Insurance in 2023: 5 key themes to look out for
December 16, 2022 Paul De'Ath
2022 has been a busy year for UK insurers. The General Insurance Pricing Practices (GIPP) rules came into force for Motor and Home insurers in January, one of the largest changes to regulation in a generation. The market turbulence in terms of new business volumes and pricing has been significant. Inflation, in part caused by the war in Ukraine has also caused major headaches for many in the industry. As we come to the end of the first post-COVID (hopefully) years we take a look at five key themes that will impact the UK insurance market over 2023.
1. Regulatory reform: It isn’t over yet
The GIPP rules came in at the start of 2022 and immediately pushed up new business prices in both Home and Motor, as expected. What was less expected was the impact on new business volumes. We estimate that new business (switching) volumes reduced by around 20% at the start of 2022. While the market conditions may have been a factor, we believe that the main driver of the decline was the increased competitiveness of renewal prices. The anniversary of GIPP implementation in 2023 will be another interesting test for the market. Customers who had a renewal price cut in 2022 (as they had been overpaying) will likely see an increase in 2023 due to inflationary rises (more on inflation later). This could help new business volumes move back towards their previous levels but much will depend on the ability to get better deals when shopping around.
2023 will also be a big year for regulation as Consumer Duty comes into force in July across all consumer facing financial services (not just Home and Motor). Personal lines insurance is in decent shape when it comes to Consumer Duty however there is still work to be done even at the most “ready” firms. There could be some lasting changes: for example, the use of tiered products could come under scrutiny. If products are differentiated and aimed at different segments of the market, they should be fine – but if the main reason for tiering is to secure higher value sales, insurers could be challenged whether they are “acting in good faith” towards customers. Communication with customers will also be more important, and we could see greater use of advisers for parts of the market where the duty of care should be higher (e.g., vulnerable customers). Finally, the Duty reinforces the requirement to allow customers to cancel their policy without undue friction. The days of cumbersome phone-in processes could be behind us, meaning business and operating models will need to adapt too. For more information see our article on Consumer Duty.
2. Distribution: There is a new kid on the block
UK personal lines distribution has been dominated by price comparison websites for a long time giving insurers almost no option but to participate. Aviva, for example, moved its flagship brand onto PCWs in early 2021, after previously holding on to its direct only status. In 2022 Amazon entered the insurance distribution space with the Amazon Insurance Store. It says it will be a “like-for-like” comparison experience with a “streamlined” question set and “integrated” check-out experience. This is a considered move that leverages the company’s considerable and growing sources of competitive advantage. This should worry the industry, and regular readers of our commentary will know that we do not say that lightly
In 2023 we will see how this develops. Will Amazon move into more business lines (currently only Home building and contents)? How many new insurance partners will come on board? How much of the market can Amazon take given its reach into customers homes? Others have tried to enter this market and failed (most notably Google) but Amazon has the opportunity to change the game. Insurers need to think carefully about what Amazon’s entry into the market means and what they should do about it – our team can help with that.
3. Inflation: Can prices offset the impact of claims inflation?
2022 has seen a significant spike in inflation that is set to continue into 2023, though some commentators believe we may already be past the peak. Insurers are most impacted by inflation through increased claims costs. As general inflation drives wage inflation this will also have an impact on staff costs. Inflation is not uniform in nature. We note that the November spike in inflation has been driven by energy and food costs. While energy prices have a knock-on impact all industries, the large uplift in the cost of milk and cheese are unlikely to directly increase the cost of motor repairs. Motor claims inflation has been accelerated this year due to supply chain issues alongside the general increased cost of parts and labour, though this is starting to level off as supply chains open up more.
Despite this, inflation is not fundamentally bad for the industry. If insurers can manage the impact of inflation through higher premiums, they can maintain profitability. The difficulty is that premiums written now need to consider the level of claims inflation over the coming 12 months or more, so sharp increases in inflation as we have seen this year are impossible to fully price in and will impact profitability in the short term. Therefore we would expect premium rates to continue to increase for some time yet as the market adjusts to higher expected claim levels.
While claims inflation can be mitigated by increasing premiums, the question remains over the ability of customers to pay. Within the personal lines space, motor insurance has relative protection due to its compulsory nature. Though the need to increase prices is less marked than in Motor, Home, Pet and Travel insurance, we could see dips in demand as the cost-of-living increases and customers cut spending on ‘non-essentials’.
4. New entrants: Is this an opportunity for big tech?
Lemonade’s entry into the UK market has been talked about for some time – as the fourth largest insurance market in the world (source: Swiss Re) it makes sense. The regulatory double impact of both GIPP and Consumer Duty in 2022/2023 should provide Lemonade with scope to do well and perhaps this is the reason that the company launched its Home contents proposition in the UK in 2022. Having no back book to worry about and a consumer-focused brand will benefit the new proposition when compared to some of the incumbents. Partnering with Aviva will also help to assuage any fears customers might have about taking out their insurance with a relatively unknown brand – we have to remember that those outside of the insurance bubble may not be aware of Lemonade’s US marketing spend.
With both Lemonade and Amazon entering the UK insurance market in 2022, albeit in different ways, will we see an influx of other tech-focussed entrants into the market in 2023? UK insurance is fiercely competitive and it is an easy place to lose money if you get things wrong, so why bother? The level of digital adoption in distribution will be attractive to insurtechs and large consumer brands, couple that with a potentially favourable regulatory environment and it might give them a sufficient tailwind to take on some of the incumbents.
5. ESG: New products focused on the ‘E’
As we mentioned last year, ESG has become an increasing part of the culture for insurers over 2022 and we would expect this to continue into 2023. We have already seen product development in the space with the launch of Aviva Zero a carbon offsetting motor insurance policy where Aviva calculates the required offset based on miles driven. With Vitality’s motor policy also pitching discounts for ‘car free days’ it feels like the industry is focused on the ‘E’ from ESG in terms of product design at the moment. This could develop further in 2023 with Home insurance policies aimed at customers with better insulated or smart-monitored homes to help reduce the carbon footprint of customers, not just the companies themselves. The question is whether there will be sufficient customer demand for environmentally friendly products if the price is higher than other options, particularly as money is tight for many people.
While the initial focus has been on the E of ESG, we expect 2023 to see some developments on the other aspects as well, particularly on the Social side of things. Consumer duty and the cost-of-living crisis could see insurers looking to ensure that the more vulnerable members of society are looked after better with targeted products and services. Staff welfare and wellbeing will also be a hot topic and a potential differentiator in hiring top talent in a market where geography no longer plays such a large role in retaining staff.
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To find out more or to discuss any of the trends mentioned above, please reach out to our Head of Market Intelligence, Paul De’Ath, here.