- COVID-19 will continue to have a major impact on the sector in 2021, as announced losses have already hit over $25bn globally
- The FCA’s pricing review - one of the most significant regulatory changes to ever happen to the retail insurance sector - requires insurers’ to rethink business and pricing models
- 2021 will see a huge shift as the sector further develops its climate-related plans and outlines its strategic path to net zero
Rodney Bonnard, UK Head of Insurance at EY, comments:
“Insurers are facing a number of big challenges next year. The COVID-19 pandemic, lockdowns and resultant recession will continue to have a major impact on the sector as claims relating to event and travel cancellations and business interruption rise. The FCA’s pricing review – which landed this September - will have a big cost implication for the sector as many insurers will have to overhaul their business and pricing models, and ultimately for some it could act as a catalyst for M&A activity. Overall, it should also be seen as an opportunity to build better engagement and more longer-term relationships with customers, but there should be no doubt that this will be one of the most fundamental regulations to ever impact the insurance industry.
“The persistent ultra-low interest rate environment will put pressure on profitability within the industry, as will the prospect of flat or declining premium prices, and one of the biggest concerns for insurers over the next 12 months will be identifying where growth will come from.
“However, amid the challenges, there will be some opportunities that firms should look to capitalise on. Progress in digital adoption was accelerated during the first lockdown with the move to mass remote working, and insurers should use this momentum to further adapt their business models to the digital agenda.
“As of writing, we await news of whether a Brexit deal can be reached ahead of the transition period deadline on the 31st December. The industry though has shown great agility since the Referendum, coping well through uncertain market conditions, and firms are well prepared and will largely be expected to serve customers without disruption from 1 January 2021. That being said, insurers will be keen for clarity and to see what can be achieved through trade deals and regulatory cooperation with key financial services hubs across the world.”
Andy Worth, Specialty (re)Insurance Associate Partner at EY, comments:
“For Specialty insurers, the market is seeing significant rate hardening, notably in marine and casualty, which is set to continue into next year. The reinsurance market is also seeing rates harden but not as significantly as the primary market. At the same time, carriers are having to deal with the fall-out of COVID-19, which has cost the insurance market over $25bn globally in announced losses so far, with further losses expected as we enter the new year and beyond. There has also been deterioration in prior reserves with the impact of social inflation. Many cedants are having to manage their reinsurance renewal programmes carefully due to the rate hardening.
“The rate hardening has also triggered a significant injection of capital into the market from a number of sources, notably private equity firms. This has included the backing of new start-ups in both the company and Lloyd’s market. Our expectation is that we are only half-way through the hard market and many companies will take advantage of this attractive rating environment to strengthen their balance sheets.
“As for investment returns, the forward-looking view is that they will reduce, with yield curves in many geographies being around, or even below, zero. With investment income being a significant contributor to returns historically, this is putting more upwards pressure on rates as underwriting returns need to make up for this shortfall.”
Kabari Bhattacharya, EMEIA Insurance Sustainable Finance Leader at EY, comments:
“Climate science shows unequivocally that carbon emissions must fall in order to halt climate change, and (re)insurers have a critical role to play in accelerating and smoothing the transition to a net-zero world – this will be a key focus in 2021. There are three main areas where the insurance industry can make a real difference. The first is through underwriting - stepping away from many of the highest carbon emitting companies, working with clients on their transition and pursuing growth in sectors that support the Paris agreement; the second is through the investments it makes - divesting from sectors such as coal, while integrating ESG into their investment decision-making and engaging with counterparties in their decarbonisation plans; and the third is through changing the way they individually operate, and actively reducing their own firms’ carbon footprint. 2021 will see a concerted drive by insurers to focus net-zero strategy on both sides of the balance sheet.
“One of the next steps on the road to progressing net-zero ambitions is the roll-out of climate scenario planning and 2021 is going to be a pivotal year. In 2021 the climate Biennial Exploratory Scenario (BES) will be launched by the PRA to help insurers assess how to adjust their business models. In order to better understand how to assess climate related financial risks and inform a firm’s strategy and business decisions in relation to net-zero and ESG integration, insurers (and banks) will be encouraged to analyse their exposures and size their climate risks through climate scenario analysis, which helps to identify gaps in data and risk management processes. This was further underlined by the PRA’s Dear CEO letter of 15 December 2020 setting out expectations for both BES participants and other insurers to prepare their climate risk scenarios in 2021.
“The data challenges to do this are far from trivial and insurers need to get ahead of the curve and begin the process of data collation and analysis now. Some insurers have been on the front foot on this, and have already started, using reference scenarios published by the Network for Greening the Financial System (NGFS), which are expected to be similar to the BES scenarios. These firms will have a significant advantage in better understanding their exposures.
“A sea-change is coming for the insurance sector over the next 12 months. We expect to see a seismic shift in the way the sector develops its climate-related plans, assesses its exposures, and begins to outline its overarching strategic path to net zero. The best way forward is united as an industry, but at an individual insurer level, those with the clearest strategies, and a robust climate risk framework, underpinned by strong data and metrics, will have the sharpest competitive edge. These firms will be in the best position not only to protect themselves from the threat of climate change but to lead the market into a greener tomorrow.”