Insurers Rising to the Twenty-First Century Digital Challenge

With the climate crisis, vast amounts of data, and expanding digital opportunities are creating high-stakes environments, raising new threats for appliance insurance companies and insurers at large. How they respond will establish precedents for their long-term resilience, or otherwise.

Let us explore how three macro trends will have a major impact on the world and insurance, as well as how successful insurers are connecting, predicting, adapting, and using digital technologies to become constant protectors in their customers’ lives.

According to Swiss Re’s 2018 report, global insurance premiums exceeded the $5 trillion mark (£4 trillion) for the first time. While industry’s health seems constant from afar, environmental, technological, health, and generational changes are adding challenges for risk assessment. Insurers act fast to meet consumer expectations, shut protection gaps, and neutralise nascent threats.

As the frequency of extreme weather events rise, insured and uninsured losses from natural catastrophes rise too. Climate change is a core issue for insurers with implications for governance, strategy, risk management, and operations.

Swiss Re reports that, in 2019, natural and man-made disasters were attributed to global economic losses of around $140 billion. Global insured losses are estimated at $56 billion (£46bn), leaving a worldwide protection gap of $84 billion ($64bn).

Munich Re have already warned that climate change could make cover for ordinary people unaffordable, citing global warming for $24bn (£18bn) worth of losses in the Californian wildfires. Increases in the intensity and frequency of California’s wildfire season are predicted by climate models, and their analysis combines monthly meteorological data with financial losses to graph the trend’s rise since 2001.

It is a scenario that has played out again across parts of the UK in February 2020 too, with two severe storms hitting the country and adding to the cost associated with climate change. Economic damage worldwide from flooding last year was $82bn (£67bn), the greatest of any natural peril. Only $13bn (£10bn) was insured.

Smaller insurers need to assemble data together from different sources in a serious way, like MunichRe, and act quickly, if they are to protect community resilience. On the specific details, in some cases, the costs involved may seem to be too much steep. However, they must show worried customers and investors they are attacking causes and effects proactively, by re-considering their partnerships with existing hydrocarbon partners and safe-guarding communities for generations to come.

Next, take proliferating amounts of data in the world. As more of the world moves online, the need for robust cyber insurance and risk management products will continue to grow to counter the increasing threat from cyber-attacks, data breaches, and digital warfare.

The potential of data to predict risk and anticipate behaviours are driving new kinds of insurance products that are responsive, personal, and agile. The rise of usage-based insurance, micro-insurance, and parametric insurance changes the needs of protection. According to Acumen Research and Consulting, the usage-based insurance market is expected to grow to $190 billion (£154bn) by 2026, a forecast CAGR of over 29% between 2019-2026.

However, in a digitally connected world, the risk is being defined by connected devices embedded in the important built environment of governments and organisations everywhere. Businesses are continuing to collect data on every corner of their customers’ lives to deliver better products and services. Data is a   valuable commodity at risk of theft. Insurers’ data protection and cyber defence capabilities are vital to protect consumers and corporations and maintain their corporate reputations. According to Cybercrime Ventures, damages from cybercrimes are anticipated to cost businesses and organizations $6 trillion (£5 trillion) annually by 2021.

Both McKinsey and EY  have published materials on how insurers can take realistic, manageable actions today to address these threats.

Insurers in Britain need to take hold of the data and adjust their prices accordingly. Britain may have a comparatively easier time of threats in relation to the rest of the world, but this should not make us complacent. Currently, 5.5m properties at risk of flooding in England and Wales, or one in six. Major initiatives in the form of a new scheme of British Flood Reinsurance are already underway though more needs to be done.

The current agreement between the Association of British Insurers (ABI) and government, the Statement of Principles (SoP), officially ended on the 30th June 2013, though the new scheme came into operation by late 2015. Here is a brief table explaining the differences for insurers:

Does the insurance system:   Current insurance system   Future flood insurance system (Flood Reinsurance)
Increase risk awareness and knowledge of risks through flood risk information provision? Yes- improved public flood risk information is part of the Government’s commitment under the SoP. No requirements for insurers to share information and data or increase transparency about flood risk in insurance documentation. Yes- under the new Memorandum of Understanding the ABI is to provide free of charge, a national database of property level flood claims by January 2014, and government commit to the publication of surface water map and combined maps.
Build capacity for risk reduction through advice on risk reduction measures?   There is no requirement but both government and insurers have published advisory documents and conducted research in this area.   Not referenced in the scheme, but informal approaches are present through community resilience capacity building.  
Encourage financial incentives for policyholders towards mitigation of flood risk with investment   Whilst the SoP does not SET pricing of risks, an aspect of risk reflected in the pricing has emerged under the SoP.   Prices under Flood Re are intended to be capped for all high-risk households at the same level, taking over market pricing signals and incentives. Flood Re is designed to ease the transition to risk-based pricing, prices are controlled.  
Encourage resilient reinstatement techniques after a flood loss Information material is provided by insurers voluntarily. No mention.  
Make incentives for public flood risk management policy   Yes –the government commit to more stringent planning rules as well as for flood defence investment and maintenance. This is a core element of the agreement, compliance is checked.   Yes – through ‘letter of comfort’ stating the government will provide flood risk management investment and planning policy. No mechanism for checking compliance.  
Require compulsory risk reduction   Not for policyholders, but for government in terms of public flood risk management policy.   No.  
Incentivise not developing in flood risk areas   Yes, by excluding new build (from 2009) from SoP   Yes, by excluding new build (from 2009) from Flood Re.