The economic factors impacting insurers’ business models

“The Japan-ification of the Eurozone economy is having a significant impact on the ways that insurers do business,” says Ludovic Subran, chief economist of Alliance SE.

He argues that the persistently low interest rates experienced by much of Europe, in part as a result of Central Bank policy, is putting marginals under pressure and forcing life insurance providers to rethink parts of the business model.

Alongside lower interest rates, the rise of protectionism across the globe is forcing insurers to work in new, more innovative ways. Subran says that this is not so much about President Trump imposing tariffs on shipping goods, but rather the hidden protectionism around non-tariff barriers especially in services and investment protection.

He explains: “Insurers are national services companies which are aggregated to offer international policies. The risk is that more governments will look to financial services as a way to flex their protectionist muscles and show that sovereignty has come back to the front stage.”

This is already happening in Hong Kong, as the place where most Chinese financial services companies are growing. By being more present in Hong Kong, China is certainly sending a message to the US government that it is not only about soy beans.

Financial institutions can sometimes come under the fire of state-to-state skirmishes, so insurance companies need to adapt to a world that is more fragmented. That means public affairs departments working with local authorities are pivotal to explaining the value proposition of insurance and the importance of foreign insurers offering products in their countries.

“The purpose and mission statement of insurance will become more important going forward as we need to show that we can be a companion to growth and a risk transfer intermediary.”

This issue, in particular, is one risk managers need to take notice of. As more companies operate internationally, there is a growing demand for global insurance services, and if insurers are struggling to achieve this, the risk management industry will suffer.

Another issue is the changing nature of risk and the growing complexity of the threats that organisations face. Subran points to the latest World Economic Forum 2020 top risks as well as the Allianz Global Risk barometer, which both show that cyber, geopolitics and climate change are rising up the agenda.

These risks call for more bespoke solutions, and Subran believes that the insurance industry needs to innovate and get better at working in long-term partnerships with risk managers. Equally, risk managers must be prepared to develop deeper relationships with insurance providers in order to tackle some of the more challenging threats.

He says: “I think it’s all about codesigning today. If you look at some of these risks such as the cold war between the US and China and the new forms of political risks, they are hard to insure.”

They can severely impact business continuity, but because it hangs on temporary policy measures decided by one government, it is hard to transfer the risk. How do you insure against a government policy, when it’s not a real political risk? You can insure yourself against terror, but what is happening with China and US protectionism is not really insurable, it’s a cold war not real war.

“The direct impact on business risk is that you have to co-share and work with your insurer. The same goes for cyber and climate and many of these growing, large risks.”

“We need to build long term trusted relationships. For a long time there were a lot of off the shelf products that would work in most situations, but there has been a reality check which has forced insurers to work more closely with brokers and clients to raise the bar.”

“It completely changes the power relationship between the various stakeholders and has forced the insurance world to really rethink the business. It has made brokers be more innovative and work to prove their worth and has seen the awakening of a generation of very astute risk managers that characterise the market today.”