As risks become more complex and interconnected, insurance leaders must stay ahead of climate, technological, economic, and regulatory challenges to ensure long-term success.
A panel at the 2024 American Property Casualty Insurance Association (APCIA) conference held in Chicago this month took a deep dive into a wide range of emerging risks, but a few key themes stood out to Insurance Business.
Climate change is leading to more severe and unpredictable weather patterns, such as hurricanes, wildfires, and floods, which are driving economic and insured losses. There’s a growing concern from policymakers and the media about whether certain properties are becoming uninsurable due to climate risks.
Ann Chai, chief risk officer at Zurich North America, highlighted insurers’ role in educating consumers about coverage gaps for perils such as flood and earthquake that may be underestimated.
“At Zurich, like many others, we focus heavily on education, working with customers to build resilience against the increasing frequency and severity of climate events,” she said. “It’s not just the existence of these events, but the combination and secondary impacts that can be underestimated.”
The devastating impacts of Hurricanes Helene and Milton have shone the spotlight on the climate protection gap, she added.
“While the industry understands hurricane exposure in the Gulf, we didn’t anticipate Hurricane Helene would cause significant flood damage in western North Carolina, where a lot of home and business owners did not see the potential for damage, and therefore many were underinsured or uninsured,” Chai said. “The industry needs to share this knowledge with society and collaborate with regulators and policyholders to close those gaps.”
Industrial chemicals such as per- and polyfluoroalkyl substances (PFAS) are creating new environmental hazards that could lead to significant litigation and liability. These so-called “forever chemicals” contaminate the air, water, and soil and have now been shown to cause serious health effects.
Stephen Marohn, president, specialty P&C at The Hanover Insurance Group, said that PFAS, nitrosamines, and other substances pose risks that may not have been previously considered. He called on insurers to be proactive as more information is uncovered about PFAS.
“From a business leader’s perspective, you analyze and assess risks, then set terms, conditions, and pricing accordingly,” he said. “You do your best to anticipate changes, but those changes can happen unexpectedly, and as an industry, we need to be prepared to respond, adjust, and consider the past but also the risks ahead.
The APCIA panel highlighted risks around artificial intelligence (AI), machine learning, and information security as the industry increasingly relies on technology and data.
Insurance companies must continue to invest in technology to streamline underwriting processes, improve claims handling, and provide personalized pricing for policyholders.
Marohn stressed the industry’s responsibility to thoroughly examine both known and emerging risks, understanding that well-known risks continue to evolve.
“As business leaders, we should leverage all available data to improve our risk selection, pricing strategies, and policy terms,” Marohn said. “Additionally, we need to manage risk aggregation effectively through limit profiles and property exposure aggregation, continuously using information to enhance our practices.”
At the same time, insurance companies need to navigate the complex cybersecurity threats and impacts that AI’s disruption brings.
“The rapid advancement of AI threatens to disrupt non-manual labor roles, which could lead to significant societal and economic upheaval,” Chai noted. “I’m not sure we fully grasp the potential consequences.”
The global economic outlook remains uncertain, with inflation, rising interest rates, and market volatility all presenting challenges to the insurance sector. Additionally, factors such as supply chain disruptions and geopolitical tensions are contributing to the financial pressures insurers face.
Elevated costs for construction materials, vehicles, and other assets have made claims more expensive, tightening profit margins. Insurers must adjust their pricing models to account for these inflationary trends while remaining competitive.
One pressing issue is the $30 trillion in real estate mortgages coming due. “We need to explore how our financial and insurance markets can mitigate this risk,” said Chai. “This challenge is compounded by an aging infrastructure and a private housing shortage, which could either support society and the economy or create significant financial risks.”
Additionally, changing demographics, such as the aging baby boomer generation and a shrinking middle class, are creating new exposures – something insurers must address.
Despite the less-than-optimistic outlook, Chai remains hopeful. “As we consider macroeconomic factors, we must rely on our expertise in risk mitigation and management,” she said during the APCIA panel.
Rapid political and regulatory shifts are challenging the industry’s traditional pricing and underwriting practices. From the rise of stringent climate policies to ever-evolving data privacy laws, insurers are under pressure to adapt quickly.
At the same time, regulators are under increasing scrutiny from the public to hold the insurance industry accountable. In troubled insurance markets like California and Florida, the results have been mixed.
“Most commissioners genuinely strive to create a functional marketplace,” said Terri Vaughan, former CEO of the National Association of Insurance Commissioners (NAIC) and former Insurance Commissioner of the state of Iowa. “But some commissioners may have political aspirations that lead to counterintuitive actions.”
This approach may work for larger states like Florida, California, and Illinois, which can experiment with counterintuitive solutions and address the fallout more easily than smaller states, where market disruptions could drive companies away. Vaughan said organizations like NAIC are helping bring more “centrist” solutions to the table.
“While the process may look messy, the commissioners engage in significant debate behind closed doors, bringing diverse views together to reach a consensus,” she said.
Overall, the industry was urged to stay ahead of changing regulations through thorough preparedness and collaboration with industry partners and regulators.
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