Why insurers must monitor investment trends to stay profitable
Key investment classes like ESG, as well as regulation, and tech are the main areas that insurers need to watch not to get left behind in, says a new KPMG report.
Insurance Investor Editorposted on Thursday, August 04, 2022
Commercial insurance’s profitability could be under serious pressure in coming years, says a new KPMG report, which would gravely affect their assets and investments.
In the “Future of large commercial insurance” report, KPMG records responses from over 400 representatives from commercial insurance organisations across the globe. The aim of the report they said was “to better understand trends and their impacts on the future of the sector.”
"Focus on harnessing the technologies, adapting to the changing economic and social landscape, and effectively reducing the “tower of legacy” on which current products rely.”
The findings of the report said that the industry will have to change rapidly to cope with the evolving landscape, which could affect all areas of its balance sheet. The fields that needed the most adaptation included: client and broker expectations; economic uncertainty preparedness; regulatory and legal deglobalisation; technology evolution and environmental, social and governance (ESG) activism.
One of the report's main takeaways was the risk to established names by global players - especially those that can’t navigate emerging trends. “These are established players — often large international insurers covering multiple countries, business lines and segments,” said KPMG and added that they can be less adaptable to change with long duration investments and lack of action on responding to new trends. KPMG recommends they “focus on harnessing the technologies, adapting to the changing economic and social landscape, and effectively reducing the “tower of legacy” on which current products rely.”
This could be key for insurance asset managers and investors to take heed of as the market changes, especially around sustainability and what areas are more profitable and growing. This area is growing, and one with many resources with frameworks such as new regulatory best practice guides being launched to help investors understand areas such as ESG legislation, which could help mitigate hits to returns.
“The businesses that power ahead are expected to be those that prioritise and focus their investments and execute at pace.”
According to broker Aon, a forecast in 2021 found that ESG-based assets could exceed US$53 trillion by 2025, representing more than a third of total assets under management, so there is an onus for insurers to make sure it’s a focus for future profitability.
“The businesses that power ahead are expected to be those that prioritise and focus their investments and execute at pace,” said KPMG. “Connecting their back and front offices across functions and geographies. Simply refreshing current platforms will likely not be enough to keep up with client expectations and the digital experiences being delivered by other sectors.”
“Managing regulatory complexity is not easy for commercial insurers that often deal with multinational clients and risks. It will require them to establish trust with multiple regulators and create a culture where employees are rewarded for doing the right thing.”
Other key areas that could be a massive change for insurers was tech evolution. “Technologies are permeating throughout the industry,” said KPMG. They said that Cloud-driven technologies, artificial intelligence (AI), and machine learning were assisting in creating faster processes. “To help ensure they are maximising their technology investments, we anticipate insurers will need to put digital and data capabilities at the core of their operating models to drive decisions.”
A third critical area was regulation, which many insurers already see as their main concern and for investors can be a complicated picture. “Getting ahead will require a more holistic view of the changing regulatory landscape,” says KPMG. “Managing regulatory complexity is not easy for commercial insurers that often deal with multinational clients and risks. It will require them to establish trust with multiple regulators, understand and anticipate future changes in regulators’ priority areas, embed values into their decision making and create a culture where employees are rewarded for doing the right thing.”