Insurance Executive Search: 2023 Insurance Industry Outlook
Going into 2023, insurers face an imminent global recession, persisting problems related to the Covid-19 pandemic and the ongoing consequences of Russia’s invasion of Ukraine. According to McKinsey’s Global Insurance Report 2022, the insurance industry is struggling. Globally, around 50 percent of insurers are not earning their cost of capital, and productivity improvements have been limited. In 2020, the largest US life insurers’ share of market capitalization, compared to their financial-service peers, was only 9 percent, compared to 17 percent in 2005 and 40 percent in 1985.
According to Deloitte research, insurance companies who made the transition to remote work and virtual customer engagement are more likely to profit from an evolving digital marketplace. Insurance companies should continue to adapt. Technology and its influence on risk selection and pricing will be the key to profitability; however, insurance companies should not discount the importance of DEI and ESG concerns, which will drive talent acquisition, investment and market share.
At a very basic level, insurance companies collect fees in exchange for absorbing and distributing risk. When risk is high, premiums need to be high enough to make sure the insurer can offer coverage profitably. The overall state of the world has been unpredictable for the last few years, and this is expected to continue through 2023. This means 2023 will continue to be a “hard market” for insurance – i.e. higher premiums and more difficulty for the consumer in getting coverage.
Inflation affects property insurance providers more because payouts of these policies are tied to the costs of goods and services (unlike, e.g. life insurance, in which payouts for standard policies are not adjusted for inflation). For example, building materials are more expensive, so home repairs cost more, so homeowner’s insurance providers have higher payouts, which then either cut into profits or get passed on to consumers.
Despite a lackluster overall performance for the industry, there are pockets of growth. In the United States, fixed and fixed-indexed annuities, variable universal life insurance, and protection-oriented products like accident and health products distributed through worksite channels are expected to grow more than 5 percent between 2021 and 2026. This is because they provide protection with some upside based on market performance. By contrast, market-oriented annuity products where the customer bears the risk are set to decline by 5 percent.
Due to climate change, natural disasters like flooding are becoming more frequent and less predictable. This creates difficulties for insurance providers because disasters like floods force the company to make a lot of expensive payouts all at once (unlike, for example, car crashes, which are spread out over time and follow relatively predictable patterns). This is why flood insurance is normally expensive and hard to obtain. But as climate change places more and more residential areas under threat of catastrophic flooding, insurers will be strongly incentivized to devise new models to make the actuarial math work.
Property and casualty (P&C) insurers in general may soon need to reimagine their business models. Climate change and the shift to net-zero emissions also provides insurers opportunities, as the demand for insurance will grow along with investment in green technology. Insurers who establish themselves in this ecosystem early will benefit from a significant first-mover advantage.
Technology has had a seismic impact on the insurance industry. AI underwriting and Analytics-as-a-service (AaaS) are transforming the business. Faced with competition from so-called digital attackers, ecosystem players, and big tech platforms looking to expand their services into the insurance realm, incumbent insurance players are more and more building digital businesses. These digital transformations will require a unique set of qualities and skills from executives.
What This Means for Insurance Executive Search
These are uncertain times, and for an industry based on quantifying uncertainty, top-quality leadership is more crucial than ever. Leaders will need to combine cutting edge actuarial and data science with insightful, empathetic understanding of life and conditions on the ground.
In their Global Insurance Report, McKinsey outlines imperatives which they say leadership should embrace at the industry’s current crossroads. The first is to center the business model on environmental, social and governance (ESG) concerns. The CEO should be a role model committed to ESG and retaining talent through DEI beyond empty posturing. The transition to decarbonized economies necessitates an industry transformation if insurance carriers are to stay relevant.
According to McKinsey, the highest-potential near-term target markets for insurers are in renewable power and established green technologies including solar, wind and electric vehicle (EV) batteries and EV charging infrastructure.
The second imperative is to provide coverage for emerging threats; for example, P&C insurers can emphasize data and cybersecurity risk as well as machine learning liability.
Another imperative is to develop new business models in the digital sphere. In 2021 alone, $14.6 billion was invested into insurtechs. According to McKinsey, of the top 20 European insurers, the share of companies with a digital business increased from 1 percent to 70 percent from 2015-2020. For U.S. insurers, the share of companies with digital businesses went from 0 percent to 20 percent. Traditional insurers may want to build a digital business to stay competitive in this evolving market. It may even prevent insurers from losing customers to brokers, a trend that predates the pandemic.
