General insurance
Carving opportunities out of change and challenges
Following sustained market and economic pressures, including high inflation, ongoing cost-of-living pressures, mounting catastrophe losses and continued geopolitical turmoil, the outlook for the General Insurance (GI) sector across the EU and the UK remains challenging. Although most firms are weathering the storm well - often due to higher yields on investments offsetting higher claims inflation - they now face the difficult task of staying on course in 2024. At the same time, several ongoing regulatory initiatives will require GI firms’ close attention, such as the Solvency UK (SUK) reforms1. From a conduct point of view, GI firms need to focus on embedding the Consumer Duty (‘the Duty’) and responding to intense regulatory scrutiny on their delivery of good customer outcomes.
GI firms will continue to face significant pressures in 2024, but our view is that the economic and regulatory environment could also present certain opportunities for firms. To succeed, GI firms must:
- innovate to meet their customers’ changing needs;
- maintain robust underwriting discipline with effective feedback loops across all three lines of defence and relevant functions (i.e., pricing, reserving, risks, and the Board); and
- assess how to benefit from the potential advantages brought about by changing regulation.
SUK presents one such opportunity. The UK Government has signalled a full de-coupling from the EU and is in the process of implementing its new prudential regime aimed at making the UK insurance market more attractive. Although the SUK-driven capital release will be smaller for GI firms than for life insurers, some of the reforms could, in aggregate, allow GI firms to free up some resources. For example, by the end of this year, GI firms will be able to take advantage of a more streamlined internal model (IM) approach as well as a reduction in the reporting burden.
The new streamlined IM process reduces the number of tests and standards for new IM applications and introduces more flexibility for the Prudential Regulation Authority (PRA) to grant permission for a model subject to residual limitations. This is likely to reduce upfront costs for GI firms to use an IM and would result in a more tailored and risk sensitive capital requirement.
Although the SUK-driven capital release will be smaller for GI firms than for life insurers, some of the reforms could, in aggregate, allow GI firms to free up some resources.
Applying for an IM or partial IM could be particularly attractive for GI firms that have started to underwrite specialty products that require a more nuanced and risk-sensitive approach, or those that are highly diversified and could benefit from better use of diversification models. GI firms should also consider other external factors including the fact that IMs are now better understood and third-party model validation more widely available than before.
Some of the SUK reforms could affect the make-up of the sector by introducing a new insurance mobilisation regime and removing third-country branch (TCB) capital requirements. This could reduce the operational burden for groups seeking to establish and maintain a commercial lines TCB in the UK. Groups with a UK subsidiary should explore ways in which they, too, can benefit from the TCB reforms. For example, groups that currently operate in the UK through a subsidiary should re-visit the benefits of operating through a branch instead of, or alongside, their subsidiary. Potential benefits of a branch structure include no localisation of assets or branch capital requirements as well as less onerous governance and reporting requirements and compliance with a single regulatory capital regime (that of the home country). Potential costs include the need to open the home insurer to the PRA’s potentially intense supervisory scrutiny and limits on the volume of Financial Services Compensation Scheme (FSCS)-covered liabilities that can be written by a branch (£500m), subject to PRA approval2.
In an increasingly competitive environment firms will need to consider the best ways of winning new business and retaining customers while ensuring compliance with the Duty. Personal lines insurers have been on the receiving end of supervisory scrutiny around product governance and value for several years – we expect no let-up under the Duty. Low-value (to the customer) products such as Guaranteed Asset Protection (GAP) and legal expenses insurance, as well as other add-on products, will become a significant test case for the Duty’s effectiveness following years of warnings and little tangible action by firms. Insurers should assess to what extent their business models and profitability rely on these products, and the potential impact of reducing such reliance over time. Some insurers may need to consider rebalancing their portfolios and/or review their pricing strategies. This exercise could be made even more challenging by the changing needs of customers in a difficult economic environment, where the number of policyholders in financial difficulty could continue to increase. Moreover, we expect scrutiny around GI pricing practices to continue through the Financial Conduct Authority’s (FCA) evaluation of GI pricing rules implementation to run in 2024.
The new rules on Multi-Occupancy Building Insurance3 (MOBI) that came into effect at the end of 2023 also illustrate the increasing regulatory expectations on consumer protection. Firms underwriting MOBI products will be well acquainted with the need to ensure good outcomes for policy stakeholders but firms that underwrite other types of group policies will need to ensure they identify policy stakeholders in their books and put in place the right controls and processes. In the year ahead, firms should expect continued FCA scrutiny in this area.
