The strategic orientation of insurers’ business models is becoming more challenging

The insurance industry is currently facing a challenging macro environment in Germany and the European market and is confronted with fundamentally changed framework conditions. From Consileon’s perspective, the strategic direction is therefore becoming more challenging in view of the following future issues:

  • Increasing cost pressure with an impact on business models
  • The fulfilment of EU taxonomy requirements, climate and sustainability risks as well as increasing major weather loss events influence the risk transformation performance of insurers
  • Increasing complexity of capital investment due to geopolitical and macroeconomic influences
  • Opportunities and challenges of demographic change
  • Digitalisation, automation and data availability

The complexity of many business models is increasing – with expected higher costs

These future issues will significantly increase the complexity of many business models – with expected higher costs and an increasing need for material investment. The recent merger announcement by Gothaer and Barmenia clearly shows that insurance companies are redefining their strategic focus and that it presumably no longer makes sense for all insurers to offer all lines of business at the same time under these conditions. It can be assumed that the additional regulatory focus on these future topics will increase and the requirements will become more stringent. For example, BaFin recently pointed out the challenges that future topics such as digitalisation, climate change and changing customer behaviour will bring for insurance companies and recommended that they scrutinise their business models and risk management. [1]

Medium-sized companies in particular are therefore initially faced with the challenge of how the (legal and regulatory) requirements can be met, how the relevant issues can be addressed conceptually and how implementation can be ensured both technically and in terms of personnel. The key questions are:

  • For example, what do climate change, sustainability or demographic developments mean for the respective business model and strategic focussing?
  • Which business model will still be profitable in the future, especially for small and medium-sized insurers?
  • What regulatory (reporting) requirements exist from the EU taxonomy and how can the necessary database be created?
  • What climate risk exposure exists for the specific business model and how can the problem be solved in concrete terms?
  • What management framework is required to raise the right questions in insurance companies and support decisions based on data?
  • What data is currently available, what additional information and indicators are required for more conscious management with a view to future issues?

For many insurers, the fulfilment of the legal requirements already represents a considerable effort – accordingly, management issues can often only be considered in the next step. From a business policy perspective, insurers will have to scrutinise the climate risk exposure of their portfolio in terms of regional and line of business focus as well as pricing and underwriting. Generali, for example, reports drastically increased losses as a result of natural catastrophes, which at the end of September 2023, at 840 million euros after reinsurance, had already significantly exceeded the previous year’s losses of 673 million euros. [2] The competitive course is already being set today, and the later the fundamental questions about strategic positioning and the resulting management issues can be answered, the greater the potential competitive disadvantage will be in the future.

Can today’s management systems provide answers to these key challenges?

According to international studies, an estimated 60 per cent of strategies fail to be implemented. [3] As climate risk and sustainability strategy, digitalisation, demographics and capital investment are integral components of the business models of insurance companies, this must be reflected in a holistic management framework and KPI concept at top management level. A management concept that is economically and strategically relevant and incorporates future topics therefore requires a correspondingly robust, comprehensive and consistent KPI concept based on digital processes. An extended control model supports management in setting the course for a forward-looking and sustainable business model based on data. The interdependencies between the operational challenges and the project portfolio as well as the future topics of sustainability, degree of digitalisation, customer enthusiasm, innovative strength and change readiness must be taken into account in order to manage and prioritise investment budgets in a targeted manner. For example, sustainability and digitalisation go hand in hand when it comes to implementing a KPI management system based on digital processes, ensuring the necessary data availability and actively managing the corresponding investment budgets. [4]

However, the current management framework in insurance companies is usually still primarily performance-orientated. This means that the focus is often on past financial indicators instead of future-oriented indicators. Today’s management concepts usually take into account indicators that provide information about the company’s own positioning with regard to relevant future issues, either insufficiently or only in isolation in designated functional controlling units. Different KPI reporting formats and data pools developed in isolation often coexist in parallel and are neither harmonised nor consistent. This results in complex data structures, isolated solutions and a dependency on head monopolies. For many insurers, this has led to the emergence of human middleware, whose task is to compensate for the consequences of complex data structures by manually processing and further processing the required data and to create evaluations, reports or analyses manually on this basis. For many companies, determining their own positioning in terms of climate risk exposure or digitalisation for reporting purposes alone is correspondingly complex, error-prone and cost-intensive.

Special challenges for insurance companies and their management systems arise in particular when it comes to achieving sustainability targets

When it comes to sustainability in particular, many insurance companies are confronted with a multitude of standards and requirements. Clear indicators for measuring and managing their own sustainability position often still need to be developed. [5] While it can be assumed that most of the aforementioned topics are covered (in isolation) by existing KPI reporting structures, sustainability controlling – including corresponding KPI and management systems – still needs to be established in many insurance companies. The need for sustainability controlling and the integration of sustainability criteria into risk management results from regulatory requirements such as the EU taxonomy, SFDR, MiFID, IDD or CSRD as well as the indirect financial impact to be expected.

