Since the COVID pandemic, there's been a dramatic rise in costs associated with insurance claims. Many factors, including climate change, inflation, and the increase in the price of repairs or replacement items, have driven the increase. There is now enormous pressure to reduce insurance claims costs.

The good news is that several technologies can help. Leveraging AI and cloud computing and combining with rich data sets and low code/no code platforms can reduce costs and the time it takes to service claims. The hidden bonus is that these technologies go a long way toward improving the customer experience.

The key is to use these technologies to develop and deploy a comprehensive multiyear strategy with agile, incremental capability delivery—what we like to call the "perform while transforming" journey. 

However, embarking on a claims transformation and cloud adoption voyage can often lead to cost and schedule overruns. Migrating from legacy platforms to newer solutions is fraught with issues, including difficult business processes, manual, time-consuming tasks, and challenging integration issues. In addition, shuttering legacy systems, saving valuable records, and coming up with ways to address integration issues across multiple claims platforms can be very taxing. 

Understanding the potential issues is critical when heading down this path. Insurers must take a strategic approach to claims transformation to ensure short- and long-term success. 

Experience shows that using a modular plug-and-play architecture simplifies the transition. One strategy is to map a series of micro-transformations in three- to six-month increments to complete the transformation in one to two years. Taking a "bite-sized approach” to transformation leads to better results in both productivity gains and creating a better customer experience. For example, adding a claims tracker to customer-facing applications offers customers real-time insights into the claim status, reducing the number of calls to the agent.

One key to success is sourcing the correct data from existing platforms to ensure it matches what claims servicing agents see when fielding customer calls. For payments, it's the same—accessing information in digital apps in real time instead of via mailing checks leads to a better customer experience and improved customer retention. 

See also: How to Optimize Insurance Claims Management

Build a better data hub

Going down the path of claims transformation begins with a journey toward creating a solid data hub that democratizes valuable data. When a single data source is used throughout the entire company, all departments benefit. However, it's essential to establish access and control guidelines to ensure that data is used to generate positive results. IT leaders must design and implement data governance and access controls. 

One strategy is to use a multi-tenant architecture to separate company data and data from outside resources. Another option to get the most out of claims transformation is to design a system where the data hub can be segregated into domains with specific purposes for staging, transforming, testing, and providing data to the claims applications.

A benefit of this process is that IT departments don’t have to tackle challenging and complex legacy applications, reducing the core systems’ reporting and analysis workload. This helps reduce the time it takes to process claims since legacy applications frequently were built as “mods” or customized to meet the needs of the vendors’ products. IT leaders should also consider that new and improved data hubs can train GenAI solutions to create synthetic test data, which helps simplify test scenarios while not potentially tainting the original customer data. Over time, data hubs can deliver important training data for customer-facing AI solutions. 

See also: Why Do Insurance Claims Take So Long?

Keys to success for a claims transformation journey

While claims aren't the most exciting part of the insurance sector, they are a critical part of the overall success of any insurer. 

In today’s highly competitive insurance industry, company leaders focusing on designing and implementing a claims transformation increase their odds of financial success. Modernizing claims platforms, designed with incremental improvements to showcase benefits to stakeholders, will put insurers on a better path. 

While large-scale cloud reinvention and digital transformation may take a few years to implement, this type of agile approach greatly improves the claims ecosystem. It reduces costs, spurs innovation, streamlines operations, and leads to a vastly superior customer experience.

A new report on the cyber risk outlook by Allianz Commercial reveals that cyber claims have continued their upward trend over the past year, driven in large part by a rise in data and privacy breach incidents. The frequency of large cyber claims (>€1 million) in the first six months of 2024 was up 14% while severity increased by 17%, according to the insurer’s claims analysis, following just a 1% increase in severity during 2023. Data and privacy breach-related elements are present in two-thirds of these large losses. Overall, the total number of cyber claims in 2024 is expected to stabilize, following a 30% increase in frequency during 2023, which resulted in 700-plus claims.

The growing significance of data breach losses among cyber insurance claims is driven by a number of notable trends. A rise in ransomware attacks, including data exfiltration, is a consequence of changing attacker tactics and the growing interdependencies between organizations sharing ever more personal records. At the same time, the evolving regulatory and legal environment has brought an uptick in so-called "non-attack" data privacy-related class action litigation, resulting from incidents such as wrongful collection and processing of personal data – the share of these claims has tripled in value in two years alone.

See also: Top 10 Challenges for Data Security

"Non-attack" claims increase as privacy litigation ramps up

The rise in "non-attack" data privacy claims is the consequence of developments in technology, the growing commercial value of personal data, and a developing regulatory and legal landscape. For example, unlike the EU’s General Data Protection Regulation (GDPR), privacy regulations in the U.S. are less prescriptive and open to interpretation, while plaintiff lawyers are hungry for potential sources of revenue. This is creating a gray area that is ripe for class action litigation, the report notes.

