2019 USA Insurance Industry Outlook: Strategies to stay competitive in the insurance market
By Deloitte
Sustained economic growth, rising interest rates, and higher investment income contributed to a strong year for insurers in 2018. Although 2019 is shaping up to be a banner year, longer term challenges like the potential for economic slowdown and ongoing disputes over tariffs and trade rules may cast a shadow on the insurance market outlook.
Where do insurers stand as they enter 2019?
Sustained economic growth, rising interest rates, and higher investment income are among the positive factors that appear to be bolstering insurer results in 2018, setting the stage for enhanced top- and bottom-line growth in the year ahead. The US property and casualty (P&C) side of the business got off to a particularly good start in the first half, with net income more than doubling compared to 2017.
Although global consolidated figures for 2018 will not be available until the middle of 2019, data for the end of 2017 suggest that the non-US insurance industry is also growing, but perhaps not as quickly as its American counterpart, likely due to faster US economic expansion and lower unemployment.
In the P&C sector, US premiums written grew 4.6 percent in 2017, the highest percentage in the past decade, before jumping by 12.7 percent in the first half of 2018. Growth is not nearly as robust globally—indeed, Swiss Re’s Sigma reported that advanced markets, even including the faster-rising US region, saw premium growth of just 1.9 percent last year. Although premiums increased at a much healthier rate of 6.1 percent in developing markets, that figure was down from 2016’s 9.8 percent, thanks largely to China’s growth rate being cut by half to 10 percent.6
US P&C carriers have seen their insurable exposure base continue to expand for both personal and commercial lines, likely thanks in part to faster GDP gains, a shrinking unemployment rate, and higher consumer spending. But there has also been some luck behind improving results, as insurers enjoyed a welcome first-half respite from record natural disaster losses—down globally by one-third to $17 billion compared with the same period in 2017. This should cushion the financial hit from second-half catastrophes, such as Hurricane Florence, which caused major flood losses but perhaps $5 billion or less in insured damages, and Hurricane Michael, where insured loss estimates ranged between $4.5 billion and $8 billion as this report was compiled.
Reinsurers in particular seemed to have regrouped, with the Reinsurance Association of America reporting first-half net premiums up by one-third and the combined ratio a profitable 96.1.
Unfortunately, those in the US life insurance and annuity (L&A) business have generally not fared as well as their P&C counterparts, although the sector appears poised for a rebound. Individual US life insurance sales grew in the second quarter by 2 percent, after three straight quarterly declines. Indexed universal life led the way with 15 percent growth. Globally, life insurers continued to struggle, at least in advanced countries, where premiums fell 2.7 percent last year. Developing countries, on the other hand, saw sales rise 14 percent, although on a much smaller premium base.
However, the outlook for annuities appears to be a lot brighter, thanks primarily to rising interest rates and increased disposable income. Total US annuity sales are forecast to rise between 5 and 10 percent for 2018—and gain another 5 percent next year.
Longer-term, more robust growth rates could materialize if Congress approves a bipartisan bill—the Retirement Enhancement and Savings Act—that would, among other provisions, make changes to encourage distribution of 401(k) balances via annuities into guaranteed lifetime income streams. Annuities could also likely continue to get boosts from pension risk transfers, with single-premium, private-pension buyout sales rising 68 percent last year to $23 billion, and already up 76 percent in the first half of 2018.
Looking ahead to 2019
While improving economic conditions this year may have brightened the short-term outlook for insurers in 2019, for many insurers, a rising tide won’t necessarily lift all boats equally. There are still plenty of challenges to overcome in the year ahead, as well as opportunities to improve a carrier’s competitive position and bottom line. In this report, we spotlight some of the highest-profile issues insurers will likely be called upon to deal with in technology, talent, regulation, product development, mergers and acquisitions, and tax reform. We reflect on how each element is likely to play out over the next 12 to 18 months and offer some suggestions on what insurers should consider doing in response.
The underlying message is that while the industry may have to cope with a plethora of internal and external pressures, their impact remains very much in each insurer’s own hands. Perhaps the biggest determining factor will be how committed and prepared each insurer is to adapt quickly to a rapidly changing economy and society.
