While 2023 is behind us, the impact continues to resonate in our strategies and operational plans for 2024, because many of the challenges and shifts we experienced continue to be in play and are intensifying. Market economic factors, such as inflation, supply chain challenges, rising interest rates, and low unemployment are not abating. They are applying increased pressure to do business differently. Declining profitability, increased catastrophe losses, rising loss ratios, increased claims costs, rising reinsurance prices and tightening capacity, lower disposable incomes, and a growing loss of talent from an acceleration of retirements, are all converging on insurers, creating a massive rationale for change.

Over the last ten years, most insurers have been on a non-stop quest to transform and optimize the business, but unfortunately for many, their e­fforts have often been incremental and short-sighted; creating or intensifying many of the operational challenges faced today.

Insurers must move beyond the legacy and internal mindset of “this is how insurance is done,” to one that recognizes the world has shifted and we must as well. Now is the time to reshape the business model and technology foundation. The slow, steady 3%-4% of DWP technology investment is incremental at best and not sufficient to meet the pace of change and demands in today’s marketplace.

A Sudden Shift

Based on recent Majesco research, the top-of-mind issues insurers are now facing, in terms of both their business model and technology foundation, indicate that they are “out of step” with market demands and challenges. Not only that, but they are concerned about issues that were much lower priorities last year.

Within the top 12 issues from last year’s surveys, only 5 remain. These include profitability, operational costs, and talent. Seven new issues are on the list, including growth, technology advancements, rising reinsurance costs, regulatory changes, access to reinsurance capital, legacy technology, and shifting customer expectations.

As loss and expense ratios have increased and growth has slowed due to macro-economic factors, the importance of optimizing and innovating the business model and technology with new products and services, new channels, and new partners has increased. Insurers need to double down on investing in a new business model and technology to attain the right formula for profitable growth and be a leader in the future of insurance. Pausing or pulling back now will only create a widening competitive gap, placing insurers’ businesses at risk.

So, what are the changes needed? We only have to look at our recently published 2024 Top 10 Trends report as a roadmap for change. Here are five that stand out.

Trend 1: Legacy Debt Comes Home to Roost – Deteriorating the Business

Over the last 10-15 years, we have seen a shift in core systems, both in terms of technology and business capabilities, with the many modernization and transformation programs. But many of these programs were painful and expensive, often running over many years and costing tens to hundreds of millions of dollars due to the highly customized, on-premise implementations that have been difficult or nearly impossible to upgrade. Adding to this, many never completed the transformation — keeping legacy systems running alongside the new — adding cost and overhead.

The cost and impact of legacy debt is now catching up and pulling organizations down. With retirements increasing and the loss of institutional knowledge and skills, coupled with a new generation of employees who will not work with legacy technology, legacy debt is becoming a significant operational risk. Even worse, patchwork legacy solutions struggle to leverage the data they hold to provide meaningful, actionable insights. At the same time, they struggle to ingest new data sources in order to improve decision-making.

Insurers must develop a comprehensive strategic response that balances today’s business with what is needed to compete today and in the future, because the underpinnings of the legacy debt and architecture are an unstable foundation for the business to survive, let alone succeed.

Trend 2: Product Innovation to Close the Protection and Customer Expectation Gap

Insurance manages uncertainty and potential for loss with risk management and financial protection products and services. Today’s customers expect and need different products to meet their risk needs, help close the protection gap, and align to their financial and expectation parameters.

What is needed is product innovation that creates a humanizing and personalized aspect for the products offered. These products need to use more of the customer’s personal data, including telematic data, that better reflects real levels of risk and real-time behaviors. It includes risk prevention and mitigation capabilities to help customers avoid loss, dramatically redefining the customer experience and loyalty parameters. Traditional product-oriented strategies rarely meet these new expectations.

This is why IoT and telematic products, on-demand/Gig economy products, parametric insurance, microinsurance and embedded insurance are of high interest, particularly for Gen Z and Millennials, but also selectively with the older generation of Boomers and Gen X. With inflation eating into disposable income and claims costs driving up insurance premiums, there is a real concern that the protection gap will expand for many consumers and businesses.

