How insurers can prepare to win in a high-volatility market

To navigate these cost pressures and instill nimbleness into the business, insurance leaders must embed flexibility and scalability in the operating model. Ensuring access to talent is the first priority. The combination of higher labor costs and a shortage of key skills demands new talent strategies, as well as a rethink of the value proposition for employees. Creating operational flexibility will help manage these challenges, including cross-skilling to support load sharing across products, geographies, and business units. Increased insurance digitization is also critical.

Creative sourcing arrangements and strong third-party relationships:

Insurers need talent everywhere – from underwriting professionals and distribution teams who can provide an empathetic experience for customers feeling financial stress, to data scientists focused on new risk models and product development. Recognizing the intense competition for and rising cost of talent, more insurers are looking to access in-demand skills via partnerships and collaborations with InsurTechs and other third parties. Third-party sourcing options can help insurers find critical, in-demand skill sets (e.g., data science, experience design) that are increasingly costly to hire and develop in-house.

Managed services partners can also take on non-core transactional processes (e.g., regulatory reporting, payroll) where efficiency is at a premium. They can typically offer economies of scale via low-cost locations. When well-designed service level agreements are in place, insurers can realize performance gains even as they establish leaner and more predictable cost structures. Business process outsourcing can help insurers avoid the cost of setting up new operations or upgrading core systems, a critical consideration given the high cost of capital.

The strategic benefits of working with reliable third-party providers should not be overlooked. The right partnerships allow insurers to focus their time and resources on the highest-value and most differentiating parts of the business, such as underwriting and claims.

Humans at the center:

For all the disruptions caused by advancing technology and proliferating data, human talent is at the core of market leadership in insurance today. That’s why insurers should look to put humans at the center of their transformation agendas. EY research conducted in collaboration with the University of Oxford shows that organizations that proactively help their people manage through large-scale change programs are 2.6 times more likely to achieve success.

Fundamentally, firms that achieve the most with their people ensure that those people understand the organizational purpose and their own roles within it. Relative to change programs, people must comprehend the reasons for change, feel inspired by the vision, and be trained and equipped to advance transformation goals.

Our research also confirms that human emotions meaningfully influence transformation outcomes. In a time of volatility, key workers need to feel supported and empowered, as well as a sense of psychological safety, if they are to be fully engaged in helping the business thrive. Of course, since volatility is omnipresent in the market today, insurers should aim to support the workforce at all times and as part of standard operations.

Digitizing to unleash the power of people:

Another way for insurers to unleash the power of their people is through more extensive digitization. That may seem counterintuitive given the dark predictions of AI-enabled bots taking over huge numbers of jobs; but more automation means people can focus on higher-value and more rewarding work.

Advanced tools for data ingestion can pay big dividends by automating processes from the very first point of contact with customers and brokers. Rather than having to rekey risk, submission, or “slip”, information into multiple systems or manually search for data, underwriting staff can focus on assessing risks. Industry estimates from Glassdoor suggest that only 8% of full-time employees in insurance have digital roles.

More extensive data integration equates to common records across systems, which ultimately leads to accelerated analysis and more responsiveness in customer interactions. Further, it can help insurers manage through the complexity of volatile markets; for instance, automated tools can scan all policies to understand relevant exposures relative to newly sanctioned countries or organizations.

Building on a foundation of digitization, insurers can modify governance models and streamline decision-making processes to match the needs of the high-volatility environment. To achieve operational agility in line with the overall risk appetite, insurers need nimble governance models in addition to high-quality data that everyone trusts. That means delegating authority and assigning decision-making responsibility to people and teams at the right level of the organization, with clear guardrails and highly accessible data. To put it directly, senior leaders and boards should not – and cannot – be bottlenecks at a time when decisions need to be made more quickly and confidently. Of course, digitization is not just about optimizing back-office functions and internal processes; it also holds the key to external innovation.

As with so much else in the insurance industry, the greatest growth and innovation opportunities are closely and intrinsically linked to the greatest threats and most complex risks. Fundamentally, when individual businesses and society face increased volatility, the need for insurance increases. Today, however, insurers deal with a broader variety of risks and wider fluctuations in their exposures.

