Understanding the Past to Improve the Future: Five Trends That Affected Every Insurer in 2022
January 24, 2023
Let’s face it: 2022 was a challenging year as insurers continued to react to lingering disruptions from the COVID-19 pandemic as well as new trends and unprecedented market conditions such as record inflation and high energy costs.
The next year or two may present similar uncertainties, especially the threat of a potential recession and higher cost-of-living rates that may make consumers especially price-conscious. To help insurers plan for the rest of the year, we thought we’d take a look back at 2022 to highlight five of the biggest trends insurers faced, and how they could continue to impact the entire industry in the future.
1. Global Inflation
2022 year saw record inflation for many countries around the world. The United States experienced a 7.1% year-over-year inflation rate, its highest since 1982. Other countries struggled with even higher inflation. For example, Argentina experienced annual inflation rates near 100% for 2022 and economists are predicting annual inflation to be 90.5% in 2023.
Such high inflation has been extremely challenging for insurers since it has an adverse effect on their combined ratios. Many U.S.-based auto insurers saw their combined ratios climb over 100% for the first time in years, while Progressive’s direct loss ratio for U.S. homeowners was 236% in the third quarter of 2022, which was mostly due to losses from Hurricane Ian. Inflation also threatens insurers’ overall profitability as well as their ability to win and retain key customers.
In light of inflation, insurers now face higher prices for virtually all goods and services, which includes things like new vehicles, replacement parts, materials, labor costs, and service fees.
Increasing rates and prices may seem to be a logical way to offset these inflation loss pressures. Yet many consumers may now balk at paying higher prices as their cost of living rates continue to rise, especially higher costs related to energy, food, and homes.
2. Supply Chain Disruptions
While the supply chain delays initially began in 2020 with the COVID-19 pandemic, just about every business had to deal with them in 2022.
On one hand, these continued disruptions have contributed to high inflation (as noted above) as well as delivery delays that directly influence insurers’ experiences with their customers–both of which threaten profitability and customer retention.
Yet on the other hand, supply chain disruptions may also present new opportunities for innovative insurance carriers who can offer specialized insurance to help their customers minimize the risk of supply chain issues. Such new territory can be complicated, especially when it comes to identifying potential risk, but advanced modeling capabilities that use AI and ML can help insurers make the best decisions possible.
3. Increased Competition
The entire insurance industry was once perceived as being too big, too complex, and even too cost-prohibitive for new firms looking to enter the market and establish a competitive foothold. Yet today, a growing number of competitors are springing up–ranging from small, aggressive start-ups to larger, more traditional companies with a new offering or approach–and threatening to disrupt the entire market.
These new market entrants now see new opportunities to use new technologies and innovations to give consumers what they’ve been looking for: faster offers, more competitive pricing, and seamless, personalized experiences. Consumers are already familiar with this type of service and are increasingly demanding it from the companies they do business with. Insurance carriers have to pivot to provide this level of service–or risk losing business to new competitors who can.
4. New Technology
This market trend goes hand-in-hand with the one above. In 2022, many insurers realized that they need to focus on new innovations and capabilities through the use of better-performing and newer technologies. This includes comprehensive solutions that improve internal efficiencies, such as automation and reporting, as well as powerful new pricing software, rating, and underwriting solutions that help insurers accelerate their time to market, intelligently assess risk and win more business. Examples of these technologies include data modeling, advanced analytics, AI and ML workloads, and personalization.
Many, if not most, insurers realize more modern technology will be their key to their success. This was a theme we heard over and over again in our 2022 Industry Trends Report on modernizing operations in insurance. While most insurers know they need to transform their business, many are still slow to start and may be at risk of falling a step behind.
Instead, they still rely on too many manual processes, paper-based systems, legacy systems, or disparate technology that simply can’t provide the internal efficiencies and digital experiences consumers crave.
5. Extreme Weather Events
Extreme weather events are becoming much more frequent and more severe. Between 1980 and 2021, the United States suffered from an average of seven to eight natural disasters each year. Looking back, there were more than 15 severe storms in the first 10 months of 2022.
These climate incidents are also becoming extremely expensive. The cumulative costs of natural disasters in the last five years have added up to $788 billion. According to research from McKinsey, the total value–the total costs related to weather and natural disasters around the globe– is estimated to double from two percent of the global GDP today to more than four percent of global GDP in 2050.
One thing is clear: changing weather conditions could disrupt the entire insurance industry and could even potentially put some companies out of business. We’re already seeing the case where insurance carriers are already raising premiums and deductibles, refusing to renew policies, or denying coverage completely in the example of some policies not covering “named storms.” An example of why intelligent underwriting capabilities are of paramount importance.
It’s an extremely complex, evolving situation but insurance companies can’t afford to underestimate the true threat of extreme weather events. Future insurance solutions will have to evolve beyond traditional risk transfer and reshape existing business models.
In many cases, these trends presented new challenges and wrinkles that insurers had to react to. Yet in some, they also represent new opportunities for innovative insurance carriers looking to take the right step now to plan for more success in 2023.
Earnix can help any insurance carrier respond to changing marketing conditions to gain a competitive advantage. Our solutions empower new strategies and an evolving ecosystem of technologies to transform business processes–and business results. Learn how Earnix customers are using our insurance rating engine, pricing, modeling and underwriting solutions to seize new market opportunities.