By Mohammed Khan, General Insurance Leader, & Luke Kendall, Snr Manager PwC UK
What lies behind the numbers? What does the future hold? Why have some insurers been more impacted than others?
The year-end reporting cycle has brought to light not only the adverse impacts on insurance companies, but also some of the offsetting favourable impacts observed across the different insurance sectors. Whilst general insurers have suffered significant losses across property and commercial lines - including significantly more business interruption losses that went to court - there has been a partial offset from motor and home insurance policies, with reduction in claim frequency due to lockdown regularly cited.
In the life insurance sector, the direct impact of such a sharp rise in mortality is partially offset by a favourable effect on annuity business and any associated mortality reserve releases. However, the extent of any favourable impact is highly dependent on the underlying business mix of the insurer.
How did the insurance industry weather the storm?
In our view, 2020 showed the insurance industry what the “art of the possible” was.
Like many businesses, most of the insurance industry sent their staff home to work in March 2020. For many insurers this was a significant operational change. Initially insurers had to focus on providing laptops and on how to use potentially limited bandwidth and online systems.
Insurers (rightly) focussed on ensuring customers could call to make a claim, their claims could be processed and renewals could be placed to provide continuity of cover. We would observe, given the scale of change, insurers did a great job. There was very little customer detriment during 2020 across the general, health and life insurance sectors, which is remarkable given the transition required in the three weeks following the work from home edict issued by the Government and testament to the huge effort undertaken by the industry.
The industry quickly adapted, and during 2020, many insurers made significant improvements and accelerated changes to their online platforms. Indeed, Lloyd’s of London was able to launch their online underwriting platform - much more rapidly than potentially it would have occurred without the pandemic. This acceleration of change was similar to many other industries significantly accelerating their technology and digital customer experience.
The pandemic has also shone a light on the ability for a minority of policies to have an immediate and significant impact both operationally and on profitability. For example, the FCA test case ruling on Business Interruption claims resulted in a receipt of huge volumes of claims overnight, whilst others found themselves on the hook for claims relating to specific sectors as a result of over concentration or loose policy wording. As a result, many insurers have sought to tighten existing policy wording and have taken steps to improve their claims handling systems.
Notwithstanding the challenges, many insurers have seen their customer and employee engagement scores improve in the last year, as insurers have gone the extra mile to pay claims despite the existence of exclusions and have fully embraced flexible working.
Outlook for 2021 and beyond
The post COVID world will be very interesting. Many insurers have accelerated their transformation programs - both to improve the digital customer experience and also to automate and take cost out of their businesses. This was highlighted in the recent PwC Global CEO survey which showed that CEOs wanted to increase investment in digital transformation, but were also planning operational efficiencies in response to uncertain economic growth.
The needs of customers (and their behaviours leading to claims) have changed. There will no doubt be a surge in driving when lockdown finishes; UK holiday bookings will significantly increase in late-2021 if Government restrictions lift; working from home part of the week will likely become more normal for jobs where this is possible; and customers will continue using technology more for everyday activities
How will this impact insurers? Those that do not continue to transform themselves may find themselves left behind, with a reduced customer base open to nimble competitors and potentially new entrants, who are lower cost and focussed on a better customer experience. Increased potential fraud (which always increases in a recession); cyber risks (with more people working from home); and operational risks will also be an ongoing challenge.
As it so often does in times of uncertainty, the insurance industry has remained robust. It has continued to meet the needs of policyholders and return a dividend for investors.The pandemic has also accelerated much needed change in some areas and brought flexible working to sectors of the industry where it was never thought possible.
Whilst there will continue to be significant challenges ahead, it is clear that the insurance sector is in a good place, but must use this as a platform to further evolve and remain relevant in a changing and increasingly digitised world.
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