Consider the risk exposures faced by commercial shipping firms as their assets move through different geographies; within a single journey, a ship may face severe storms, piracy, collateral damage from war zones, or potential customs delays from trade tensions. Innovative insurers are already using smart contracts and data streams from IoT sensors to adjust premiums in real time, based on factors such as location and weather conditions. Insurers that successfully develop such sophisticated and tailored products that account for dynamic shifts in coverage needs will gain significant premium pricing power due to their ability to add more value and increase clients’ peace of mind. At a minimum, they can gain confidence that premiums and coverages are directly aligned to the actual nature of the risk.

Expanding the value proposition:

Proactive services that help customers more clearly understand their risk exposure and take tangible steps to mitigate their risks can also spark growth. Corporate customers also want insights and services that identify and reduce risk proactively, including exposures to high-impact events (e.g., pandemics, cyber breaches, climate events). EY analysis (pdf) has found that more than 50% of current revenue will be generated from advisory and loss prevention services among global brokers by 2030.

Indeed, with volatility, the value of insurance becomes more about preventing losses than about paying claims once losses occur, a fundamental evolution away from traditional modes of risk transfer. Working with ecosystem partners, insurers could also build packaged solutions that feature ancillary services, such as risk engineering, benchmarking, legal services, data and analytics services and industry-specific offerings.

Again, the predictability of certain types of events gives insurers more options to add value and expand their offerings. They can promote resilient architecture in regions at risk of earthquakes, building on the industry’s considerable evidence that such building codes work. Consider how insurers are partnering with customers to invest in smart building technology, such as warehouses outfitted with sensors to track changes in temperature, moisture levels or other conditions. Such parametric triggers will also increase the pace by which claims are paid, which is a priority for many commercial insurance customers.

The severity of climate change seems more real every day, thanks to a steady drumbeat of bad news. Storms, floods and wildfires of almost unimaginable severity have become routine occurrences. The increased frequency and severity of natural catastrophes (NatCat) combined with surging inflation have created a huge protection gap. The gap will only increase because many insurers have already announced that they will reduce their NatCat exposures due to the volatility and likelihood of rising claims costs.

During the last five years, uninsured losses have exceeded the hundreds of billions of claims paid out by insurers. Of the six years with the highest catastrophic losses since 2000, four have occurred since 2017. With more people concentrated in high-risk areas, these NatCat losses will continue to grow. It’s an understatement to say the situation is unsustainable. But it also offers opportunity for proactive and innovative engagement with clients.

Covering the intangible:

Devising tailored coverage for intangible assets, which now comprise the majority of value on company balance sheets, is another huge opportunity. Today, there exists a large coverage gap for these assets, which include patents, trademarks and other intellectual property, brands, partner networks and supply chain relationships. Based on EY analysis (pdf) and market experience, we estimate that less than 20% of corporate information assets are insured.

Insurer collaborations with captives could take many forms. For instance, (re)insurers and brokers can help the largest multinational corporations more effectively manage their own volatility by providing specific risk assessment services, supporting their captives’ capabilities and offering access to flexible pools in (re)insurance markets.

The biggest opportunity for insurers to engage lies in advanced risk assessment. Specifically, they can help multinationals analyze their unique risk profiles more precisely and across a wider range of scenarios. They may also devise strategies that manage sudden risk fluctuations, such as business disruption threats from natural disasters. Insurers that develop such creative solutions may give captives a reason to transfer risk onto the market.

As risk prevention becomes more important, captives are being used by a growing number of corporate owners to enhance their risk management capabilities. And as those parents get involved in more ecosystems and joint venture partnerships, they may need targeted support in areas where incumbent insurers and brokers excel.

There is no simple checklist of activities that will guide (re)insurers, or any other type of business, through times of high volatility. However, there are innate attributes and principles that can help companies succeed. Looking internally, senior leaders should focus on:

• Building flexibility into the business through third-party sourcing arrangements and ecosystem relationships
• Creating personal resilience within the workforce and articulating a clear purpose to engage and rally the organization
• Digitizing processes and applying analytics to create operational robustness and agility

From an external point of view, insurers should emphasize:

• Enriching the value proposition with tailored and proactive risk prevention services
• Developing new types of coverage, such as those to protect intangible assets
• Finding new ways to engage with captives and captive owners (e.g., providing specialty capabilities and services)