We are seeing more data privacy breach claims in the U.S. where there is a growing trend for class action litigation against large U.S. and international corporations related to privacy violations, such as around consent and data usage. The cost of some of these claims can be even larger than a ransomware incident, in the hundreds of millions of dollars.

Over the last year, in particular, data breaches have emerged as one of the fastest-growing areas of U.S. class action litigation. Over 1,300 were filed across a wide range of data privacy regulations in 2023, more than double the number filed in 2022 and four times that filed in 2021, according to law firm Duane Morris. 

Multiple class action lawsuits have been launched against organizations across a wide range of industries, including healthcare, social media, and gaming, for using tracking tools such as Meta Pixel to monitor consumer behavior, while entertainment streaming platforms have also been targeted, alleging that they may have violated privacy protection rights. Large data breach events can also evolve into hyper litigation, with one event triggering a slew of class actions. More than 240 lawsuits related to the 2023 MOVEit data breach were consolidated into a single multidistrict ;itigation in October 2023. And with large numbers of claimants, there are incentives for parties on both sides to settle. The top 10 data breach class action settlements last year totaled $516 million, a significant increase over the $350 million recorded in 2022. 

The risk of data breach litigation is also growing in Europe. Heightened awareness of data protection rights, a rise in the availability of third-party litigation funding, and a more consumer-friendly litigation environment could make mass data privacy claims a reality, albeit not on the same scale as in the U.S., the report notes. 

AI to power and prevent future data privacy breaches

The fact that almost every industry is now using artificial intelligence (AI) will have a significant impact on the cyber and privacy risk landscape. AI relies on the collection and processing of vast amounts of data, including personal, health, and biometric information, for training AI models and making predictions or recommendations. But AI tools such as chatbots can create potential privacy, misinformation, and security risks if not properly managed. With so much data being collected and processed, there is a risk that it could fall into the wrong hands, either through hacking or other security breaches. There are also concerns around potential breaches of privacy laws, such as whether organizations have proper consent to process data through AI. 

See also: The Evolving Landscape of Cyber Risk and Insurance

From data exfiltration to data protection

Despite a general trend for increased investment in cyber security in recent years, many data breaches, including some of the largest mass data exfiltration cyber attacks over the past 18 months, are the result of weak cyber security within organizations or their supply chains. 

Such incidents can lead to a large claim involving regulatory fines, notification costs, and third-party litigation, in addition to extortion demands, first-party costs, and business interruption.

Data breach risks are best mitigated through good cyber hygiene, including strong access controls, database segregation, backups, patching, and training. Having better oversight of any cyber weaknesses in their supply chains is an area where many companies need to improve.

To read the full Allianz Cyber Risk Trends Report, please visit: cyber-security-trends-2024.pdf (allianz.com)

The Mediterranean region has been experiencing a severe drought, driven by a complex interplay of meteorological and hydrological factors. Northern Africa has been enduring these conditions for over six years, as have southern Italy, Spain, and Portugal for approximately two years. In Cataluña, in the northeast of Spain, the drought persisted for more than 1,300 consecutive days. 

Precipitation shortfalls 

The Mediterranean climate is characterized by hot, dry summers and mild, wet winters; but, since 2021, winter rainfall has significantly decreased, especially in the Iberian Peninsula and the Maghreb in Northern Africa. The Standardized Precipitation Index (SPI) has consistently shown negative anomalies across southeastern Spain and northern Africa, indicating a substantial lack of rainfall.

In March 2024, reservoirs in Cataluña were at just 15% of their capacity, though some relief came with late April and early May 2024 rainfall, raising levels to nearly 30% capacity.

Snow cover in the Alps and Apennines has also been well below average. Snow cover in Italy, for example, has decreased by 63% compared with the 2011–2022 average, resulting in reduced snowmelt and low river and reservoir levels. Furthermore, in 2023 and early 2024, Mediterranean temperatures were often more than 2°C above average, exacerbating the drought and increasing water demand.

Much-needed rainfall during the summer of 2024 has helped alleviate some of the drought conditions. As a result, since July, much of the region has shifted from a drought alert to a drought warning, reflecting the gradual improvement while underscoring the continuing risks.

See also: Parametric Insurance Can Tackle Climate Risks

Agricultural impacts and economic losses 

Drought has affected everything from municipal water supplies to the integrity of infrastructure. A significant consequence is the availability of water for agriculture. Spain, one of the largest European producers and exporters of fruit and vegetables, has been hit particularly hard. 

The olive, a cornerstone of Mediterranean culture and cuisine, exemplifies the drought’s severity. To meet growing demand, global olive production has tripled since the early 1960s. Spain leads the olive market, contributing 45% to the annual U.S. $15 billion global market; Italy and Greece each contribute around 10%.

