Insurance company profit margin results right now are like trying to keep water in a leaking bucket. Can insurers fill the bucket with the right premiums as fast as claims pour out potential profits? It’s about rethinking underwriting and claims as well as rethinking risk resilience.  It’s tough to build new levels of risk resilience when new and heightened risks, increasing claims costs, supply chain implications, and legacy business processes and technology make it difficult to navigate a firm road to profitability.

As an example, for property repairs, insurers are still facing inflation’s effects on materials, plus labor shortage effects on labor pricing. This means that the construction repair job completed 7 months after the construction estimate may end up being 3-7% higher than they had anticipated. Of course, the trickle-down is that P&C insurers are having to make claims estimates based on anticipated costs, with no good indications on how materials and labor may change.

It is time to rethink the business and risk resilience.

Tracking trends to improve resilience

Majesco regularly examines market trends — business and technology trends — to help insurers navigate change and adapt to it within their organizations. In our Future Trends Report, 10 Trends Shaping the Future of Insurance, we look specifically at trends that will impact insurers in 2024.  In today’s blog, we’ll cover three specific areas that insurers can improve with technology’s assistance.

Setting the stage

First, we need to understand, from a macro view, what is happening in the market and its impact for insurers. Heightened volatility in financial markets, challenging economic activity, and an increased risk environment are punching new holes in the bucket. Navigating this uncertainty requires leaders to diligently execute their strategy and adapt where they need to remain relevant and competitive with innovative answers.

We have found that Leaders are rethinking their operating model and technology foundation to transform and optimize the business, making it more cost-effective, while also providing a new foundation to innovate.  This new foundation moves from fixed to variable costs, creates operational continuity and scalability, and enables insurers to accelerate digitalization and new technology adoption to drive growth and profitability.   

Swiss Re’s Sigma May 2023 report, The economics of digitalization in insurance: new risks, new solutions, new efficiencies, notes that over the last five years, protection gaps were measured as integral to their insurance resilience indices. Their research found positive correlations between the different resilience indices and their new Insurance Digitalization Index. Countries ranking higher in digitalization are typically also more resilient with respect to other areas of protection gaps. They suggest digitalization can be a force for closing insurance protection gaps. Gains from better underwriting, risk mitigation, and risk measurement through digitalization should improve the accessibility and affordability of insurance.[i]

Affordability is currently a major pressure point for insurance. As premiums rise, insureds will often choose to seek lower-cost alternatives, drop coverage levels, or drop their insurance in total, widening the protection gap.  Increasing premiums is a reaction to today’s market dynamics, but not a long-term solution for either insurers or their customers.   

Instead, insurers must focus on both operational and technology areas for investment that redefine their business in terms of today’s market dynamics and bend the cost curve to accelerate growth and profitability more effectively. 

Reaction vs. innovation

According to the latest projections by the Insurance Information Institute (III) and Milliman, the P&C insurance industry will not return to profitability until 2025. As a result, some carriers are reacting to profit concerns by pulling back in states and lines of business as well as raising premiums.  This is a reaction, not a long-term solution.

For the L&AH insurance industry, AM Best’s Market Outlook in March 2023 indicated a stable outlook due to rising interest rates boosting net yields and relieving potential reserving concerns.  However, the industry is still working through inflationary headwinds, rising medical costs, and the impact of COVID-19 on mortality rates. High inflation has eroded consumer savings, resulting in lower or nominal premium growth.[ii] 

Overall, the economic challenges and the persistent inflation in goods and services remain a top risk for insurers, reemphasizing the need to address the operational and technology challenges for the long term. Rethinking the business model and technology foundation must be the starting point and focus. Insurers who are looking through their list of ways to counter increasing risk and operational losses should be looking at strategies that will bring, not just relief, but long-term resilience.  Here are three trends that are doing that:

Trend #1: Product innovation to close the protection and customer expectation gap

Customers expect and need different products to meet their risk needs, help close the protection gap, and align to their financial parameters. They also want more than just the risk product; they want access to value-added services and an experience that humanizes and manages the process for them.

Part of the humanizing aspect is offering niche, personalized products that require product innovation. These products need to use more of the customer’s data, including telematic data, that reflects their risk and behaviors. It includes risk prevention and mitigation capabilities to help customers avoid loss, dramatically redefining the customer experience and loyalty parameters. Traditional product-oriented strategies rarely meet these new expectations.  

In our consumer and SMB research in 2023, Majesco consistently found a gap between insurers and customers in terms of interest in new products for L&AH individual, group/voluntary benefits, and P&C personal and commercial lines of business. A customer expectation gap reflects the difference between what customers expect, want, and need, as compared to what insurers are delivering.

This is why IoT and telematic products, on-demand/Gig economy products, parametric insurance, microinsurance, and embedded insurance are of high interest, particularly for Gen Z and Millennials, but also with the older generation of Boomers and Gen X.  With inflation eating into disposable income and claims costs driving up insurance premiums, there is a real concern that the protection gap will expand for many consumers and businesses. 

