An annual poll of chief executives highlights key industry trends for the rest of this year and beyond

By Andy Swales

After another year of costly natural catastrophes – headlined by devastating floods in NSW, Queensland and Victoria – it’s little wonder KPMG’s annual insurance industry review puts the need for resilience at its heart.

The consultancy’s report, Resilience in Times of Change, covers Australian primary insurers’ results for 2022 and provides analysis on 10 key industry issues for this year and beyond, drawing on the Insurance CEO Outlook survey of 1325 global chief executives.

“These [top 10] trends permeate through all areas of the insurance value chain, and are expected to be top of mind for insurers as they continue their journey throughout 2023,” says KPMG’s Partner and National Sector Leader for Insurance David Akers.

“Consistent with our 2022 … outlook, CEOs globally believe that technology and ESG [environmental, social, and governance] are among their highest priorities.”

1. Resilience

In top spot, it’s that word again. The growing exposure to natural disasters of Australia’s people, properties, businesses and infrastructure has long occupied insurers, which have pleaded with successive governments to step up mitigation against the effects of climate change and settlement sprawl into areas at high risk from floods, fires, storms and all the rest.

There has been some movement of late, with the Albanese Government’s Disaster Ready Fund soon to announce its first raft of projects under a $200 million-a-year program of disaster prevention programs such as seawalls and firebreaks.

The industry, as ever, wants more done. The National Insurance Brokers Association recently pushed for an expansion of the fund to include cash for mitigation works undertaken by property owners in catastrophe-prone areas.

“Public policy initiatives such as an increase in Commonwealth investment in extreme weather resilience measures; reviewing land use planning arrangements; and amending building codes to include a resilience and future risk standard are among policy recommendations made by the Insurance Council of Australia,” KPMG says.

“Resilience measures are important to keep insurance affordable in Australia. There is a benefit to all Australians if such measures are undertaken and for insurers and governments to work together to build a more resilient Australia.”

2. Reinsurance

“Reinsurance costs have risen much faster and higher than gross written premium has over the same period,” the report says. “Insurers are feeling the cost of this impact on profitability [and] have and will continue to pass these increased … costs on to customers, which will contribute to the anticipated 10% increase in average premiums that we expect for 2023.”

KPMG notes the Federal Government’s cyclone reinsurance pool launched in July last year, but says it’s too early to say how effective it is at improving insurance accessibility and affordability for homes and small businesses in storm-prone areas.

As Insurance News reported late last year, projected savings to customers – while substantial – have fallen with every round of modelling. The Morrison government initially projected savings of up to 46% in home, 34% for SMEs and 58% for strata properties.

After the federal election, the Labor Government released different figures based on analysis by Finity – average savings in the highest-risk areas of 38% for home, 28% for SMEs and 18% for strata. In October, that analysis was updated to 32% for home and 13% for SMEs, with insufficient data to show an equivalent figure for strata.

3. Technology modernisation

KPMG says insurers must examine their “complex technology architecture” – including often inflexible legacy systems that are expensive to upgrade or replace – and decide what is fit for purpose in line with future needs.

“Digital investment continues to be strategically important for insurers to remain relevant and be competitive,” the report says. “Insurers are realising that partnerships are critical to staying resilient and delivering on their digital transformation plans.”

KPMG says there is “enormous business value” in clear data and technology targets, against which business decisions can be assessed to ensure a continual move towards up-to-date systems.

4. Environmental, social, and governance

Under pressure from governments, customers, staff, investors and other stakeholders, businesses are increasingly building environmental, social, and governance (ESG) measures into their strategies.

The insurance industry has a role helping corporations get their houses in order on issues such as climate impact, employee relations and ethical practices, but it too must act.

KPMG notes that with International Financial Reporting Standards s1 (on disclosure of sustainability-related financial information) and s2 (on climate-related disclosures) to be finalised this year, “ESG reporting is moving towards essential rather than optional”.

The former standard will set out requirements to disclose to investors sustainability-related risks and opportunities; the latter will require disclosure of climate-related risks and opportunities.

KPMG says most Australian insurers have set ESG targets and are moving to the more difficult stage of implementing and reporting against them. This puts them ahead of other corporate players in this country, but “behind the pack globally”.

“The ability to integrate ESG into the DNA of an organisation will be a competitive advantage in the future, both to avoid any suggestion of greenwashing and green fraud, but also to attract investors and employees whose ESG expectations continue to increase.”