Protection and customer expectation gaps need to be as small as possible for insurers to create long-term customer growth, value, and loyalty — making insurance relevant, affordable, and accessible.

Trend 3: Pricing, Rating and Underwriting Speed and Flexibility

Underwriting is at the heart of the insurance business. In the face of rapidly changing risk factors, it is increasingly crucial to have capabilities for evaluating individual risks, the exposures in an entire portfolio, risk appetite, and ultimately, profitability. With rising loss ratios and different risk profiles for individuals and businesses, insurers need more flexibility in changing their pricing and rating for underwriting.

The inflationary, profitability, and competitive conditions in the insurance marketplace will require insurers to evaluate aspects of their pricing, rating, and underwriting, including improved speed-to-market capabilities. Pricing and rating engines will increasingly play a critical role to deliver rapid updates and new products to market for both P&C and L&AH, from IoT-enabled products to Gig economy, on-demand and telematic products, to name a few. The demand for more regular updates for pricing, from real-time to weekly, monthly, or quarterly rather than annually, will become mainstream.

At the core of pricing, rating, and underwriting is data. While insurance has always been a data-driven business, access to new data sources, embedded AI/ML models, and flexible pricing and rating solutions that can quickly deliver personalized or updated pricing will be central to insurer’s new business models.

The most innovative and profitable carriers focus their product management efforts on products with pricing and rating flexibility and efficiency that deliver speed to market and customer value.

Trend 4: Data & Analytics Goes Supersonic

Data and analytics are and have always been a stalwart for the insurance industry for decades, through business intelligence and predictive models. The rapid adoption of AI/ML models and now the emergence of generative AI (GAI) has turned data and analytics from a long-term strategy of incremental investment into a near-term reality and a must-have that is upending and accelerating the focus and adoption of advanced data and analytics.

GAI is viewed as or even more impactful than the Internet. In the March 2023 RBC report Imagine: Software & Internet Implications of Generative AI and ChatGPT – Moats and Boats, they note that GAI is tech’s 4th exponential capacity creator and believe it will exponentially expand technology’s capabilities on top of the previous three in aggregate: Internet, SaaS/Cloud, and Mobility.

New technologies, demographics, behaviors, businesses, and services are driving the explosion of data and will power the growth and leadership positions for insurers over the next 10 years. Data is the fuel for optimization and innovation. Insurers must find partners who can accelerate their access and use of these tools to be in the game.

Trend 5: Next Gen Architecture – A New Foundation

Elevating insurers’ business operations with a next-gen, intelligent technology foundation built on a robust next-gen architecture is now a must-have. It unlocks growth and operational superiority to stay at the forefront of the competition.

To meet the digital demands of both today and tomorrow, embracing a next-gen architecture is essential. It is a paradigm that signifies a groundbreaking leap in software design, fueled by the pillars of modern innovation: cloud-native, API-first, microservices and containerization, headless, and embedded analytics – inclusive of BI, AI, ML, NLP and GenAI.

Next gen architecture creates intelligent solutions that propel insurers into the future of insurance innovation and customer-centric experiences with an ability to launch new products, value-added services, personalized experiences, and innovative channels. It embraces best practices out of the box to accelerate speed to implementation, decrease overall total cost of ownership, provide quicker speed to market upgrades and speed to market of new products, to keep the company at the leading edge. Insurers’ ability to create an interconnected intelligent tech foundation will deliver both growth and customer relationship opportunities.

Unfolding 2024

As 2024 unfolds, decisions are being made that will determine which companies will emerge as winners in the next three to five years. Winners will be sought after as partners and employers due to their ability to achieve scalability, agility, and their pivotal role in leveraging technology. These leaders will be prepared for the next major disruption, leaping forward from the competition.

These leaders are nimble, creative – and bold – in order to flex to the pace of change, the shifting market, and the new risks. They are listening to customer trends. They are remaining competitive, relevant, profitable and growing.

What are your plans for 2024? Are they bold enough?

Join our upcoming webinar, 2024 Trends Reshaping the Insurance Industry – Are You Ready?, with a number of leading InsurTech influencers where we will discuss and debate these topics and more areas of change and opportunity in the insurance industry.

By Denise Garth