The future of insurance: The state of play

Belgian insurers generated €30 billion in premium income in 2021. Will this level of activity be maintained?

Around the world and across industries, companies are being forced to look at how they operate in a different light. Amid rising competition, increasing technological disruption, and a host of unfamiliar developments—most notably the Covid-19 pandemic—they are finding they have little choice but to rethink the way they do business. Here in Belgium, many insurers are starting to come to a similar conclusion.

It’s no secret that conditions in the Belgian insurance market are changing rapidly, mirroring what has occurred in other financial industries, both locally and elsewhere. Companies that once viewed the business as a “walk in the park” are no longer as sanguine as they were. Although there are many reasons why the operating environment for insurers is growing more challenging, below are five of the external drivers we believe are largely responsible:

Evolving client expectations

The needs of the overall population are evolving, and so are the needs of clients. Spoiled for choice and used to being accommodated, they want things faster, clearer, smarter, and easier. As a result, insurance companies must adapt their offerings to retain, in particular, the trust of younger individuals, who seek products that are tailored to their needs, provide good value for money, and marketed in terms that are both accessible and understandable. Hein Lannoy, CEO of Assuralia, has said that the industry clearly needs to place more emphasis on the use of plain and understandable language, which is undoubtably a factor behind the organization’s "Clear Language” initiative.

New, more agile competitors

Insurtechs and other upstart firms have rolled out an array of new “insurance as a service” and “embedded Insurance” products. These are either targeted directly at end clients or serve as the ticket to partnerships with existing actors that can enhance their credibility and bolster synergies—think of Qover’s international success or online broker Yago’s growing prominence in the Belgian market. Companies that fail to pay heed to this development will likely soon find themselves suffering at the hands of hungry competitors. Needless to say, we do not even dare think about the GAFA threat (Google, Apple, Facebook and Amazon) which could be devastating for the insurance industry.

Low-interest rates

As with the banking sector, continuing low-interest rates are impacting short-term profitability and overall financial results. But that is not all. This historically anomalous situation also increases long-run uncertainty for insurers that must maintain life contracts that offer guaranteed interest rates over decades. Under the circumstances, the need for smart product development, as well as astute pricing and decisions regarding associated underlying investments, are essential. For insurers, making the right trade-off between profitable and sustainable investments is becoming an increasingly important consideration.

Rising regulatory burden

Insurers are faced with heightened regulatory pressure on a number of fronts: Mifid, KYC, and AML regulations in underwriting and contract management services, Cloud and GDPR requirements that have an outsized impact on IT and compliance departments, and of course, evolving Solvency II framework and IFRS standards and constantly increasing reporting requirements, all of which weigh on financial departments. Then there are climate-risk considerations and the recent Sustainable Finance Disclosure Regulation (SFDR). While the cost-benefit balance of these varying and often overlapping frameworks can be questioned in regard to the overall value chain and differences among firms, having to contend with these regulatory frameworks remains unavoidable.

Growth in M&A activity

In Belgium and elsewhere, industry consolidation and corporate transactions involving a variety of players are becoming more of a factor—think of recent acquisitions such as Baloise-Athora-Fidea, Athora-NN and Monument-Integrale—leading many insurers to reconsider their strategy or reassess business models. This development also adds another layer of complexity to the work of finance & risk managers, especially when evaluating and accounting for integration projects that last for years and that are not always properly completed.

But not all of the changes impacting the Belgian insurance sector reflect exogenous developments. At least some could be considered self-inflicted challenges. Below are a few of the more familiar internal drivers that are undermining the resiliency and stability of many firms in the industry:

Legacy IT infrastructure

The information technology framework in most of the incumbent Belgian insurers remains something of a maze owing to the combination of a multiplicity of customized product offerings, the dozens of M&A deals that have been completed in recent decades, rationalization projects that have proved unsuccessful, and occasionally inadequate IT architecture strategies. The suboptimal IT landscape has impaired decision-making data quality and engendered a proliferation of chaotic, inefficient, and more often than not, processes that are not adequately documented—or even documented at all. On top of this, the relevant internal and industry knowledge is concentrated in the hands of a few “champions,” making for difficult handovers.

Operational complexity

At most Belgian insurers, even routine activities are not “lean”—generally speaking, they remain needlessly complex, costly to implement and manage, and require significant resource capacity. Based on what I witnessed more recently, I can confirm that despite the pressing need to make certain operational adjustments during the Covid-19 pandemic, it was still necessary for some employees to go to the office to process paper files that could not otherwise be dealt with owing to a lack of digitalization or interfaces between systems.

Talent attraction and retention

With resource capacity a key limitation, the importance of hiring and retaining high quality talent speaks for itself. However, insurance companies face difficulties attracting young, talented professionals who often view the industry as being among the least exciting career options in the financial world. Keeping talented individuals on board is especially challenging at a time when many up-and-comers want mobility and flexibility, more consideration, and a purpose for what they do. Finally, providing employees with a new and efficient, post-pandemic way of working is another issue that insurers must now address.

Risk management

In one industry after another, managing risk in a changing world has garnered increasing attention, and the insurance sector is certainly not an exception. That said, when we speak about risk, we are not referring to those aspects pertaining to the core insurance business but rather to internal threats stemming from fraud, operational failures and inadequacies, and ineffective internal controls. Moving from physical to digital does not necessarily reduce risks, but often simply transforms them, requiring a holistic and continuous review of the risk management approach.

Given these various challenges, few would argue that insurance companies can continue with the “walk in the park” mindset that prevailed during the industry’s golden ages. For Belgian insurers, the clock is ticking, and smart adaptation and choices are essential.

Certainly, many have already launched ambitious programs aimed at fundamental transformation, which are set to run for several more years and whose results will need to be carefully measured as they reach fruition. But for those who are lagging behind, the pressure is that much greater. Now, more than ever, it is time for change.

What does this transformation need to look like? Stay tuned for our next series of articles on the future of the insurance sector.