This year will be a tough one for insurers

Legacy Covid issues, hard reinsurance rates and data integrity are among the range of challenges facing senior management this year.

The start of every calendar year brings challenges for the market’s C-suite insurer class to grow their shareholders’ return on equity.

This year is no different, yet the substantive challenges business leaders face in 2023 are arguably materially different from previous years. Certainly, while the market remains unsettled to varying degrees, it is no longer soft – or as soft – and it is able to consider and discuss the hardening of rates.

However, offsetting that positive are a number of significant issues insurers will need to grapple with and master to deliver profit and therefore generate acceptable stakeholder returns.

First, Covid-19 as an issue remains. It is true the direct market has received court guidance though structured and generated consolidated/conjoined disputes to determine which policies must respond to claims for Covid losses. Exposures to such losses on a direct basis are (or should be) already identified and reserved.

However, what remains legally opaque as 2023 begins is exactly how reinsurance engages to respond to those claims payments being made, which will of course have a material impact on net underwriting performance and profitability.

Reinsurance disputes
These issues still need to be worked through at a wider market level. Predominantly, this results from disputes at a reinsurance level being agreed to be resolved by confidential arbitration. Without all party agreement, and unlike the direct carriers, it is simply not possible to have a court-style market-wide directive hearing and at any judicial fast pace.

Covid-19 has also contributed to supply chain pressures. Allied with similar problems caused by the war in Ukraine and of course with that causing a spike in energy costs, the market is now dealing with significant inflation that generates higher claim settlements and awards, with associated demands for increases in reinsurance protections to protect and preserve underwriting performance.

The market has just concluded the January 1 renewals, which has not been easy from a reinsured perspective. Indeed, in its recently issued renewal report, broker Gallagher described the recent renewal process as “complex and in many cases frustrating”, with reinsurers taking a tough line on capacity, terms and pricing.

But the route to profit in 2023 also requires adroit handling of wider market issues. Key in this respect will be data adequacy, its management and control and, through that, the identification of growing new market risks.

Climate risk
Data is now the currency of a successful market business, being the tool that now provides information on the growing or changing of risk.

A classic example of this is climate risk. Data, properly assembled and analysed, will identify the developing and changing risk profile, in terms of frequency and geography, of climate-related events such as hurricanes, storms, floods, drought and fires.

However, if that data is incomplete or statistically dubious, risks will be wrongly priced and ultimately claims exposures may be hidden.

Conversely, data inadequacy may mean decisions to decline risks could be made on a false belief they carry too much risk, when that may not be the case, so leaving profit and earnings “on the table”.

With other pressures on profit abounding, mastering data analysis and data capture is a necessary means to keep or grow competitive advantage and to maintain or improve shareholder value for a business.

The importance of data integrity extends into other newly important areas for the market, such as disruption technologies and artificial intelligence (AI).

Disruptive technologies
Telematics, smart technologies and algorithmic analysis all provide exciting new ways for the market to access data.

They also allow businesses to process data to improve efficiency, manage costs and open markets to new customers, which are all essential requirements in difficult economic times to deliver profit.

But there is no free scrutiny pass when it comes to AI. If used, AI must be assured to be ethically compliant. In 2023 business will need to be sure that the data used, often procured from third parties, is complete, accurate, and free from biases. Get it wrong and lawsuits are around the corner.

Finally, there remain those constant good business practices that must continue to be observed: continue to control what can be controlled; deliver clear business focus; hire the best people; review acquisitions and disposals for organic growth and economies of scale; or divest non-core and cost-heavy business.

This year will be hard. Hard times tend to shine a spotlight on C-suite performance. How adroitly the above issues are managed and processed by the business will determine whether businesses deliver for their stakeholders this year and that management will determine whether C-suites are indeed “match fit” to drive their business forward.