However, warmer winters coupled with a prolonged drought have significantly reduced olive yields. In Spain, production fell to half of its usual volume in 2022–2023. 

The loss in olive production for Italian and Spanish growers during the 2022–2023 season was estimated at €4.15 billion (U.S. $4.45 billion). Retail prices for olive oil rose more than 2.5 times, making it one of the most shoplifted items in Spain. 

Recently, the situation has begun to improve, with production nearing the five-year average, indicating that prices are expected to start normalizing. 

While this story highlights losses to olive growers, many other Spanish farmers have suffered drought-related losses as well. With around 40% of Europe’s fruit production concentrated in Spain, concerns about global food security are mounting as the climate warms.

Government response and challenges 

The Spanish government has responded by approving €2.2 billion (U.S. $2.36 billion) in aid for the agricultural sector, including €40.5 million (U.S. $43.5 million) in insurance subsidies; however, most of Spain’s olive farmers will not benefit, as only 4.5% of the country’s olive grove area is insured.

Around 80% of Spain’s olive groves are rain-fed and highly vulnerable to changes in precipitation, with the remainder using irrigation systems. Increasing irrigation might boost olive production, but in recent decades it has caused environmental issues. In areas such as La Loma, Spain, the over-extraction of groundwater for irrigation has depleted aquifers, leading to long-term unsustainability.

See also: Climate and Catastrophe Risk Strategies

Climate change and future drought risk 

Climate change is expected to exacerbate drought in the Mediterranean by causing higher temperatures and shifting precipitation patterns. These changes will lead to faster soil moisture depletion and reduced water retention, affecting water availability for agriculture and other uses. 

WTW’s Global Climate Hazard Indices show that areas already under water stress, such as mid- and northern Cataluña, are likely to experience more frequent droughts (up to 1.5 times) in the next decade even under a "middle of the road" climate scenario. Conditions could worsen if we fail to shift to a lower-carbon economy and instead follow a high-emissions trajectory. For instance, drought frequency could significantly increase in the coming decades, not just to northern Cataluña but also to most of the Spanish Mediterranean coast under a fossil fuel economy. 

Other Mediterranean regions, such as southern France, Italy, and northern Africa, may also see more damaging drought, with frequency increasing on average 1.4 to 1.6 times in most areas by the next decade. 

Addressing drought risks and opportunities 

Companies can benefit from risk screening their portfolio of assets, operations, and supply chain to identify exposure now and under different future climate scenarios. This may lead to deeper dives on the most at-risk sites, to inform decisions about how best to avoid, reduce, or transfer risk. This type of work assists with risk management directly and informs disclosure and reporting on climate-related risks and opportunities, including the Corporate Sustainability Reporting Directive, International Financial Reporting Standards, and the Securities and Exchange Commission climate rule.

Companies are rushing to harness the benefits of generative AI (GenAI) tools such as ChatGPT, Copilot, and DALL-E. While GenAI promises cost savings and efficiency, however, customers still value genuine human connections. Striking a balance between AI-driven interactions and authentic human experiences is vital for earning customer trust and maintaining empathy.

See also: A Reality Check for Generative AI

Despite the excitement around GenAI, customers remain cautious, selectively trusting AI with low-risk tasks like crafting communications, creating meal plans, or generating workout routines. However, when it comes to more complex, high-stakes interactions, customers prioritize privacy and security. A 2023 study by the International Association of Privacy Professionals highlighted these customer concerns:

- 57% believe AI poses a threat to privacy.

- 53% think AI makes it harder to protect personal information.

- 81% worry about how their data will be used.

- 69% don’t trust companies to use AI responsibly.

While businesses explore AI for efficiency, customer-focused companies are addressing these concerns by being transparent about data usage and providing customers with control over their data. Offering human interaction channels alongside AI solutions helps maintain consistent and trustworthy experiences.

Customers Desire Authentic Empathy

In 2023, a peer-to-peer emotional support service faced backlash for using ChatGPT to communicate with users who expected human empathy in a vulnerable and challenging situation. While GenAI can deliver empathetic-sounding responses, customers were disappointed by the lack of authentic human connection, particularly in an emotionally challenging journey.

This incident underscores the importance of aligning empathy with customer expectations. For emotionally charged moments, such as dealing with insurance claims after the loss of a home or loved one, customers often seek real human support. As Danny Allred, leader of the conversational AI strategy at Nationwide says: 

“Companies need to consider how the transparent artificial empathy is transformed into authentic empathy with a person. This is where they will see real value in leveraging Gen AI at scale while still retaining the human element.”

By balancing GenAI’s scale with human intervention, companies can offer genuine empathy where it matters most.

See also: Balancing Technology and Empathy in Claims

Focusing on the Customer

To meet customer expectations, companies should assess key customer journeys and feedback to determine where human touch is needed and where AI can be beneficial. These interactions typically fall into two categories: consultative and transactional.

