Bracing for a New Era of Risk

Bracing for a New Era of RiskInsurers are entering an era that requires them to continuously confront previously unforeseen risk. Some lines of business, such as cyber insurance, have been able to overcome a deficit in claims data through analytics and predictive modeling. Other lines have grappled with business interruption coverage and adjusting life insurance mortality models in the wake of the COVID-19 pandemic.

Climate change is emerging as another challenge, particularly for residential and commercial property. According to a recent AM Best Market Segment report, the excess and surplus insurance market grew 25% in 2021, partially due to growth of new and unique exposure risk. Many insurers have shifted homeowners (and even commercial property) policies toward excess and surplus (E&S) coverage as a result.

Partnership Is Imperative

How can insurers calculate emerging risk with limited or no claims and exposure data? This is a question that insurers have brushed up against in the face of other large-scale catastrophes like COVID-19 and cybersecurity, and it’s coming to the fore in the face of climate change.

In all of these cases, the answer will come in the form of analytics. But more importantly, the answer will also require partnership. Some insurers may partner with existing third-party data providers. Insuretech startups are also increasingly focused on climate risk analytics and modeling, and insurers may want to partner with these new and emerging players to onboard their expertise.

The simple reality is that risk and markets are beginning to change at a pace with which the industry is having trouble keeping up. External partnerships may help insurers stay ahead of new and unforeseen risk.

Rethinking the Role of Insurers

A changing risk landscape may also change what insurers bring to the table. As Noldor’s CEO pointed out, the market shift of homeowners from admitted to E&S may leave a vacuum for MGAs (and ultimately carriers); MGAs may be better positioned to navigate individual relationships with policyholders amid an increasingly complex market.

This may be an advantage for insurers who can provide paper and capacity while leaving the relationship management to distribution partners. Yet the emergence of new risk will also prompt insurers to rethink their role in other lines of business. Cyber insurance is one example; the fact that real-time and emerging data and analytics can overcome a lack of historical claims data makes market entry easier for emerging players.

Incumbent insurers may be able to take advantage of the legwork these insuretech companies have done with regards to analytics and risk modeling and act as a fronting partner; in essence, these new players can also be new distribution channels.

Will we see a future in which insurers simply front paper and leave distribution, relationship management, and product development to third parties? It is not likely anytime soon. Insurers will always have knowledge about risk and underwriting that new entrants simply won’t have. Yet insurers may be able to lend this expertise to new industry players and in turn gain access to new distribution channels, market segments, and analytics savvy without having to commit substantial resources of their own.

Enter the Regulators

One eventuality that insurers must anticipate is regulatory intervention, especially if the industry can’t agree on how to price coverage. There is already a precedent for this type of intervention with health insurance and the Affordable Care Act. The potential for regulators to get involved reared its head again with COVID-19 and business interruption coverage: What does business interruption insurance cover, and what is the obligation of insurers to cover losses incurred by the pandemic?

The regulatory future of events or conditions such as the impact of climate change on homeowners is a difficult one to predict; some insurers have limited or stopped writing in high-risk areas altogether, and in some cases coverage has moved to the non-admitted market. Regulators may certainly mandate coverage or provide a federal program in a similar vein to FEMA.

There are three ways to create value in insurance: sell more, manage risk better, and/or cost less to operate. Emerging risks present a challenge to all three. Data, ecosystems, and partnerships present a potential solution. Future-proofing an organization will be dependent on a strong integration strategy and a keen eye on regulatory compliance.

For more information on ecosystems and integration strategy, see our recent report The New Insurance Ecosystem: How Approaches to Core Systems Are Expanding With the Point Solution Ecosystem or reach out to me at [email protected].

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