A cash flow projection estimates future income versus expenses for a business. In the insurance industry, it is essential to create accurate projections to help avoid costly mistakes.
From the lingering effects of COVID-19 to soaring inflation, interest rates, and protectionism, there is no shortage of challenges for commercial carriers. Fortunately, there are also opportunities for those willing to step up.
1. Inflation
Inflation is a significant concern for property and casualty insurers. Property claims are particularly susceptible to inflation as rebuild and repair costs rise, shortages of materials increase business interruption values, and higher labor rates drive up claim severity. In addition, the industry faces new ESG reporting standards, with implications for how insurers consider climate risk and other impacts of inflation in their operations.
Amid the Great Resignation, labor markets are tightening and will further increase premium inflation. Insurers can offset some of these challenges by increasing digital self-service and driving automation and efficiencies. In the long term, these efforts should reduce costs and cycle times.
In addition, leading insurers will continue to create visibility into pricing levers that can be deployed to address high inflation. These include enhancing actuarial modeling to provide greater insight into the impact of loss trends and market conditions and developing rate indications frequently and with the most significant degree of granularity possible to identify early warning signs and mitigate premium leakage risks. They will also focus on building favorable account pricing trends and reducing calendar period exposures through product enhancements.
2. Recession
Over the last few years, insurance leaders have adapted to a dizzying array of challenges. From the lingering aftereffects of the COVID-19 pandemic to the economic fallout from the Russia-Ukraine conflict and spiking interest rates, inflation, and fluctuating currency valuations, upheaval is the new normal.
Insurance industry projections suggest that property-casualty premium growth will slow in 2020 and 2021 but will eventually recover to long-term trends bolstered by the growing global economy. But the threat of escalating claims costs, higher reserve risks, and surging loss-to-value ratios will persist. Insurers that remain profitable will rely on premium growth in less cyclical sectors, strong underwriting discipline, and cost controls.
A well-constructed cash flow model is a must for any insurance company. An insurer should create one at least quarterly, but ideally, annually, ly to ensure that future operating cash flows are correctly forecasted. This is especially important when assessing future events’ impact on an insurer’s bottom line. Ultimately, the insurance companies that get this right will be the ones that are positioned to prosper in the future.
3. Rising Interest Rates
Insurers are comparatively more insulated from inflation than other industries that rely on discretionary spending. After all, putting a car on the road or running a business are necessary expenditures. Inflation will still affect insurers in the short term, impacting premium volumes and eroding earnings.
When interest rates rise at a moderate pace, bond portfolio yields increase, which helps insurance companies realize additional investment earnings. This is particularly true for life insurers. But higher rates also raise the cost of financing liabilities, dampening insurance profitability.
As the insurance industry faces many challenges, companies must be prepared with comprehensive strategies that support growth without sacrificing profits. The key to doing so is having accurate cash flow projections, which help identify and manage potential issues. Working with an expert ensures your projection model is as robust and detailed as possible. Contact us today to learn how we can help.
4. Technology
Insurance technology is integral to the P&C insurance industry for carriers and customers. Today, getting a quote can be done in minutes online, and managing your coverage is usually as easy as downloading an app.
With new customer segments requiring unique services, like usage-based and parametric insurance offerings, insurers must leverage modern technologies to stay competitive. This includes software that readily integrates with existing IT systems to eliminate data siloes. Additionally, low-code or no-code platforms allow insurers to quickly bring new products to market, reducing the need for specialized IT resources.
Embedded insurance is an ongoing trend that will continue in 2023, with more third-party products offering coverage to customers. Think about the travel insurance accompanying your Norwegian cruise, the Apple warranty that comes with your iPhone 13, or the auto coverage offered by Progressive to customers who purchase their telematics-enabled Smart Cars. Additionally, IoT devices are being used to monitor and analyze risk factors and help prevent loss before a claim is made. For example, Farmers are utilizing Kespry drones to aid in home risk and damage assessment.
5. Globalization
As American headlines become more and more filled with economic news from China, Greece, and other countries halfway around the world, insurance companies will have to consider the impact of globalization on their business. While many view globalization as a threat, for insurers, it provides an opportunity to increase market share and build customer trust by offering products specifically tailored to their needs.
With a global client base, insurers can leverage their strengths in product design and underwriting, balance sheet management, and distribution to differentiate themselves from competitors and generate returns over the cost of capital. Insurers can best achieve this by identifying which of the four insurance functions they are most proficient at and finding partners that excel in the other areas.
However, with globalization comes the challenge of managing diverse regulatory standards. Insurers must meet the requirements of hundreds of international jurisdictions, increasing costs and limiting expansion. This hampers FDI and trade and inhibits the growth of the industry. The international community is working to create new standards, but they will have to be implemented by individual countries and regions to make a difference truly.
