the impact of the pandemic and the economic result of the Russia-Ukraine conflict. Systems and capabilities were improved, while agile talent and technology strategies paid off. But is the industry ready for emerging challenges heading into 2023 and beyond? The road ahead is dotted with manifold hurdles—rising inflation, interest rates, and loss costs; the looming threats of recession, climate change, and geopolitical upheaval; and competition from InsurTechs and even noninsurance articles such as e-tailers and manufacturers, to name a few. This is no time for carriers to be satisfied with the variations they’ve had to make.

Instead, they should be building upon the momentum they’ve achieved to maintain an ongoing culture of innovation. While making customer-centricity the focal point of the industry’s standard operating model. Our research suggests that they should start shifting their focus from basic operational transformation—such as transitioning to the cloud—to fully realize the value and benefits of infrastructure and technological upgrades; move from replying to the supplies of regulators and other industry overseers to more proactively forestalling and satisfying distributor and policyholder outlooks; and widen their historical focus from risk and cost reduction to prioritize greater levels of research and risk-taking that drives enduring innovation, competitive distinction, and lucrative growth.?

The key findings about the 2023 insurance industry outlook:

?Inflation hinders nonlife viability even while boosting prices, and top-line growth. While property-casualty price hikes were among the drivers thrusting up the premium volume and sending US consolidated surplus over the US$1 trillion mark for the first time, inflation is driving loss costs even higher and faster in most markets, dejection underwriting profitability. As the average replacement costs were up 16.3%—nearly twice the Consumer Price Index rise. But opportunities abound for proactive non-life players.?

The makeover upheaval in the small-business insurance market, the global transition to green energy and related insurance products, coverage for emerging exposures among intangible assets such as cryptocurrency, nonfungible tokens (NFTs), and virtual activities on the metaverse, all point toward plenty of room for growth. Life insurers' transformation is likely key to sustainable growth. The pandemic-driven surge in premium growth since 2020 appears to be waning driven by obstacles like inflation-driven disposable income pressure and financial market volatility. Carriers should respond to economic pressure and COVID-19–related uncertainties with proactive measures like doubling down on their pandemic-spurred digital enhancements, introducing new products, services, and distribution options, or seeking out previously underserved customer niches.

?Group insurers are getting innovative amid shifting dynamics

To facilitate portfolio expansion, many insurers are beginning to develop partnerships with other providers as well as third-party vendors. The development of “as-a-service” solutions offers another potential competitive advantage group insurers can explore. Insurers are reinventing workplace strategies and culture as the talent war intensifies.?Obligatory virtualization of work during the pandemic has fueled revolutionary changes in employee expectations and upended many traditional employment models. Carriers may struggle to fill and retain their workforce through 2023 unless there are some novel changes implemented to the underlying culture that help these organizations to be potentially simply irresistible.

?Technology infrastructure has improved, but the focus needs to shift to value realization

Many carriers are benefiting from the technology transformation being driven by InsurTechs, especially the point solutions offered by enabling startups in underwriting, claims, and online distribution platforms, among other customer-facing functions. In terms of cloud adoption, insurers should start integrating their systems and data while leveraging cloud capabilities to achieve greater customer-centricity. Concentrating on micro improvements utilizing industry cloud applications specific to their business could be a great next step.

Time to make environmental, social, and governance (ESG) a competitive differentiator

Insurers are likely to be judged not just by plans laid out in their annual sustainability reports, but by how their initiatives actually limit the impact of climate change and other nascent systemic environmental risks while addressing carbon emissions at the source; diversifying their leadership and workforce; enhance inclusivity of their products and services, and increase transparency and accountability in their governance structures.?

More needs to be done to step up diversity, equity, and inclusion (DEI) efforts

While many insurers are taking steps to diversify their workforce, large gaps remain in the industry as a whole—particularly at the executive level. Much needs to be done in expanding their workforce and customer base, increasing access to insurance products and services in underserved communities and market segments, making a wider range of voices heard in leadership circles, as well as creating a more inclusive organizational culture.

