How insurers can profit amid inflation

By Anton Tomic

Inflation and the higher interest rates driven by central banks’ attempts to tame it are causing trouble among insurers. Particularly in property/casualty and health insurance, claims cost inflation is outstripping general inflation – which is itself high. That’s leaving policies written just months ago languishing in the red. Auto insurers, facing high prices for new and used cars and skyrocketing repair costs, are having as hard a time as anyone now. But they’re far from alone.

However, there is no shortage of ideas as to how insurers can dig out of this predicament, with McKinsey, Allianz, and the Geneva Association among those sharing some good ones.

McKinsey suggests leveraging digital workflows, data and analytics to transform underwriting capabilities. They urge “creating maximum insight into product profitability, developing rate indications frequently and with the most granularity possible to enable quick action.” The consultancy advocates maintaining “visibility into data indicators that provide early warning.” They also suggest  cataloging “all available pricing and rate levers to seize opportunities and to identify and triage existing sources of leakage.” Speed to market is of the essence, McKinsey adds: “Delays of just a few months can cost millions of dollars in lost revenue.”

Allianz notes the importance of using technology to help automate processes and streamline operations, reducing costs and increasing efficiency. The Geneva Association adds that investment in online marketing, claims automation, digital self-service, and sales and policy binding can counter wage inflation while improving customer service and customer targeting.

Holistic purview

Of course, inflation can also open up opportunities for those with the capabilities of exploiting it. One example is that inflation can leave policyholders underinsured as replacement costs outstrip coverage caps. Insurers with the ability to present tailored – and profitable – alternatives can boost sales while better matching pricing with claims risk.

Insurance is already a technology-heavy business. The above illustrates how harnessing IT will be essential in managing through today’s inflationary environment – and whatever monetary environment follows. Here are some thoughts on the way forward.

Just as inflation affects a business holistically, it’s important to think holistically in addressing it. That means considering inflation’s impacts on profitability and performance as well as from the perspective of expense management. Insurers don’t enjoy a manufacturer’s comparatively straightforward cost of goods sold calculations. Rather, they must determine the often-fuzzy allocations of administration, IT and actuarial costs based not only by line of business and product segment (life, health, P/C and so on) but also all the way down to individual products and policies.

To this end, allocation engines capable of expense-line-item and policy-level detail can reveal where an insurer is making and losing money. That can help improve the pricing, cost structure, underwriting precision, and other possible problem areas associated with unprofitable or underperforming products. Agent management is another critical function within the insurance industry. As prices rise due to inflation, agents may experience a lower sales volume and, consequently, lower commissions. Those same insights can also guide strategic decisions for insurers to channel more resources to brighter prospects. Ideally, you end up with a single source for profit and performance insight that synchronizes with existing business-intelligence frameworks.

These solutions, which run on data from ERP and third-party systems, can be accessed by teams across the organization so they can make better – and faster – decisions to maximize performance and profitability while minimizing costs. Automating agent lifecycle management helps navigate agent-commission challenges and streamline agent-management processes – including onboarding, compliance, relationship management, book-of-business management, communication, and analytics. All that helps improve agent experience and stickiness.

Simulation and modeling are part of this story, and they play an especially important role in helping insurers manage the impacts of inflation. What was profitable yesterday may not be tomorrow. Given the breadth and staggering volumes of data involved, machine learning and stochastic financial analysis play central roles in such modeling. These tools can take wide ranges of revenue and cost assumptions for myriad product mixes to help guide portfolio composition on down to the pricing of individual policies.

Sustainability matters

Finally, solutions that help insurers thrive amid inflation can help them satisfy environmental, social and governance requirements in ways that align insurance operations and financial goals with sustainability targets. Doing ESG right means proving to internal stakeholders, regulators, ratings agencies, and shareholders that you’re meeting your sustainability goals. Foremost here is tracking not only an insurer’s own emissions, but also those of the companies that they invest in. As are solutions capable of profiting despite inflation, this is a big-data play.

Fortunately, insurers can typically get there without having to implement an entirely new data warehouse. Instead, it’s often a matter of adding a semantic layer on the existing data infrastructure and then reporting based on the needs of the various interested parties.

While better portfolio returns from higher interest rates can somewhat offset the pain of higher claim costs, inflation is an insurer’s enemy. By harnessing detailed insights into revenue, cost and ESG impacts, insurers can help safeguard their own profitability and prove their sustainability in today’s uncertain environment. Their business exists because of uncertainty, after all, and they should excel at managing it.

Anton Tomic is SAPs global head of insurance business solutions. He may be contacted at [email protected].

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