Understanding insurance megatrends
Emerging megatrends in a fast-changing world, increasingly impacted by climate change, pose testing challenges for the insurance industry.
Shocking bush fires in Australia recently dominated headlines around the world and will dominate insurers’ inboxes for some time to come as families and businesses count the cost of the devastation. But were this season’s fires a one-off extreme event or a new norm? “It’s impossible to say at the moment” says Simon Laird, global head of insurance at law firm RPC. “We are seeing a series of new and evolving risks that are hard to quantify in traditional ways.” Insurance, as a business, demands a wealth of data to be profitable. You can, of course, insure anything from an alien abduction to a skydiving nonagenarian, but such one-off events are a specialist side of the industry. Setting the right premium generally relies on an in-depth understanding of the customer, the product and the probability of insured events occurring.
An underwriter assessing risk will be looking to the past for that understanding; without a reliable data set behind it, risk assessment becomes considerably more difficult.
But underwriters are now having to cope with a rapidly changing world that is placing unusually high demands on the profession and impacting the portfolio of risks insurers cover.
“While insurers have always faced change, it is the number of megatrends that is unusual,” says Laird. He cites as examples the increasing use of technology, political unrest, cyber and climate change. “The challenge for insurers is that it is hard to predict the new and evolving risks arising out of these global megatrends,” he adds.
“Insurers talk about the importance of making evidence-based decisions. These megatrends are changing the nature, frequency or severity of insured events. The data insurers have to hand does not necessarily help them to understand that changing risk. Take the bush fires; there have been bush fires for years, but how will the frequency and severity be amplified by climate change?”
Insurers are experts at assessing probabilities, but the present age of disruption can make it hard to understand claim trends. In some cases, the law is playing catch up. It has taken two years already for the UK courts to weigh the evidence on whether supermarket chain Morrisons is vicariously liable for the actions of a rogue employee who published sensitive staff details online and the final decision is not expected until later this year.
Uncertainty such as this is often resolved by legal disputes or changing regulation. In the meantime, how do insurers assess and price the risks of that kind of data breach?
Or take the issue of “silent cyber”, whereby an insurer may have to pay out on cyber losses under a policy not designed for that purpose. The cyber risk arising out of the technology megatrend has arguably caught out insurers and the markets are now taking steps to clarify whether cyber risk is covered under their existing suite of policies.
“It can be difficult to assess the adequacy of existing products,” says Laird. “There are a whole series of uncertainties which means insurers need to constantly be reviewing their products, pricing and adequacy of reserves. Adequacy of reserves is incredibly important for insurers and something the regulator takes a keen interest in.”
The industry needs urgently to examine how these megatrends might affect its portfolio of risks and keep an eye out for new ones on the horizon. Will, for example, the law around mental health develop in such a way as to introduce a new megatrend?
Not surprisingly, those who best understand the uncertainties as they evolve will be best placed to deliver sustainable underwriting profits. That may well mean a forensic re-examination of contracts; “standard” clauses may need to be revised or new products developed to meet new challenges. Insurers will need to innovate to stay ahead of the game in a digitally transformed world.
Despite the overflowing data pools that are being produced by new technology, insurers are wrestling with a series of unknown unknowns. It is time to take stock of the portfolio of risks your business covers and ensure you understand the impact of these megatrends.
* This article was originally featured in 'The Future of Insurance - a joint publication with Raconteur and The Times, published on 27 February 2020. You can download the publication in full here.