5. Simplification and cost optimisation

With profits still being squeezed by high reinsurance costs and claims, insurers are urged to “continue to focus on digitisation, simplification, productivity, automation and operating model adjustments across all aspects of the value chain to drive efficiency and cost reductions”.

Automation may be one of the key words there, as the technology behind it continues to develop at pace, with implications for companies and their staff.

For example, in March, Insurance News reported that business insurance service BizCover has harnessed “intelligent automation” from Salesforce to put repetitive tasks on “cruise control”, supporting 200,000 customers with fewer than 20 full-time customer service staff across Australia and New Zealand. The technology’s uses include managing email inquiries from customers, so queries such as resending documents or rescheduling payments can be automatically processed in real time.

6. Changing customer expectations

KPMG notes customers are “increasingly looking for personalised, value-driven digital solutions and they want experiences that allow them to be in control of the process as well as having ongoing visibility of their status”.

It says some insurers have invested in digitised sales, renewal and policy amendment processes that reduce costs and enhance customer experiences. Others have introduced changes on the claims side such as claims tracking apps.

But here it strikes a note of caution.

“As the claims management process is a critical interaction with a customer that can really ‘make or break’ a future customer relationship, a continued focus is warranted to provide more transparency over the claims management cycle,” the report says. “To improve the customer claims experience, companies should begin with the customer and work backwards, taking an outside-in perspective to reverse-engineer and shape what the experience should be.”

7. Cyber

Optus and Medibank: two huge Australian corporations that, for the time being at least, are perhaps more readily associated with cyberattacks and data breaches than the services they provide.

The high-profile hacking of these two megabrands last year led to huge costs, millions of customers’ data being exposed and untold reputational damage.

And they are just the tip of the iceberg: KPMG says the increase in cyberattacks is “exponential”.

Insurers have a job to do protecting corporate clients, but they are just as likely to be targeted themselves.

“In addition to focusing on their cyber defences, insurers are reviewing the data they hold, determining what should be retained, and purging excess data,” the report says. “The recent cyberattacks in Australia have left consumer trust low and organisations exposed to more security risk than ever before on how they prepare for and respond to a breach. Building and protecting that sense of trust requires many parts of the organisation to work together to deliver a consistent unified vision.”

KPMG says cyber cover is offered by only a small number of insurers in Australia, and government action may be needed to provide protection. The Federal Government is currently working on its Australian Cyber Security Strategy, with the goal of making this “the world’s most cyber secure country by 2030”.

8. Data

The report says changes to the way the Australian Prudential Regulation Authority (APRA) collects data from regulated companies – under its latest corporate plan – “create an opportunity to leverage compliance into a larger business transformation, in order to develop an insights-led organisation”.

It says the regulator’s five-year time frame for detailed data collection marks it as more ambitious and aggressive than overseas counterparts, and regulated entities should be “planning for delivery and capability enhancements to ensure the outcomes delivered over the next five years are sustainable and enabled by strategic data and technology architecture”.

9. IFRS 17

Still on the subject of regulation and data, KPMG notes many general insurers – particularly small and medium ones – have “sprinted to the finish line” to comply with the new International Financial Reporting Standard 17 Insurance Contracts, relying more on tactical shifts than strategic ones. It says more investment will be needed to embed strategic solutions. “Ideally insurers should look to use IFRS 17 data as an input to management decisions and embed the new standard in their ways of working. It is now time for insurers to find ways to gain efficiencies and value from IFRS 17 data.”

10. Regulatory and compliance transformation

The industry has faced significant regulatory change in recent years, and KPMG sees no let-up on the horizon. “Unfortunately, regulatory change has not slowed down. If anything, it continues to accelerate, both in the quantum of changes and the reduced implementation time frames, leaving insurers struggling to keep up.”

Among changes being implemented are APRA standards on operational risk management, recovery and exit planning, and remuneration, plus the Australian Securities and Investments Commission’s pricing promises review. The commission announced earlier this year it would step up surveillance of misleading pricing practices after some insurers had to return millions of dollars to consumers over failures to deliver premium savings as promised.

“The expectation [from regulators] is a customer-focused, integrated operation where accountability is clear, material service providers are managed well, promises to customers are monitored, and executive remuneration aligns to prudently managed risks,” KPMG says.

“While regulatory changes have been necessary, the pendulum may have swung too far. It is hoped that some balance will be attained in the future.”