2018’s most dangerous risks for insurers

red flags on top of rocks by the ocean

One definition of insanity is “doing the same thing and expecting a different outcome.” Well, we asked insurers the same question in December 2017 that we asked in December 2016: What are the most dangerous risks to your company in the coming year? And we did get a different outcome.

What we found was that insurers’ concerns have shifted. Last year, other than the top entry, cybersecurity and cybercrime, most of the concerns were the usual suspects – the traditional risks that insurers have always faced – pricing, IT, competition, underwriting, regulations, investments, catastrophes.

The 2018 responses to that same question suggest that many insurer managers are concerned that the industry is now closer to becoming the next victim of the modern wave that has emptied out shopping malls and closed many book stores. Risks in the top ten now include: disruptive technology and whether customer needs are being served by traditional approaches. What’s especially notable is there’s less confidence in management‘s ability to find its way through these problems; the risk of strategic direction and opportunities missed moved up from eighth place to third.

Based on responses of more than 200 participants (twice as many as last year), our list of the top 10 most dangerous risks for insurers in 2018 is outlined below:

  1. Cybersecurity and Cybercrime (Number 1 in 2017 also)
    Cyber has appeared at the head of both emerging risk and presenting risk lists in the past year. Risk managers think that cyber is a major presenting risk and that it’s by no means finished evolving. As insurers transform business operations to become more digital, they grow more susceptible to cybercrime and require heightened cybersecurity. This operational risk may be on top because of the heavy news coverage of a relatively small number of major incidents.
  2. IT/Systems and Tech Gap (Third in 2017)
    Most insurers that we talk to have just completed, are in the middle of, or, are planning a major IT systems overhaul. There’s a fear, however, that all that IT updating requires a constant and expensive effort to keep up. But, if information technology systems are not up to par, insurers run the risk of not being able to satisfy customer service expectations, presenting both an operational risk and a strategic risk. The amount of investment in computer systems is the strategic issue while the successful operation of those systems is operational.
  3. Strategic Direction and Opportunities Missed (Eighth in 2017)
    Respondents show a lack of confidence that management can get it right. They’re afraid top management will take the company off in a rush – but in the wrong direction, while leaving valuable options on the table. This is, of course, a strategic risk and its position on this list indicates that respondents believe that top management may be too much in the weeds and not enough in the clouds.
  4. Pricing and Product Line Profit (Second in 2017)
    Insurance has always been a business where sales are made and prices are fixed before the cost of goods sold (claims costs) is known. The data analytics revolution ties this risk firmly to technology issues. This is an insurance risk and if ever it falls outside of the top 10 risks for any individual insurer, it’s a clear indicator of impending doom.
  5. Runaway frequency or severity of claims (19th in 2017)
    Nothing like the highest natural catastrophe claims year to bring about a major jump in this insurance risk. Even if prices and underwriting are just right, chance can result in more claims or larger claims than anticipated.
  6. Disruptive Technology (14th in 2017)
    No one knows what it will be, but many survey respondents are sure that someone, maybe Alphabet or Amazon, is quietly developing the insurance company killer app. This strategic risk is a fear that’s tied very closely to the next risk.
  7. Customer needs not served by traditional approaches (New in 2018)
    This is perhaps the flip side of the prior risk. For many carriers, the average age of insureds and agents/brokers increases by almost a full year each year. They fear that the younger generation does not see much value in the insurance products that have been sold for 50 years or more and do not have interest in a sale or claim process that cannot be completed with a few clicks on their smartphones. It’s another strategic risk that may be linked to aging of insurer management teams.
  8. Emerging Risks (10th in 2017)
    This risk can be read to mean “We do not know what, but something bad is right around the corner”. It may have moved up because of an increasing feeling of ill-defined gloom, or it could be the opposite — emerging risks may have moved up because there’s increasing confidence in management’s ability to handle the risks that have been identified.
  9. Competition (4th in 2017)
    Insurers seem to fear a tech-based takeover more than pressure from a traditional competitor, but it’s still a top concern and beat out 65 other risks. Competition is always a major risk for insurers because of the high degree of price sensitivity of most customer bases, along with low barriers to entry. Many insurers are seeking diversification via expansion out of their traditional geographic footprint, which heightens traditional competition. Competition is the classical strategic risk of a capitalist system.
  10. Underwriting (5th in 2017)
    Another classic insurance company risk with falling rank. Insurance risks include pricing, underwriting, claims and reserving. Three of these still fall into the top 10. Reserving does not, coming in 32nd. So respondents still think it’s highly important to execute the basics of the insurance business. Reserve risk may be seen to be low because of a relatively long streak of reserve releases. That’s one of the cyclical parts of the insurance business and it’s surprising that insurers don’t seem to think that recent declines in reserve releases isn’t a sign that the potential for reserve strengthening is getting closer.

Falling out of the Top 10

Three risks fell out of the top 10 in 2018:

  • Legislative and Regulatory (6th in 2017, 11th in 2018)
    Recently completed federal activity on taxes and lack of activity on the Affordable Care Act may be the reason for decreased concern about this risk.
  • Natural Catastrophe (9th in 2017 and 17th in 2018)
    The position of this risk in 2018 may be an example of the Gambler’s Fallacy: High losses from natural catastrophes in 2017 don’t actually drive down the likelihood of large losses in 2018.
  • Investment Market Risk (7th in 2017, 22nd in 2018)
    This shift in priority for investment risk seems to match the markets where securities prices are booming and volatility protection is cheap. Sometimes not a great sign, but as JM Keynes said, “Markets can remain irrational a lot longer than you and I can remain solvent.”

What can you do with this information?

We hope you’ll use this list and its ranking to challenge your own list of top risks. Think about how this list and the changes from last year compare to your company’s thinking. Are there highly ranked risks here that aren’t on your risk register or that have a lower ranking? Are you okay with that?

About Dave Ingram

Dave is an Executive Vice President of Willis Re, specialising in theory and practice of ERM for insurers. Based in…
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