Putting your data where your money is

By: Karen Scott

13/01/2022

The tense 1 January renewal season deadline so crucial in the world’s insurance markets passed without any great dramas and few dramatic headlines about swathes of unrenewed accounts, although some key deals were left very late. It was not without its casualties, however.

The most influential deals are those between major insurers and their reinsurers. The rates agreed on these multi-billion Dollar deals ripple through the insurance market, affecting what businesses and individuals pay for their insurance as their own policies come up for renewal.

Analysts are stilling poring over the fine print of the deals but there is a consensus that property rates – especially for catastrophe cover – have risen by around 10% and that liability premiums in many classes have pushed upwards by as much as 20%. There are also reports of a shortage of capacity for some risks, with climate change impacts, cyber risks and professional indemnity risks all reportedly struggling to find sufficient reinsurance coverage.

One of the big talking points in the market is the impact of data and the powerful analytical tools insurers have invested in over the last few years. This has handed primary insurers new tools to scrutinise intensively the biggest risks on their books in anticipation of reinsurers doing the same and asking awkward questions. This may have enabled insurers to get their reinsurance renewals away but at what cost? Will it leave gaps in coverage?

When it comes to catastrophe risks – man-made and climate-related – the gap between economic losses and insured losses has steadily grown in the first two decades of the 21st century. In some parts of the world, insurance is already almost an irrelevance as few governments, businesses or individuals can obtain cover for catastrophic losses. This is now becoming a problem for other high risk regions, such as California where insurers have little or no interest in covering wildfires. As data gets richer and analysis more sophisticated, more insurers will be able to confidently identify the loss-making parts of their portfolio – and ditch them. This might be good for short-term industry profitability but it will be damaging for the long-term credibility of the commercial insurance market.

The experiments with parametric insurance – such as those in the Pacific islands that insurers are running with the World Bank – are likely to proliferate as insurers come under pressure from governments to stay in the game.

The other talking point emerging from the renewal season is concern about inflation, both social and economic.

There is satisfaction that the increases achieved will be sufficient to restore profitability in many classes, helping to attract back some of the capital that has left the market over the last couple of Covid blighted years. According to broker Gallagher Re the outflows in insurance linked securities now exceed inflows after years of this providing a vital source of new capital for reinsurers. Reversing this trend will be crucial if the market if to avoid a capacity crunch at the mid-term or 1 January 2023 renewals. This will not be easy if costs quickly erode the benefits of price increases.

Rising claims costs, whether driven by court decisions, government policies or economic pressures, are a nagging worry for insurers. Predicting the trends likely to emerge from any of these factors is notoriously difficult, never more so as we emerge from the pandemic.

Data will be at the heart. Claims managers will be asked to scrutinise claims data for signs of increased costs while the focus on business acquisition costs, especially in the London Market, will intensify. Anything or anyone that does not value will be squeezed out of the supply chain.

With these clouds gathering on a not too distant horizon, the congratulations for getting another renewal season done are likely to muted.

For more information on Research in Insurance and the studies we conduct please contact Karen Scott or Toby Finden-Crofts.