UK Insurers will have to embrace these transformations if they are to overcome the economic challenges, concludes data from S&P Global Ratings.

The rating agency has highlighted the need for UK insurers to reconsider their capital allocation strategy in light of the current economic climate, including high interest rates and the possibility of a recession.

In addition to capital allocation, insurers also need to adapt their product offerings to account for demographic, climate, and technological changes while balancing strategic goals with stakeholder demands and maximising risk-adjusted returns, S&P Global Ratings noted.

“Management teams at UK insurance companies are grappling with competing pressures from various stakeholders,” said Simran Parmar, credit analyst at S&P Global Ratings. “In their attempt to harmonise often diverging demands, we have seen several UK insurers rehaul their business models, for example by divesting operations, rebasing capital strategies, or seeking external and inorganic growth via consolidation,” Parmar added.

UK life insurers will need to secure long-term investment

Maintaining their position in the UK economy will require UK life insurers to secure long-term funding from investors with matching objectives and realign their operating models and investment strategies with new shareholders. They will also need to decide whether to be a large-scale generalist or a specialised fund manager, battle cyclical markets, and build or buy capabilities at significant cost.

S&P Global Ratings highlighted that UK insurers face challenges in maintaining strong balance sheets and managing asset and liability risks amid volatile financial markets, rising funding costs, and demographic trends, with growth and earnings potentially being volatile.

The upcoming Solvency II reforms in the UK could allow for more flexibility in asset allocation and capital release, but insurers’ risk appetites and approach to additional capital release will be important factors in determining their creditworthiness, the rating agency said.

Pension reforms and real estate vulnerability

Furthermore, pension reforms and the dominance of defined contribution pension products present growth opportunities for UK insurers, particularly in the bulk annuities market. While real estate may be vulnerable, equity release mortgages and rental covers could become growth areas, according to the report. 

The evolving wealth management needs of consumers also highlight the need for growth products that come with financial advice and secure income, such as fixed annuities or guaranteed savings.

“UK insurers that successfully make the most of these growth trends and innovate to cater to new demands and risks could further cement their competitive positions and develop sustainable earnings and capital profiles, supporting their creditworthiness,” concluded S&P Global Ratings.

SIX biggest challenges to the insurance space in 2023

Speaking recently about the challenges insurers are facing, Simon Laird, Global Head of Insurance at the international law firm RPC, said: “Climate change, ESG, cyber and the continuing conflict in Ukraine remain centre stage for the insurance industry, creating both new opportunities for insurers and new challenges from a claims and coverage perspective.

“The headwinds that the economy is creating will also prove a significant challenge. Recessions normally mean more claims against professional advisers. For insurers the challenge is establishing which professions will be most exposed this time around.”

Laird went on to clarify a number of critical areas that the insurance industry is facing, and which, the space needs to address over the next few months.

1) More scrutiny required in the digital asset space: In light of the recent events and volatility witnessed in the cryptocurrency market, including the collapse of FTX, insurers are expected to review and potentially amend policy wordings to ensure they are not inadvertently providing coverage for losses arising from insureds’ involvement in cryptocurrencies. This may involve the implementation of virtual currency exclusions, which would prevent policyholders from making claims for losses related to cryptocurrency assets. Currently, only a small number of insurance providers offer coverage for crypto insurance risks, including theft.

Some crypto firms may advertise the fact that they have insurance policies underwritten by well-known insurance brands to safeguard their clients’ cryptocurrency assets and attract new investments. However, there is a risk that investors may misunderstand the scope of the insurance coverage in place. It is crucial for crypto firms to accurately communicate the extent of coverage to avoid potential claims arising from overstatement or misinterpretation of coverage. Otherwise, they may face legal and financial repercussions. It is important for insurers and crypto firms alike to carefully assess and manage the risks associated with insuring cryptocurrency assets and ensure that policy wordings and communications are clear and accurate to mitigate potential disputes or misunderstandings in the future.

2) Cyber wars: Cyber cover continues to be a trending subject in 2023. Lloyds has recently unveiled four new clauses for cyber insurance policies, in collaboration with the Lloyd’s Market Association (LMA). These clauses explicitly exclude coverage for losses resulting from cyber operations launched during times of war, retaliation by specific states, or cyber events that cause significant detrimental impacts to a state’s functioning. The efficacy of these new LMA clauses will be put to the test in 2023 and their impact on the insurance market remains to be seen. In the meantime, insurers and businesses must navigate the delicate balance between insuring against known risks, managing the ever-evolving landscape of cyber threats, and maintaining competitive and manageable premiums.

3) Sustainability: In response to the urgent need to address climate change and the growing significance of environmental, social, and governance (ESG) factors, insurers are proactively refining their business strategies by expanding into the sustainable insurance market. With increasing pressure to adopt renewable energy sources, insurers must adapt their underwriting portfolios to align with this transition. In a groundbreaking move, Marsh launched the world’s first insurance coverage for hydrogen projects in August 2022, signaling innovative approaches to sustainable insurance. As this product gains traction, the insurance market eagerly awaits its impact and the potential for other insurers to follow suit with their own initiatives in this emerging sector. In the meantime, claims teams must remain adaptable to effectively respond to potential new exposures arising from this evolving landscape.

4) Extreme weather events: The increasing frequency of extreme weather events, resulting in substantial losses to global property. In the first half of 2022 alone, these losses amounted to approximately $65 billion. The rise in frequency and severity of climate-related natural disasters has become a concerning trend in recent years. This trend is particularly impactful on the reinsurance sector, with catastrophe and other forms of reinsurance anticipated to continue experiencing significant growth as a result of climate change-related disasters.

5) ESG and the downturn: As corporations and their directors make promises of being socially and environmentally responsible, they will face heightened scrutiny, with allegations of “greenwashing” gaining more attention. The social aspect of ESG is gaining momentum, with companies now mandated to disclose data on the representation of women and ethnic minorities on their boards and in executive management. Depending on how companies respond to these requirements, there could be an increase in litigation related to disclosure. As economic downturns lead to a rise in company insolvencies, directors and officers may face an uptick in claims brought against them, especially with the availability of litigation funding. It is critical for companies to manage such challenges with transparency and authenticity in order to uphold their ESG commitments and protect their directors and officers from potential litigation risks.

6) Claims in the construction industry: The construction sector insurers in 2023 are facing the highest risks from factors such as company insolvencies, rising interest rates, supply chain pressures, and labor demand. Delays or cessation of construction projects due to these challenges pose significant risks to insurers operating in this industry.