Nothing has quite tested businesses, communities and individuals around the world as severely as the COVID-19 pandemic – for some decades at least.
Combined with a slowly worsening backdrop of climate change effects, COVID-19 has brought significant disruption and a dramatic increase in the level of risk globally facing society. Insurance companies traditionally offer protection against risk, but the insurance industry has also been massively affected by these twin threats and is facing major challenges to respond to the threats.
At the same time, there has been something of a technology revolution which is also stirring up the insurance industry, given a decent nudge by COVID-19. In April 2020 – a couple of months into the pandemic, the CEO of Microsoft reported 200 million MS Teams meetings occurring in a single day – two years of digital transformation took place in two months, he added. Other tech advances are changing the risk environment in a big way too – driverless cars, anyone?
The tech revolution has seen insurance company IT evolve from simple record-keeping systems – basically automation of manual ledgers – into systems capturing data inflow from external parties and now systems which capture not just the business transactions but the client-provider conversations that accompanying them. Very soon the technology will be making insurance decisions on their own, in real-time.
That climate change has increased the level of natural catastrophes – and huge corresponding human and financial losses – is undeniable. Lloyd’s calculated that Superstorm Sandy, which rampaged through eight countries from the Caribbean to Canada in 2012, racked up economic losses of close to $US70 billion – the second costliest tropical cyclone on record. A 20cm rise in sea level since the 1950s, measured at New York, saw around a 30% increase in losses because of swell surges from Sandy, Lloyd’s estimated.
Last year alone, the global economic bill from natural disasters was $US190 billion – of which only $US81 billion was insured, leaving a gap of around $US110 billion, according to the world’s biggest reinsurer – Swiss Re. More than half of all natural catastrophes leave damage and loss that isn’t covered by insurance – that bill is met by communities, governments and thus ultimately the taxpayer.
The impact of natural catastrophes also features increasing incidence of secondary perils like wildfires and floods – also a consequence of climate change – which Swiss Re reported made up around 70% of all insured losses in 2020.
Increasing urbanisation has exacerbated the issues, risks and losses. In 1900, only 13% of people lived in cities; currently the figure is 54% and predictions are it will be around two-thirds of the global population by 2050. Lloyd’s 2018 City Risk Index, which measured the GDP risk of 279 cities globally against 22 threats, put the risk of losses at more than half a trillion US dollars. Man-made risks counted for almost 60% of that – a market crash threatening around US$100 billion in losses annually, while a human pandemic costed out at US$47 billion. If cities improved their resilience to these threats, global exposure to GDP would drop by US$73 billion.
COVID-19’s loss profile is also frightening. By April 2021, COVID-related insured loss estimates were around US$36 billion – but the predicted total global GDP economic loss is pegged at around US$4 trillion, according to German data specialists Statista. COVID also challenged businesses by reducing the resilience of key systems to weather the shocks and allowing failures to cascade from one system to another. The business landscape became more precarious because of drawn-out uncertainty and confusion over pandemic responses.
Businesses have had to manage both economic and health crises, develop new ways of engaging with both employees and customers and ushering in new work behaviours such as remote working – which raises questions around employee wellbeing management.
The global crisis isn’t helped by volatile geopolitical tensions: a US-China trade war, the fraught UK Brexit departure, and complex and messy tensions throughout the Middle East.
A more globally interconnected world has also brought consequences; economies rely on complex and interconnected systems to deliver goods and services around the globe. The insurance industry sees the effects of the disruption to these systems first-hand in the nature and level of claims activity in relation to business interruption, supply chain ruptures like the EverGreen blockage of the Suez Canal, and an alarming growth in cyber-attacks.
Embracing the technology revolution and making a digital shift in its operations is one key driver for success for the insurance industry. A McKinsey report found the best-performing 20% of insurers captured almost 100% of the industry’s total profit. Those top performers have transformed their operations to automate significantly and optimise their processes in the face of strong consumer expectation, particularly in how they respond to COVID-19 and the increasing threat of natural catastrophes.
That future has its challenges for insurance, however; the digital revolution has spawned a new set of man-made “ecosystems” linking different parts of the business world – ecosystems McKinsey estimates will generate US$60 trillion in revenue by 2025. That’s luring new competitors into the business, such as Zhong An, a digital insurer selling lifestyle consumption, consumer finance, health, cars and travel, formed out of Alibaba, Ping Ann and TenCent.
The traditional roles of players in the insurance value chain are also changing in the face of competition, tech change and shifts in customer demand. We’re seeing new players entering the market like insurtechs and a blurring of the traditional lines of demarcation between brokers, insurers, reinsurers and capital providers.
Brokers are continuing to consolidate, gaining greater market power and taking on greater underwriting responsibility, particularly for larger and more complex risks. Meanwhile, there’s something of a tug-of-war between insurers and reinsurers, with more of the latter providing direct cover. We are also seeing an increase in the availability of alternative capital into the insurance market, beyond the historically catastrophe-related risks.
Power of data
Renowned engineer and data scientist the late great W. Edwards Deming said: “Without data, you’re just another person with an opinion.” It’s no secret that a dominating factor in this new insurance environment is the power of data. Huge amounts of data are being generated, challenging insurers to manage and use it properly and effectively. In the London specialty insurance market alone, for example, around £70 billion of premium flows into the market annually – covering more than 150 different classes of business, each with its own dataset (source: DQPro).
Mismanaging data can not only lead to insurance errors or omissions and potentially the threat of regulatory fines and reputational damage but can increase the operational cost of doing business when margins are already under pressure. Data- and analytics-led businesses can use AI and algorithms to select risks, optimise pricing and enhance portfolio management – and thus overall company performance.
So, what will be the place of the insurance sector in this brave new world? We unquestionably have a role to make the world more resilient to that storm of threats, encouraging society to invest in risk transfer and close the protection gap.
But we need to build simpler insurance products – and innovate to meet emerging risks – and increasingly focus on safeguarding our customers’ reputations and their IP, increasing their readiness for new threats in the ever-changing risk landscape. The public and private sectors also need to collaborate more to achieve greater resilience.
Above all we need to focus on building trust and co-operate as an industry for the benefit of all our customers.
Building resilience is not a competitive advantage – it’s a shared responsibility in the end.