6 Factors influencing insurer profitability over the next decade

6 factors influencing insurer profitability over the next decade

November 9, 2023 6:29 AM

Executives using various devices at the meeting: technology in business

Transformation continues to be the focus of many aspects of the insurance industry and a new report from Forrester addresses some of the premium volatility in markets around the globe, identifies the risks insurers should be monitoring and focuses on several key factors that will affect profitability in the coming years. The Future of Insurance report finds that insurers have remained strong despite market instability, but that could change in the future, with six factors affecting profitability over the next 10 years.

Geopolitical unpredictability

As leadership in governments worldwide shifts, this could lead to instability that creates an increase in military, economic or cyber risks. The result is likely to be an increased demand for products as part of a risk management strategy, including business continuity, cyber and political risk coverage. Additionally, insurance coverage in war-torn areas will be harder to obtain as carriers pull out of those regions, and entities seeking coverage will likely pay higher premiums going forward.

Economic challenges require product innovation

As prices for energy, food and other life essentials increase, the added risk of higher inflation will affect future economic growth. An increase in claims costs and repairs and combined ratios near 100% means premium prices will not be dropping, so carriers will need to develop new products and business models to continue growing and innovating.

Protection gaps are increasing but are providing opportunities

A recent study by the Global Federation of Insurance Associations found that there are significant protection gaps in areas such as pensions, computer security, health and natural disaster coverage. Some of the factors contributing to these gaps are lower incomes, failure to understand the risks of insignificant coverage, increasing catastrophic weather events and even shifting demographics.

Expect technology to continue transforming the industry

Insurtech will continue to help carriers innovate services and products, but it also generates new risks as well. As technology automates aspects of the insurance process, it provides more information to accurately assess and prevent risks, while advancements like autonomous vehicles will require new types of coverage.

Regulatory changes will create new compliance issues

Data privacy and ownership, digital platforms, AI and disclosures will be factors to consider and monitor for global compliance. Regulators are also considering climate-related financial risks, forcing risk managers to consider new risks, rework the three-lines-of-defense model and monitor systems for compliance.

Climate change will continue to affect insurance coverage

According to the report, the effects of climate change will only increase, particularly as insurers continue to withdraw from states like California, Florida and Louisiana. Additionally, the cost of insured losses, which were $23 billion in the 1990s have risen to $70 billion annually and could increase by 70% by 2030. The increase in climate-related events will also make it more difficult for insurers to predict and model their exposures.

These factors will force insurers to reconsider their business models, the products they offer and even their insurance processes to maximize resources and create new opportunities. The increased use of technology will create a more "touchless" process, but could improve efficiencies and costs for insurers and customers.