Consultative interactions require guidance, empathy, or emotional support. Here, human connections are essential, and AI should enhance, not replace, these interactions. For example, AI can support employees in providing empathetic service during claims or new product purchases.

Transactional interactions prioritize speed and efficiency, such as bill payments or routine policy changes. AI can automate these tasks, improving convenience for customers.

Recognizing the difference between consultative and transactional experiences allows companies to design more effective digital interactions. However, these distinctions aren’t always clear-cut. A transactional interaction may shift to a consultative one if the customer encounters issues, requiring empathy and human intervention. 

Customer journey orchestration technologies can help businesses identify these shifts in real-time, allowing them to intervene with empathy and prevent negative experiences. 

By ensuring that customer needs drive engagement strategies, companies can build trust and loyalty. Involving customer experience teams in AI strategy decisions ensures that AI is used to enhance customer well-being, ultimately helping them thrive.

Paul Carroll

I read a piece in the New York Times recently by Nicholas Kristof about how heat affects people in more ways than we realize. People fall off ladders much more often in hot weather. They make more mental errors. Kids learn less when they’re hot. 

And, of course, the world is continually getting hotter. 

So I was really interested to hear your presentation at the inaugural meeting of CIRCAD about your work investigating how insurers might develop coverages that protect against the problems heat causes. Could you tell me a bit about the genesis of your work?

Jordan Clark

My PhD focused on extreme heat. I did a lot of work with high school football players, for instance, to understand how they can better use heat stress information to safeguard their health. That kind of transformed into forecasting extreme heat. At Duke, over the past year and a half, we’ve had some engagements related to climate, insurance, and finance, and there are a lot of unanswered but pressing questions related to heat. 

It’s a tough peril to define and insure even though it’s affecting almost every part of society. We think about what heat does to contribute to hurricanes, convective storms, drought and wildfire, but the direct effects of extreme heat are largely under- or unmeasured. 

One of our goals is to influence public policy, and that can’t happen if the impacts aren’t understood and quantified.

Paul Carroll

You talked a fair amount about how heat contributes to injuries on the job and to people missing work. Could you talk a bit about what you’re thinking?

Jordan Clark

Let’s say a company is constructing a building. At the moment, it could buy insurance for heavy rain or flooding that would delay the project, but it can’t buy a policy that covers extreme heat that either diminishes workers’ productivity or makes it too dangerous for them to show up at all—something that is happening in Houston as we speak. 

Can we figure out a way to cover the workers for their lost wages? And can we cover the construction company itself for the costs of the delays? 

Heat is tricky. Maybe workers can work but only at 40% of their normal productivity, because they have to get out of the sun and take frequent water breaks.

Paul Carroll

Business interruption is another issue you raised.

Jordan Clark

Some small businesses and some municipalities have expressed concern about what can happen to foot traffic during extreme heat. They’re wondering if the reduction in sales is insurable. How would that work?

Paul Carroll

You also talked about open air workers in India who are getting some coverage for heat.

Jordan Clark

The idea is that, if someone has a food truck, for example, they could insure themselves for possible lost time. The India example isn’t directly applicable to the U.S. because that was kind of done through an NGO [non-governmental organization] and workers union. We would miss a lot of workers in the U.S. if we just did this through a union. 

There were also some interesting challenges there. The women who are part of the program had days when the insurance kicked in because the temperature exceeded a certain level, but the money didn’t arrive immediately, and they needed money that day or the next, so they actually went and performed some other labor outside. The insurance didn’t prevent them from exposing themselves to danger. They just got double the normal money. 

So timeliness of payment is something we have to work on. That maybe gets us into forecasting extreme heat, rather than just reacting to it after it happens. I think there’s potential there. 

Paul Carroll

I assume forecasting could also help better prepare for the extreme heat.

Jordan Clark

Right. People can sometimes get their health insurance premiums lowered if they show that they exercise regularly, and I can see construction companies having premiums reduced if they buy tents, buy fans, and so on. 

Paul Carroll

When I think about heat, I mostly think of what it does to people, but you talked about a number of ways that heat affects property insurance, too.

Jordan Clark

There is increased wear and tear on siding and roofing materials and HVAC units due to extreme heat and fluctuations. That issue starts to get into what the insurance industry is already covering, but insurers, relying on historical data, may not be accounting fully for what increasing heat is doing to undermine the integrity of structures and equipment. Homes, for instance, may be more likely to suffer wind damage than underwriters understand.

This past summer, there were drawbridges in the New York City area where authorities had to bring out a powerful sander because parts had expanded so much that the bridges couldn’t close. Amtrak had to suspend service at times because the rails just got too hot. Heat increases wear and tear on bridges and other infrastructure at the county and municipal level. Heat can cause big problems for the electric grid.

Paul Carroll

You also talked about how extreme heat can compound other problems.

