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05-19-2020 Blog: A New Normal: Perspectives for Insurance Organizations

A New Normal: Perspectives For Insurance Organizations

May 19, 2020 | George Freimarck

What will the world look like after the coronavirus pandemic of 2020? A recent survey of 30 leading German insurance industry executives conducted by EY and V.E.R.S. Leipzig (EY/VERS) emphasizes a paradigm shift in thinking around talent and facilities management, technology adoption, and merger and acquisition (M&A) activity.

The Changing Workspace

A significant percentage of the survey respondents expect the workforce to shrink in the next two years, with one in five companies expecting a reduction in staff due to the crisis. The expected reduction is undoubtedly tied to an anticipated increase in the use of technology. An overwhelming majority of survey respondents see an accelerated rise in technology solutions. Ninety-three percent expect a digitalization boost leading to a more flexible business model, and 70 percent expect a modernization of traditional sales channels. Although technology and digitization are viewed as the way forward, the combined effects of adverse losses and a poor investment environment will cause some carriers to reconsider their investments in insurtech. The recent example of AIG putting its middle-market commercial insurtech, Blackboard, into run-off, could be a harbinger. This will provide a greater opportunity for digital insurance experts to provide white label solutions.

With most employees now working from home – many for the first time over such an extended period – insurance executives are taking a long look at productivity levels and costs. Even as a sizable piece of the workforce working remotely must contend with homeschooling and other personal commitments, anecdotal evidence indicates most companies have made a transition to working remotely and meeting and conferencing via the web.

If company leadership decides fewer team members are needed in an office at any one given time, the inevitable effect will see the workspace itself shrink. Admittedly, no one expects that corporate headquarters will disappear anytime soon. Virtual meetings can only take you so far, and there is still value in face-to-face, interpersonal contact, and collaboration. So, shrinking office space –will be a lead topic of discussion across insurance boardrooms. In fact, for one insurer in the U.S., Nationwide, the results are already in: Nationwide has announced plans to shut down at least five of its traditional brick-and-mortar offices by Nov. 1, 2020, with employees and other workers associated with those offices working permanently from home.

Business Challenges

A large majority of EY/VERS respondents, 84 percent, anticipate a reduction in new business due to the COVID-19 crisis. But we may see an increase in premiums to compensate for that decline in top-line results as the overall market continues to harden. Moreover, a flagging investment environment is noted by all (96 percent), coupled with expected sharp rises in loss ratios due to event cancellation, business interruption (BI), travel insurance, and legal expense, adversely impacting the bottom line for insurers. These business conditions will test even the hardiest of players.

Reputational risk is real. The challenges to business production are compounded with the fear of negative fall out for the industry, as pandemic risk is explicitly covered in only 17 percent of respondents’ business. In trying times, however, there is always opportunity. Players who were on the sidelines or less exposed in BI or event cancellation will look to step in, albeit with carefully-designed solutions, as the more traditional insurers look to retreat. The opportunistic players will also look to the development of pooled, industry-wide catastrophic backstops, along the lines of Pool Re in the U.K. and TRIA in the U.S.

Industry-wide Consolidation on Deck

Some 38 percent of the EY/VERS respondents expect accelerated M&A activity among insurers, but even more so among brokers and agencies as the smaller players are viewed as not having the resources to meet the increasing technology and analytics demands of the marketplace. More M&A may be targeted at alleviating structural weaknesses in the insurance sector and modernizing legacy businesses.

While size always matters in a consolidating market, the reality of merged systems is not a simple matter. Being able to rip and replace one system with another is rarely the case. Rather, the newly combined systems often exist side-by-side to maintain the acquired business. Management reporting becomes an issue. The synergy of the newly-merged entities is often not realized in the IT, and newly ascendant management faces an arduous journey on the enterprise integration front. Insurance CXOs looking to achieve maximum returns on investment with M&A initiatives would have to build a robust digital roadmap focusing on IT consolidation and rationalization.

What’s Next for Insurers

With travel restrictions in place and industry conferences being canceled, and roughly a quarter’s worth of travel and expense budget freed up, strategic projects could take center stage. It is a good time for insurers to make investments in digital transformation initiatives spanning the enterprise and build out a lean and scalable operating model.

There is a popular meme doing the rounds on social media. It features a questionnaire which asks, “who is driving your digital transformation,” and lists out three options – “CEO,” “chief digital officer,” and “COVID-19.” It may well be interesting to see – post-pandemic – if insurance companies will make the necessary investments in digitization and legacy modernization to advance their strategic capabilities with the “new normal” environment.

George Freimarck is vice president and managing director – Europe at Xceedance.