Challenges for the insurance sector in 2022

France Assureurs (FA, formerly FFA) has published its annual?risk map for the insurance and reinsurance sector. It lists the main risk factors identified by the industry and divides them into several categories: economy, environment, society, technology, policy, and regulatory issues. According to this, insurance operators will have five major challenges over the medium term. While most of them were already on last year’s list, some have become even more pressing.

?1. Becoming experts in data management and security

The importance highlights the issue of personal data. This is the main technological risk associated with changes in insurance businesses. Insurers must absolutely develop impeccable expertise in controlling and protecting the data of their policyholders. Maladministration exposes them to three risks: reputational, operational (pricing error), and judicial risks. This is a major challenge, given how communication channels are evolving between insurers and policyholders (special apps, chat or messaging services with advisors, online claim submission, etc.).

2. Preparing for climate change

It will no longer be enough to simply reduce the impact of human activities on the environment. We must also prepare to live with the consequences of climate change, particularly the adverse effects on habitats. Environmental risk stands out in the France Assureurs risk map as a more pressing issue, climbing from fifth to second place in a year. The main consequences, according to insurers, relate to human health, infrastructure, and imbalance in economic systems.

3. Shifting towards new pension and healthcare models to address an aging population

This is a long-term trend: technical advances in the field of health (intensive care, cancer treatments) are having an impact on human mortality rates and life expectancy. People are living longer and are also in better health. This demographic shift raises several questions. First of all, how can we adjust the balance between public and private care, amid rising healthcare costs and the emergence of new personal care services? Secondly, how can we allocate wealth (pensions and dependency grants) in a balanced and sustainable manner?

4. Enhancing cyber security in a world of remote working

All insurers expect cybercrime to be the main risk in five years’ time, ahead of environmental risk. The outpouring of cyber-attacks during the pandemic lockdowns posed a challenge for businesses when it came to securing their activities in remote working environments. They will need to move quickly to explore reliable technological solutions and processes but, above all, they will need to raise awareness among their staff.?

5. Integrating new technologies and new sector players

This is a challenge that particularly concerns traditional insurers. The report pinpoints blockchain and AI as the two most disruptive technologies for the sector. If they want to keep their market share from being snapped up by new operators, insurers will have to integrate these initiatives and make changes to their models: incubation of new projects, in-service training for employees, strategic alliance with tech leaders or the GAFAM, etc.

Like last year, the report points to two overriding concerns: technological risk and environmental risk, which are now the predominant risks in the France Assureurs classification. In contrast, the pandemic and its implications are nowhere in sight. Ultimately, what if the biggest challenge for the insurance industry was unpredictability? We can already assume that, given the current environment, the perception of political risk will change, after remaining stable between 2020 and 2021. However, the stability of political risks, which rank anywhere between 14th and 17th place depending on geography, clearly illustrates how this issue is being pushed to the back of people’s minds, and how difficult it is to anticipate it. And not just for insurers.

Four Pillars Of The Future Of Insurance

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The insurance ecosystem is evolving rapidly, and insurers can no longer lean on old familiar ways while the prevailing technological and strategic winds shift around them. As our often-cloudy present opens up toward a brighter future, insurers should embrace technology across the customer journey if they hope to secure the trust and loyalty of tomorrow’s policyholders. But like many industries where digitization has taken hold, tech shouldn’t be adopted for tech’s sake. Simply upgrading to the latest technological trend is not enough to sustain a competitive edge. Factors such as distribution, operation, proposition, risk, and capital can drive insurers’ potential for future success as they consider their digital strategies. Insurers aiming at growth should forge new partnership opportunities to help them develop new offerings and maneuver into new markets.?