Jordan Clark

Heat is an exacerbating factor on every peril. If a hurricane knocks out the power grid, then all kinds of people lose air conditioning and are vulnerable to heat. 

We’re already in dangerous territory anyway because of the rising heat. In manufacturing or warehouse settings, even in the South, they tend not to be air-conditioned. They just use big fans, and when temperatures get high enough the fans lose their ability to cool people sufficiently. Something like 50,000 schools in the U.S. don’t have air-conditioning. Those problems aren’t insurable, but thinking about the cost of upgrading to deal with temperature is mind-boggling. 

Paul Carroll

So you’re saying the first thing to do is to quantify the heat risk, the second is to determine if it’s insurable, and the third is to explore what coverage might look like. This is new territory. How far along are some of the early efforts?

Jordan Clark

We’re mostly looking at the data and having conversations. But we’ve been increasingly engaging with certain sectors, such as construction and some municipal and county governmental organizations. And we have a pilot project going with an electric utility that pays it if temperatures reach a certain level, to cover the expected cost of shutting off power and having to compensate its customers. We’ll mostly be talking about small pilot projects for the next year or two.

Paul Carroll

I figured this was early days. I’ll be fascinated to see where you go from here.

Thanks, Jordan.

The math on the aftermath of Hurricane Helene is the starkest I've ever seen. 

Accuweather says the total economic losses from Helene could be $225 billion to $250 billion. CoreLogic calculates that insurance could cover $10.5 billion to $17.5 billion, which includes as much as $6.5 billion from the National Flood Insurance Program. 

Those numbers leave an awfully big gap. Even if you take the low estimate for losses and high estimate for insurance, you're still left with more than $200 billion in uninsured losses. I'll say that again: The property owners and communities that were hit by Helene could be on their own for more than $200 billion.

And we have an even bigger storm, Hurricane Milton, headed right at the Gulf coast of central Florida and expected to make landfall Wednesday night. Milton will be the biggest storm to hit the heavily populated area in more than a century. 

If history is any guide, we'll muddle through. Homeowners will turn to their insurance, find that they likely don't carry the sort of flood insurance that would cover the damage Helene caused, and turn to the politicians. The politicians will posture -- especially given that we're lurching toward the end of the long presidential election season -- and eventually come up with a potful of money that will cover a large percentage of the damage. 

But I say it's time for a grownup conversation about where responsibility lies -- how much with homeowners, how much with insurers, and how much with each layer of government. 

We've meandered our way into a mess. And if Helene and Milton can't focus our attention long enough to address it, then I can't imagine what will. 

The basic role of the insurance industry is clear: We cover the claims we've been paid in advance to cover. We can't be expected to bear all the other losses, no matter how rich people may think the industry is. 

But there is an advisory role that I think insurers can play, at least during the recovery from Helene and Milton. As Veronika Torarp, a partner at PwC, says in the interview I did with her for this month's ITL Focus on Resilience and Sustainability, insurers are the ones that know best what precisely caused the damage and what interviews would have reduced or prevented the damage. So they can advise property owners on how to build more defensively so they do better in the next storm -- perhaps by installing steel roofs that can withstand hail. Insurers, she says, could even get involved with the Army Corps of Engineers, which has a massive budget and will be doing considerable work in the areas hit by Helene, to offer thoughts on how to rebuild roads and bridges in ways that best protect people and property. 

Insurers can also, of course, encourage people and businesses to buy more of the sort of coverage that will reimburse them for damage in the next storm, and, if history is any guide, customers will be more receptive to that idea for at least months, perhaps even a year or two. But big gaps in coverage will persist. They always have.

Some people will even leave the areas hit by hurricanes and find safer harbor elsewhere. The Wall Street Journal published a story Monday under the headline, "The Great Florida Migration Is Coming Undone." The article says hurricanes and other extreme weather are contributing factors. But I suspect that movement away from risky areas will be slow. Other than, perhaps, people whose homes have been destroyed, folks don't just leave their homes behind.  

With the role of insurers limited and with individuals unlikely to respond fast enough and robustly enough, that leaves government. 

I know, I know, hoping to fix the federal government is a fool's game, especially with today's hyperpartisan environment throughout the U.S. But I'll at least lay out what I think the two core questions are and suggest a way that the insurance industry might be able to provide a nudge in the right direction.

The first question is whether the federal government should play any role in covering, say, those $200 billion in uninsured losses from Helene. Historically, the answer has always been yes, but it's been a tortured yes. Republicans in Congress, in particular, get stuck between conservative principles (meaning they vote against additional spending, including for disaster relief) and the need to advocate for their constituents (demanding disaster relief when they are affected). 

For instance, as a congressman, Ron DeSantis voted against disaster aid for New York and New Jersey following Superstorm Sandy but has asked for federal aid for Florida as the state's governor after hurricanes and will surely request aid in the aftermath of Helene and Milton. Kentucky Sen. Rand Paul has been adamant about not writing a blank check for disaster relief but has supported aid to Kentucky following tornadoes and will surely be involved in seeking help following the damage that Helene caused. 