Overall, delivering good outcomes for customers while retaining the best risks and staying competitive in the process will require significant ingenuity, including being on the forefront of product innovation to meet the changing customer needs and regulations.
Ingenuity and better decision making are some of the objectives of a different regulatory initiative that GI insurers will need to respond to in 2024. The PRA and FCA will publish their final rules on Diversity and Inclusion (D&I) later this year. If the regulators stick to their original proposals, most insurers will be required to develop, maintain, and publicly disclose their D&I strategies, set targets against key demographics and report data across a range of metrics on an annual basis. We expect this to be particularly challenging to the wholesale insurance market, given the FCA recently mentioned that it has a long way to go to develop an inclusive culture4. Wholesale GI firms need to identify the root causes of their lack of progress and deal with any residual obstacles, not only because of regulatory pressure but also to meet the expectations of a range of stakeholders. The new proposals will require significant disclosures and firms might find themselves in a difficult position explaining why their D&I metrics look worse than their peers. Moving the dial on D&I takes time, so the earlier firms start acting on the root causes of this challenge, the easier it will be to get on the right track.
Moving the dial on D&I takes time, so the earlier firms start acting on the root causes of this challenge, the easier it will be to get on the right track.
Environmental, Social, and Governance (ESG) issues continue to dominate both the prudential and conduct regulatory agendas across EMEA. GI firms have a lot more work to do in this area – particularly when it comes to embedding climate risk into their risk management frameworks. Although GI firms have been proactive in terms of climate stress testing and scenario analysis, particularly for physical and transition risk, one area where they fall short is around integrating scenario analysis into their overall strategies. In 2024, we expect this to become increasingly important, especially as the impact of climate risk on GI products and customers becomes more tangible. Firms should ensure the Board gets the appropriate Management Information (MI) to inform strategy and pricing, including results of climate stress and scenario analysis, and how this compares to risk appetite.
More broadly, both commercial and retail GI firms are exposed to all types of climate risk through their insurance products. As catastrophes become more severe and frequent, and the risks associated with the green transition (e.g. through restricting insurance coverage to certain high-emitting industries) materialise over time, GI firms are at a crossroads in terms of how to deal with the changing nature of the underlying risk in their products. Commercial insurers also face the growing threat of increasing climate-related litigation through their liability products (especially Directors’ and Officers’ insurance). GI firms that innovate and adapt products in line with the changing demands of customers and the environment, while maintaining a robust underwriting discipline, will be at a clear advantage going forward. This is why supervisors continue to advocate ‘impact underwriting’5 as a way for insurers to work innovatively with policyholders to reduce the level of risk.
In conclusion, GI firms face several challenges, brought about by a continuation of the difficult economic environment, changing regulation and evolving risks such as climate change on the horizon. In 2024, GI firms need to navigate these challenges safely while also making the most of potential opportunities along the way.
In detail
Read more about capital and risk management, implementing the Consumer Duty, other conduct considerations for GI firms, climate- & environmental-related financial risk and disclosures, artificial intelligence and data and operational resilience.
- PRA, Review of Solvency II: Adapting to the UK insurance market, June 2023, available at https://www.bankofengland.co.uk/prudential-regulation/publication/2023/june/review-of-solvency-ii-adapting-to-the-uk-insurance-market
- PRA, The PRA’s approach to the authorisation and supervision of insurance branches, October 2023, available at https://www.bankofengland.co.uk/prudential-regulation/publication/2023/october/approach-to-the-authorisation-and-supervision-of-insurance-branches
- FCA, Multi-occupancy building insurance: Feedback to CP23/8 and final rules, September 2023, available at https://www.fca.org.uk/publication/policy/ps23-14.pdf
- FCA, Insurance Market Priorities 2023-2025 – Wholesale sector, September 2023, available at https://www.fca.org.uk/publication/correspondence/wholesale-insurance-market-priorities-2023.pdf
- EIOPA, Impact underwriting: EIOPA reports on insurers’ use of climate-related adaptation measures in non-life underwriting practices, February 2023, available at https://www.eiopa.europa.eu/impact-underwriting-eiopa-reports-insurers-use-climate-related-adaptation-measures-non-life-2023-02-06_en