Nine key trends shaping the future of insurance

The insurance industry in Canada looks a lot different than it looked just a few years ago. Technological enhancements are helping the industry gain productivity and save costs, omnichannel distribution models are becoming the norm, and climate change continues to be an existential risk to the country and the industry. Canadian insurers are also facing economic headwinds as consumer attitudes evolve, and reporting and regulatory requirements mount.

Despite the scope and scale of these changes, Canadian insurers are keen to grow their organizations and increase their competitive advantage on a global scale. We host our annual insurance conference to help the industry gain perspective on the challenges and opportunities ahead. At our most recent conference, we focused on helping insurance organizations prepare for this uncertain, yet exciting future.

Canadian insurers are grappling with big questions. They’re looking for ways to best serve the changing needs of their clients, and earn an appropriate return for the risks they are taking on – especially given that extreme weather events, market challenges, technological changes, a shifting regulatory landscape and geopolitical concerns continue to command attention.

Many insurers are focused on how best to embed ESG (Environmental, Social, Governance) policies into their businesses and how to harness the power of Artificial Intelligence (AI) for forecasting, product personalization, and automation. Exciting innovations such as embedded insurance and cyber insurance are gaining speed and are set to have considerable impact in the insurance space through 2024 and beyond. As leading insurance organizations leverage new opportunities, they’ll also stay focused on making coverage available to underrepresented customers and keeping workplaces inclusive and equitable for employees.

As Canadian insurance organizations navigate this changing landscape, here are nine areas that are shaping the industry in 2024 and beyond.

Climate change is likely to bring more disruption to the industry. Extreme weather events are resulting in increased claims and the protection gap in natural catastrophes – amounting to approximately US$1 billion in 20231 – is accelerating due to climate change.

While this situation compels some insurers to withdraw from high-risk areas, others are seeking new opportunities by developing new products and services – from policies that incentivize climate risk prevention, to parametric insurance products, and risk advisory services. In either scenario, insurers need to ensure their underwriting, investment, and supply chain management operations are prepared to monitor and navigate emerging climate change related risks.

As ESG grows in importance for investors and regulators, many are striving to embed ESG successfully and holistically into existing operations. However, while 44 percent of insurance CEOs see ESG programs as a financial advantage2, only 51% of insurance CEOs are confident that they can address ESG priorities, such as forging a pathway to net-zero, simultaneously with other strategic priorities.3

Many insurance carriers are finding that embedding ESG is a balancing act that requires new forms of governance, new talent, new controls technology, and new expertise. Some firms are looking at the skillsets and resources developed for IFRS 17 implementation and diverting them toward ESG. From a sustainability perspective, this approach may prove to be an effective way to retain talent and maintain reporting consistency and credibility.

Growth is expected to be modest over the next two years. Inflation remains a major concern for insurers, alongside political uncertainty and emerging technology risk. After global premiums fell by an estimated 0.2% in 2022, forecasts expect the insurance industry to return to premium growth of 2.1% annually this year and next4. Factors driving growth include increased activity in Asia, easing inflation, hardening in property and casualty (P&C) insurance, and demand for life insurance.

As the insurance workforce ages and retires, a skills gap is emerging in underwriting, actuarial functions, claims adjusting, and other key areas. Insurers are hopeful that new technologies will not only bridge the gap but introduce new efficiencies. Estimates suggest that AI could increase productivity and reduce operational costs for the insurance sector by nearly 40 per cent5. In response to a recent KPMG survey, 71% of organizations plan to implement their first generative AI solution within the next two years. Use of the technology is also expected to increase profitability by 21 percent.6

While digitization continues to drive productivity, many insurers are still dealing with cost-heavy legacy systems that fuel inefficient workflows. In today’s economic environment, insurers that have more granular data and can make decisions faster are better positioned for growth. To remain productive, competitive, and profitable in 2024, digital services and digital transformation will be indispensable.

While AI is not new to the insurance industry, it’s no longer being used exclusively for chatbots and customer service assistance. AI is being applied to claims automation, fraud detection, underwriting, and even regulatory compliance. AI and machine learning are helping insurers make more precise risk assessments and provide hyper-personalized insurance offerings. Such forecasts may help explain why the global AI in insurance market, estimated at USD $4.59 billion in 2022, is expected to reach USD $79.86 billion by 2032.7

As organizations adopt AI – whether it’s to automate business processes, manage risk, or improve the customer experience – they need to attend to increased regulation around AI, ESG compliance, and ethical use. The European Union’s “AI Act,” for example, heightens AI regulation with several “high-risk” categories and the Act is now serving as a benchmark for other countries looking to regulate AI more effectively. AI’s large carbon footprint and potential for algorithmic bias, which can produce discriminatory outcomes, can have an adverse effect on ESG goals. Insurers need to balance automation and predictive gains from AI with responsible and ethical usage that meets customer and employee needs.

More and more consumers are demonstrating that they want to buy home insurance, car insurance, travel insurance, and health insurance the moment they actually need it – at the point of sale. As a result, the market for embedded insurance is accelerating in earnest, ringing in opportunities for insurance carriers and distributors.

