Top 10 risks for P&C insurers in 2023

Every year presents risks for the P&C insurance industry — some more traditional, others new and emerging. SMA’s annual research on the strategic initiatives of P&C insurers reveals that for 2023, the inexorable march to digital transformation will continue along with the expansion of channel options, enhanced coverages, new partnerships and more. However, this is juxtaposed against more cautious budgets and the pullback of some more innovative initiatives.

How this will play out by the end of 2023 is a task for other industry prognosticators and seers. In the meantime, the ten key risk factors identified in this article should be considered and incorporated into strategies, and adjusted as needed throughout the year. The implications of each risk factor will vary, but most apply in some way to every segment of the market.

1. Key risk factor: Digital exhaustion

Digital transformation in the industry has been underway for many years. The pandemic and changing customer expectations have further elevated the journey to the digital enterprise. Most in the industry have graduated from thinking that digital is only about customers to recognizing it spans the whole internal and external ecosystem. In practice, this results in dozens or even hundreds of projects to address the process, technology, data and organizational aspects of transformation.

Implications for insurers: Managing the transformation has become a challenge at best and a nightmare at worst. Recent roles such as chief transformation officer, chief digital officer and others are providing strategy, governance, and senior-level accountability for digital initiatives. However, there is a sense of exhaustion among many at the pace of change and implementation challenges.

2. Key risk factor: Economic and political instability

The range of critical economic and political issues is expanding and potentially causing big swings in insurer strategies and financial results. After high inflation and rising interest rates in 2022, the outlook is uncertain for 2023. Even if there is a soft landing and mild recession, the P&C industry is left with prices that have risen significantly — especially in materials and labor costs for repairs and replacements of vehicles and property and in escalating medical costs. Add in the escalation of the Ukraine conflict, trade wars, more virus mutations and the resulting government actions, and you have a formula for chaos.

Implications for insurers: Rising costs result in rate inadequacy. Insure-to-value programs may be enhanced to ensure appropriate coverage levels but may also cause customer satisfaction issues. Supply chain challenges, inflation and labor issues continue to further exacerbate problems and costs for claims.

3. Key risk factor: Distribution confusion

Very few carriers are standing pat with their distribution strategies. Even those that distribute exclusively through one channel (i.e., independent agencies) have many projects to improve digital capabilities for sales and service. Many also have plans to expand into new channels or partner with tech platforms. The evolution to omni-channel strategies is complicated and fraught with challenges such as channel conflict and customer adoption.

Implications for insurers: Insurers risk either doing nothing or being too aggressive in new distribution plans. Those with strong, stable distribution partnerships face pressures from M&A and the demands of larger agencies/brokers and aggregators. They may also see business being chipped away from insurtechs, embedded approaches or other channels. Being too aggressive in moving to a broad-based omni-channel environment may create execution risk, brand confusion and channel conflict that could erode submissions.

4. Key risk factor: Traditional catastrophes

The magnitude and geographic reach of catastrophes influence the financial performance of P&C companies every year.  Last year was awful for the industry in terms of CATs, and continued construction in CAT-prone areas signals difficult years in the future. What 2023 will be like is anyone’s guess, with current predictions trending toward some improvement over 2022.

Implications for insurers: CATs are business as usual for insurers, although the challenges with inflation, labor, and supply chains have an outsized impact on handling CAT claims. Companies that have yet to invest in technology solutions for claims such as aerial imagery, computer vision, business texting and geo-visualization need to up their game to be competitive. Those that have already invested must capitalize on these capabilities to benefit policyholders and improve claims handling.

5. Key risk factor: Cyber CAT

Cyber risk exposures have risen as the world becomes increasingly connected and digital. Massive volumes of data are now flowing from vehicles, buildings, farms, people, and many other “things” that have devices tracking activity and the environment. We can hope that a cyber catastrophe does not occur in 2023, but someday there is bound to be an attack that knocks out an industry sector or geographic area.

Implications for insurers: Insurers need to prepare for a cyber catastrophe. The recovery efforts and claims implications could be enormous. Add the drag on the economy and the likely wave of litigation, and it creates a scary scenario for the entire industry.

