As our recent feature on risk management revealed, insurance buyers get frustrated at a perceived lack of innovation on insurers’ behalf.
Insurers retort that this is all very well but risk managers often balk at paying for innovation. “Sometimes innovation is just another word for more coverage for the same price,” noted Axel Theis, CEO of Allianz Global Corporate & Specialty, at the French risk management association Amrae’s annual meeting in February.
A look back at the industry’s recent history would suggest a more sympathetic reading. Insurance is a product for which the price is not known at the point of sale. Sometimes that price ends up greatly exceeding expectations. Insurers’ relative conservatism is the reason many are still in business to serve their customers.
In the 30-plus years that Reactions has been going the industry has changed greatly, although in other way it is exactly the same. In that time, Asbestos has nearly wiped out many insurers, not least Lloyd’s of London. The industry has also had to contend with unprecedented catastrophe losses from events such as Hurricane Andrew, the Northridge Earthquake, Hurricane Katrina and last year’s Tohoku Earthquake. And no one could predict the horror of the September 11 2001 attacks.
The next 30 years hold perhaps even greater challenges. As our cover story in April reveals, big changes are in store. Even over the next decade the industry will evolve greatly.
PWC identified five of the biggest drivers of change in the industry before 2020. They were:
- the balance of power is shifting towards customers;
- advances in software and hardware are transforming so-called big data into actionable insights;
- the rise of more sophisticated risk models and risk transfer to address the increasing severity and frequency of catastrophic events;
- the rise of economic and political power in emerging markets; and
- harmonisation, standardisation and globalisation of the insurance market.
This last point of harmonisation of the market is not necessarily a given. To some, global harmonisation of regulation is not only desirable but inevitable. Don’t bet on it. A few years ago it seemed Europe was convinced that Solvency II would end up taking over the world. Now, opposition appears to be rising towards the directive. The world’s biggest market of the US also remains fragmented. And it seems that emerging markets’ regulation will remain in flux as they work out their way on the fly.
In three decades’ time many of the markets we refer to as emerging these days will be fully emerged and will rank as some of the biggest in the world. For today’s insurers this will be a welcome source of growth in contrast to limp growth in today’s developed markets.
Bob Hartwig, president of the Insurance Information Institute, tells us this month: “I think the biggest change the global insurance and reinsurance business is going to see is: where will it derive growth from? The 21st century belongs to the emerging world. Growth in mature markets will be elusive.”
There will be blood, however. Even when insurers know an exposure exists, market forces make it very hard to include it in pricing if the risk has not been seen for a while. This is true in developed markets let alone newer markets that firms are falling over themselves to get into.
As last year’s Thai floods revealed, all of a firm’s progress in a country can be wiped out in an instant. It will take years for reinsurers to make up their losses in Thailand, with the annual premium of about $1bn in the country far below the multi-billion dollar price tag of the floods. It is a similar story in the New Zealand market.
Many companies are certain to disappear in the coming decades.
As Magnus Lindkvist, futurologist thinker and writer, puts it in our cover story: “I believe that insurance as our grandchildren will know it has a shiny, rose-tinted future. Whether the brands and companies we know now are part of that is another question, however.”
Insurers must adapt. The need for insurance will not go away, and if the industry is smart about adapting the amount of business may even increase. For example, much liability business remains uninsured, especially in areas such as cyber risk, with firms taking on the burden themselves when they might prefer to transfer risk were the right product available.
Another example is the hefty liability losses borne by BP after 2010’s Deepwater Horizon explosion. Some may see the insured loss – which was the largest energy loss ever but far below the tens of billions of losses borne by the oil giant – as the industry dodging a bullet. Others may feel it is an example of insurers not meeting a need in the market.
It is clear that insurance will still have a fundamental role to play in 30 years’ time. It is less clear which market participants will still be around by then. Who would have thought 30 years ago that Lloyd’s of London – which had enjoyed a market-leading position for more than three centuries – and AIG would come close to disappearing?