How can insurers seize opportunities amidst heightened volatility?

Key strategies include diversification and setting up rigorous capital models.

The insurance industry, facing heightened volatility due to macroeconomic and geopolitical factors, can address risks and seize emerging opportunities through a multi-faceted approach, according to an industry expert.

Richard Hewitt, head of business intelligence for Europe, the Middle East, and Africa at Guy Carpenter, stressed the importance of diversification as a critical strategy for spreading risk and minimising exposure to any single event or market. He added that effective risk assessment, which takes into account geopolitical, economic, and other external factors, is essential for identifying vulnerabilities and making necessary adjustments.

Hewitt noted that insurers’ work doubled amidst the recent inflation, saying they can leverage advanced technology such as dynamic pricing models, machine learning, and artificial intelligence to respond more effectively to market fluctuations. These tools enable insurers to develop adaptive pricing strategies that ensure premiums remain realistic and reflective of volatile conditions, he added.

He also said insurers must be able to adjust their investment portfolios in response to changing interest rates, economic shifts, and market volatility. This involves asset liability management, ensuring liquidity, and diversifying investments to balance risks and returns.

Hewitt highlighted the value of scenario planning, which allows insurers to anticipate and prepare for various potential geopolitical and economic outcomes. Engaging in such exercises can enable the development of robust strategies for future uncertainties whilst fostering key relationships that could prove beneficial in challenging scenarios.

Above all, insurers must prioritise the establishment of rigorous capital models to ensure they can meet the expectations of clients, investors, regulators, and rating agencies, Hewitt said. He underscored the need for capital models that address factors such as composition, efficiency, reinsurance utilisation, sensitivity to changes, transferability, fungibility, and the ability to raise additional capital even under extreme circumstances.

“Volatility reminds us of [the] fundamental value of insurance and therefore the potential to develop new opportunities and also growth areas,” Hewitt said.