Industry leaders see a difficult year ahead, and nominate technology as the best way to transform their nightmares into opportunities
By John Deex
The people who manage Australia’s insurance companies and brokerages spend much of their time anticipating the opportunities and challenges just beyond the horizon, and so are uniquely placed to comment on what the next year may hold.
After a period of significant turbulence – during which the industry was buffeted by covid, massive natural catastrophes, and regulatory reform – they can only hope for a quieter year ahead.
But as the dozen senior industry executives who responded to the annual Insurance News Leaders’ Survey make clear, a quieter year doesn’t equate to easing up.
Change – and the need to meet the challenges change brings – means that even if 2023 proves to be less destructive than last year there’s still a great deal to be done to make the business more flexible, responsive and efficient. Change doesn’t sit still.
Some key themes emerge from the survey. Capacity and affordability is the greatest challenge – not surprising after the catastrophes we’ve just had – and this is linked to concerns about reinsurers tightening their belts.
There’s positivity too, however. The industry’s leaders still see technology as their greatest opportunity to cut costs and improve services. Cutting costs through smarter tech helps business performance by making it more efficient. The desired result of technology-driven efficiency is more focused products, accurately priced (and hopefully lower) premiums, better claims services and happier customers.
The following is a summary of the answers to the key questions in the survey. Some participants asked to remain anonymous and we’ve agreed in the interests of gaining as much candid commentary as possible.
What do you believe are the biggest challenges for the industry in 2023?
The biggest challenges in 2023
Chief executives were asked to rank the biggest challenges facing the industry this year. One issue stood out above all others.
Capacity and affordability is very much on CEOs’ minds, with 11 of the 12 respondents to the Insurance News survey including this in their top five issues.
This was followed by inflation, climate and extreme weather, staff retention and recruitment, and rising business costs.
“Affordability and capacity was ranked first because many of the other factors are drivers of this challenge,” Allianz Chief Corporate Affairs Officer Nicholas Scofield said.
“For example, rising business costs, inflation, staff retention and recruitment (ie, higher remuneration costs/expectations), regulatory compliance costs and extreme weather events are all exacerbating a growing property insurance affordability crisis, particularly for those vulnerable to extreme weather perils, especially flood.”
Paul George, the Managing Director of Adelaide-based national brokerage MGA, says capacity is “at the heart” of accessing options for clients.
“Things are very hard,” he says. “This is exacerbated by the shortage of qualified personnel and generally large delays with claims. [It] makes things tough all over – lucky we’re a strong industry delivering solid value to our customers.”
Insurance Advisernet Managing Director Shaun Standfield says an additional challenge related to rising inflation is “ensuring clients have the correct sum insured values for the property and business interruption components of their insurance programs”.
And there’s no end in sight to these challenges. IAG Group Executive Intermediated Insurance Australia Jarrod Hill says issues like inflation, supply chain problems, geopolitical tensions and natural disasters will continue to impact the sector in 2023.
“In particular, we’re likely to see our customers and clients becoming more price sensitive in response to rising interest rates and inflationary pressures,” he says.
“For example, our business customers across most industries are facing rising input costs, of which insurance is just one area of pressure.”
Honan Chief Operating Officer Laurence Basell singles out the regulatory environment as “continuing to cause issues and challenges”.
“This is very relevant to the smaller clients and smaller firms, and means that many client types are no longer profitable (due to the high cost to serve).
“Climate change and associated issues continue to cause impact and cause many issues around claims, hard-to-place areas, and uninsurable risks”.
What do you see as the biggest opportunities for your company in 2023?
Where there’s challenge, there’s opportunity, and industry leaders are quick to point out that it’s not all doom and gloom for insurance.
Increased efficiencies through technology tops the list of opportunities over the next 12 months, followed by mergers and acquisitions. Given the amount of M&A activity around broking, that’s not a surprise.
Rumours suggesting smaller foreign-owned insurers might quit the Australian market also raised interest last year, but so far nothing has come of that – apart from the scuttlebutt around Suncorp’s renewed interest in Zurich’s local operations. After selling its banking operations to ANZ – pending regulatory approval – the insurer is said to be now focused on bulking up general insurance business.
Logically, companies see opportunity arising from moving into new specialist markets, followed in our survey by increased profitability, and (then some way back) overseas expansion, indicating that most companies have their eyes firmly on the domestic front at this point.
“There are a huge amount of opportunities for efficiencies through technology that are currently untapped, in particular on the insurer-to-broker integration through APIs [application programming interfaces],” Mr Basell says.
Mr Hill sees opportunities to demonstrate the protection provided to customers, and the value of insurance.
“Insurance serves as a shock absorber when things go wrong, and in difficult times it becomes even more important to keep customers and their assets safe,” he says.
“For our SME and commercial business customers this means we must remain nimble, evolving our products to offer relevant cover as needs change.”
Creating value through digital is a key pillar of IAG’s strategy, he says.
“We see technology improvements as a significant opportunity for our business to be more efficient, as well as create better experiences for our broker partners and customers.
“Our customers’ digital needs are changing fast, from how they lodge a claim to how they choose to engage with us as an industry.
“Our brokers increasingly expect seamless and timely engagement, appropriate coverage options for their customers and competitive pricing.”
