EY ITEM Club Forecast: Outlook for Financial Services Autumn 2013
Forecast for Insurance
News of UK economic recovery is music to the ears of insurers, but it is barely relieving the pressure on many players’ business models.
General insurance is a case in point. Recovery should give a lift to premiums, but the FCA’s thematic reviews (e.g. dual pricing and ancillary sales) represent a direct challenge to many firms’ current models. Many insurers and brokers will see an erosion of certain profit streams and need to focus harder on customer/ risk specific value propositions, making full use of behavioural data for advice and underwriting. At the same time, they need to simplify their operating models and become more transparent to customers in order to secure long-term profitability.
The picture is not so different in the life market. In the short term, recovery in the housing market will encourage policy renewals. Looking further ahead, protection providers need to move away from broad assumptions around morbidity and mortality to writing individual risks. Again, this means doing more to collect and understand personal and behavioural data and turn new sources of data (e.g. pharmaceutical life cycles and medical practitioner performance) to their advantage.
Meanwhile, the effects of the Retail Distribution Regulation (RDR) are challenging life companies’ savings and pensions businesses. On one hand, firms need to improve their ability to provide wealthy groups and individuals with tailored services. On the other, they need to reconnect with mass market consumers increasingly cut off from affordable advice and at risk of being given a false sense of security by auto-enrolment. We anticipate that continuing improvements in longevity and the concentration of wealth in the ‘later life’ segments will see insurers look to innovate in this space, leading to increased prevalence of equity release and long term care solutions.
Specialty insurance markets face a different sort of challenge, with pricing under pressure from the sheer volume of capital entering the market. Cost reductions will only have a temporary effect on performance, especially given the prospect of increasing scrutiny from the PRA and FCA. To deliver sustainable profitability, underwriters will need to focus expertise in their chosen risk segments; achieve a more complete management of aggregated risk portfolios and realise the benefits of more sophisticated predictive claim modelling.
Across the industry, the over-riding theme is the need for insurers to focus on their core underwriting, often by making it more tailored. This means that each firm needs to strike a balance between harnessing technology and developing vital human skills. Every firm is under pressure to invest further in digital channels to meet the increasing service expectations of the new consumer generation. Many face the difficult choice of layering new technologies on top of legacy infrastructure or starting afresh with entirely new business models.