Risk revolution is driving transformative changes for the insurance industry

This article originally appeared in Insurance Day, July 2024.

The Covid-19 pandemic created the biggest global crisis in generations and sparked seismic change across the insurance industry.

Emerging risks such as digitisation, consumer protection and mental wellbeing were thrust into the mainstream. These risks have led to a raft of legislative and policy developments in these areas, although the UK’s recent general election has resulted in important bills being dropped.

Future Labour government policies are likely to address artificial intelligence (AI) strategy, consumer protection and the future of work.

The pandemic pushed AI to the fore when businesses across all sectors underwent rapid digital transformation to adapt to remote working practices.

Fast forward to 2023, when generative AI made its mark, providing a platform for businesses to increase operational efficiencies and reduce costs. While it may be in its nascent stages of development, the technology is already becoming more sophisticated and effective, exemplified by the development of automated claims processing tools and fraud detection systems.

It continues to have a profound impact on the insurance industry, driving meaningful change across a variety of areas from customer service and claims management to underwriting and pricing. The use of data generated by AI technologies has the potential to make insured risks more predictable and, therefore, more preventable.

Light touch

So far, the UK government has adopted a light touch, principle-based, “pro-innovation” approach to AI regulation, having established a framework for existing regulators to interpret and apply within their sector-specific domains.

A private members’ bill, the Artificial Intelligence (Regulation) Bill, was introduced to the House of Lords in November 2023 with the aim of making provision for AI regulation. While the bill was dropped when the general election was called, continuing debate is expected on the future of AI regulation in the UK.

Although the pandemic accelerated the digitalisation of consumer markets, creating a wealth of opportunities for businesses, it also left vulnerable consumers susceptible to unfair business practices. This has been addressed through landmark legislative changes across digital markets and financial services, placing increased governance obligations on companies operating in these sectors.

The Digital Markets, Competition and Consumers Act, which is expected to come into force this autumn, introduces a new regulatory regime for competition in digital markets. The act empowers the Competition and Markets Authority (CMA) to prevent competition abuses by technology companies with strategic power. This will include eligible companies operating in the insurtech space. The CMA will also have more robust enforcement powers to strengthen consumer protection by creating a fairer and more transparent marketplace for consumers.

Consumer protection

The Financial Conduct Authority’s (FCA) Consumer Duty, in force from July 31, 2023, introduced a higher and more consistent standard of consumer protection for retail financial services consumers. Firms across the insurance industry are required to put the interests of consumers at the heart of their business. This includes monitoring customer outcomes of products and services.

In a similar vein, the FCA has sought to protect consumers from increasingly sophisticated greenwashing practices by introducing several measures, including mandatory climate-related financial disclosures, new Sustainability Disclosure Requirements on investment labels and an anti-greenwashing rule, which applies from May 2024.

The pandemic also exposed untoward activities of claims management companies (CMCs), which have led to an increase in fraudulent claims, often involving the use of deepfake images created by generative AI technology.

This had led to companies implementing their own checks and balances to validate claims. While the new Online Safety Act criminalises deepfake images of an intimate nature, the far-reaching impact on businesses may bring about broader legislative measures.

Business interruption losses also came under scrutiny in the wake of the pandemic following the thousands of claims for recovery of losses because of Covid-19. This necessitated a wholesale review of business interruption clauses across global insurance policies. The FCA test case was brought to clarify whether there was cover, in principle, for Covid-19-related losses under a variety of different standard policy wordings.

While the outcome of the test case provided some answers, many elements were not addressed, leaving some claims unresolved and judgments continuing to be handed down in the UK and beyond.

The pandemic has shone a light on policy wordings for the insurance industry as a whole. The need for clarity of terms and understanding from all parties of what is and what is not being covered is fundamental when looking at new and renewal cover.

The lessons learnt will (or at least should) result in a fairer, more consumer-friendly industry. This will be vital to gaining trust in the sector at a time when policyholders look to their future insurance providers as their expert advisers to protect against a growing range of unknown risks.

Employee mental health has, increasingly, become a strategic business priority, with employers being urged to put employee wellbeing into the “S” of their environmental, social and governance strategy. The Financial Times recently reported that employee wellbeing, including mental health, has barely improved since the pandemic.

Notably, insurers have seen an increase in personal injury claims for pure psychiatric injuries, as well as claims for physical and psychiatric injuries. While a Mental Health Bill tabled in June 2022 did not progress, the new government has pledged to review all mental health services.

The pandemic undoubtedly accelerated the insurance industry’s response to emerging risks by driving digital transformation, strengthening operational resilience and improving consumer protection. Advances in AI and other innovative technologies have underscored the importance of insurers investing in data analytics capabilities to better understand and respond to emerging risks and to predict future trends.