Allianz’s Mr Scofield notes the cyclone reinsurance pool for northern Australia as an additional opportunity, enabling expansion into the catastrophe-prone region by “removing the need to limit exposure to cyclone risk”.
MGA’s Mr George, meanwhile, sees potential for brokers to become more involved with the claims value chain.
“We hope to see more efficiency in what continues to be a very problematic and common issue within our market.”
What changes do you think the industry will undergo over the next five years?
What will impact most on the industry?
Respondents were asked to pick five changes from a long list of options that will have the most impact over the next five years.
Increasing risk-rated premiums was chosen the most times (8), followed by increased use of artificial intelligence, more specialist underwriting agencies and reinsurers withdrawing support or imposing tougher conditions (7).
Brokers becoming more important, some parts of Australia becoming uninsurable and technical skills training were all chosen six times as impacting on the industry.
QBE Chief Executive Australia Pacific Sue Houghton believes there will also be “greater focus on the impact of climate change and transition to net zero”.
She says there is a significant opportunity for the industry to serve customers better using digital and data to “make insurance easier”.
“Using technology to automate administrative tasks will help free up the time of our team members, enabling them to focus on what’s really important in serving our customers,” she says.
IAG’s Mr Hill added two extra points to the list – modular product architecture by commercial insurers enabling improved coverage outcomes for brokers and customers; and more automated actuarial-driven pricing in commercial insurance.
“Brokers will continue to have an important role in advising clients on complex and emerging risks, such as cyber incidents, especially in the SME segment,” he says.
“We’re also likely to see new technologies and assets, such as electric and automated vehicles, change the way insurers think about risk and how we adapt our products to evolve with the market.”
He says if the industry invests in technology, frictional costs will be removed, which will drive better outcomes for customers and help to address affordability concerns.
“It also presents an opportunity for early adopters and those that invest wisely, enabling market share gains and scope for improved returns to shareholders.
“We may also see challengers enter the market who believe products can be commoditised and transacted via a digital platform outside traditional insurers and brokers.”
WTW Head of Asia Pacific Simon Weaver agrees that increased AI and digitisation will deliver efficiencies, but cautions that “if we are not careful [it] will remove roles that have been the traditional breeding ground for career development”.
“Between entry level roles disappearing, a continuing need for experienced client and market-facing practitioners, and experience leaving the industry through retirement, this could all create a knowledge gap,” he says.
Honan’s Mr Basell believes technology and efficiencies will be critical to remaining competitive and delivering high customer service.
“I think we will continue to see consolidation in the space which may see competition issues arise for the larger listed and international businesses – particular if there is further vertical integration.”
Mr George sees brokers doing less personal lines business in future, but adds that “brokers with broader market options and good knowledge will thrive over the next five years”.
What keeps CEOs awake at night?
This was an open-ended question, but not surprisingly the same things are at the centre of industry leaders’ concerns.
Allianz’s Mr Scofield simply wrote “cyber risk”, and this was mirrored by others.
“Any clients not taking cyber cover,” says Mr George, and CBN’s Richard Crawford agrees, confirming “cyber security” is a big issue.
“More time and attention is spent on thinking about what else we can practically do to protect our data,” Insurance Advisernet’s Mr Standfield says.
“I believe cyber criminals will continue to seek opportunities to exploit businesses and brokers won’t be immune from these activities.
“We are working with external experts to actively improve our cyber resilience and ‘keyboard’ behaviour across our teams.”
But cyber isn’t the only worry. Natural catastrophes also keep executives tossing and turning.
Mr George is disturbed by the “possibility of a wide-scale catastrophe and our insurers coping with the claims management” as “they appear to be at capacity now”.
Mr Hill says the impact of climate change and recent widespread floods on communities is distressing for the whole industry.
“Our strong view is that we, as an industry, and with governments at all levels, need to lean into the bigger issues around risk mitigation, how we invest for the long-term, better land-use planning and improving building standards.”
He says there have been welcome announcements on mitigation projects from governments, but it’s vital that funds are allocated and flow through to make them happen.
“Combining mitigation investments with improved land-use planning and strengthening building codes will better protect communities and have flow-on benefits such as making insurance more affordable.”
Mr Crawford also notes the “affordability of appropriate insurance cover for small business” as a troubling issue, while another (unnamed) respondent simply notes “PI exposures”.
Mr Weaver says climate is “an increasingly prevalent topic which the industry will need to work through and, at some point, ideally land on standardised net zero frameworks”.
QBE’s Ms Houghton notes that all the opportunities and challenges are connected in some way.
“It’s important we are conscious of this connection and approach the right things in the right sequence, considering the insurance industry for the long-term.”
Honan’s Mr Basell maintains he sleeps soundly – but if anything were to keep him awake it would be the positive opportunities the industry faces.
“While there will be challenges at adopting new regulations and compliance, this creates massive opportunity for the businesses that operate as professional services firms,” he says.
“As there are more hard-to-place insurance categories, the role of the broker and the differentiation of a good broker becomes more relevant.
“I think there is no industry that offers as much opportunity as there is from the insurance sector at the minute. I am kept more awake by the excitement of the opportunity than the fear of issues in the sector.”