“There’s a lot they can do except exit the market” | insurance business usa
ESG expert on recent insurer backlash and avoiding short-sighted underwriting strategies
risk management news
by Kenneth Araullo
If there’s one thing the recent comeback of insurance companies has taught us, it’s the fact that the world we live in is uncertain. The impacts of climate change across the industry cannot be underestimated, and every region of the insured world is facing increased premiums equivalent to increased weather risk, coverage uncertainty and, in some extreme cases, market exits for those who have Have decided that the risks now outweigh the rewards. ,
However, these extreme cases should be presented as the perfect opportunity for those looking to capitalize on the uninsured market. Cody Dong (pictured above), senior associate of MSCI ESG and Climate Research, said that those in the business of pricing risks should be aware, but do not, because of a number of factors.
“I guess, like any business [the] The number one priority is always to make profits. This is the essence of any company, including insurance companies,” Dong said in a conversation with the Insurance Business’s Corporate Risk Channel. “That being said, generating profits doesn’t necessarily equate to easy exits from high-risk markets. Insurance companies are in the business of pricing risks. For insurers, it is about meeting the challenges and finding their own climate-related competitive edges over competitors.
These insights follow a study by Dong that looked at the retreat of insurers after recent wildfires in California and the potential threat of its spread to Asia under certain circumstances. However, while their research shows that some areas of the region have reached similar limits to what is happening in the Americas, there is still some leeway involved due to the large differences in Asia.
“Asia is very different from North America or Europe. Insurance is less likely to move away from high disaster-risk areas in Asia. This is because insurance companies have not yet penetrated most of APAC’s catastrophe market,” he said.
MSCI ESG research found that only 14% of economic losses from natural disasters in the APAC region were insured, compared to a global average of around 40%. Dong emphasizes that this distinction is discriminative; However, he still cautions that extreme weather events could still make carriers think twice about their coverage.
“With the frequency and intensity of various physical hazards increasing due to climate change, the end result on a global scale will be similar around the world. This means that in high insurance penetration areas, such as North America and Europe, you will see higher insurance deductions from certain areas due to higher disaster risk. But in Asia, you see insurance companies are more hesitant to provide protection and grow business in disaster risk areas. Globally and across all regions, climate change will exacerbate the problem of the security gap,” he said.
P&C Markets – Both Blessed and Cursed
Dong also emphasized short-sightedness as an issue that needed to be addressed. In short, those who exited some markets due to increased risks may find another barrier to entry in others. In turn, it also presents a unique opportunity for those who have chosen to hold on.
“If every insurance company flees high-risk markets and moves into so-called low-risk areas, I think the concentration of competition will hurt them differently from climate change,” he said. “So, for insurance companies that are better equipped with climate risk management tools, more sophisticated pricing capabilities and more innovative products, they can not only face this challenge brought by climate change, but also stay behind other competitors. You can also benefit from withdrawing.
Barring retrenchment and scale-back, Dong said insurers can do much more than simply sit back and react to increased risks in their respective markets.
“The first is more fair about pricing risks. Generally, if the risk is high, the insurance may charge a higher premium. However, things are not that simple as there are other factors involved. One is regulation; In the case of California, there are rules that limit insurers’ abilities to raise premiums. Basically, in terms of revaluation, their hands are tied,” Dong said.
While in practice it is not as simple as Dong described it, he said that regulatory involvement should be a priority for any carrier to deal with current climate risks. Dong believes that the government could share some of the burden from these risks, including subsidizing households or policyholders, corporate or individuals. It all hinges on ensuring the market remains profitable and sustainable in the face of growing climate threats.
“The second, which is related to my research, is long-term underwriting strategies and pricing strategies. P&C insurers are both blessed and cursed in that they can basically reevaluate and renew their policies every year. It’s a luxury because they enjoy annual underwriting adjustments,” Dong said.
“However, this often leads to short-sighted underwriting strategies. If a major catastrophic event occurs, policies become more expensive and less affordable the following year. And yet, this type of annual pricing does not necessarily reflect the long-term outlook, or the real climate risk we will face over the coming few decades,” he said.
Finally, there are also sophisticated risk mitigation measures such as disaster models and climate models, the latter of which are more innovative and cutting-edge for insurers who know how to use them. Scenario analysis, stress testing, early warning calls to policyholders — there are a host of solutions, Dong stressed, adding that before one can even consider a final warning, it is time to retreat.
Product innovation also comes into play, he said, adding that encouraging policyholders to reduce risk is a great way to reduce the burden. It also moves into the realm of parametric insurance, where payouts are dependent on certain thresholds rather than losses, a mechanism that is becoming increasingly popular in the agricultural industry.
“There are a lot of things insurance companies can do besides opting out,” Dong said. “You also have examples of disaster bonds, a financial instrument that can transfer risk from insurance companies. All these risk mitigation measures are helpful and should be explored by insurance companies.”
risk takers in a risky world
Despite the many challenges that exist in the industry, and all of this without taking geopolitical tensions into account, Dong believes there will still be an insurance market. However, the question of its feasibility is a different issue entirely.
“There will be extreme cases in areas where a viable insurance market is not possible,” Dong said. “Policies will become costlier to such an extent that they will not be affordable at all. But as I said, the risk appetite varies for different insurance companies. This is due to the fact that their cost of capital is different. Therefore, their break-even points are different.”
For risk-takers in a risky world, the onus is not just on them, but on everyone else, to keep the engine running. On the part of the government, it means protecting homes and individuals through better legislation. On the insurance side, it is about offering robust propositions that will ensure that these families and individuals are protected while keeping operations sustainable and profitable.
“Keep in mind, you have all these risk mitigation measures under-explored by insurance companies, other than public-private partnerships or government assistance. This will encourage at least some high-risk insurers to stay in or join these markets,” Dong said.
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