Take Hippo, an insurtech company that partnered with ADT and?Handdii?to improve the security and home repair services available to policyholders. Also, companies like Microsoft and Salesforce have formed similar?parameters?with insurtech platforms such as Bold Penguin and Snap sheet to build out their own insurance ecosystem software capabilities.

As new partnerships emerge, new distribution arrangements will be implemented as well, resulting in a more intuitive and frictionless customer journey. For example, major auto manufacturers like Ford and?Tesla?are creating their own internal insurance offerings targeted directly to buyers of their vehicles. Volvo has been working?hand-in-hand with Allianz to build a collaborative insurance ecosystem. By leveraging their large, pre-existing customer bases, auto manufacturers and insurers alike can extend their reach into new channels and tailor insurance offerings to be in line with the types of vehicles they make, as well as their larger company ethos.

?The Risk-Reward Trade-Off Of Changing Consumer Behavior

?New capabilities such as “connected insurance” have lately become fixtures of the insurance landscape. Global consumers are becoming increasingly comfortable with sharing their data, especially when it means they can receive discounts. That means insurance companies can support individual decisions with individual data gleaned from personal devices and other connected platforms. They'll also begin to use internet of things technology to monitor clients and issue warnings about risky behavior. Connected insurance products provide personalized coverage and risk management. Hyper-personalized policies are beneficial for both the insurer and the insured; in particular, pay-per-use insurance can provide added value and savings to customers on a budget. Along with an increasingly personalized experience, connected insurance also allows for self-service, customer-facing platforms that allow consumers to seamlessly take charge of their own insurance-related processes without the need to interact with customer service or waste time seeking answers.

?Proposition And Product

?To stay relevant and competitive, insurance companies should shift focus to solutions rather than products. No two customers have the same needs, and the insurance solutions they are offered should reflect their specific risks. In order to ensure protection against loss is tailored to each and every customer, insurers should utilize the latest technology and leverage data and analytics to better understand their customers’ needs. Leveraging data also gives insurers the foundation to provide on-demand services to their customers—hyper-personalized experiences where platforms are tailored to customer needs on a usage basis. For some insurers, these digital capabilities may be slightly out of reach. But there are multiple technology suppliers that can enable insurers who lack these capabilities to adopt more customer-centric policies.

Operation And Technology

When it comes to increasing revenue and margin optimization, it is critical to capitalize on core capabilities. To do so effectively, insurers should first define their core abilities; only then should technology be put in place to scale these core abilities and create value for stakeholders.

For creating digital business models, there are three new opportunities insurers should hold:

?D2C involves selling insurance directly to consumers online

?These sales are made through insurance aggregators—a group of independent agencies that band together to combine premiums, giving members the scale and advantages that are usually only available to larger agencies.

??It is becoming increasingly common for non-insurers to build insurance businesses.

?As seen in the examples above, several carmakers now offer or even build their own auto insurance policies to offer in conjunction with the cars they manufacture.

?The platform/ecosystem approach attempts to integrate insurance with other larger services on one centralized platform.?

?It incorporates third-party products and solutions, as well as collaboration with segment-focused distribution partners. By now it is overwhelmingly clear that new technologies, digital sensors, and real-time responses rooted in data are the keys to enabling the business models above. Take personalized insurance: it can’t be achieved without the ability to track customer needs, predictively assess the risks they pose, and synthesize all these insights in a digital, automated manner. But it is important to remember that merely implementing smart technology without a strategy can hurt your company more than help it. New technologies should be chosen and deployed in conjunction with the right business model and value proposition. Advances in technology have enabled new opportunities, making way for insurtechs and other players to offer intuitive digital experiences to insurance consumers. Insurers should invest strategically in these innovations to further improve and personalize the customer experience; customer loyalty, retention, and profit will soon follow. As these trends accelerate, the future of insurance could be promising for the insurer and the insured alike.

?CONCLUSION

There is an urgent need for empowering insurers with digital software platforms, solutions, and services.?