M&A on hold but will return

The days of mega-mergers in the insurance industry may be behind us. Activity has dropped significantly from the peaks of 2014 and 2015 as the industry steadies itself in the face of waves of global economic and political uncertainty. The over-arching sentiment is to wait and watch, but that is unlikely to prevail as we go into 2018. There are multiple pressures building up. Digital innovation has reached the top of corporate agendas and the search for the best solutions should stimulate M&A activity. Alongside this, Solvency II is having a significant impact, especially in the life insurance market where several major funds have closed and in the general insurance market where activity in the run-off sector is on the rise. International influences such as the fall in the value of the pound and the ambitions of large Asian insurers will also combine with these other factors to rekindle M&A activity.

Gender remains a key diversity issue for insurers

Insurers have been working hard to address the lack of women on boards and in senior management and still have work to do to meet, let alone exceed, expectations. The market will continue to support the many excellent initiatives to help address this. As it does, attention will move further down corporate structures as the gender pay gap reporting rules begin to bite. This will expose inequalities in firms and make it easy for prospective employees to see shortcomings, pushing female talent towards the best performing firms. Some firms will have to take drastic, and costly, action to address this.

The robots are coming

The insurance industry has belatedly woken up to the huge potential impact of artificial intelligence (AI) on the sector. Up until now the focus has been mainly on the automation of admin-heavy processes, but academic research shows the potential of AI to replace high-level actuarial, underwriting, pricing and claims roles. New entrants to the market will not carry these high fixed costs and that will accelerate a review of roles in established insurers. We will see a new generation of data scientists, some of whom will also have actuarial and underwriting skills, emerge as key roles. AI will still have a major impact on large numbers of largely administrative roles, even customerfacing ones, as customers are attracted to digital platforms to interact with insurers. This will create significant challenges in terms of corporate structures, property portfolios and handling sensitive personnel issues.

The certainty of political uncertainty

The clearest consequence of the inconclusive general election in June is a period of heightened political uncertainty. With the Government trying to push through the hugely complex Brexit-inspired legislation without a majority in the Commons or the Lords, the potential for it to fail and provoke another election within the next 18 months is high. This will affect business confidence and investment decisions are likely to be delayed as a consequence. Insurers will be also nervous that the new Government will return to Insurance Premium Tax (IPT) to raise money as its spending and borrowing plans come under pressure. The industry has made a powerful case for not increasing IPT further after the sharp rises of the last two years with the core rate now at 12%. IPT is already set at 20% for travel insurance and mechanical breakdown and closing this gap could be tempting for the Chancellor.