5 areas analysts predict will challenge the insurance industry in 2023

After two years of surviving – and in some cases thriving – during the height of the pandemic, insurers may be in for some rough times ahead. In fact, according to a predictive analysis from Forrester, insurance leaders in 2023 will navigate turbulence not seen since the 2008 financial crisis, especially in five key areas.

The headwinds are strong, the report said, as coverage will shrink or disappear as consumers and small businesses face cash flow pressures. Tech teams will be confronted with trimmed budgets and increased regulator attention on the artificial intelligence platforms they’ve come to rely on. More insurers will launch value-added services to shore up revenues while reducing claims. A likely recession will dissolve the IPO market and many insurtechs will exit through “wind downs, roll-ups, or carrier acquisition.”

“The business of insurance is about expecting the unexpected, but 2022 took everyone by surprise.” Forrester report

“The business of insurance is about expecting the unexpected, but 2022 took everyone by surprise,” the Forrester report said. “Russia’s invasion of Ukraine and the impact on energy prices, extreme drought in food-producing regions around the world, and red-hot wages are creating a return to 1970s-style stagflation that will ultimately hit consumer decisions about insurance.”

Forrester, a national research and advisory company based in Cambridge, Mass., focused on five areas in which it predicted will raise challenges for the industry in the coming year.

• Policy lapses will rise by 20% as customer tighten purse strings. Inflation and big weather-related losses are impacting carriers’ loss rations thanks to more costly materials, litigation, and labor. Insurers will likely pass these costs on to customers who will likely be rate shopping, downsizing coverage, cashing out life insurance and even letting policies lapse.
• At least half of the top 10 insurers will roll out fee-based, value-added services. To offset declines in premiums and policies in force, more insurers will introduce new non-insurance services.
• IT spend will rise by a modest 2% year-on-year – half of what tech teams had planned. Reducing costs will be one of the top insurance business priorities into mid-2023.
• Digital teams will accelerate 75% of STP projects as regulators turn up the heat on AI. Insurers have aggressive goals when it comes to using AI. But the means to achieving the ambitious goals of 70% to 75% hands-free claims and underwriting are coming under fire. In 2023, the EU and the US will put a low flame under consumer data protection regulations, instead turning up the heat on explainable AI and the potential for bias from the humans that train AI models.
• A quarter of insurtechs will exit the market, either as wind downs or acquisitions. The pandemic accelerated insurance’s digital transformation, much of which depended on insurtech partnerships. This drove insurtech investment to an all-time high of $20.4 billion in 2021, according to VentureScanner. That funding is now drying up on the back of high inflation, looming recession, and more discriminating investors choosing to invest in profitable firms.

At the same time Forrester was issuing its report, another analysis of the P&C industry seemed to confirm some of the findings. The Insurance Information Institute said the decline in underwriting results last year, driven by Hurricane Ian and significant deterioration in personal auto line, made it the worst year for the P&C industry since 2011.

Underwriting losses expected

“Underwriting losses are expected for the commercial multiperil line, for which the 2022 net combined ratio is forecast to worsen to 107.6%, 1.4 percentage points higher than 2021, according to Jason B. Kurtz, principal and consulting actuary at consulting and actuarial firm Milliman Inc. Premium growth of 14.5% is forecast in 2022, following 17.4% growth in 2021, he said.

The 2022 combined ratio for commercial auto lines is forecast to be 104.7%, nearly 6 percentage points worse than 2021, according to Dave Moore, president of Moore Actuarial Consulting LLC. “We are forecasting underwriting losses for 2023 through 2024 due to inflation, both social inflation and economic inflation, loss pressure and prior-year adverse loss development,” he said. “Premium growth is expected to remain elevated due to hard market conditions.”

Overall property/casualty industry underwriting premium growth is forecast to increase 8.8% in 2022 and 8.9% in 2023, primarily due to hard-market conditions, according to Dale Porfilio, chief insurance officer of the institute.

Loss pressures and a hard market are expected to continue due to inflation, supply chain disruptions, and geopolitical risk, the institute said in a statement.

“Rising interest rates will have a chilling impact on underlying growth across P&C lines, from residential to commercial property and auto,” Michel Léonard, chief economist and data scientist for the institute, said in the statement. “2023 is gearing up to be yet another year of historical volatility. Stubbornly high inflation, the threat of a recession, and increases in unemployment top our list of economic risks.”

Looking at the workers compensation line, Kurtz noted that underwriting profits continue, although margins are expected to shrink through 2024.

“The workers compensation line continues to stand alone, with its multiyear run of strong underwriting profitability forecast to continue for 2022 and into 2023-2024,” he said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].