To this end, CEOs should be open to a test-and-learn culture. In building a digital business, the best CEOs will encourage an experimental culture where trial and error will allow them to learn what works and what does not work. In order to build a digital business, CEOs will also need to rethink their corporate strategy and allocate the requisite people and funds. Smart leaders will make bold moves and invest for growth and innovations, and in the competitive field of insurance executive search, such leaders will be in high demand.
Shifts in customer expectations necessitate an enhanced and personalized customer experience. Consumers now expect a seamless experience across multiple channels. For example, one survey found that 84 percent of German respondents use digital channels in the process of buying insurance, though 55 percent could not imagine purchasing an insurance product online. Customers prefer the ability to switch between different access points – agents in person or over the phone, remote calls over the phone or online, and digital.
Insurance leaders should be able to modernize technology not just on the front end, with increasingly digitized customer experiences, but also on the backend, where technology can increase productivity and performance. Legacy systems are often decades old and are strained, and executives may want to overhaul their core systems.
Historically, insurance carriers have had difficulty keeping their costs low. Industry-leading technology will lead to maximum returns, but CEOs and CFOs will have to carefully allocate their budgets to pay for this technology. Leadership will have to find ways to free resources to totally transform the company.
Another imperative McKinsey emphasizes is reimagining culture and diversity in order to attract and retain talent. According to Deloitte, the executive level of the insurance industry is particularly lacking in diversity. Though the overall industry is more diverse than other industries, with two-thirds of the entry-level workforce being women, this diversity does not extend to senior positions. Women of color in particular are underrepresented.
As the insurance industry becomes more digital and customer-facing, it will face challenges in an uncertain environment, and therefore diversity in experience and perspective will become more and more important. However, women are increasingly leaving the workforce due to burnout. Research shows that companies with higher diversity, especially those with more women, have 20 to 25 percent more ROI.
Insurance carriers have difficulty competing against insurtechs and fintechs for top talent in analytics and digital. “Insurers need to change how they present themselves in talent markets,” Bernhard Kotanko, a McKinsey insurance expert, said on a recent McKinsey podcast episode. “They need to emphasize the critical role of insurance and the value it creates for society.”
As interest rates have declined over the past 20 years, investment alpha has increasingly become a source of competitive advantage. Because investors are interested in growth that provides value, insurers will have to position themselves as value-creators rather than value-destroyers. An ideal insurance CEO in 2023 will have a growth mindset.
Product innovation has driven returns in the US insurance industry. Register index-linked annuities (RILAs) and morbidity riders have been hugely popular in recent years. Mutuals can capture growth through product specialization that meets the needs of customers. The best way to do this is by innovating products.
Insurance is all about risk management, and tends to be risk-averse when it comes to experimentation. Insurance leaders will need to embrace innovation and a quicker pace of change – think the speed of a start-up. Quick decision-making will give companies a competitive advantage.
The insurance industry will continue to face challenges in the coming years, from geopolitical risks to high inflation to returns after cost of capital. The changing industry landscape provides challenges but also opportunities to grow by transforming. What will make a good insurance executive in 2023 is a strong commitment to pivoting to long-term reinvention.
Insurance Executive Search: An Ellig Group Specialty
Since 1977, with the founding of its legacy firm Gould McCoy, Ellig Group has had a reputation for advancing women and underrepresented groups. Women-owned and -led, Ellig Group has a significant track record of driving parity in the C-suite and boardroom. Ellig Group partners with clients to recruit women, LGBT candidates and veterans to leadership positions and the boardroom, with the goal of changing the face of corporate America.
A member of IIC Partners, one of the top ten retained executive search groups in the world, Ellig Group boasts an extensive professional network. As a smaller, boutique firm, Ellig Group has the ability to focus on each individual search, with each search personally supervised by CEO Janice Reals Ellig, named by Business Week as one of “The World’s Most Influential Headhunters.”
Diversity in leadership in the insurance industry has become more important than ever, because its customer base is growing more diverse. Companies are more resilient with a wide range of perspectives. “Only the top half of companies are making progress [on gender diversity],” Kweilin Ellingrud said in an episode of the McKinsey podcast McKinsey on Diversity. “And only a very small percentage – about 5 percent on the gender diversity side and 15 percent on the racial diversity side – are making significant progress. So the question is: how do carriers get into that 5 to 15 percent top decile, if you will, of performance on diversity?”
Leading companies, he says, set clear and aspirational goals for gender and racial diversity. Ellig Group partners with top management who make it their goal to source diverse talent.