Inflation will have varying impacts across the industry. Inflation-driven increases in claims costs (e.g., repairs, replacement parts, labour) will be a particular problem for property and casualty (P&C) insurers in the US, where regulators have been turning down rate increases. In the Asia-Pacific region, the short-tailed nature of insurance products in many markets gives insurers increased ability to reprice policies quickly, thus correcting for inflation and partially compensating for depleted reserves. Life insurance companies are cautiously optimistic as higher interest rates today fuel future profitability and seem to outweigh the impact of inflation.

While inflation and recession will hurt insurers, in the form of higher claims costs and reduced demand, higher interest rates may provide an earnings tailwind, thanks to improved investment returns. But those returns will require brave decision-making, careful hedging and timely refinements to asset and liability management policies. The bottom line is that insurers will need to monitor a range of metrics, including liquidity and asset valuations, and be prepared to adjust asset and liability management (ALM) policies in line with market developments.

Geopolitical tensions have risen considerably during the last few years. The war in Ukraine has caused the most significant impact on geopolitical relations since the Cold War. The result for business leaders is the increased consideration of geopolitical factors in strategic decision-making and resource allocation.

“War exclusions” may limit claims losses, though that is far from certain, especially relative to cyber, and policies designed to cover political risk. Marine, aviation and transit (MAT) lines of business will likely feel the greatest impacts in terms of price increases. Underwriting for political risk and trade credit insurance will also get much more cautious. Increasing volumes of state-sponsored cyber attacks are another major risk vector that senior insurance leaders are monitoring, largely because their commercial customers may be caught up in the impact.

Insurance firms that focus on the protection gap can do well by doing good

The recessionary environment is not helping the huge and steadily growing worldwide protection gap. In fact, the gap – incorporating climate and cyber protection, as well as retirement savings and life and health insurance – is only going to widen. Demographic trends, especially increased longevity, also point to increasing gaps.

In the wake of the COVID-19 pandemic, social unrest and more natural disasters, consumers and companies have never been more aware of their need for protection. Closing the gap will require insurers to think and act differently – launching new products and services in innovative ways, with new underwriting models and via new distribution channels. Those new revenue streams can address the USD 1 trillion protection gap. In other words, insurers that continue to focus exclusively on the risks they’ve always written profitably will not only miss out on the huge potential upside, but also contribute to the expanding gap.

Looking at climate risk, insurers need to develop new products (e.g., parametric products) that protect against physical damage and help lead public-private collaborations for uninsurable risks. But insurers also have a critical role to play in facilitating the transition to a net-zero economy. Cyber risk presents a similar opportunity; insurance solutions should both protect against downside risk and provide support for all types of businesses to reduce their exposures.

As compelling as the growth upside is, insurers must not lose sight of the bigger picture. By addressing the protection gap, insurers can live their purpose of protecting individuals, businesses and communities against the most severe threats. In other words, this is a classic case of doing well by doing good.