Protection gap at risk of rising as firms feel knock-on effects of headwinds

The protection gap in the insurance industry is at risk of widening due to ”challenging macroeconomic situations”.

That was according to Will McAllister, Guidewire’s senior vice president and managing director for Europe, Middle East and Africa (EMEA), who said that headwinds like a lack of capital from reinsurers and inflation was having knock-on effects.

This came after Robin Gilthorpe, Earnix chief executive, told Insurance Times that access to capital had been complicated by multiple factors, including the tough inflationary environment. 

Inflation started to bite in 2022 and was exacerbated by the conflict in Ukraine and knock-on effects on energy markets.

“One of the challenges, which flows from the challenging macroeconomic situation, is you run the risk of insurance facing a bigger protection gap,” McAllister told journalists during a media briefing at the Guidewire Connections conference in Nashville.

“Insurers are either going to be raising prices, writing more conservative risk or writing different risk due to the change in the situation.

“Or [it can be the] reinsurance market and their concerns about the escalating cost of capital, which [is one of the] most important things over the last few years.”

Capital

Meanwhile, Guidewire’s president and chief revenue officer John Mullen said that less capital was putting “a lot of pressure” on insurance firms’ portfolio management.

“The friction in the reinsurance broker [space] is very high,” he added.

“The battle for the value chain is absolutely very real. For insurers, this means that better portfolio management is a must.”

Mullen added that part of the reason there was more friction was due to the pressure of start of the year.

For many, the reinsurance renewals on 1 January 2023 were the most difficult they had seen in a long time.

The Q1 2023 Global Insights report released by broker giant Aon earlier this year (9 May 2023) noted that this renewal cycle was “the most delayed, complex and difficult in decades” and introduced ”significant volatility into the market, especially for natural catastrophe exposed property risks and specialty risks impacted by war and inflation”.  

When it comes to “rebalancing risk”, Mullen felt that while the operational components of risk selection and pricing were key, the removal of friction from the transactional base was just as important and required a need for “the interoperability of data”.

“That’s the thing carriers really need to think about as they think about managing risk in what’s now a new normal with all the macro pressures on them,” he added.

Data

While such challenges are having knock-on impact for insurers and brokers for now, McAllister said the industry has had an obligation over the last few years to think about how it closes the protection gap.

“These vectors that are all impacting the industry right now and my instinct is they will only continue to exacerbate and there will only be more of them,” McAllister added.

“The threat of new entrants to the market, new distribution models and changes in consumer demand means the industry is going to have to continue to adapt and think about what the product offerings are and think about risk differently.”

He felt data was key for this and felt firms needed to “better leverage data and technology”.

For example, he highlighted that although large amounts of data was proprietary, using it in a more collaborative way could see better results.

”For me, there’s a change of mindset that’s still required for the industry,” McAllister said.

“It’s coming, [but it is a case of] how do we be more adaptive, more innovative and think differently about data and the role that can play in the rebalancing.”