Just how urgent is the Climate Change problem for the insurance industry? Here is a graph of the 10 largest insured losses since 1900 to 2018. All losses have been indexed to 2019 dollars.
Actuaries use past experience to predict future experience. What do you do now? Recent past experience isn’t available and Climate Change is nothing we’ve seen before. Expect considerable uncertainty with future pricing models. Unpredictability is very bad for insurance.
If you are wondering why we are looking at 4 year old data (in 2022), that is part of the problem. The complexity of unravelling the cost of damage involves many parties including multiple insurers and reinsurers. The process of calculating losses takes months and even years. For the recent years we don’t know the full development of the most catastrophic events.
Climate Change is an urgent insurance problem and technology has the answer. The answer, for the winners, is digitalization. This is where reinsurers can step up and be a tremendous boost to innovation efforts.
Most people equate digitalization as an insurer’s ability to store data and transform that data into useful information (Analytics, Actuarial and Financial Reports) and outputs (quotes, policies, policy changes and renewals) mostly using automated processes.
Digitalization only starts with being able to store data digitally. Beyond data storage there are 3 additional elements that encompass digitalization: automation, connectivity and collaboration.
The next step is the ability to automate that data to produce outputs which is the current focus of most insurance technology today. Digital connectivity is where distinctly different entities can transfer data seamlessly between one another. Digital collaboration occurs when two or more entities can work in unison to achieve service excellence and cost reduction.
Automation is the Next Step
Insurers and brokers/agents have been automating manual processes as much as they are able. That is the work of policy administration systems and broker administration systems. Despite the tremendous investments being made, the efforts so far have had very little impact on industry efficiency. In contrast, the march towards Direct-to-Consumer insurance appears to hold the greatest reward in the terms of efficiency and lower costs for customers as a result. In this article, J.D. Power observes that direct insurers GEICO and Progressive captured nearly 92% of all premium growth in the past year in the US.
The truth is that automation efforts are siloed in either the broker/agent operations or the insurer operations. A quote from a recent panel discussion on the theme of ‘Broker Technology—Where Are We Now?’ at the Insurance Brokers Association of Ontario (IBAO) 2021 Virtual Convention sums up these efforts: “You have 100 different companies trying to do 100 different solutions for millions of clients…”. It is more likely 100 different companies and 10,000 brokers trying to do 1,000,000 different solutions for customers.
Building siloed solutions is not helping customers and that is the bottom line.
Connectivity – Not Just APIs
The next stage of digitalization is connectivity. Insurance is a complex business with many different stakeholders connected in many different ways. This is a barrier to effectively servicing customers. The dream of Real-Time service delivery is still a dream for most. A few insurance distributors are reaching Real-Time status with the initial purchase experience but there is a lot more to the insurance experience than the initial sale.
Insurance is also much more than insurers connecting to customers. Advisors (Brokers and Agents) play a key role (to varying degrees in certain segments) for customer advice and regulatory requirements. Reinsurers are part of almost every transaction (treaty or facultative), yet they are always the last in the chain of communication. Reinsurance brokers and MGA’s are other stakeholders in the insurance distribution vertical. As well as insurers sharing risk between each other (on a subscription policy for example).
Improving connectivity through the value chain is vital as the world is experiencing the negative and disastrous effects of climate change. The insurance industry is set to surpass US$100 billion in losses in 2021 for the fourth time in five years, according to Aon in this article, and company executives have pointed to rising global temperatures and ensuing extreme weather as key culprits.
This highlights the need for the last element of digital transformation, collaboration.
McKinsey suggests that Ecosystems will account for 30 percent of global revenues by 2025. A new market study published by Global Industry Analysts Inc., suggests that Digital insurance platforms could be worth $169 billion by 2026. We are witnessing the growth of digital collaboration in insurance.
The same market study recognized that it is a more efficient approach and leads to a smoother customer experience, as well as reducing the cost associated with insurance processes. This view is rather simplistic seeing the insurer-broker/agent-customer as the ecosystem when it is actually much more.
We agree with the value of insurance ecosystems but take a broader perspective. Ecosystems unleash the potential of Real-Time connectivity and collaboration in insurance. Ecosystems can mean more to reinsurers as the threat of Climate Change continues to hammer the insurance industry. A good reference point is this article, “AIG, underwriters leaning on reinsurance with prices set to jump” by Bloomberg 17 Nov 2021 which highlights the imperative role that reinsurers have in managing Climate Change in the insurance vertical.
AIG CEO Peter Zaffino stated, “We’ve never seen consistent CAT losses at this level,” on a conference call with analysts earlier this month, referring to catastrophe losses. The industry needs “to acknowledge that frequency and severity has changed dramatically as a result of climate change and other factors.”
The article further quotes Tom Johansmeyer, of Verisk Analytics Inc.’s, “It’s too early to say exactly how much reinsurers are on the hook for when it comes to Hurricane Ida and other third-quarter natural disasters” and “The process typically takes many months”.
“The process typically takes many months”Tom Johansmeyer, Verisk Analytics Inc.
This highlights the urgency of collaboration that is required for the insurance industry to face this crisis with resilience. The process of discovery when these catastrophic losses occur can’t take months. Digital ecosystems with Real-Time connectivity offer significant advantages for the entire insurance vertical from customer to reinsurer and everyone in-between. Not to mention the possibilities of Real-Time to allow de-risking insurance at a time of crisis.
Contact us to learn more about enabling Real-Time advantages within your entire insurance vertical.