Both the protection and customer expectation gaps need to be as small as possible for insurers to create long-term customer growth and improve insurance company profit margins. It demands a customer-centric strategy that understands the unique generational segment differences in behaviors, lifestyles, and more, that drive insurers’ decisions about products, both traditional and innovative. Doing so will help improve underwriting profitability with more personal data-driven risk assessments and will also help drive risk avoidance or mitigation. It’s a win-win-win approach.

Intelligent core software solutions, such as Majesco’s Intelligent Core for P&C and L&AH have the potential to deliver personal data-driven products and services that create greater value for customers, and along with reversing and closing the protection gap for people and businesses, make it relevant, affordable, and accessible.

Trend #2: Pricing, rating and underwriting speed and flexibility

Underwriting is at the heart of the insurance business. In the face of rapidly changing risk factors, it is increasingly crucial to have capabilities for evaluating individual risks, the exposures in an entire portfolio, risk appetite, and ultimately, profitability. But with rising loss ratios and different risk profiles for individuals and businesses, insurers need more flexibility in changing their pricing and rating for underwriting. 

The inflationary, profitability and competitive conditions in the insurance marketplace will require insurers to evaluate aspects of their pricing, rating, and underwriting, including improved speed-to-market capabilities. Pricing and rating engines will increasingly play a critical role in delivering rapid updates and new products to market for both P&C and L&AH, from IoT-enabled products to Gig economy, on-demand, and telematic products, to name a few. The demand for more regular updates for pricing, from real-time to weekly, monthly, or quarterly rather than annually, will become mainstream. 

At the core of pricing, rating, and underwriting is data. While insurance has always been a data-driven business, access to new data sources, embedded AI/ML models, and flexible pricing and rating solutions that can quickly deliver personalized or updated pricing will be central to insurer’s new business models. 

The most innovative and profitable carriers focus their product management efforts on products with pricing and rating flexibility and efficiency that deliver speed to market and customer value. Tools like Majesco’s P&C Enterprise Rating and Intelligent Sales and Underwriting Workbench are available to help insurers bring greater understanding to underwriting, rating, and pricing.

For more on this topic, be sure to register for Majesco’s webinar, Today’s Holy Grail: Pricing, Rating and Underwriting Speed and Flexibility.

Trend #3: Risk resilience through improved Loss Control

Risk doesn’t always show itself, yet it is an ever-present companion for insurers. Risk is growing and becoming more complex. Gone is its predictability. New risk layers, such as climate, societal, and technology risks add new considerations and complexity. Yet, even if the risk is changing, assets are growing more understandable through improved analytics, AI, and machine learning, increasing some areas of predictability in light of new risks.

The concept of risk resilience is closely aligned with the old adage of “control what you can control.”  It is now front and center for insurers as they consider new risk management strategies as a crucial component of their underwriting and customer service strategy.  While most insurers are focused on improving risk assessment, many more are expanding to also focus on loss prevention and mitigation, creating risk resilience for customers.

Leading insurers leverage technology such as IoT devices, advanced analytics, digital loss control assessments, and value-added services to not only assess and monitor risk but to proactively respond to it with mitigation services and actions. From concierge services, to monitoring water hazards and the safety of employees, to helping people live healthy lifestyles, leading insurers are shifting to risk resilience strategies that not only drive better business outcomes but also cultivate customer loyalty.

With risk resilience, customers experience prevention before they need protection — whether businesses, homes, vehicles, assets, or employee health and wellbeing are at risk. Even better,  risk-resilient technologies communicate and educate. Every claim and pre-claim event becomes a teachable moment to help avoid future claims.  Majesco is active at the forefront of risk prevention technologies in nearly every area of insurance, including P&C Loss Control.

Lasting results

Our industry talks a lot about the future of insurance. The excellence of insurance and its ability to consistently keep doing what it does well are wrapped up in two sides of a complex equation: a.) customer need/satisfaction and b.) risk management/profitability.  

Both sides of the complex insurance economics equation can advance if insurers are willing to adopt new business models and employ next-gen solutions and technologies the insurance industry has to offer. Resilient strategies are within reach. Instead of employing insurance’s traditional reactions to profit loss and mitigation, insurers should be looking at longer-term solutions with near-term benefits. Build on a solid, next-generation insurance technology foundation and prepare for a future with greater resilience, simpler market adaptations, and stronger premium growth.    

To uncover additional trends, be sure to read 10 Trends Shaping the Future of Insurance and then find out how AI and GenAI are contributing to new operational models by watching the Majesco webinar, Unleashing the Power of AI to Drive Business Efficiency and Optimization: Majesco’s Spring ’24 Release.

[i] Anchen, Jonathan, et al., “sigma 5/2023 – The economics of digitalisation in insurance: new risks, new solutions, new efficiencies,” Swiss Re Institute, October 11, 2023, https://www.swissre.com/institute/research/sigma-research/sigma-2023-05-digitalisation.html

[ii] Kohlberg, Edward, “Market Segment Outlook: US Life Insurance,” AM Best, March 29, 2023

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