Whilst there is optimism in the sector, most see the prospects for the overall economy as tentative at best, with only 15% of insurance CEOs believing that it will improve over the next twelve months. Nearly a quarter expect the economy to decline, though this is a much less pessimistic outlook than last year, when nearly half anticipated worse times ahead. Recession in the US and falling growth in China are now seen as more likely and damaging scenarios than a break-up of the Eurozone, though the prospects for growth in Western Europe are still seen as limited compared to other regions.
Jonathan Howe, UK insurance leader said: “The insurance industry is facing significant challenges and opportunities. Trajectories of growth in different parts of the world are diverging; customers are demanding more transparent and accessible products; technology is revolutionising risk analysis and customer profiling; and, the speed of change is putting existing business models at risk.
“The insurers that come out on top will focus keenly on the customer and have a superior capacity for innovation and reinvention. They’ll be able to anticipate change and how it affects them, as well as be nimble enough to quickly capitalise on emerging opportunities.”
Existing insurance business models are at risk…
While many insurance CEOs have fixed their sights on the immediate challenges of low interest rates, slowing demand in mature markets and the resulting pressure on share values, they can’t afford to ignore the following transformational changes on the horizon:
– Diverging trajectories of growth in different parts of the world;
– Customer demand for more transparent and accessible products;
– A technological revolution in risk analysis and customer profiling;
– Rapid change that is putting existing business models at risk; and
– A heightened threat of new entrants picking off profitable business.
As a result, existing business models are at risk. The insurers that adapt effectively will focus keenly on the customer and have a superior capacity for innovation and reinvention. They’ll also be able to anticipate – not just react to – change, and be nimble enough to quickly capitalize on emerging opportunities. Businesses that fail to respond could find themselves priced out of the market, falling short of customer expectations, and under threat from aggressive new entrants.
Jobs and the search for talent
Insurance CEOs see the availability of talent as the biggest threat to their growth prospects although it is surprising that less than 30% see filling talent gaps as a key investment priority.
Competition over pay is still strong, with nearly three-quarters of industry leaders believing that they need to match the rewards their peer organisations offer to retain top talent. However, sustaining this compensation model will be difficult as returns continue to come under pressure and tax demands in many markets increase (nearly 60% are concerned about the increasing tax burden).
More than 80% of insurance CEOs believe that risk should be factored into performance evaluation and pay, while a third has changed the way they set executive pay in response to shareholder and public pressure. The challenge for insurers is how to create a coherent compensation framework that can attract and retain talent, while reflecting risk considerations and leaving sufficient funds to meet investor expectations.
Rebuilding public trust
55% of insurance CEOs are concerned about lack of trust in the industry, a higher proportion than banks (54%) and asset managers (44%). Ongoing success is likely to require a cultural shift as insurers seek to rebuild public trust. Over 60% of survey respondents are looking at how to strengthen their culture of ethical behaviour. This includes defining the right behaviours, as well as reinforcing mechanisms such as changes in hiring practices, organisational design, development programs, performance management, and rewards.