The conservative policy blueprint Project 2025 calls for major cuts to the Federal Emergency Management Agency (FEMA) and the elimination of the National Flood Insurance Program, but no right-minded politician would call for such measures now, in the face of so much need across the Southeast. That'd be a great way to lose a presidential election.

So we're probably stuck with today's tortured yes. Democrats in Congress will align with Republicans from affected areas and pass aid bills. But there will be lots of grumbling, And that grumbling will surely get more serious if the relief package for Heleme and Milton soars into the hundreds of billions instead of the usual billions or tens of billions.

That brings me to the second question, where the insurance industry can play a role and where what is likely to be a mammoth aid package could maybe even have an effect. 

The question is: What level of government should be responsible? Historically, the states have taken some responsibility but have pretty quickly turned to the feds. Even a rich state like California has asked for federal help on some massive wildfires. 

In some ways, the question is almost philosophical. Are we all in this climate change mess together, or should we take individual responsibility? Are those of us who live in California responsible for dealing with our wildfires, landslides, and earthquakes ourselves, or should Minnesotans, say, have to contribute to some grand aid fund that helps us, on the theory that they'll have their turn in the barrel some day? 

I'm not saying we should tell those hit by Helene, "We warned you you should buy insurance. Good luck with those $200 billion in uninsured losses. Maybe given your governor a call."

But I do think that pushing responsibility for disasters down from the federal level would help -- and insurers could facilitate conversations along those lines. Assigning responsibility at the state or even community level would get the people in danger to face the danger and understand that they have to do something about it, whether that's hardening their properties against storms, floods, and fires or whether that's buying insurance to cover the cost of repairs and recovery. 

States could be the enforcer here. They could assess the risks to communities and require that they purchase a sort of stop-loss insurance that would kick in if disaster strikes. The state would have incentive to get the assessments right and have communities be able to pay, because the state would be the backstop for the community up to a certain level of cost, before federal aid would kick in. (This article in the New Republic gets into this hybrid idea in some detail.)

My suggestion raises a zillion questions, including the obvious one about discrepancies between homeowners in a community. If I'm in the valley and you're on the hill, shouldn't I pay more toward the community flood insurance? 

But I'm tired of the status quo. It isn't working. We should use the attention that Helene and Milton will get to start the conversations that can make disaster recovery work better for everyone.

Cheers,

Paul

P.S. The community-based insurance idea was developed at the climate conference that I promised last week I would get into this week. I just couldn't do the conference justice while still addressing the issues that Helene and Milton raised in my mind. I'll tell you about the conference next week. Honest.  

Europe is struggling with extreme weather. In Central Europe, floods are causing devastation. Their intensity is almost unheard of for this time of year. Across Poland, Austria, Romania, Hungary, and Czechia, the authorities have been forced to draft in volunteers and even members of the armed forces to help strengthen flood defenses. Already, the floods have taken the lives of 23 people. In Portugal, meanwhile, wildfires rage. Seven are dead, homes have been flattened, and swaths of land have been burned. These events share a cause: the climate crisis.

See also: Climate and Catastrophe Risk Strategies

The events in Europe are a tragic reminder of why, with Climate Week NYC just completed, and COP29 within sight, it’s no longer acceptable to respond to climate change with commitments to act. The last few years have furnished us with plenty of pledges and promises, agreements and assurances. But not enough has changed. So although a place exists for statements about what will be done, our attention must now be on what is being done. Action is the order of the day. At the country, company, and individual levels, we need to talk less and do more. 

No one sector can solve the problem by itself, but each can play its part – and set an example for others. Insurance is doing this. As a sector that plays an important social role, insurance must. It has long mitigated the financial impact of events such as illness, accidents, and disasters, undergirding economic activity by allowing people and businesses to take calculated risks and providing long-term security to organizations and individuals so they can plan ahead. 

Faced with one of the greatest challenges to long-term societal stability, insurance has turned to cutting-edge technology, thanks to which providers can now, with an enormous degree of accuracy and at breathtaking speed, monitor and to some extent mitigate climate events. Climate intelligence firms are using artificial intelligence and geoanalytics to transform raw satellite imagery into usable information. That means, in practice, processing the pictures taken by public and private satellites orbiting the planet and then visualizing them. Insurers are forming partnerships with firms like these and incorporating their technology into platforms. Because of this, they can shift from responding to disasters to predicting and preventing them. It’s a fundamental change: Insurance, traditionally, focused on helping people recover after an event; it can now help prevent those events from happening.

