Despite a year filled with challenges, insurance industry growth opportunities continue to emerge.
A new report from A.M. Best predicts a strong 2017 for the reinsurance and insurance industries. After a decade of unprecedented turmoil — including the financial crisis, major catastrophe losses, political uncertainty, and a sustained period of low interest rates — insurers and reinsurers are adopting more robust risk practices to ensure that their balance sheets are equipped to absorb the hurdles that lie ahead.
The report, titled “Insurers Hunt for Diminishing Opportunities in a Market Laden with Challenges,” was not wholly optimistic. “There is no doubt that the reinsurance industry is entering a highly challenging period in its history,” said Analytics Director and report co-author Mahesh Mistry. “It is a time when margins are coming under increasing pressure at all levels of the industry and return on equities are now in high single digits.”
Insurers would be wise to begin strategically consolidating risk as global markets grow increasingly connected and outcomes become more interdependent. Because of diminishing reserve releases, industry fundamentals could begin to deteriorate in the face of large-scale crises if tested by a major event or series of events.
Interconnected Risk Management
As a direct result of globalization and rapid advances in technology, the report notes that the “potential for significant accumulation of risk is growing.” Potential accumulations relate most directly to casualty clash events, as opposed to property risks, in which geographically disparate but related socio-economic and legal issues interact.
Casualty clash events are those that “involve a significant loss to multiple policies or insureds from a single event,” while casualty catastrophes can impact “multiple companies, geographies and lines of business.” Both are activities or products that “result in a number of lawsuits from multiple plaintiffs alleging damages that impact multiple insureds, coverages and/or time periods.”
To manage growing casualty accumulation risk, A.M. Best advises that insurance and reinsurance companies implement thorough property catastrophe risk management systems in combination with emerging risk analysis, advanced modeling techniques and enhanced policy information.
Catastrophe Response Readiness
The report sought to analyze just how equipped insurers are to withstand a severe global pandemic, noting that such an event would affect numerous classes of both life and non-life insurance and could threaten the financial strength of insurers. “Under such a scenario, insurers would be faced with both underwriting and investment losses as well as operational challenges, such as workforce absenteeism,” the report stated.
But the report also pointed out that the risk of pandemics could be reframed as an opportunity across the industry. Improved modeling capabilities and advances in medical care may offer the market the tools it needs to develop new products which help to “close the significant gap that exists between economic and insurance costs arising from major pandemics.”
Technological advances and increasing online business opportunities are one pathway to the future. Now is the time for agents to take full advantage of strategic tools and tactics, like partnering with a qualified internet lead provider, as they work to overcome challenges to growth and profitability. The companies best positioned to succeed in the coming year will be those that take steps to reduce their cost of capital and better manage portfolio accumulations by leveraging data and sophisticated exposure management tools.
“Devising new solutions and products to help close the protection gap, making better use of data and exposure management tools, and pursuing growth with control and discipline are some of the areas in which insurers and reinsurers can create competitive advantage and prosper in an otherwise difficult operating environment,” said Senior Analytics Director and report co-author Catherine Thomas. Strong industry players will invest in the necessary technology in order to strategically minimize risks, maximize digital outreach channels, and differentiate their products and services from their competition.