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SBM-3
Short and medium term
The year 2024 will be the last period of implementation of the current “Potential and Growth” Strategy. In the short term (current) and medium term (continuation of the strategy), issues related to the macroeconomic and regulatory environment, as well as those specific to the sectors in which the main PZU Group companies operate, will be particularly important. The table below presents references to key factors that could affect the PZU Group’s business.
Long-term
In the long term (more than 5 years), the PZU Group’s core business will be affected primarily by demographic and social changes related to population decline, with an aging population and declining birth rate, technological developments, in particular the use of artificial intelligence, climate change, increased environmental awareness and green transition.
One of the most pertinent challenges before the insurance industry in Poland and worldwide is the immense insurance gap created by risks faced by people in their lives – both privately and in the corporate environment – which are not covered by insurance products existing in the market, and those for which cover has not been bought out by the interested parties themselves. It is estimated that worldwide, this gap amounts to USD 1.5 trillion, this being the total value of premiums which should be paid in order for clients to avoid potential costs of risk materialization1. Part of the gap concerns life insurance and health insurance, but is also related to new risks involving climate change, green transition, and cybersecurity. Risks related to insuring natural disasters still pose a challenge. The insurance gap is an opportunity to build insurance awareness among clients. What is immensely important here is education addressed particularly to the young generation, and an adequate adaptation of the insurance offer.
The COVID-19 pandemic raised the feeling of uncertainty and therefore insurance awareness among clients. This is related to the higher demand for life insurance and health insurance. Similarly, the fact that healthy, active yet safe living is in vogue globally increases interest in insurance and medical products. The challenge for the insurance industry is not only to maintain this interest, but also to prepare an appealing offer in different channels of distribution. Changing customer expectations will affect the business and performance of the PZU Group in these two areas of activity. This is especially true with regard to the personalization of offerings and quick and easy access to a comprehensive ecosystem of health services including preventive measures, psychological support, dietary advice and immunizations, rapid assistance from specialists and access to diagnostics as well as hospital insurance.
Health debt that emerged between 2020 and 2021 during the COVID-19 pandemic remains a challenge. The long tail of the epidemic, in the form of deteriorating health for many people and the resulting complications, may drag on for years. The possible overlap of the long-term effects of the pandemic and the effects of not treating other diseases will be an additional risk factor. The pandemic has also evidenced other problems, such as obesity which is a precipitating condition for most chronic diseases, such as diabetes, hypertension, heart diseases and motor diseases.
Factors that will affect PZU’s operations over the long term include demographic trends, mainly the aging population, mortality, morbidity, especially of civilization diseases, and fertility rates. As the population continues to decline, coupled with the simultaneous aging of the population, the demand for health care and long-term care to senior citizens and financial services increases. Middle-aged people are increasingly realizing that they will need to be more financially independent in a decade or so. The aging population is generating a heavy burden on the pension and health care system. If the government is unable to fund these expenditures, it will have to make cuts – most likely the largest in health care and social spending. At the same time, citizens will need to make more provisions for old age. How the development of artificial intelligence will affect the length and quality of life and what benefits it will bring to future retirees is difficult to predict at present, but will undoubtedly be reflected in the offered range of health, insurance and financial products.
New technologies and developments in artificial intelligence are setting the standard for customer service. Further transfer of clients from traditional to remote channels can be expected. Just like remote or hybrid work models, remote sales, inspections or claims handling have spread fast. In the next few years, we can expect to see more and more widespread use of artificial intelligence-based solutions, in an increasing number of business areas such as underwriting, offer personalization or customer service automation. The key will be to use artificial intelligence to predict customer trends and behaviors to create more tailored and competitive insurance, health and financial products.
The development of new technologies entails several challenges that insurers and financial institutions will have to face. One of them is effective management of the implemented solutions.
