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Shoring Up the Bottom Line: Why Insurers Prioritize Profitability Over Growth

Earnix Team

December 13, 2023

  • Pricing
  • Transformation

As insurers continue to face lingering economic conditions and challenging markets, they are devising new strategies in response.

Focusing on Insurance Profitability

One interesting shift is an increased focus on insurance profitability instead of growth. Research findings from our 2023 Industry Trends Report: Insurance Operations in a Changing Industry research report found 48% of insurance companies report that they are now focusing on profitability over growth. Only 13% said that they were continuing to prioritize growth strategies.

This strategy makes sense for many different reasons. The first, and most obvious, is related to global inflation and the higher replacement costs insurers now face for goods and materials, labor, and services. Higher, even unpredictable costs now make it difficult for insurers to price their offers to generate profitable returns. According to McKinsey & Company, as a result of COVID-19 market conditions, overall insurance profits fell by 15% in 2020.

What Affects Profitability?

Understanding, modeling, and pricing risk is now much more difficult, and any missteps can have devastating effects on insurers’ profitability. Growing risk from climate change have caused insurance companies to increase premiums or pull out of markets entirely. Yet failures to price premiums effectively in the face of this risk and the growing number of climate-fueled storms are also increasing insurers’ costs.

At the same time, many insurance companies still rely on inefficient internal processes that hinder productivity and contribute to higher structural costs. For example, when it comes to rating and pricing systems, so many carriers still use manual efforts, outdated legacy technology, and disparate, siloed systems.

Such an approach wastes valuable time and effort, but more importantly, it prevents the company from achieving its full potential in all areas of the business – sales and marketing, product development, operations, and more. All of this represents an opportunity to improve operational efficiency and productivity that can strengthen the bottom line. (More on this later.)

Overall demand plays a role, too. In challenging economic times like these, overall demand may drop off. Consumers may balk at “extra” policies such as a RV, motorcycle, or sports car, or they may even choose to opt out of important optional coverage such as flood insurance. As demand slows, growth will have to come from price increases as opposed to the volume of policies sold – a new dynamic that many insurers don’t have an answer for.

Additionally, more aggressive competitors, including a growing number of InsurTechs, are increasing pricing pressures using price comparison websites and other digital tactics that make it even more challenging to grow revenues. Instead of fighting for new market share, many insurance carriers may choose to use this time to focus on maximizing their returns from their existing customer base. 

The Role Technology Can Play

Technology can help increase insurance profitability in uncertain times like these and beyond.

Where disparate, siloed legacy technology and slow operations are ill-equipped for the data-driven personalized experiences customers now expect, modern, agile solutions integrate with existing systems and infuse automation and industry-leading analytics into every aspect of your pricing process. For example, today’s intelligent, flexible pricing and rating systems can overcome costly and time-consuming processes – key to improving productivity – and reduce their reliance on inefficient, monolithic legacy systems.

Technology also translates to real business results. Insurers can determine the right price for risk, get data-driven product offers to market much faster than ever before, and model their pricing strategies against business objectives. All of this helps them maximize profitability for every line of business.

In an industry known for its notoriously slow adoption of technology, the decision to implement new tech is clearly aligned with profitability. In our Insurance Operations in a Changing Industry report, 35% of executives reported that pursuing innovation was important to hitting their profitability targets – the top answer cited.

Investments in technology and data analytics can help insurance companies streamline operations, enhance risk assessment, and improve overall efficiency. By leveraging technology, insurers may find opportunities to enhance profitability without necessarily expanding their market share.

 

To help insurance executives understand new changes in the insurance industry, Earnix engaged 
the Market Strategy Group, LLC to conduct a comprehensive independent research survey. Our report, “2023 Industry Trends Report: Insurance Operations in a Changing Industry” summarizes key findings to show how other insurers are thinking about and reacting to so much change.

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Earnix Team