See also: How AI Can Help Insurers on Climate

The response side shouldn’t be overlooked, however. Technology is transforming that, too. With Earth observation (E.O.) data – satellite data made usable by technology companies – insurers can precisely monitor the extent of a flood, wildfire, or other disaster as well as the damage it has caused. That streamlines the claims process and reduces the emotional toll on all involved. Even as it shifts its focus from response to prevention, insurance hasn’t neglected the importance of rebuilding after disasters, or of the reality that some disasters can’t be prevented. It’s become better at responding, too.

But the focus of insurers remains prevention, and that’s because, as the Dutch philosopher Erasmus put it, "prevention is better than cure." Through the use of geospatial data from E.O. technology, insurers can now help clients around the world mitigate risk. Agents can explain why properties are at risk and how to reduce those risks. Clients are given access to a virtual pharmacy – a kind of large medicine cabinet, containing software and services, supplied by third parties, that can reduce their risk of harm. They can visualize data on fires, floods, and other natural hazards in close to real time. They can even be warned via a push notification if a natural disaster is imminent or likely so they can protect themselves, their families and their assets.

A sea change is underway, propelled by the reality of the climate and other overlapping crises, the availability of state-of-the-art environmental intelligence technology, and the boldness and readiness of insurers to walk forward into the future. The gravity of the challenges we face as a planet notwithstanding, it’s an exciting time to be working in the insurance sector. Because at a time of global volatility, insurers are stepping up, rising to the full height that their social role demands. 

The litigation defense community is facing a critical challenge: a growing data deficit that threatens to undermine its negotiating power. This issue is particularly evident in the industry's struggle to define the Best Alternative to a Negotiated Agreement (BATNA) in litigated claim files.  

Our Industry Operates the World's Largest Negotiation Network

The insurance litigation defense community operates the most extensive negotiation network anywhere. With more than 30,000 claim professionals assigning approximately one million files annually to about 30,000 defense attorneys, its scale is unmatched. 

Negotiation is the lifeblood of the property casualty claims industry. In terms of frequency, it’s undeniably successful– a staggering 97% of all litigated files settle before reaching a verdict. However, frequency isn't the only, or even most important, metric. The industry is tasked with securing "good" settlements, not "overpaid" ones. This is where the challenges begin.

The Elusive "Good" Settlement

Defining a "good" settlement has always been a struggle in the industry. Did we overpay in this settlement? Was that the right number? The difficulty in justifying settlement amounts has led to industry catchphrases like "a good file is a closed file." But this oversimplification masks a deeper issue.

To truly define a good settlement, the likely outcome of a verdict must be quantified. This is because, in our world of litigated claims, a verdict is the ONLY alternative to a negotiated settlement. Drawing the red line, where you opt for trial rather than paying a penny more, is the only thing standing in the way of unbridled escalation of plaintiff demands. A verdict is the only BATNA we have, and knowing your BATNA is the most important thing in any negotiation, no matter what industry you’re in. 

The BATNA Dilemma

We have always struggled in the insurance defense industry to predict BATNAs. There has simply been a lack of good data. As a result, the methodology for estimating verdict outcomes hasn't changed significantly in 40 years. The industry relies on a polling process, seeking opinions from seasoned colleagues and experienced defense counsel. Based on this anecdotal input, a determination is made about what "the case is worth at trial.”

The impact of the venue and the specific plaintiff attorney who has the case are then factored in – critical elements in arriving at a BATNA. Unfortunately, this input is largely anecdotal, as well. Color-coded maps might be used to see if the venue is favorable or unfavorable, conservative or liberal. Defense counsel will provide adjectives about the plaintiff attorney, like "scary," "good," or "very competent," all words that frame imprecisely our perception of the attorney risk.

Flaws in the Current Approach

This process is riddled with problems:

1. It's primarily anecdotal, based on reputation and general feelings rather than actual track record and performance data.

2. Recency bias skews perceptions, making dramatic outliers (like recent nuclear verdicts) more memorable while making more common outcomes forgettable.

3. Without concrete data, qualitative descriptions are processed inconsistently. Two "bad" venues might have a 10X difference in median verdict values, and two "scary" plaintiff attorneys could have a 10X delta in their ability to maximize non-economic damages.

The Plaintiff Bar's Technological Leap

Historically, while identifying the BATNA was hard for the defense, it was equally hard for the plaintiff bar. Negotiations were very much like poker games, where neither side could see most of the cards. 

But that world is gone. The plaintiff bar has made significant strides. Their investment in technology, AI, and contributory data sharing is nothing short of revolutionary. The amount of venture and private equity money pouring into the personal injury legal tech space is nothing short of staggering. 

EvenUp Law is one example. With over 900 personal injury firms using their technology, they're preparing 3,000 demands a month and claiming 30% higher settlement amounts. They are likely to hit unicorn status in the next six months, funded by Silicon Valley’s most respected venture funds. They are just the first of many to follow. 