It is becoming extremely important to balance service processes in such a way that the human factor is retained where it is necessary and expected by customers, and the part of the processes that will not cause a deterioration of service quality is automated. Another challenge is the supply of skilled workers with expertise and skills in areas related to cybersecurity, artificial intelligence, machine learning and data analytics. The rapid growth of these fields has resulted in an increased demand for employees who can assist companies in leveraging their technological potential. The risk associated with the shortage of employees with appropriate skills in new technologies is one of the main problems associated with the implementation of technological advances.
Technological progress has also led to the emergence of so-called insurtechs and fintechs2 , which are already influencing and will continue to influence the transformation of the insurance and banking industries over the long term. Recently, one of the more popular trends in the financial industry is Embedded Finance. It involves the integration of various financial products such as loans, insurance, debit cards and investments, with almost any non-financial product. This means providing financial services in a sector where the core operations are not of this nature.
Ongoing digitization, development of the Internet and cloud solutions led to a new challenge for the insurance market – cyberthreats. Cybersecurity risk is currently one of the fastest growing among all risks within the insurance gap, and insurance products cover only a small share of risks related to cyberthreats. With ever-greater awareness among entrepreneurs, one should expect an ever-faster development of a comprehensive cyberinsurance offer, not only for large corporations but also for small and medium enterprises. This will include not only protection of personal and corporate data, but also safeguards against attacks on critical infrastructure. Insurers will focus on offering comprehensive solutions that combine financial protection with prevention and incident response services.
The second segment of risks where the insurance gap has been widening in recent years is climate risks. The value of the gap is increasing due to the increased frequency and severity of floods, heavy rains, frosts, heat waves, droughts, fires, hurricanes and other natural disasters. Given the long-term nature of this trend, better prediction and prevention activities are needed. Better prediction of climate risks allows for better tailored insurance cover. Insurers are beginning to take advantage of new data streams (e.g., satellites, drones), as existing underwriting methods based on past events do not reflect well the nature of dynamic global climate change. The complex nature of climate risk presents insurers with the challenge of developing new insurance products which will adequately reflect the frequency of catastrophic events and translate into the premium levels. The risk of climate change not only affects the costs involved in claims paid or reinsurance schemes, but also the capital requirements for insurance companies.
At the same time, insurers and financial institutions are increasingly expected to take responsibility for delivering a just transition to a low-emission economy. This influences the development of „green” insurance and loan offerings for, among others, large corporations and smaller businesses, supporting sustainable development, and in particular energy transition. At the same time, financial institutions, including insurers and banks, increasingly incorporate responsible investment principles taking into account ESG factors into their investment activities. This is determined not only by regulatory issues, but also by society’s changing expectations of financial institutions and corporations – customers want large companies to take a proactive stance in the fight for a better planet.
Energy transition opened the path for insurance companies and banks to insure and finance investments in renewable energy sources, such as onshore and offshore wind parks, biogas plants, and photovoltaic systems. This generates new challenges in developing adequate offerings ensuring financing and insurance from the moment works commence, through construction, to completion and start-up. A similar challenge spread over decades could be the planned development of nuclear power in Poland.
Customers themselves are also increasingly opting for eco-friendly solutions that contribute to combating climate change. The quest for convenience and the increasing environmental awareness result in a rapid development of the shared mobility industry. City dwellers increasingly frequently choose means of transport which allow them to quickly and efficiently move around and change the means of transport depending on the situation on the road – this is the so-called shared mobility. This global trend includes not only cars but also scooters, segways, skymasters and electric unicycles, rented via smartphone apps. Insurers’ offerings will meet customer expectations and include products dedicated to shared mobility.
Growing electromobility also significantly impacts the motor insurance segments, in the context of claims handling and premium calculation, as valuing a policy for an electric car involves other rules than for vehicles with combustion engines. With respect to the latter, one of the more important criteria for valuing motor insurance is engine capacity, because this determines the car power which translates to potentially more considerable damage. Electric cars have no engine capacity, which is why insurers need to modify their tariffication method for third party liability insurance and own damage insurance.