Insurance: 2023 Recap and Expectations for 2024

Insurers thrive on predictability, yet there’s reason to believe the coming year could be anything but. The industry is facing significant challenges, including an evolving financial landscape, a higher-for-longer interest rate scenario, a shifting regulatory environment, advancements in artificial intelligence, a growing number of cyber threats, and climate change.

Although these issues affect all industries, insurers are acutely sensitive to them, given a single event like a cyberattack or major hurricane can trigger significant claims. Still, if the past year’s performance of Property & Casualty (P&C) and Life Insurers is any indication, the industry is finding ways to adapt.

A Mixed Year for Insurers

The reinsurance market, in particular, eschewed the ‘hard’ market conditions created by persistent inflation and regular interest rate increases that have cooled business and consumer spending. Rising property rates have been one of the biggest contributors to growth in this market.

While property rates have been strong, the casualty side of the business has not kept pace, which has raised the reserving risk on these insurers. Look for that to change in 2024, with casualty rates climbing as insurers look to grow their reserves to ensure they can pay future insurance liabilities.

The Excess and surplus market (E&S) has also been favorable over the year. That momentum is expected to carry through into 2024, given that submission growth amongst these hard-to-place risks remains strong. 

While the specialty market sees growth, some personal line carriers spent early 2023 turning away new business in certain states. Often, these decisions were based on the need for rate adequacy and increasing frequency of catastrophic weather events striking the same region.

The steps taken to lower their risk profile have resulted in higher rates for personal lines. As the severity of claims is declining, more companies are now looking to ease some of the restrictions they put on new businesses as they near their profitability targets.

Higher interest rates have been benefiting life insurers. They are experiencing higher yields on new money, positively impacting spread-based business, investment income, annuity sales, and flows. As many insurers have 8–10-year durations, the rates' benefits have longer to play. AUM and related fee businesses reported an excellent start to 2023 as higher AUM levels (from rising markets) resulted in higher fee income and better flow trends.

Expanding the Insurance Market

Several reinsurance companies emerged from stealth mode over the past year to expand their market scale and presence, although the influx of new capital was limited. BMO Capital Markets advised Altamont Capital on the formation and launch of Hedron, a hybrid insurer focused on providing capacity to its managing general underwriter partners. 

The market also grew with the launch of a pair of initial public offerings in the specialty insurance space. Skyward Specialty and Hamilton, which used BMO Capital Markets as their underwriter, highlight the demand for specialty assets amongst public investors.

Insurtech was one part of the market that faced challenges, with overall funding for Insurtech falling Q3. Despite the decline, this part of the market still has strong potential as insurers and financial investors look to invest in digital technologies to streamline operations, enhance customer experience, and improve efficiency.

More specifically, the industry is considering adopting artificial intelligence (AI), machine learning, and automation to improve risk assessment and claims processing.

In life insurance, a few asset management specialized private equity managers have gone out in search of liabilities to match their superior asset management returns, creating permanent capital-like vehicles. Consequently, several clients have recently announced transactions to reinsure closed block liabilities, and pension risk transfer activity remains robust. BMO Capital Markets advised Brookfield on its $3.4B acquisition of American Equity, a fitting example of the increasingly visible trend as asset managers seek to acquire life assets.

Looking Ahead to 2024 and Beyond

Five key themes will add unpredictability for the industry in the year ahead. The evolving financial landscape is one area that will require insurers to make continuous adjustments. This includes mitigating the effects of inflation, an uncertain interest rate environment, and potential recessionary pressures. Given an expectation of higher investment returns, it remains unclear whether P&C companies will accept higher combined ratios. With the surge in interest rates and widespread expectations for a “higher for longer” rate environment, companies have had to rebalance their investment portfolio and are sitting on unrealized gains and losses.

Outside of economic pressures, the ongoing digital transformation, which was reinvigorated by recent advancements in AI, will play a significant role in helping the industry work more efficiently and attract more investment.

Increasing regulatory requirements will test insurers' agility, especially in consumer protection, climate risk disclosures, cyber risk, and data privacy. And while regulators are increasing scrutiny, the leading firms are already considering some of these areas, which they see as business risks. Insurers will continue to refine their risk models to predict the impact of natural disasters more accurately on claims in response to increasing climate change impacts.

The threat of climate change could also see insurers introduce new products to address emerging risks and changing consumer needs for climate-related damages, like floods and wildfires. The more sophisticated cyber threats are another area that insurers are watching closely.

In the past 20 years, global life insurers have moved towards asset management, annuity manufacturing, and retirement planning while reducing emphasis on traditional life insurance. In the next decade, the industry will focus on meeting retiring baby boomers' income protection and wealth accumulation goals.