What are the biggest risks facing property casualty Insurers?
Social inflation, Climate change, Consolidation, and technological advancements are a few of the threats property casualty Insurers must address. In addition, they are likely to lead to a greater need for sophisticated customer insights capabilities. These capabilities can help insurance companies make faster and better business decisions. Let’s look at three of them. What do they mean to property casualty insurers?
The rising costs of social inflation is a growing concern for many insurance companies. Social inflation affects the reliability and quality of data, and can cause significant disruption. However, with proper understanding of the strength and weakness of the data, reasonable forecasts can be completed. Social inflation disrupts the data and increases the complexity of its use, making it difficult to make a reasonable forecast. Insurers may elect to account for social inflation by incorporating more conservatism or adding more contingencies to the policy.
The US legal system has long been considered a threat to European companies. In recent years, however, social inflation has become an increasing concern. While this trend is only a US phenomenon, it is expected to spread to other countries in the near future. There are several causes of social inflation, including legal, political, and economic factors. Moreover, the media has also contributed to the public’s distrust of large corporations and big business.
Various trends in society are causing increased liability costs. A COVID-19 pandemic, for example, has contributed to social inflation. Behavioral and legal trends have also contributed to social inflation. In the United States, it is particularly prominent due to the adversarial legal procedures, which have resulted in high jury awards. The insurance industry can help mitigate these risks by leveraging relationships with business partners.
Despite the increasing costs of insurance claims, social inflation remains one of the biggest threats to the industry. Rising societal anti-corporate sentiment and trends toward social responsibility have all contributed to social inflation. Insurers need to be aware of these trends to better navigate the litigious environment. However, it is difficult to understand the causes and trends behind social inflation. There is no simple answer, as it’s impossible to identify which causes it.
In addition to the increase in costs, social inflation may also impact liability lines of business. For example, social inflation may cause long-tail claims to resolve at exorbitant settlements or jury awards. Insurers may be asked to defend legacy occurrence policies that are no longer valid because of social inflation. This increases the costs of liability claims and may result in higher premiums in the future.
As a former California insurance commissioner, I’ve been concerned about climate change as one of the biggest risks facing property casualtiy insurers. The recent Intergovernmental Panel on Climate Change report warned of increased risks caused by global warming. The report, dubbed a “code red for humanity” by United Nations Secretary General Antonio Guterres, has only raised the stakes for insurers. The report also raises concerns about increased costs resulting from climate disasters and the risk of companies going without insurance coverage.
Regulatory changes have put pressure on insurers to act and assess the risks posed by climate change. The PRA has given insurers a 2021 deadline to meet their climate risk management expectations, covering governance, risk management and scenario analysis. Moreover, the FCA has mandated premium listing firms to disclose climate risk. And lastly, EU regulations on Sustainable Financial Disclosure Regulation impact insurers and their ability to make informed decisions about the risks associated with climate change.
Despite the fact that climate change poses a number of risks to property casualty insurers, it’s important for policyholders to understand what the risks are before deciding how to respond. Insurers have to balance the books against regulatory requirements and protect consumers, but the costs of disaster recovery are too high. Supervisors should act now to reduce climate-related risks. A moratorium prevents insurers from rescinding coverage, but this doesn’t mean the problem will go away.
While it is still difficult to determine the full extent of the risks associated with climate change, the consequences are already being felt in many regions of the world. As a result, insurers can no longer ignore climate-related risks – they must address these issues and ensure their business continues to operate as normal. And the future of the insurance industry depends on it. And if they don’t, their clients may face serious consequences for their operations.
Many businesses reduce insurance programs in times of economic downturns. Many of these companies rely on past data to calculate future risks. But the uncertainty about future climate risks will require more accurate modeling and projections. The increased risks may also require national government involvement. There will be more lawsuits over climate-related issues. And this is just the beginning. If the effects of climate change don’t come to pass, property casualty insurers could suffer substantial losses.
The FIO should encourage state insurance departments to make climate risks a mandatory component of risk disclosure for insurers. It should also advise insurers on ways to address climate-related issues like bluelining and affordability of coverage in low-income communities. It should strive to lead by example in order to create a more fair and stable insurance market. It’s also an opportunity for insurers to work with state insurance departments on policies and regulations.
While traditional business models are still in place in the property casualty insurance industry, newer regulations and weaker economic conditions are putting them under pressure. Carriers can no longer rely on investment income to sustain operations. As a result, more consolidation is on the horizon. While consolidation could result in higher rates, it could also spur innovation and new market entry. Progressive companies are expected to capitalize on this trend through advanced data and analytics.
Insurers must adapt to rapidly evolving insurable mass. New risks and markets will continue to emerge, requiring the reinvention of the business model and refocusing resources. New product innovation and portfolio reallocation will be necessary to address these challenges. P&C insurers will have to adapt their go-to-market strategies, embrace modularity in their product offerings, and reallocate capital between commercial and personal lines. New types of risks will continue to emerge, and the industry must compete for them. Some examples of new risks include cybersecurity and data, machine-learning liability, and terrorism risk.
The recent “deal boom” has resulted in many companies consolidating. As a result of the resulting consolidation, insurers gain market advantages through negotiating with healthcare providers and customers better. However, mergers and acquisitions are also highly susceptible to financial distress and competition. Consequently, insurers should carefully consider the impact of consolidation on their business model before deciding whether to divest.