Spotlight on the economy
Recession could put a damper on insurer growth by 2020
While 2018 and 2019 are shaping up to be banner years for insurers, some concerns are being raised about an economic slowdown, if not a full-fledged recession, as early as 2020. Many are worried about the potential for ongoing disputes between the United States and China as well as other nations over tariffs and trade rules. Meanwhile, some expect the economic stimulus from federal tax cuts and additional government spending to peter out by 2020, while rising interest rates could perhaps discourage consumer borrowing, housing construction, and business expansion. In fact, Vanguard recently warned that the chances for a recession by late 2020 are between 30 and 40 percent.16 One warning sign cited by economists was a flattening yield curve between short- and long-term interest rates—a development that has historically indicated a recession ahead.
It would therefore be prudent for insurers to maintain their growth momentum by continuing to focus on improving operational efficiency, boosting productivity, and lowering costs with new technology and talent transformations, while customizing products and services to meet the evolving demands of the emerging digital economy.
Why should talent be high on insurer agendas in 2019?
Insurers seem to be up against a number of obstacles in maintaining, let alone expanding or upgrading, their talent for the digital age. One is simple supply and demand. While about two-thirds of insurers say they plan to increase staff over the next year, many may find this to be problematic given the general unemployment rate of just 3.7 percent and an insurance industry rate less than half that at 1.7 percent. The labor market is perhaps the tightest it has been in a decade, particularly when hiring technology, data science, and actuarial talent.
Meanwhile, robotic process automation and artificial intelligence that can automate manual tasks are rapidly infiltrating the industry, remaking or eliminating jobs that are labor intensive and even some with cognitive requirements. Insurers will likely be challenged to retrain and repurpose workers impacted by tech upgrades to make more productive use of their time and talent.
Where is talent heading in the next 12–18 months?
Most insurers are coping with drastic changes in the economy and workforce, calling for more creative and proactive approaches to recruitment, retention, and the very notion of the workplace.
To start, most insurers are decomposing jobs to analyze how work is currently performed, determine which capabilities can and should be automated, and establish what new skill sets may be required to maximize the value employees can bring in the wake of automation. The time and attention of actuaries, underwriters, claims adjusters, and other key players will likely be freed up for higher-level tasks and more strategic responsibilities. Employees should ultimately be spending more time on ideation and decision making—and far less on computation and distillation.
Beyond technology, insurers are also putting plans in place to respond to broader, fundamental employment shifts as more professionals join the open talent economy—a blend of full- and part-time workers, short-term contractors, and freelancers. Time is short, as nearly 6 million people, 3.8 percent of workers, held contingent jobs in the United States in May 2018. Another 10.6 million held other alternative work arrangements, including independent contractors, on-call workers, temporary help agency workers, and for-contract firms.
What should insurers be doing about talent?
With traditional employee roles and workplace structures in transition, insurers should start transitioning now to the more flexible and virtual workforce of the future. Carriers can set the tone at the top by developing leaders who know how to act, think, and influence in this new working environment, promoting the organization’s revamped digital DNA. At a minimum, new job descriptions would have to be written for long-established functions, and additional training could be required to repurpose current and future staff and help them evolve along with emerging systems and technologies. The goal is to create exponential insurance professionals—those augmented by emerging technologies and poised to leave behind traditional tasks to focus on higher value, strategic roles.
The biggest organizational challenge will likely be to constantly adapt and invest in new capabilities so insurers can take advantage of rapidly developing talent opportunities. Integration of cutting-edge technology should help insurers attract younger, more tech-savvy workers into the industry. However, this new workforce will likely demand an exceptional physical and digital workspace, as well as an appealing experience that puts employees at the center, helps them feel engaged, and keeps them in the fold.
While recruitment of new blood is important, insurers should also pay closer attention to retraining and retaining Baby Boomers, who typically have irreplaceable institutional knowledge and industry experience. Cross-mentoring between Baby Boomers and Gen Z employees just entering the workforce could benefit both groups.
Why should cloud be high on insurer agendas in 2019?