Insurers are considered pioneers in the recording and assessment of climate risks. Based on a study by Morgen & Morgen [6], however, there are some clear differences between individual companies, both in terms of the quality and transparency of the publication of ESG measures and with regard to the recording and assessment methods (e.g. CO2 emissions), the description of sustainability investments and targets and the social criteria. Accordingly, there are still transformation hurdles in the concrete processing and integration of ESG data and implications into the management framework and risk management. [7]

The management of climate risk exposure is an element of risk transformation and affects the core business as well as the financial success and capital costs of insurers

The formulation of sustainability targets is not a purely regulatory exercise. Sustainability risks are an element of risk transformation and are therefore part of the core business of insurers. Accordingly, forward-looking risk identification and management is required. Long-term climate effects must already be taken into account in the Own Risk and Solvency Assessment (ORSA). It can be assumed that climate risks will have an indirect impact on the balance sheets and Solvency II capital requirements of insurers in the medium to long term – be it via the capital investment side, in underwriting and pricing or via climate-related major loss events. The fact that this is already relevant for refinancing costs today can be seen, for example, from the fact that the rating agency Standard & Poor’s (S&P) expects some of these factors to have a material impact on the credit rating and stakeholder value of insurance groups (globally). According to S & P, the creditworthiness of insurance groups is already influenced by drivers of the ESG dimensions S and G today. S & P also emphasises the relevance of biodiversity as well as environmental and social risks for stakeholder value in the (global) insurance industry. Access to insurance products, major loss development and transitory climate risks take centre stage. [8]

Sustainability positioning therefore has a direct (e.g. via claims development and investment income) and indirect (e.g. via capital costs) impact on the financial success and capitalisation of insurance companies. The capital market relevance of ESG ratings is therefore increasing accordingly. However, the current ESG ratings of insurers do not yet reflect this significance. If one compares the positioning of insurance companies in the dimensions “financial strength rating” and “ESG rating”, they perform marginally worse in the ESG ratings than in the financial strength ratings. Nevertheless, the ESG ratings show a wider range and spread than the financial strength ratings. Depending on which rating approach prevails in the future, this could mean significant downgrades for some companies. It can be observed that larger insurers or subsidiaries of international groups perform better on average in ESG ratings. A “size bias” can therefore be recognised in the ESG ratings, which could be related to the available data basis, capacities and investment budgets.

The development of sustainability controlling and its integration into the management framework are necessary

The integration of sustainability into the management framework of companies is achieved through sustainability controlling, which is to be integrated into the organisation, the data structures and the reporting and decision-making processes in the same way as established financial and performance-oriented controlling functions. Sustainability controlling should be seen as part of a comprehensive management framework and should by no means be viewed in isolation. All non-financial performance indicators relating to ESG aspects are bundled together in sustainability controlling. They cover business model-specific requirements that investors have of insurers with regard to sustainability targets and climate risk exposure, for example. It is therefore necessary to integrate sustainability controlling in the same way as or into financial controlling in order to be able to fulfil the various reporting obligations on sustainability, for example from the Taxonomy Regulation, Disclosure Regulation or BaFin circulars on dealing with sustainability risks. [9]

Managing climate risk exposure and sustainability positioning requires tangible and concrete measures, operational sustainability targets and measurable KPIs. The latter in particular are central to the measurable achievement of formulated sustainability strategies. However, practical implementation is made more difficult by the challenges of data availability and quality as well as the definitions and standards, some of which still need to be concretised. [10]

The Consileon approach for holistic KPI and management concepts is based on a three-stage process model

The Consileon approach for holistic KPI and management concepts is based on a three-stage process model

Based on a new, more comprehensive management concept, we identify the strategic fields of action together with our clients and address them jointly with specific measures. With the help of the new Consileon management model, we help to develop clear answers to the challenges formulated at the beginning and make the positioning measurable.

The Consileon management model is based on a consistent integration of all relevant management parameters with regard to the future and transformation capability of our customers. Isolated control silos are eliminated by rigorously pursuing the “single source of truth” approach. Another aim is to reduce the complexity resulting from the data and system structures and the often historically grown reporting system landscapes. This makes the resulting time-consuming and error-prone processes more efficient. Based on Consileon’s project experience, a three-stage approach has proven its worth, whereby different toolbox approaches can be used depending on the initial situation and requirements. The process is divided into three phases: 1. readiness check, 2. develop and implement target image and 3. optimise and automate.

The holistic Consileon approach has five clear advantages:

  • Integration of forward-looking topics in the management framework and risk management
  • Reliable and consistent management concept based on standardised KPI definitions
  • Economically and strategically relevant management focussed on sustainability
  • Strategic and operational acceptance through the involvement of business owners and prioritisation according to management relevance
  • Cost efficiency and reduction of susceptibility to errors/head monopolies

Using the Consileon approach, we support insurance companies with an elementary building block to meet the challenges of the EU taxonomy as well as future topics such as digitalisation, sustainability and climate change and to create the data-based foundations for regulatory requirements and relevant strategic decisions.