In the context of fractious global trade dynamics, businesses have no choice but to adapt their strategies for planning, pricing and protection. The interconnected nature of the global economy means that instability in one sector often has ripple effects across others.
Insurers are no exception to this with recent trade developments having introduced a more volatile environment also impacting both the demand for and the cost of providing insurance. US inflation is set for a potential increase of 0.8-2.8% while we might face a potential decrease in global Gross Domestic Product (GDP) of 0.3-3.9%. In addition, resulting higher US Treasury Yields mean the risk for a liability-asset portfolio mismatch can intensify for life insurers and shrinking reinvestment yields pressurize earnings. According to our calculations, just US households face potential additional yearly costs of $4900.
Life and P&C segments are particularly affected, with likely reductions in demand due to lower disposable incomes and reduced consumer spending. As insurers navigate these challenges, they are also grappling with reduced risk pools and lower premium appetites. Additionally, higher claims severity is leading to increased indemnity costs, and the volatility of financial results is adding another layer of complexity.
However, while the rising risks of inflation, GDP decline, and market confidence erosion may lead to softer demand, higher cost of claims, and increased volatility in the long term, these challenges also present opportunities for innovation. But above all, boosting their overall resilience will be critical for insurance companies as they navigate a shifting economic landscape and markets in flux.
Resilience as a gateway to opportunity
Resilience can be defined as a company’s ability to withstand and adapt to uncertainty and volatility, and to emerge stronger by building the capabilities needed for long-term, profitable growth. As the meaning of the word evolves, too many companies might remain anchored to outdated playbooks. We are witnessing a fracturing as a result, with the divide between strong and weak organizations widening. Resilience actually delivers its greatest value in times of disruption, with our research showing that the most resilient organizations outperform their peers during high-stress periods with faster revenue growth and higher profit margins.
There are four key areas that insurance executives will need to focus on to become more resilient:
1. Operational resilience: Operational efficiency is impacted by increasing competition, rising operating costs, evolving customer expectations and buying patterns, as well as the changing nature of risk. To maintain a competitive edge and improve overall business health, insurers should consider long-term, structural cost reductions by equipping their organizations with future-ready technology and operations. Embracing human and machine collaboration – through the integration of automation, data and AI with human insight – can elevate business outcomes and employee performance.
Building operational resilience also requires reinforcing supply chain resilience by implementing strategic changes in sourcing, procurement and network strategy, followed by a focus on reinventing cost and productivity through spend optimization. To optimize costs, improve efficiency and expand market reach, insurers could consider adopting strategies that leverage resources, services and capabilities from various geographic locations. This includes utilizing Global Capability Centers (GCCs) to access specialized expertise and drive cost-effective operations. Additionally, exploring innovative distribution models can streamline how insurance products and services are delivered to customers. For example, embedded insurance integrating policy offerings directly from e-commerce or travel platforms enables customers to purchase coverage without visiting an insurer’s website.
2. Commercial resilience: Develop a pricing and commercial strategy that can help navigate trade uncertainties by addressing cost absorption, price adjustments and the commercial structures that can support these changes, while exploring growth and M&A opportunities in a slower economic environment. Insurers are being forced to make quick, strategic decisions about which costs to absorb and which to pass on to customers. This comes against a backdrop of already rising claims costs and premiums for many insurance customers, particularly in auto and home insurance. By moving beyond transactional interactions and one-size-fits-all solutions to understanding customer preferences and offering innovative, behavior-based products and services, insurers can create new opportunities for sustained, profitable growth.
3. Technology resilience: The strongest performing businesses in this area have a focus on cybersecurity, AI and data capabilities. Insurers can accelerate their AI efforts to drive enterprise productivity, which should be accompanied by implementing a system to deploy autonomous agents to monitor real-time data and identify potential risks. Insurers should also introduce stronger safeguards and secure processes to account for geopolitical risks and cyber threats. AI and data analytics can transform customer engagement by processing large volumes of data to identify patterns and trends in customer interactions. To realize the full potential of AI, insurers will need to build a secure digital core supported by a simplified cloud infrastructure and powered by a robust data and model ecosystem.
4. People resilience: Last, but certainly not least, is the talent component. Insurers can make all the technology investments they want but without employees to interpret, apply and scale these tools, they could find themselves at a competitive disadvantage. To build an agile workforce, insurance leaders should implement a talent and recruitment strategy that offers and prioritizes continuous growth and diverse career paths to attract and retain highly skilled talent. With the industry facing a retirement crisis, reinforcing an employee value proposition that moves away from the perception of ‘tenured’ positions and manual task-oriented stagnant jobs to one that emphasizes the purpose-driven nature of the industry becomes critical. They can lean on AI to identify skills gaps and encourage their workforce to upskill and improve their digital dexterity. For example, AI can help underwriters work more efficiently by reducing the time dedicated to routine activities. As AI redefines the historical apprenticeship-based career path, insurers will be prompted to adopt new talent sourcing strategies that tap into external expertise across the spectrum of domain knowledge.
Resilience will be the key differentiator of the future
In a world of uncertainty, adaptive resilience is the most valuable corporate asset. While many would liken resilience to a mattress, using it to soften the landing or cushion the blow, it should act more like a trampoline, absorbing the impact and propelling the company forward, creating new value. Resilience is the key differentiator in any future scenario. It should be built as a cohesive, company-wide strategy, not in isolated silos. Companies that adapt and enhance their responses to policy changes would be better equipped to handle uncertainty.
For those looking to implement transformation programs to build more resilient businesses, it might be worth having a look at our latest insurance thought leadership that analyzed a variety of change programs across the industry. One key observation is that transformation needs to be precisely defined, tightly aligned to business outcomes and supported by decisive action. Small gaps in clarity, consistency and execution—compounded over time—could lead to large gaps over time. I am interested in your views on this topic – feel free to contact me on Linked in.
Leave a Reply