As insurers look toward 2021, their priorities and concerns are shaped by the unusual events of 2020.
- Kate Smith
- December 2020
The year 2020 will go down as one of the most tumultuous and challenging years insurers have faced.
A pandemic killed more than a million people and infected roughly 40 million. Global economic contractions exceeded the Great Recession. The Atlantic hurricane season included more storms than alphabet letters. Cyberattacks multiplied. Civil unrest continued to rise. Lockdowns created legal battles over insurance coverage. And, at one point, legislators proposed retroactive business interruption coverage that posed an existential threat to the insurance industry.
It was a tough year.
“COVID is the first real global insurance stress test that we have had,” said Alban de Mailly Nesle, group chief risk and investments officer at Axa and a member of its management committee.
But while the COVID-19 pandemic created an unprecedented level of health, economic and social pressures, it also has led to what the World Economic Forum calls “the great reset.” It forced the world, and insurance companies, to stop and reevaluate.
“Major events, whether a pandemic, recession or 9/11, give pause for thought and a review of your goals and broader mission,” Paul Mallen, CEO and president of Amalgamated Life, said.
As the calendar gets set to turn, Best's Review asked industry leaders and observers what issues and concerns are top of mind as they enter 2021—and how they were shaped by 2020.
Here's what companies are thinking about.
COVID is the first real global insurance stress test that we have had.
Alban de Mailly Nesle
Diversifying Amidst Globalization
When Axa released its Future Risks Report in October, the top three issues cited by the general public and risk professionals who were surveyed, were: pandemics, climate change and cybersecurity. Axa could not agree more.
“What is important, talking about an insurer's point of view, is the interconnection or the globalization of those risks,” de Mailly Nesle said. “When you think about those three—be it health with the pandemic, climate and cyber—the common characteristic is that they're global. I would add a fourth one: the current state of the economy. And that also is a global state.
“When you think of the insurance business model, which is about mutualization and diversification, having those risks at a global level and therefore preventing part of the diversification is something we need to think about.”
Axa started this year, and will continue next year, to clarify policy coverages, diversify its model and partner with governments on solutions for perils that insurers alone cannot handle.
“It's important for both customers and insurers to have clarity on whether insurance grants protection, or if it's the state, or if it's no one,” de Mailly Nesle said. “You would have seen the same sort of questions if you had a cyber crisis or a cyber pandemic, as we had with NotPetya [malware] a few years ago.”
He also noted that risk appetites for cyber are changing after the explosion of attacks during lockdown. Between February and March of this year, phishing emails increased by more than 600%, Axa said in its Future Risks Report.
“I attended the virtual Monte Carlo meeting,” de Mailly Nesle said. “Risk appetite on cyber from everyone—insurers and reinsurers—is not high enough.
“That's a part of our commercial lines strategy that needs to be well-understood by our customers. It's going to be challenging to provide large amounts of cyber insurance capacity going forward. As these risks are global, we need a public/private partnership to provide solutions.”
We’re seeing capital going into new reinsurance vehicles, particularly in offshore jurisdictions.
Clyde & Co.
Hardening rates across lines of business have drawn investor interest into the insurance market.
“You see a flow of capital coming in,” said Vikram Sidhu, a partner at Clyde & Co. and leader of the international law firm's insurance transactional and regulatory practice in the United States. “It's made a lot of investors, especially investors who were already in insurance in one way or another, consider putting more money into the insurance business, including to potentially make acquisitions.”
After a steady flow of mergers and acquisitions in the first half of 2020—most of those negotiated in 2019—a drop in deal activity was expected through this month. But Clyde & Co. says the stage is set for (re)insurance transactions to make a comeback in 2021.
“I believed in the spring after the pandemic began spreading across the world, based on discussions and my sense of marketplace, that deal-makers would sit on the sidelines for quite a long time,” Sidhu said. “But looking ahead to 2021, I think I was too pessimistic, and we're going to see quite a bit of robustness in opportunistic entry into the insurance space. Investors will put their money in.”
Six months ago, Sidhu would have dismissed the idea of a new Bermuda class of reinsurers. But now?
“We're seeing capital going into new reinsurance vehicles, particularly in offshore jurisdictions,” he said. “There's a lot of activity happening; it's quite impressive.”
The coming year also could see an uptick in books of business being sold, as insurers reevaluate their portfolios.
“Insurers are trying to be strategic about distilling down their businesses so they make sense,” Sidhu said. “The current upheaval, brought about by the pandemic and the ups and downs of the financial market, has led folks to step back and try to rationalize their businesses. It's a natural cycle. When times are going really well, then there's no sense of urgency to cut out pieces of the business that don't make sense for the overall company or insurance group.
“There are areas to make money and do well in. So they'll be pulling back from areas that do not make strategic sense for them and redeploying the capital to lines that make more sense or fit better with their strategic business.”
The conversations we’re having are emblematic of the general theme that insurers are looking at new areas to grow into.
Finding New Revenue Streams
Strains on profitability are nothing new for insurers, who are accustomed to interest rates, market conditions and natural catastrophes putting pressure on results. But the pandemic added another layer of profitability concerns.
“I don't think the search for profitability in itself is new, but the conditions have made people consider things that may have been thought of as out-of-the-box ideas or revenue streams that they wouldn't have prioritized or thought much about before,” said Kassie Bryan, head of P&C solutions, Americas, for Swiss Re.
Bryan's team helps clients open up new revenue streams. Those discussions, she said, have accelerated during 2020. The challenges of this year have insurers widening their views.
“The conversations we're having are emblematic of the general theme that insurers are looking at new areas to grow into,” Bryan said.
U.S. flood is a prime example.