For many insurers, the cloud-computing debate is over. With 7 in 10 carriers using cloud in their business today, it is already an integral part of their technology environment and business platform strategies.
The traditional drivers of cloud computing—cost savings and pay-as-you-consume contracts—will likely continue to push usage. Yet the next round of adoption will likely be driven by other key benefits that cloud offers—namely speed, flexibility, and scalability.
Insurance CIOs, who are under pressure to deliver digital capabilities, are looking at developing applications on the cloud as a faster alternative to on-premises deployments. Beyond that, evolving technologies such as advanced analytics, telematics monitoring via the Internet of Things (IoT), and cognitive applications generally demand newer technology capabilities that are both quickly scalable and flexible, given the amount of data being generated and the processing power needed to leverage it.
Cloud providers seem to be actively evolving their capabilities to offer advanced solutions in partnership with system integrators to create industry-specific solutions. Carriers have an opportunity to be part of this ecosystem of partners to gain a competitive edge by drawing timely insights from data in a cost-effective manner.
Where is cloud heading in the next 12–18 months?
More and more core business capabilities are likely to move into the cloud as carriers continue to pursue legacy system modernization. Survey data from Ovum, a technology research firm, measured the progress of Software as a Service (SaaS)—much of it residing in the cloud. Ovum’s data suggest that insurers are already leveraging cloud applications for core operational activities, although there is still plenty of room for growth here. For example, the number of US insurers with claims systems fully deployed in the cloud has seen a steady rise from 13 percent in Ovum’s 2016 survey to 26 percent in 2018.
Given these trends, technology vendors are likely to increasingly direct their investments to develop innovative cloud-based alternatives, which should spur more insurers to look to the cloud first when replacing on-site legacy systems and adding new functionality, such as artificial intelligence.
These drivers should result in more carriers shifting core system capabilities to the cloud in a bigger way, even as they start opting for a cloud-first strategy for new applications and workloads.
What should insurers be doing about cloud?
As with any transformation, getting the most out of cloud will likely require planning, management, and up-skilling. To maximize benefits, carriers should develop a multiyear cloud strategy, ideally as part of broader efforts to create the digital insurer of the future.
As insurers plan their IT investments, they should give cloud a higher priority when deploying new applications. At the same time, they should utilize the advanced capabilities of cloud to gain access to better analytics for business decisions. For legacy systems, carriers should apply scoring rules based on business value, application complexity, and system criticality to identify which applications to migrate to the cloud and when. The result is a phased cloud migration path based on a carrier’s specific requirements.
As discussed later in the regulatory section of this outlook, cyber security seems to be an area of concern for many with cloud, because core systems and critical data are essentially being moved off-site to a third party. Regulators across the United States, Europe, and Asia have begun questioning the risk management implications of cloud migration. Insurers should keep in mind that while it may be true that providers are accountable for the security of their cloud’s hardware and software, applying security policies to cloud functions ultimately remains an insurer’s responsibility.
Spotlight on blockchain trends
Moving off the drawing board and into full-scale applications
This year has mostly been about assessing where the most immediate value of distributed ledger technology may lie for insurers, determining what processes to upgrade initially, and figuring out how to collaborate with competitors. Looking ahead, 2019 will likely see the industry move past basic education and proofs of concept to preparing for the launch of an increasing number of real-world blockchain applications impacting day-to-day operations.
In Asia, for example, AIA Hong Kong launched a blockchain-enabled bancassurance platform allowing the life insurer and its bank distributors to share policy data and digital documents in real time, streamlining the on-boarding process, improving transparency, and reconciling commissions automatically through smart contracts.25 On the property-casualty side, the Hong Kong Federation of Insurers is working to establish a blockchain-based auto insurance platform. In Europe, AXA is offering flight-delay insurance over a blockchain platform with parametric triggers and smart contracts.
In addition, groups of insurers are forming consortiums to share startup expenses as well as enable cross-industry collaboration, open-source agility, and quicker scalability.
While we probably won’t see sudden and dramatic implementation growth in 2019, large carriers and consortiums are expected to launch more impactful blockchain initiatives that could change the shape of insurance operations. This could set the stage for much wider blockchain adoption across the industry going into 2020.
