The insurance industry, like any other, faces both risks and opportunities as each year begins. But as 2023 solidifies into reality, some clear risks emerge, and each brings its own challenges. The insurance industry is evolving, and as companies work to embrace diversity, equality, and inclusion and become more environmentally responsible, other issues overtake them. Here are some of the top risks for the insurance industry in 2023.
A Potential Global Recession
Perhaps the greatest risk to any business this year is the potential for a global recession. Insurance companies can profit during a recession, but it is more difficult. Individuals and businesses cut costs and tightening their spending on insurance coverage is a common way to save.
At the same time, costs for insurance companies can rise as well, narrowing profit margins in key areas. To mitigate this risk, the time for evaluating the coming economy, setting cost goals, and making changes is now. These can include improving margins through automation and risk management information systems (RMIS), decreasing the costs of certain tasks, but also providing companies with better data that enables companies to cut costs by calculating and allocating them better using a couple of steps.
- Make clear allocations to business units.
- Automate your allocations.
By doing this you will improve risk management across your business.
The Increase in Nominal Interest Rates
Insurance rates globally are higher than they have ever been, and while some life insurance companies can leverage this for short-term gains, in the long run, this increases borrowing costs and decreases long-term profit margins.
Higher interest rates also make both businesses and individuals more cautious about purchasing high-ticket items, thus decreasing their insurance needs, at least in the short term.
For life insurers who can often take advantage of high interest rates, this can be a good thing, but on the property and casualty side, it creates risk instead. This risk needs to be accounted for in gauging potential exposure.
Inflation and the Impact on Replacement and Other Costs
While increased interest rates can be good news for life insurance agencies, inflation is not. Costs as a share of revenue have increased by 23% since 2003 compared to much lower rates for the P & C insurers. Those costs will only climb with inflation and increasing premiums can result in additional customer recidivism during difficult economic times.
Even when it comes to property and casualty, increases in replacement costs when there is a claim quickly decrease what are often already narrow profit margins. Inflation brings additional risk to all aspects of the insurance industry and is largely not something a business can control.
Increasing Risks in Cybersecurity
There are two major risks in the cybersecurity area for insurers. First, due to the data that insurers collect, they are ripe targets for bad actors and hackers. From the risk of ransomware that holds data hostage to actual data breaches where personally identifying information (PII) is stolen, insurance companies are open to tremendous amounts of liability.
However, the second risk is the companies that insurers work with and insure. When insuring potential damages from a cyberattack, it is important for insurers to outline clearly what they do and do not cover. This is illustrated by the recent settlement related to the Target hack that occurred in 2013, in which they sued their insurance company for not adequately paying out on their policy. Nearly a decade later, the issues have yet to be fully settled, and the response by both targe and their partners is often used as a case study.
RMIS software can help companies with incident management, which often has features that enable companies to better analyze the data related to those incidents, enabling them to decrease exposure and compartmentalize structured data for better security going forward.
Labor Shortages
Finally, one of the greatest risks to the insurance industry is the increasing labor shortage. It has become more and more difficult to find employees with the right skills to fill open positions. Since insurance often requires specific education and certification, this deficit is further complicated.
While improving technology is an opportunity, and many tasks can be automated using risk management software and other technology, this automation will likely not happen fast enough to fill many vacancies. Insurers must look to new sources for talent, provide incentives and benefits to retain current employees, and reskill their current workforce.
Managing Risk in 2023
The insurance industry faces several significant risks in 2023, and while some are unique, others are those the industry has faced before. Companies need to be proactive and engaged in risk management in every area, from economic risks like rising interest rates and the recession to increasing cyber security threats and struggles with labor shortages.
A big part of that is engaging with the right partners. This includes cooperation with Federal agencies around new regulations and mandates for collaboration in the private sector. Using technology to transform how insurance information and risk are managed will go a long way to making sure the next year is the most secure and successful one yet.
Ready to improve your risk management data and improve your company's risk management overall? Check out Ventiv Risk Management Information Systems or schedule a demo today.
