In January, we wrote about 2018’s most dangerous risks for insurers, highlighting what more than 200 insurance managers cited as the top 10 risks to watch for the year. Now that we’re midway through 2018, it’s time to take a step back and review what’s now trending based on our research and what adjustments insurers might need to make to their risk assessments.
Here’s a midyear review of the risks we noted in January:
1. Cybersecurity and cybercrime: While malware remains a concern, the most pervasive cybersecurity problems to date are Meltdown and Spectre, two hardware vulnerabilities built into the chips of almost every server, computer, and mobile device that enable attackers to steal and exploit data from the memory of other programs located on the same device. In instances where there’s a shared server or cloud-based system, the implications can be disastrous, making it much harder for companies to protect themselves against vulnerabilities. For more information, read Protecting your company from a cybersecurity Meltdown (or Spectre).
2. IT/Systems and the tech gap: Technology is moving at light speed and InsurTech is booming, with more than $700 million invested in projects in the first quarter of 2018 – more than double the amount invested in the first quarter of 2017. Here are a few of the projects under development that insurers should watch for:
- A blockchain startup that allows customers to create a secure catalog of all of their assets
- An artificial intelligence (AI)-enabled online managing general agent that generates auto coverage recommendations depending on specific customer needs
- A single plan incorporating cyber protection services, cyberattack support and cyber liability coverage
- An AI-enabled claims management system for workers compensation insurance
- Full automation of simple claims with 99% accuracy
- Data mining of web, real-time and social data to improve the rating process and identify fraudulent claims
- Concierge service to manage logistics of home service needs, including comprehensive maintenance scheduling
- Single item on-demand coverage for any valuable item for any time period
- Machine learning analytics combined with vast specialty databases for real-time management of risks
- Self-service mobile apps for estimating auto claims by photo
And that’s just the beginning. According to developers, more ideas are on the way, many of which will incorporate AI, cloud, agile software delivery, robotic process automation, Big Data and enhanced analytics, blockchain, parametric sensors, biometric sensors, virtual reality and chat bots, to name a few. For more on tech, see our Quarterly InsurTech Briefing Q1 2018.
3. Strategic direction and missed opportunities: Homeownership is among the many things in flux these days. While it’s been trending downward since the 2008 financial crisis, a recent report from Freddie Mac projects homeownership among younger families will trend upward to historic levels in 2018, as will the costs of owning a home. If home ownership does take a turn for the better, insurers that can offer homeowner coverage that meets young families’ protection needs on their budgets will be the ones that capture this opportunity.
4. Pricing and product line profit: It’s always a concern, but in 2017, it was both a concern and a problem, likely driven by losses from the severe storms in the Caribbean and the Gulf of Mexico. According to data from SNL Financial, 54% of the top 200 property and casualty (P&C) insurers had combined ratios over 100% in 2017, up from 47% in 2016 and 39% in 2015. But while 39% is better than 54%, it still means that about two in five of the top insurers weren’t able to make an underwriting profit. So for many insurers, this risk is still very real and the outcome for this year remains to be seen.
5. Runaway frequency or severity of claims: The first quarter of 2018 was consumed by reports on the catastrophic events in 2017. Two major hurricanes made landfall on the U.S. mainland, Harvey in Houston, and Hurricane Maria, which dealt a savage blow to Puerto Rico that took out the power grid, requiring months of repairs. Massive wildfires consumed the western states, damaging thousands of homes and businesses in the process. The record level of insurance claims paid led to records for reinsurance recoveries and to a halt of the continuing downward trend in reinsurance rates. Insurers are understandably afraid of a repeat of the events of 2017.
6. Disruptive technology: It’s anybody’s guess as to which technologies will be applied by firms outside of insurance to disrupt business and which will be embraced by insurers that aim to disrupt from the inside. But insights from Willis Towers Watson’s 2017/2018 P&C Insurance Advanced Analytics Survey Report reveal that more than half of insurers plan to be early adopters of technologies such as smart building data, telematics, social media and unstructured claim and underwriting data. Usage-based insurance driven by telematics data is just one example of a game changer that could leave late adopters out in the cold
7. Customer needs not served by traditional approaches: There’s a growing feeling among insurers that they’re losing younger consumers because they don’t offer seamless access to insurance protection and claims settlement via smartphone applications. However, this past February, JD Power released a survey of consumer satisfaction of homeowners recently filing insurance claims and found that despite record-setting claims levels, satisfaction was at the highest level in total for the industry.
But there’s room for improvement: Some insurers scored far below the averages and some of the states with the worst catastrophic claims scored lower. Insurers have done a good job of setting and meeting expectations regarding the timing of claim settlements, but need to improve when it comes to incorporating outside appraisers into their processes. Even with that good news, insurers are still feeling the pressure to meet customer expectations set particularly by the top online retailers.
8. Emerging risks: In addition to these risks, insurers are concerned about what’s to come. According to a survey released by AXA on emerging risks, the top five to watch include:
- Climate risk — Considered to be the most concerning risk due to the ever-increasing concentrations of coastal populations, climate change could bring more storm surges and higher tides.
- Cyber risk — This is seen as a top presenting risk AND a top emerging risk because of the way cyberattacks are always changing and evolving.
- Artificial intelligence — It’s not AI itself, but the reliability of automated decision systems run by AI that’s of most concern. Just remember the days when stock market prices went crazy because some trading algorithm developed a tic — and apply that to many other areas where AI is being applied.
- Financial risk — As central banks move away from the ultra-low interest rates they’ve held for most of the past 20 years, the ability of global economies to operate on their own will be challenged. In addition, the potential for trade wars could place stress on the financial system.
- Natural resources — Population growth is expected to slow, but not before several billions of people are added to the population. That means it’s likely there’ll be substantial pressure on natural resources, most notably fresh water. And with 20% or more additional people, we’ll need to determine how we can be more efficient in our water usage. The same argument may apply to other natural resources, but few are as fundamental to life as water.
9. Competition: Smaller insurers are always worried that a much larger insurer will use their deep pockets to take over their niche. Larger insurers worry that a non-insurance giant will poach their clients. But 2017 was a benign year for competition, and it’s likely that 2018 will follow suit. According to data from SNL Financial, about 84% of the top 200 P&C insurers experienced positive premium growth in 2017. That’s the highest percentage in the past four years. Total premium growth for that group was 4.8% in 2017, also the highest in four years. Over that period, 79% of insurers had positive premium growth in at least three of the four years if not throughout. Cumulatively, 86% of these insurers had positive premium growth for the 2013 to 2017 time period. So while competition is almost everyone’s worry, for the vast majority of insurers, things will continue to be business as usual.
10. Underwriting: On the whole, underwriting results are weak at best. Telematics, AI and chatbots are taking on more of the roles of underwriters, but we don’t see this as a threat, at least not to the underwriters who are able to adapt to the brave new world and can work as the human interface between the technology and prospective customers.
What can you do with this information?
We hope you use this midyear update to gauge against where you stand on the top 10 risks outlined this year, and if needed, make adjustments to your risk assessments. While this list is based on our own research, we hope this spurs you to do a little research of your own, taking into account your private sources of information about these risks. As for what the rest of the year holds, insurers who will do best will be those who stay on top of these trends in this radically changing environment.