Key Challenges for Insurance Organizations to Sustain Competitiveness
It is important for risk management and insurance organizations to continuously embrace innovation and have effective leadership in order to progress and succeed.
The insurance industry has undergone significant changes in recent years. The COVID-19 pandemic forced insurers to reconsider their traditional in-office business model and shift towards a more technology-driven and remote approach, with a focus on risk management.
While it’s good to see progress made by insurers over the last few years, there’s still much room for improvement. To that end, insurance leaders are addressing issues such as talent acquisition, risk education, and upgrading conventional risk transfer methods. Their aim is to push ahead with innovation.
Even though we have overcome the daily challenges posed by the pandemic, it is crucial for risk management and insurance firms to continue with innovative practices and effective leadership to stay relevant and competitive.
An innovative methodology
The objective is to ensure the long-term success of insurance companies. To achieve this, leaders can focus on these three specific areas.
Embracing the “predict and prevent” business model: A paradigm shift from “detect and repair”
Insurance companies have been using the detect and repair business model for over 300 years. This means that when a policyholder experiences a loss, the insurance provider will compensate them to cover the damages.
Since the frequency and severity of claims are increasing, it’s advisable to focus on preventing losses rather than dealing with them after they occur.
Swiss Re reported that insurance companies faced losses of $125 billion due to natural catastrophes in 2022, which is the fourth-highest recorded amount. Verisk and the American Property Casualty Insurance Association (APCIA) stated that insurers had an underwriting loss of $26.9 billion in 2022, the largest since 2011.
Insurers need to offer more feasible, economical, and reasonable products, as claim and repair expenses increase. To stay financially strong, insurers must switch to a predict and prevent business model that assists policyholders in preventing any loss from happening. This approach is now more crucial than ever.
Insurers who want to adopt a predict and prevent business model need to embrace innovative opportunities and tools that assist clients in building resilience. The good news is that insurtechs have a wealth of data, analytics, and tactics at their disposal to help insurers recognize and mitigate risks.
One option for risk management is to use telematics that can detect problems before they occur. This can help save on claims costs.
According to the National Association of Insurance Commissioners (NAIC), usage-based insurance (UBI) programs for automobile insurance utilize telematics to connect insurance premiums directly to the real-world performance of an individual vehicle or fleet. This enables insurers to establish premiums with greater precision.
According to NAIC’s findings, UBI programs incentivize policyholders to drive less and adopt safer driving practices, resulting in a 50% decrease in crash risk due to the technology.
To cope with the rising risk of extreme weather events, insurers can play a significant role by providing support and investing in resilience efforts. This can help society adapt to climate risk. In areas prone to disasters such as hurricanes and wildfires, it is crucial to improve public infrastructure and enforce more robust building codes.
The National Institute of Building Sciences (NIBS) has reported that investing in making existing facilities more resilient or building higher-quality construction projects can lead to potential benefits worth $11 for every $1 spent on upfront construction costs and long-term maintenance. This type of investment can also reduce the chances of devastating losses and provide increased safety.
According to a recent survey on Insurer Innovation by AM Best, there is a correlation between innovation that produces improved risk data and resilience. However, the survey found that insurers struggle to establish a reliable innovation process and often react in an unstructured manner.
According to AM Best, although insurer innovation scores have improved since the pandemic, 94% of the survey participants require improvement in transformative initiatives. Transformative initiatives are those that enhance customer engagement & experience, create value, help to make superior business models, or significantly improve growth opportunities.
Developing internal expertise and skills to foster innovation and streamline processes
Insurance companies need to change their mindset in order to successfully shift their business model. They should recognize that their business is no longer just focused on recovering losses, but on enhancing people’s safety and well-being.
What implications does this have for how insurers operate? They are already transforming their approach to prioritize discovering novel methods to deliver value and cut expenses, which involves integrating risk management into their offerings.
In addition to reducing insurance costs, they provide customers with valuable financial risk advice.
Insurance professionals can find support on their journey through organizations like The Institutes. This not-for-profit enterprise brings together stakeholders in risk management and insurance such as policymakers, insurers, trade organizations, insurtechs, and others with different viewpoints and expertise.
Their commitment involves educating consumers about resources to make better decisions, bringing attention to important issues for both consumers and insurers, and facilitating connections between various stakeholders to exchange knowledge. By building knowledge and skills, those in essential risk management and insurance roles can better handle future challenges and have the potential to become leaders in prediction and prevention.
Empowering consumers: Enhancing awareness, mitigating risks, and dispelling insurance misconceptions
Insurance is not a topic that many people feel comfortable discussing, except for those who work in the insurance industry. Although people may acknowledge that insurance safeguards financial stability, it is often overlooked how it can significantly impact the world’s economy.
Dr. Steven Weisbart, who is a former chief economist at the Insurance Information Institute (Triple-I) and a current nonresident scholar, has explained that the insurance industry is crucial to the development and advancement of any modern economy. According to him, insurance companies serve numerous purposes ranging from providing initial financial assistance and reducing risk to securing capital funds, supporting the supply chain, and collaborating in social policies.
According to Statista, U.S. insurers held almost $13 trillion under management in 2021. As significant investors, they frequently invest in private and municipal bonds that support the development and progress of communities, therefore acting as community builders.
The New York Insurance Association supports Weisbart’s assessment by stating that insurance companies invest the premiums they collect in state and municipal bonds, which help fund the construction of public projects like schools and roads. They also invest in corporate equities and bonds, providing businesses with the necessary capital for research, expansion, and other ventures.
Weisbart explains that insurers play a crucial role as facilitators of infrastructure and innovation. He points out that insurance has been instrumental in driving every industrial revolution and is therefore essential for the growth of an economy. Additionally, insurers also facilitate credit.
Insurers have a unique opportunity to educate the public due to their abundant resources and capabilities. They possess a wealth of data on various topics such as risk management, the economy, cybercrime, and climate risk. This data can be utilized not only for consumer protection but also for education. Insurers are well-positioned to inform individuals and companies about emerging risks and provide guidance on how to minimize them.