General insurers’ profitability set to be challenged in 2020

The coming year is set to be another challenging one for UK general insurers’ profitability.

Low interest rates and Brexit will continue to impact firms’ bottom line and UK insurers, according to professional services firm EY.

Commenting on the newly released EY Insurance Outlook 2020 report Rodney Bonnard, UK insurance leader at EY, said: “To ensure they remain competitive in the year ahead, insurers must focus on meaningful digital transformation, operational resiliency, particularly around data protection, and finding the talent which will propel the sector forward. All of this at the same time as adhering to increasing regulatory demands.”

EY’s research shows that insurers across the board agree that finding the right talent is vital to maximising returns on investments in technology, driving digital transformation and creating new, innovative business models. But currently the industry is struggling to attract the right skills to drive this activity and change.

“Insurers need to reposition themselves as technology-first firms, and better articulate why insurance is a dynamic sector that tech professionals should consider,” said Bonnard. “Attracting and retaining the right talent as well as reskilling the existing workforce will be a crucial element to success in 2020.”

General insurers are currently navigating considerable regulatory demands, including IFRS 17 and the FCA pricing review, which will have a big effect on firms’ bottom line.

“They will also be exploring the opportunities vs the threats of sustainability and climate change, which will be an increasing priority into next year,” said Bonnard. “On the one hand, it’s extremely difficult to manage the aggregate risk in the portfolio, and a major climate event could have a devastating impact on individual insurers. On the other hand, the industry is uniquely positioned to help families, businesses and communities protect themselves and to capture considerable premiums for providing those protections.

“Insurers will need to be able to accurately model and price the risk associated with climate change into their businesses if they are to turn the potential upside into actual value.”

With profitability hanging in the balance, Bonnard said that insurers need to be focused on achieving sustainable growth over the next year, but this cannot come at the cost of progress.

“Firms needs to make investing in technology a priority,” he said. “Technology can improve processes, enhance customer experiences and engagement, and will be a turning point for data analytics in risk pricing.”

Data privacy will be another key focus for the year to come. Privacy is a core concern for both consumers and regulators, and in light of the General Data Protection Regulation (GDPR), higher standards around data usage are likely to continue to come down the line. “For general insurers, however, this rich data is hugely valuable and will help them improve risk pricing if they get it right,” said Bonnard. “Firms will have to work very hard over the coming months to build customer trust and ensure that breaches are prevented.”

The low interest rate environment is likely to continue, which means 2020 is set to be tough with margins being squeezed. UK insurers will need to reduce their dependence on investment income for profitability and simplify their business models where possible.

“They will also need to maintain a strong focus on cost efficiency, and selectively invest in digital transformation and talent reskilling to enable innovative new ways of working, better customer experiences, all to unlock sustainable growth,” said Bonnard.

“The General Election result will bring a welcome degree of certainty to insurers’ planning, although we are still far from the finish line and many questions remain as the work to negotiate the future UK/EU relationship begins. Without question, though, there will be additional costs relating to Brexit which firms will need to absorb.”

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