FUTURE CHALLENGES FOR THE INSURANCE INDUSTRY

The companies that make up the insurance industry together make up the largest group of institutional investors in Europe, holding financial assets equivalent to more than half of the EU’s gross domestic product. Insurers invest insurance premiums, collected from retail and institutional policyholders, in capital market and other assets. Given the long-term investment approach adopted by insurers, much of their investments focus on fixed income type of securities, such as corporate and government bonds and steady income stream such as real estate and infrastructure.

Insurers across Europe face deteriorating economic fundamentals, including an ageing population, rising customer expectations and a long-term stagnation in growth. Following the introduction of the EU’s Solvency II regime in 2016, many insurance companies started to revisit their asset-allocation strategy in favour of credit risk solutions that better match cash inflows from annuity payments. Favoured investments included fixed-income assets, such as corporate bonds, as well as direct lending to corporates and long-term infrastructure investments.

Although fixed income still remains the primary driver of yield for insurers, the insurance industry has been spurred to seek new investment opportunities and explore high-yield and equity-type investment solutions, including alternative asset classes. For many insurance firms, alternative investments represent a shift in their general investment practices, to achieve higher returns, but also to better manage risk through portfolio diversification.

Luxembourg is perfectly placed to accommodate this change of course in the investment strategies of global insurance firms. A first mover in the implementation of European UCITS regulation, the Grand Duchy of Luxembourg has played a pivotal role in building a bridge between European and international financial markets and cross-border fund distribution, granting European retail and institutional clients access to international investments. Today, Luxembourg-domiciled investment funds are distributed in over 70 countries, with a focus on Europe, Asia, Latin America and the Middle East. The world’s leading asset managers have chosen Luxembourg as the centre for their international fund ranges.

Building on the infrastructure and the cross-border expertise developed in the EU retail fund industry over the past three decades, Luxembourg also boasts a first-class alternative fund regulation, which has helped it confirm its role as a leading hub for the global private equity and venture capital industry. The Grand Duchy has developed a comprehensive legal toolbox to meet the different needs of private equity general partners (GPs) and investors in the global alternative investments landscape and facilitate cross-border acquisitions in private equity and real estate.

The Luxembourg insurance industry has the potential to become a driving force for a sustainable and responsible financial future in Europe, thanks to the cross-border features of the vast majority of its insurance contracts. As a pioneer in sustainability and, with an established financial ecosystem which is familiar with responsible and green investments, the Grand Duchy is a leading international platform for sustainable finance. Luxembourg supports a range of activities, from responsible investment funds and blended finance, to green bond listings and ESG fund labelling.

The European institutional investment scene is increasingly influenced by ESG values and retail and institutional investors are increasingly interested in green asset classes which reflect the consumer preferences of sustainability-conscious Millennials and Generation Z. In the aftermath of the UN Sustainable Development Goals, the Paris Climate Agreement in 2015 and the subsequent EU Commission sustainable finance proposals, Luxemburg’s insurance industry has been actively integrating ESG factors in its business models, risk management, as well as products and pricing structures.

Insurance customers, both individuals and corporates, are at the very epicentre of the disruption tearing through the worldwide insurance industry. In these times of rapid digital evolution and continuous search for more cost-efficient business structures, insurance businesses have to innovate and also rethink their core products and services in order to retain their customer base.

The emergence of InsurTech, pay-per-mile car insurance models, the development of blockchain solutions in insurance contracts and the provision of cyber insurance services, which take into account consumer and EU data protection requirements, are driving fundamental changes across the insurance industry’s value chain. The traditional insurance approach has now reached the end of the line and future growth will depend on innovation and a greater focus on proactive prevention, instead of just protecting against loss. Faster adoption of new technologies by insurance companies is the key driving element towards success and growth.

Insurance companies have already contributed to the emergence of digital platforms by consolidating their position as trusted providers for third parties. Platforms interested in insurance companies are mainly establishing themselves as partners for insurers, providing them with the needed agility in order to boost each segment of their value chain. When looking to fully embrace Amazonisation, insurers must focus on improving the overall client experience. Transparency of products and pricing will be key as consumers gravitate towards the products best tailored to their specific needs. At the same time, leveraging huge amounts of data will be crucial to profitability, as more and more customers demand usage-based insurance.

Operating in a persistently low interest rate environment, which has now been exacerbated by the Covid-19 crisis, insurers face challenging economic fundamentals as well as relentless regulatory pressures at the international and European levels. Insurers already started transforming their business models in order to stay ahead of these disruptive trends.