What does the new year hold for the insurance industry? Inflation, the Ukraine conflict, energy crisis, and recession fears will continue to make 2023 a year of existential challenges – all against the backdrop of the fundamental challenges posed by digital transformation that every insurer must face.

However, another aspect is often overlooked amid this multitude of external and internal problems: the question of how relevant the insurance industry can remain with its products and services in the face of a rapidly changing world. Ultimately, the future of insurance depends on this.

The future of subsidized retirement is uncertain

Specifically, in 2023, political decisions are expected for the largest sector: the German government will finally tackle the reform of subsidized retirement. The role of life insurers as the previous leader in retirement provision is at stake. If German politics decides on a state-owned equity fund model like in Sweden, life insurers could lose out at least in the successor to the Riester pension. With their traditional and modern retirement products, they would then be out of the game compared to a cost-effective standard model for investing in funds.

To remain relevant in the future, which will require the expansion of additional retirement provisions, and to participate in the strongly increasing business volume, the industry will have to move and make its own offers. It may be worth considering high-yielding standard products that can also be concluded digitally, and in case of doubt, without an initial fee. This has so far been a taboo topic for an industry that spends around €8 billion per year on initial costs. If there is a political showdown in Berlin, life insurers will have to make changes here. The new GDV concept for a “citizen pension” is a first step in this direction.

Therefore, 2023 is likely to be a very difficult year for life insurers, regardless of whether customers continue to be sold safety-oriented products as a good retirement solution in the face of record-high inflation rates, especially with a further sharp decline in single premiums dominating new business.

No coverage for the new digital challenges?

Equally urgent is the question of the relevance of the insurance industry in light of newer risks that are now concerning customers: cyber-attacks have become a central threat to the economy. In response to the increasing number of claims, insurers have recently reduced coverage and tightened conditions. Many companies have the impression that insurers have no solutions for the new digital challenges, including how to insure future innovations and digital expertise. If insurers only pay out when there is physical damage, a significant part of the modern world remains uninsured.

Insurers, according to many customers, are increasingly hesitant to take on new risks under the dictate of actuaries and analysts. For core technologies of the climate-friendly transformation of the economy, such as facilities for the production of green hydrogen, coverage is difficult to obtain because there is no experience with these risks. Insurers have therefore been losing importance in assuming risks for some time, as seen in the United States: according to Aon, insured risks in property and casualty insurance accounted for about 2% of US gross domestic product in 1970. By the end of the 1980s, the value had risen to just under 3%. Since then, it has fallen back to under 2%. Apparently, less insurance coverage is also possible.

Is there a future in the core business of automotive?

 In 2023, there is also a threat of increasing irrelevance in an old core business of the insurance industry. Car manufacturers like Tesla see cars as data collection points for various services, including a new form of car insurance. With access to the massive amounts of driving data collected, Tesla can calculate its policies competitively and without competition through its own insurance, leaving traditional car insurers at a disadvantage. If this example catches on and other manufacturers use the data from their vehicles to a similar extent, the largest property and casualty insurance sector will come under significant pressure. Only if car insurers can compete using their own telematics systems and calculate policies as individually as the manufacturers can they survive.

Can the industry survive in ecosystems?

The topic of ecosystems also has the potential to question the future importance of the insurance industry. It is uncertain what role the many insurers from the still highly fragmented German market can play in these systems. Is it a realistic option for insurers to dominate such systems, for example in the field of mobility? Or will a few companies remain as mere suppliers of policies for a business model that is dominated by others?

Moreover, when seeing a digital giant like Amazon increasingly engaging in the insurance sector, the question arises whether insurers, at their current level of digitalization, would even be able to compete with such competition in organizing their business. Remaining important for increasingly digitized customers also means that insurers must offer quality of service similar to that of Amazon and other companies.

For insurers, the new year brings an increased need to assert their relevance to customers (and also to politics) in various areas. Given the crisis-like circumstances that are likely to shape 2023 and that companies must overcome, this is a tremendous challenge for the industry. Life was once easier for the insurance industry.