According to a recent report,8 embedded insurance could exceed $70 billion in premiums by 2030. A 2023 survey conducted by Chubb Insurance9 showed that 81% of financial executives who make decisions about insurance products think embedded insurance will transform from a “nice-to-have” into a “must-have.” Nearly three quarters of bank and financial technology executives, furthermore, feel that providing embedded insurance helps build trust with customers.

Cyber is one of the fastest-growing areas in insurance, both in Canada and abroad, especially with large enterprise organizations. Estimates see the global cyber insurance market rising to US$33.3 billion in 2027 from US$11.9 billion in 2022.10 At the same time, the increase in ransomware attacks is pushing reinsurers to seek new ways to raise additional capital to cover what could potentially be a huge demand for capacity. In the United States (U.S.), for instance, ransomware claims increased by 77 percent in the first quarter of 2023.11 Fallout from geopolitical conflicts and related nation-state activity could lead to increased risk in the area.

Insurers need to keep pace with regulatory requirements and that’s still the case in 2024. For global insurers, a significant regulatory development comes into effect next year. The Insurance Capital Standard (ICS) is a new global solvency standard that aims to align capital standards for internationally active insurance groups.

With the first year of IFRS 17 reporting behind us in Canada, insurers are now looking ahead to understand how the Office of the Superintendent of Financial Institutions (OFSI) will oversee its mandate to protect policyholders and navigate the implications of an industry that’s growing faster than the Canadian economy. Other developments insurers are focused on include:

• OSFI’s guideline B-15 was released in March 2023 and requires insurance organizations to divulge climate-related risks to their stakeholders and manage these risks
• Upcoming OFSI guidance on the way financial institutions protect themselves against foreign interference may change the way property and casualty insurance risks are underwritten
• OSFI’s guideline E-23 on enhanced model risk management frameworks and B-10 on third-party risk management will likely be extended to federally regulated financial institutions (FRFIs), including insurers
• The Financial Services Regulatory Authority of Ontario (FSRA) has introduced a new regulatory framework and an enhanced supervisory approach to the life and health insurance sector

As organizations update their processes to align with reporting requirements, they’re building resilience at every step. Key challenges to keep in mind include defining important business services, developing metrics to measure resilience, setting impact tolerances, and including third and fourth parties in those calculations. Ideally, resilience capability needs to be embedded into Business as Usual (BAU) and become part of organizational DNA, from board members to the entire staff.

While the economic climate has slowed the pace of M&A activity involving large carriers to some extent, private equity interest in Canadian Property and Casualty (P&C) brokerages remains high. The Canadian market remains a highly fragmented space with lots of opportunities. With interest coming from private equity groups in the US and a far more mature European market, the Canadian industry stands to benefit from incoming knowledge and digital expertise. With M&A targeted to acquire capabilities up and down the value chain, more consolidation is expected.

The resulting pressure on incumbents will drive more changes. Organizations will need to determine what’s core and what’s non-core to their businesses and find ways to control claims costs. In an uncertain inflationary environment, the key to growth will be improving capital efficiency and modernizing with automation, AI, and analytics.

By 2025, more than 60% of the global workforce will consist of millennial and Gen-Z employees who prioritize continuous skills development and meaningful growth opportunities in the workplace.12 Diversity, Equity, and Inclusion (DEI) are fundamental to that vision. Organizations that make fair pay, work-life balance, and advancement opportunities a priority will be stronger in 2024.

Diversity and gender equality is an important part of workplace culture and insurance organizations have work to do. While 49 percent of entry-level positions are occupied by women, they comprise only 23 percent of the C-suite.13 KPMG’s CEO Outlook for 2023 suggests that changes are coming: 75 percent of CEOs recognize that diversity in the workplace could require a senior level leadership change. The same proportion expects more scrutiny of diversity performance over the next three years.

1. ^{Global Federation of Insurance Associations, Global protection gaps and recommendations for bridging them, March 2023, Verzekeraars website}
2. ^{ESG in insurance: Insured emissions report, KPMG website}
3. ^{2023 KPMG CEO Outlook, KPMG International, September 2023}
4. ^{World insurance: stirred, and not shaken, SwissRe, 2023}
5. ^{Artificial Intelligence (AI) in Insurance Market, Precedence Research, July 2023}
6. ^{2023 KPMG CEO Outlook, KPMG International, September 2023}
7. ^{Artificial Intelligence (AI) in Insurance Market, Precedence Research, July 2023}
8. ^{Embedded Insurance Distribution Could Exceed $70 Billion in Premium in the U.S. by 2030, PR Newswire, January 2023}
9. ^{Banks and the Digital Wallet Race: The Embedded Insurance Strategy, Chubb Insurance}
10. ^{Cyber insurance: Risks and trends 2023, 26 April 2023, Munich Re website}
11. ^{US Cyber Purchasing Trends, 10 May 2023, Marsh website}
12. ^{Companies can’t wait to upskill their workforce, 01 July 2023, KPMG}
13. ^{Global Gender Gap Report 2023, 20 June 2023, WEF}