Internal, external pressures to impact 2019 insurance industry

Sustained economic growth, falling unemployment, and a series of interest rate hikes have bolstered insurer results in 2018. Yet a rising tide won’t necessarily lift all boats next year — at least not equally. There are still plenty of fundamental challenges to overcome, as well as transformation opportunities available to improve an insurer’s competitive position and bottom line.

Indeed, carriers cannot afford to depend on positive, yet possibly fleeting macroeconomic developments alone to maintain growth and profitability in the short- or long-term. Instead, they need to tackle a much broader, foundational challenge: how to remain relevant in the face of systemic changes in the economy and consumer preferences.

High profile flashpoints we examine in Deloitte’s 2019 Insurance Outlook include:

• Technology: While rapidly evolving InsurTechs are having an impact across the industry’s value chain, one overarching technology in particular — the cloud — is poised to perhaps take the biggest leap forward in 2019. Insurers are looking to the cloud to power advanced analytics, enhance data gathering through the Internet of Things, and fuel cognitive applications. Insurers might therefore consider placing a higher priority on migrating existing systems to the cloud as well as launching new applications off site.
• Talent: Insurers are looking to increase staff, especially in analytics and technology, where talent is increasingly scarce. Some of that pressure may be relieved by expanding the use of robotic process automation and artificial intelligence), which promises to reinvent or even eliminate a broad spectrum of insurance job functions. This could free up existing personnel for more complex tasks, but first they must be upskilled to meet the demands of working at a digital insurer. Meanwhile, the needs of the open talent economy are prompting shifts to temporary, contract, and remote workers.

As a result, insurers will want to rewrite job descriptions and retrain current staff to develop a new lineup of “exponential” professionals — those whose work is augmented by emerging technologies that enable them to focus on higher-value, strategic roles. At the same time, insurers should be transitioning their operations to accommodate a more flexible and virtual workforce. And while recruiting the next generation of employees is important, carriers should also be considering rear-guard efforts to retain Baby Boomers, even beyond the traditional retirement age of 65, to keep their irreplaceable institutional knowledge and industry experience in-house.

Two other business mandates for insurers include work on:

• Product development: Fundamental changes in the economy and technology call for new types of coverage, revamped policies, and alternative distribution platforms. Yet swift, agile product development remains constrained by traditional obstacles, such as siloed business lines, legacy processes, and regulatory considerations. Insurers can respond by fast-tracking hybrid policies that cover both commercial and personal risks. Another option is to supply on-demand coverage options, which give consumers more control over their policy terms and time frames.
• Regulation: Insurers will deal with at least three high-priority compliance issues in the year ahead. They are:

1. Market conduct, with “best interest” standards being considered at both the federal and state level to protect consumers buying annuities and perhaps life insurance as well. Property-casualty producers have expressed concern that such efforts could spill over into their bailiwick. Insurers will need to review and adjust compliance structures to meet what could turn out to be a patchwork oversight system. One option might be to integrate new regtech solutions to enable continuous oversight and management of the sales process.
2. Cyber risk, which continues to bedevil insurers and regulators alike. Insurers with New York operations are already facing compliance deadlines with the state’s new cybersecurity regulations, which also formed the basis of a nationwide model law developed by the National Association of Insurance Commissioners. Looking ahead, attention is likely to spotlight how insurers plan to manage third-party risks, especially with so much emphasis placed on migrating policyholder data and software systems to external hosts.
3. Privacy oversight is being tightened thanks to implementation of the Global Data Protection Regulation out of the European Union, and similar standards to be imposed in California. This is partly a data security and reputational risk issue, but more importantly involves how data can be used by insurers going forward, including new rules governing disclosure and consumer sign-off. Insurers will want to involve multiple stakeholders in compliance efforts, not just legal and IT. Longer term, carriers need to reconsider how the vast amounts of alternative data at their disposal may be productively leveraged for the mutual benefit of carriers and policyholders alike, while remaining compliant domestically and globally.

Additional challenges lie ahead

In 2019, insurers are also likely to have their hands full dealing with the aftermath of U.S. tax reform and accounting rule changes, as well as a resurgent regulatory focus on sustainability and the handling of climate-related risks. More strategic concerns revolve around whether to keep pushing for greater organic growth or to seek consolidation, scale, and new capabilities through mergers and acquisitions — including possible takeovers of InsurTechs.

The underlying message of Deloitte’s 2019 Insurance Outlook is that while the industry may have to cope with a plethora of internal and external pressures, the impact of such challenges remains very much in an insurer’s own hands. Perhaps the biggest determining factor will be how committed and prepared each carrier is to seize the opportunities presented by ongoing changes in the economy, society, and technology, and to respond before competitors or new market entrants beat them to the punch.

Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.

Gary Shaw (gashaw@deloitte.com) is vice chairman, partner, and U.S. Insurance Leader for Deloitte & Touche LLP in New York.

These opinions are the authors’ own.