Looking Ahead: 3 Challenges and Growth Opportunities Awaiting the Insurance Industry in 2021

Difficult as it is to choose one adjective for the past year, “tumultuous” may sum it up best. The headwinds have been many: a deadly pandemic, a fractious political climate, social unrest, a depressed economy, raging wildfires and one of the most active hurricane seasons to date.

These events have brought the world to an inflection point. Countless references to the “new normal” hint at the pandemic’s long-term effects on the way we live our lives; a new administration could be the catalyst for sweeping legislative changes around economic, environmental and judicial policies; and mounting losses from severe weather underscore a need to rethink how we treat our environment.

2021, it seems, will be a year of transformation.

For the insurance industry, these changes represent both obstacles and opportunities. Here’s a look at three big challenges set to impact the industry next year, and their potential upsides.

  1. Pandemic-Related Losses and Litigation

The Challenge: Cost Containment

Lloyd’s of London, the leading insurance and reinsurance market, reported $3.1 billion in losses through June 2020 stemming from the COVID-19 pandemic, and expects that figure to land somewhere around $6.4 billion. They expect losses for the industry as a whole to total roughly $107 billion. Global brokerage Willis Towers Watson offered a more optimistic estimate of $80 billion, but even so the financial impact is severe.

The final tally will also depend on the outcome of a wave of lawsuits brought by entities seeking reimbursement for business interruption (BI) losses – perhaps the most hotly contested coverage question. Insurers are winning these court battles in most cases, thanks to virus exclusions that became standard more than 15 years ago. But some policy holders have been able to successfully argue their case that viral contamination constitutes the physical damage needed to trigger BI coverage, setting precedent for hundreds of claims to some.

With new lockdowns in effect or on the horizon as COVID cases spike, BI insurance litigation will continue well into 2021 and beyond. Insurers will also continue to face suits related to general liability, EPL, and D&O claims.

To offset these losses, insurers will likely raise rates and look to introduce pandemic exclusions that limit their exposure to such ‘Black Swan’ events… but they’ll also need to carefully manage litigation expenses.  There will be an increased need for analysis of legal claims to contain costs and optimize outcomes. (This is where LegalNet shines – the legal metrics and analysis provider is a trusted business partner of many Fortune 50 employers, TPAs, and insurance carriers.)

The Opportunity: Alternative Risk Solutions

Despite the financial hardships caused by the pandemic, the crisis has also highlighted the need for new insurance products to fill in the gaps left by traditional policies. Parametric policies offer one option.

Triggered by event characteristics rather than losses, these policies were initially developed to help insureds recover from natural disasters. For example: A magnitude-6 earthquake with an epicenter 20 or miles or less from an insured site triggers a pre-defined payout, regardless of actual damage incurred. That payout can be used for any purpose, not just repair or replacement expenses.

The same concept could be applied to business interruption losses from any cause. For example: A 20% decrease in revenue sustained for a period of 14 days triggers a payout of X dollars. The root cause of the interruption doesn’t matter—the policy is activated as long as the custom, predetermined thresholds are met.

Because thresholds are based on metrics that can be clearly measured and documented, this type of coverage is much more clear-cut, and less likely to result in claim litigation.

According to “Parametric Insurance: 2021 outlook and companies to watch,” a report by InsTech London, “Parametric insurance is starting to offer attractive solutions where conventional insurance has failed,” and is likely to gain steam in the year ahead.

2. Remote Work and Cybersecurity Risks

The Challenge: Security and Productivity

The pandemic response necessitated a rapid shift to remote work. For many organizations, this was the first real test of digital capabilities. Could VPNs withstand the sudden and dramatic increase of users? Were policies and procedures in place governing use of personal devices? Were systems secure enough to be accessed remotely from disparate locations without creating openings for opportunistic hackers?

According to a Deloitte survey, 79% of senior leaders in the financial services industry believe the pandemic revealed shortcomings in their company’s digital capabilities and transformation plans – shortcoming that cyber criminals did not hesitate to exploit. The FBI’s Cyber Division reported an average 4,000 cyberattacks per day since the beginning of the pandemic, a 400% increase from pre-pandemic numbers.

