As with elsewhere in the world, across the Nordic region, we have seen how geopolitical events and the consequent effects on international markets have impacted the insurance industry. Concerns around rising interest rates and costs continue to affect market dynamics. This pressure now sits alongside the need to innovate, improve efficiency, and provide products that respond to evolving customer needs.
So, what can insurers in the Nordic region do to mitigate the impact of these changes, and how can they still be open to new opportunities in the industry?
What is the true impact of inflation on Nordic insurers?
The high inflationary environment we are currently in is unfamiliar for many and understanding its effect on the claims side is critical. As costs for services and raw materials fluctuate, insurers need to be able to model the effect this will have on their portfolios and translate that into accurate pricing for their products. With continued uncertainty around interest rates and inflation, this is easier said than done.
According to the 2022 Annual Report of our customer, Topdanmark, despite rampant wider inflation, there has been limited inflationary pressure on claims. The report also shows that actual inflation on average claims is lower than overall market inflation due to strong results from procurement and underwriting. Whilst a signifier of the direction of travel, the fact is that the basket of goods used to calculate headline inflation does not necessarily provide the best guide for assessing the impact on an insurer’s profitability.
In looking for a more accurate measure, insurers should first take a look at their data. Insurers have a treasure trove of information built up over years of serving their customers. By pooling both current and historic data together with third-party data - such as economic indicators or shipping information - insurers ought to be able to identify patterns in pricing that can provide a more accurate and relevant model on which to make forecasts and underwriting decisions.
Unfortunately, only a few insurers have yet managed to extract the full value from the data that they hold, largely due to siloed infrastructures and the complexity of maintaining API integrations with other data sources. This can be a time-consuming and costly process and diverts highly paid actuarial specialists away from doing their primary jobs. To overcome this, insurers need scalable data infrastructures that allow them to bring together all of the data that they hold in one data lake. Alongside this, cloud-based systems that have pre-built APIs, which are automatically updated, shift the burden of maintenance away from actuarial teams. With a proper data infrastructure in place that contains clean, high-quality data, insurers can then be better placed to develop models for forecasting market changes and risks, thus making informed pricing and product development decisions.
Contend with new regulations
As more and more businesses, including insurers, have digitised their operations and increased their use of data, new frameworks have come into play to ensure that this is done ethically and securely, and rightly so. The latest of these is the EU Digital Operations Resilience Act (DORA) which is set to come into effect in 2025.
In essence, DORA aims to standardise Information and Communication Technology (ICT) risk management processes in Europe and addresses the operational resilience of the financial services industry. This is in the context of increasing cyber risks and a less certain geopolitical environment.
With the Nordic countries being among the most digitalised across the EU, the implications of DORA may be more keenly felt than elsewhere. Complying with the new rules will mean changes to already developed and implemented digitalisation plans in a manner that will not be the case in markets where digitalisation is less mature. This, however, should not be a barrier to innovation.
Whilst the new rules govern the use of cloud-based technologies, the solution to comply with them can also lie in their use. Cloud platforms benefit from regular updates, which means that they are always up to date. Nordic insurers can leverage cloud-based systems which are secured against the most recently discovered vulnerabilities and, in turn, will be able to react to regulatory changes as they come into effect. This has the benefit of avoiding costly system updates, which take time and require significant upfront investment.
Engage customers with technological innovation
As the insurance market becomes more competitive in the Nordic region and beyond, customer centricity is key. However, providing personalised and efficient services to customers is much easier said than done. Big players in the region are investing heavily in technology to improve their operations, particularly in artificial intelligence and data analytics, to process claims faster or offer new insurance products.
Making large investments in new technologies is trickier for smaller insurers, who are less able to put significant amounts of capital into developing their technology. However, these smaller insurers could partner with a rich ecosystem of insurtechs that can add layers of innovation to their existing systems. This enables them to leverage the technologies and innovations which they feel would best serve their customers and then integrate them into their core processes. These partnerships can also enable smaller insurers to create a holistic view of their customers and engage with them better to address their unique needs and risk profiles.
For example, an insurer who wants greater insight into their exposure to flood risk might partner with a geospatial data provider like ICEYE. They may then take this data and partner with a push notification insurtech that can warn their customers when a flood is imminent. This offers a strong move towards risk mitigation, and providing real value to insurance customers in addition to insurance protection.
Establish resilience through innovation and agility
Innovating in a manner that meets the needs of customers does not have to be the sole domain of large insurers with big budgets. Smaller insurers can punch above their weight by enacting three measures: reaching data maturity, partnering with insurtechs and third-party data providers, and moving to a more proactive model of insurance. On this journey, smaller insurers can leverage their greater agility and faster decision-making to complete these steps more rapidly than their larger counterparts. In doing so, they can make the best use of technology to meet their customers’ needs and make their businesses more resilient to change and economic shocks.
There are various opportunities available for Nordic insurers despite inflationary pressures and new regulations. In developing a strategy to accommodate these challenges, Nordic insurers need to make sure that innovation remains at the forefront so that they can continue to serve the highly digital markets in which they operate.