“It wasn't so long ago that flood was viewed as an uninsurable risk,” Bryan said. “Thanks to technology improvements in areas like mapping and modeling, we can now underwrite the peril with more confidence than before. And because five of six houses have no flood insurance, there's a tremendous opportunity. Now we see more private insurers have an interest in writing flood insurance or entering U.S. flood.
“We've done dozens of deals in the market to access this largely untapped risk pool. The market is still in its infancy, but we're seeing increased traction and interest in growth.”
Alternative sources of distribution also are on the radar. Insurers are looking to partner with non-insurance companies that “see insurance as a valuable complementary product offering to their core service or product,” Bryan said.
Swiss Re partnered with IKEA this year, developing a home insurance product called Hemsaker, which is sold on IKEA's website.
“It fits in nicely with the concept of increased interest in digitization or increased interest from consumers to buy products where it's convenient for them,” Bryan said. “And through partnerships, the insurance company gets access to new customers.”
When you have fewer players running the show, the products may be similar, but they have to position themselves differently.
Building Trust and Brands
Many insurers took a hit to their reputation this year over business interruption insurance. And it wasn't just policyholders who were unhappy with how the industry responded to BI claims.
“Most brokers are quite negative about how it's been handled by carriers, especially in the midcommercial market,” said Ben Bolton, CEO of Gracechurch Consulting, which focuses on the London market. “There's been a loss of trust from brokers, and it must be even worse with the end customer.”
Insurers have some rebuilding to do in 2021.
“Small and medium enterprises may not want to buy BI,” Bolton said. “They may conclude they don't trust insurance products. The upside is the brokers, because they have to sell the product, will put pressure on carriers to become more customer-focused.”
But it's not just brokers and customers whom insurers need to please. Bolton predicts stiff competition for staffing once COVID settles down.
“A lot of people have stayed where they are for now. But they're going to start to ask: Have they had a good experience with their employer?” Bolton said. “At a micro level, people have thought about where they want to work and what they want to do. As this change happens, there will be a battle for talent. And the employer brand will become important.”
Consolidation is leading to a more distilled group of competitors and bigger brands, Bolton said, noting Aon's acquisition of Willis Towers Watson.
“When you have fewer players running the show, the products may be similar, but they have to position themselves differently,” Bolton said. “Things like purpose and what they stand for will come through quite strongly. That's inevitable.”
Workplace culture, diversity and inclusion are important pieces of that. And while they've been addressed previously, there is a new sense of urgency.
“I think a lot of those things were lip service—'Let's do a survey of culture!'—but not action,” Bolton said. “A lot more people are now saying, 'We have to act.'
“Investors will demand it. Talent will demand it.”
Among the possible changes that will impact our business will be potential changes in health insurance and the continued economic impacts of COVID-19.
Amalgamated Life has always tried to adjust and move quickly. This past year highlighted the importance of being able to do so.
“That has to be one of the takeaways: You have to be able to be agile,” Mallen said. “We are becoming much more agile in our operations, adapting to new working models, leveraging technologies to achieve operational efficiencies and provide a better customer experience.”
Agility is a core skill for leaders, particularly in today's climate of uncertainty. The factors that have made 2020 tumultuous, after all, will not disappear at the stroke of midnight on Jan. 1. As insurers reflect on this year and plan for the next, their concerns may very well be the same.
“One [of my concerns] is the impact that the coronavirus will have on our operations and sales results, as well as the outcome of the presidential election and what that might bring in the short term and long term,” Mallen said. “Among the possible changes that will impact our business will be potential changes in health insurance and the continued economic impacts of COVID-19.
“Leadership requires agile decision-making and the ability to pivot when disruptions or the unexpected occurs.”
Though the events of 2020 didn't alter Amalgamated Life's strategy for 2021, they did heighten the company's focus on a key area—voluntary benefits.
“COVID-19 brought the value proposition of voluntary benefits front and center, for both employers and employees, and further confirmed our goal to continue expanding our worksite/voluntary offerings in addition to evaluating new distribution models.”
The role of the CEO has changed.” The CEO is now the “chief calibrator,” responsible for figuring out how to change, and how quickly.
Leading in a New Era
Kurt Strovink, senior partner at McKinsey, has heard all of the above in his conversations with insurance leaders. They're thinking about strategic growth, new products, innovative distribution methods, diversity and inclusion, sustainability. But those at the top of the ladder—the CEOs—are also rethinking leadership.
“The role of the CEO has changed,” Strovink said. “It's subtle but important.”
The chief executive is now the “chief calibrator,” responsible for figuring out how to change, and how quickly, he said.
The pandemic has left CEOs well-positioned for this. Having been grounded from travel for months, they have gotten closer to the front line. And that's given them a clearer view of the chessboard.
“There's been more skip level interactions,” Strovink said. “It's put a lot more knowledge directly in the hands of some of the senior-most people. That leads to faster decision-making, faster resource allocation. A lot of people realized their processes are cumbersome, and they've sped them up. A lot of those things will get institutionalized for 2021.”
The experience of shifting to a fully virtual environment in 2020—and the confidence gained from doing so successfully—also will have an important impact.
“They've been very excited by how they were able to migrate to this all-virtual format,” Strovink said. “They've been proud of it. That learned experience is a big deal in terms of further innovation.”
Insurance CEOs also are looking in the rearview mirror far less often, and instead are looking to other sectors.
“We see evidence that CEOs are learning from other industries at a much greater rate,” Strovink said. “They're interested in spending time with other CEOs in other industries. We estimate that's increasing by two to three times.
“It's almost as if CEOs are less interested in what the last CEO would say about this; they're more interested in hearing from other people who are facing this crisis in adjacent spaces. They want to learn from people who are on the field now.”