Insurers had to find a way to maintain customer service standards while managing the workforce shift, addressing IT needs, and ensuring the protection of systems and data. In addition to security, productivity was a top concern; working from home introduces more opportunities for distraction, especially for employees with childcare or eldercare responsibilities.

While maintaining work/life balance has become more challenging for many employees, most still appreciate the flexibility that comes with remote work. And studies show that workers actually put in more hours away from the office. So it seems remote work will stick around even after the pandemic subsides.

Going forward, insurers will have to continually re-evaluate and fine-tune their cybersecurity protocols to accommodate the increased exposures that come with a remote workforce.

The Opportunity: Cyber Resilience and Talent Retention

The growing importance of digital capabilities will spur a rise in technology investment, which could fuel the development of more innovative solutions, including the incorporation of analytics and AI.

About 95% of respondents to Deloitte’s financial services survey said plans to speed up their company’s digital transformation were either already underway or high on the priority list. Nearly 67% of respondents were planning to increase cybersecurity spending, including updates to firewall and user verification protections as well as more employee training.

Ultimately, the renewed focus on technology development and cybersecurity can make the insurance industry more modern, quicker to adapt to changing customer needs, and more resilient against the omnipresent threat of cyberattacks.

Secure work-from-home environments also enable insurers to expand talent recruitment efforts and improve retention. When employees can work from anywhere, there are no geographical limits on the pool of potential job candidates. Remote capabilities will be a boon for the industry’s efforts to curb its talent shortage – one of the top risks facing the industry today.  

According to TalentGuard, a talent management research and consulting firm:

  • There are about 400,000 vacancies unfilled by the industry this year
  • The biggest challenge is attracting new talent
  • Millennials remain in their jobs for just 12-18 months on average.

The ability to work from home – securely – can help to attract younger candidates and keep them on payroll longer.

3. New Administration, New Regulations

The Challenge: Keeping up with Regulatory Change

Elections always introduce uncertainty, especially when power shifts from one party to another.

The business-friendly Trump administration prioritized deregulation and relaxed many environmental considerations for manufacturing and energy companies. Most notable was the withdrawal from the Paris climate agreement in 2017,  which had set targets for the reduction of greenhouse gas emissions and average global temperatures by 2050. The Trump administration also cut corporate taxes to a flat 21%.

Both of these efforts are likely to be reversed under the Biden administration. For insurers, the biggest impact will likely come in the form of a bigger tax bill, which will add to financial pressures already created by the pandemic and heighten the need to crack down on cost containment.

In general, the flurry of legislative activity that normally comes with a new administration will require insurers to re-evaluate their compliance risk and make any necessary changes to avoid penalties or legal action.

The Opportunity: Addressing Climate Risk

On the climate front, an anticipated renewed focus from the Biden administration on cutting greenhouse gas emissions and supporting a transition to renewable energy will likely provide long-term benefits to insurers.

Climate risk is a top-line threat to the industry. Increasing frequency and severity of storms, tornadoes, flooding and wildfires are driving steep losses. It was, after all, the severe hurricane season of 2017 that sparked the transition to a hard market.

Beyond mitigating losses, investing in renewable energy just makes good business sense. As technology advances and costs come down, the renewable energy sector will continue to grow even without support from the federal government.

For insurers, shifting investment portfolios toward this sector will yield more financial stability over the long run, and fall in line with corporate sustainability policies, which have increasingly become competitive differentiators. Clients expect their insurer to act as responsible corporate citizens and use their financial strength to support the health and viability of their communities.

Ultimately, efforts by the new administration to mitigate the effects of climate change will help to reduce risk for the industry as a whole and could potentially bolster investments focused on sustainability.

We’ll see how these three challenges unfold over 2021, but we’re crossing our fingers that this period of uncertainty brings about positive change for the industry.

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