Top Risk Factors Facing the Insurance Industry in 2023
The insurance industry faces many pressures including very dynamic regulatory complexities, which presents companies with significant risks that impact financial and operational stability, and conversely, potential opportunities to embrace. This article outlines key strategic priorities and risk factors facing the insurance industry.
Rapidly Evolving Regulatory Compliance Changes
The pace of change in the insurance industry is increasing, which has caused the number of available insurance products in the marketplace to grow, and innovation to escalate to meet market demands. These changes can make it difficult for insurers to keep up with the latest requirements and can increase the cost of compliance. Regulators also increasingly scrutinize new insurance products and services, particularly those offered online or through mobile devices. Changes in regulatory frameworks, new legislation or legal actions can create compliance challenges and increase operational costs. Non-compliance can result in fines, penalties, reputational damage or even loss of license. The increased scrutiny can also make it more difficult for insurers to bring new services and products to market and increase the cost of compliance.
Diverse Regulatory Requirements by Jurisdiction
Since states within the U.S. have different insurance needs, each state has its own rules for licensing, product regulation, market conduct, financial regulation and consumer services. Keeping track of these can be burdensome for insurance companies and agents. For international insurers, regulatory requirements can increase exponentially on a country-by-country basis.
Modern Technologies Disruption and Adoption
Modern technologies, such as artificial intelligence (AI), machine learning and blockchain, are transforming the insurance industry, and the industry must embrace these technologies to remain competitive. The ability to effectively automate tasks at scale will set successful companies apart from their competitors. Rapid advancements in technology can disrupt traditional insurance models. Insurtech companies leveraging AI, big data and blockchain can provide innovative insurance products and services, challenging established insurers. Failure to adapt to modern technologies may result in a loss of market share.
Cybersecurity and Data Security Threats
The insurance industry holds vast amounts of sensitive customer data, making it an attractive target for cybercriminals. Data breaches and cyberattacks can result in financial losses, reputational damage, regulatory penalties and legal liabilities. Cyberattacks are becoming increasingly sophisticated and are a major threat as high-profile cyberattacks have recently hit the industry. The stakes in combatting cyber risks are high because hackers can steal sensitive data, such as customer information and financial records, disrupt operations, impact financial stability and severely negatively impact company reputation.
Climate Change and Sustainability
The effects of climate change, including increased frequency and severity of extreme weather events, can have a substantial impact on the insurance industry. Insurers may face higher claims payouts, increased reinsurance costs and difficulties in assessing and pricing climate-related risks. There are significant regulatory requirements currently in place related to climate change, and these requirements will continue to intensify as regulators continue to focus on climate change. Regulations related to climate change disclosures and climate change management currently exist. Climate change will broadly impact the insurance industry, affecting issues ranging from the calculation of reserves to the premiums that insurance companies will charge their clients.
Economic Instability: Liquidity and Capital Management
With the current rise in interest rates and the associated impact on companies’ investments, regulators will focus more scrutiny on the performance of investments held by insurance companies, and whether company reserve requirements are being met, particularly in the case of investments for which the value is difficult to measure or is not priced on public markets. Regarding how insurance companies invest, offshore reinsurance transactions will also be an area of focus. Furthermore, during periods of economic downturn, insurance companies may experience reduced demand for policies, increased policy cancellations and lower investment returns. Economic instability can also lead to higher levels of unemployment and increased default rates, impacting the insurance industry’s profitability.
Competition From Other Industries
Increased competition from non-traditional players, such as technology companies and financial institutions, which often have different business models and lower costs than traditional insurers, will continue to put pressure on margins for insurance companies.
How Can We Help
At Cherry Bekaert, we have a specialized Risk Advisory team with deep experience in financial services and the insurance industries, with knowledge across property and casualty, life, health, disability and reinsurance, ensuring our clients stay ahead of the regulatory compliance matters.
With increased regulation, we help our clients develop their risk management plan, implement effective audit, enterprise risk and compliance programs, meet and stay ahead of state, federal and international regulatory requirements, assess the most effective controls and technologies to address risk, and facilitate effective relationships with stakeholders, including third-party administrators, to ensure an effective and comprehensive risk management and audit framework.