6. Key risk factor: Generative AI

Version 2.0 of ChatGPT took the world by storm when introduced in late 2022. Breakthroughs in AI solutions for a variety of knowledge-based and content-creation tasks have both delighted and alarmed the scientific community and society. Writing articles, creating art or music, completing tests, automating business decision-making, and many activities that require judgment and creativity are now within reach. This class of solutions — termed generative AI — creates new problems and risks. The potential for fraud skyrockets, and legal actions to determine ownership or authorship may become common. Job loss due to automation may accelerate for all classes of workers.

Implications for insurers: Insurers may need to grapple with new liability-oriented products and coverages for this new class of risk. These capabilities may also introduce new categories of fraud in a world where fraud is already rampant. On the positive side, leveraging the technologies for conversational AI to improve customer experiences and insurer efficiencies may be a possibility.

7. Key risk factor: Labor disruptions

The COVID-19 pandemic and its many new waves based on mutations have permanently altered the labor force’s structure. Workforce mobility has increased dramatically due to the rise of remote work models. The Great Resignation, quiet quitting and increased gig-worker models are some of the trends that have made life difficult for HR. Now some companies are mandating return-to-office models and more aggressively using part-time resources. Employee demands, compensation that lags inflation and layoffs complicate the workforce world.

Implications for insurers: Ongoing and new developments will result in even more severe competition for talent. This is especially true for skilled, in-demand resources that insurers need, such as tech talent (e.g., data, AI and IT), underwriters and adjusters.

8. Key risk factor: Mobility acceleration

The mobility landscape is rapidly evolving, with many new options to move people and goods from points A to B. Telematics adoption sprinted forward during the pandemic after years of plateauing. Now adoption has slowed again but is likely to pick up in the future. In the meantime, transportation options continue to grow, driven by the electrification of vehicles and the sharing economy. There are now EV (electric vehicle) versions of bikes, scooters, buses, trucks, aircraft and public transportation. Although there is a clear recognition that roadways filled with fully autonomous vehicles are still far away, there is already a wide range of vehicles and levels of autonomy with increasingly sophisticated ADAS features (automated driver assistance systems).

Implications for insurers: Understanding the risk factors of various features and types of vehicles gets increasingly complicated. Actuaries need more loss experience data for rating. From a claims standpoint, the computer-driven capabilities embedded in vehicles make repairs more complex, and 2023 is likely to be another year with increasing total loss percentages.

9. Key risk factor: Housing crisis

It may not be fair to call it a crisis, but there have been big shifts in the housing market over the last couple of years. After the recent boom in home sales, the Fed’s actions regarding interest rates have considerably cooled the market. First-time buyers have found it difficult to afford a house and must also contend with rising rental rates. When people were homebound and the government was handing out stimulus money during the pandemic, there was a new wave of activity for home repairs and upgrades. Now repairs are often being delayed due to inflation.

Implications for insurers: Rising repair costs and increasing weather-related CATs require insurers to increase premiums, but coverage often remains inadequate. Claims may also increase due to long-delayed repairs.

10. Key risk factor: Outrageous verdicts/social inflation

While not a new risk, the trend to ultra-large verdicts has made it difficult to maintain good loss ratios. Juries today are awarding extreme verdicts upwards of $10 million at an alarming rate as lawsuit volumes continue to rise. These decisions are driven in large part by a “war on corporate America” mentality that influences jurors to deliver high awards as a form of social justice.

Implications for insurers: Exceptionally high jury awards result in tremendous losses for insurers and impact claims across many insurance lines, including commercial auto, professional liability, employment practices liability and others. This will inevitably impact insurers’ appetite for certain risks and harden an already firm market.

In a dynamic world, it is likely that other risk factors not identified here rise to the top and become critical issues for the industry. Success in 2023 will be about maintaining a focus on the fundamentals (sound underwriting, effective claim handling) while building more agility into the organization to respond to a more volatile environment — one where the risks are becoming more varied and more complex.

Mark Breading (mbreading@strategymeetsaction.com) is a partner with Strategy Meets Action, A ReSource Pro company. He is known for his insights on the future of the insurance industry and innovative uses of technology and leads SMA’s research program, publishing 25-30 research reports per year and conducting various custom research projects for insurer and vendor clients. 

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