The plaintiff bar now has access to more objective data points and a contributory database, giving them more precise BATNAs. Their shared data includes both verdict data and settlement patterns – sometimes down to specific claim professionals, with dossiers on file handlers and defense attorneys. The playing field is no longer level; they can see far more cards than the defense. And poker is not so much fun when the other players can see more cards. 

The Consequences of Inaction

This asymmetry of information is leading to dire consequences. Many litigation executives have almost stopped trying cases, with some trying less than 0.5% of their cases annually. When cases are actually taken to trial, claim and litigation executives commonly say it was because the plaintiff attorney "gave them no choice."  

The consequences of removing verdicts as an option is to lose sight of the BATNA. And when the BATNA is lost, we would expect settlement values to rise precipitously. Which, as most insurance executives will attest, they are. 

See also: Social Inflation: Decades of Insurance Litigation Abuse

Reclaiming the BATNA

While our industry appropriately bemoans social inflation, nuclear verdicts, and legal system abuse, the defense litigation community is not helpless. We can respond by using, just as the plaintiff bar is doing, data – data that helps us to rediscover the BATNA. 

Step one requires shedding long-held beliefs that our decision-making is purely a form of art based on experiences and subjective judgment. The plaintiff bar has no such hang-ups. More data is available than ever before, and we must learn to use it effectively, as the plaintiff bar has done. 

Access to filing rates, trial rates, verdict frequency, verdict results, case type experience, historical damage multipliers, venue demographics, and many more data points help to establish fact-related BATNAs. Using this data effectively will maximize our collective ability to curb, control, and minimize the very social inflation that we discuss so often. 

Of all the new AI tools available, perhaps the most intriguing quantifies an attorney's ability to maximize non-economic damages with juries. The ability to compare a specific plaintiff attorney's reputation with their actual track record has been eye-opening. Seeing how this data changes defense counsel's perspective on specific plaintiff attorneys has proven even more eye-opening.

See also: The Plaintiff Bar Is Winning in AI

A Call to Action

Silicon Valley has pumped $100 million into EvenUp Law alone, and Lightspeed Venture Partners now lists personal injury law as the largest segment in LegalTech for AI investment. The plaintiff bar is backed by a growing war chest of capital, and the defense is two to three years behind. The litigation defense community can and must get out of the starting gate and find its collective BATNA again. The tools and data are available; they need to be embraced.

Our litigation defense community stands at a crossroads. It can continue with outdated methods and watch its negotiating power erode, or it can embrace a data-driven future that's already here. By reclaiming the BATNA, we don't just level the playing field, we upgrade the industry's core competency – effective negotiation. 

Paul Carroll, the editor-in-chief at Insurance Thought Leadership, recently sat down with Michel Léonard, the chief economist and data scientist at the Insurance Information Institute. They discussed the state of the global economy, geopolitical risks, and their potential impact on the insurance industry.

What follows is a transcript of that conversation, edited for length and clarity.

Paul Carroll

There’s certainly a lot to think about. Where should we start?

Dr. Michel Leonard

The global economy is facing a complex set of challenges that are likely to have significant implications for the insurance industry. Inflationary pressures, geopolitical tensions, and the continuing effects of the pandemic are creating a high degree of uncertainty and volatility in financial markets.

In this environment, insurers will need to be particularly vigilant about managing their risks and maintaining adequate reserves. They may also face increased claims activity in certain lines of business, such as business interruption and event cancellation insurance.

At the same time, the current economic conditions could create opportunities for insurers that are well-positioned to navigate the challenges. For example, rising interest rates could boost investment returns, while a heightened focus on risk management could drive demand for certain types of coverage.

Overall, the insurance industry will need to remain adaptable and proactive in responding to the evolving economic landscape. By staying attuned to the latest developments and adjusting their strategies accordingly, insurers can position themselves for success in the face of uncertainty.

Paul Carroll

This report is a bit different, focusing on potential problems and geopolitical risk scenarios, rather than the specifics of economic conditions.

Dr. Michel Leonard

In our recent economic discussions, we've been covering a lot of topics such as growth at the GDP level for both the country and the P&C industry, as well as inflation and replacement costs. Throughout these conversations, I've consistently mentioned that geopolitical risk is a major caveat to growth recovery and prices returning to a more normal range.

Given the significance of geopolitical risk, I thought it would be valuable to take a step back and pay more attention to specific risk scenarios. The aim was to expand on what we have in mind when discussing these risks and how they can affect not only the economy at large but also the P&C industry specifically.

Paul Carroll

What are the key geopolitical scenarios the insurance industry should be concerned about?

Dr. Michel Leonard

We identified three key scenarios that warrant serious attention from the insurance industry: conflict in the Taiwan Strait and the South China Sea, continuing or worsening war between Russia and Ukraine in the Black Sea, and the Houthis’ attacks off the coast of Yemen.

Let’s take those one by one. Taiwan is a real concern, but it has not yet degenerated into armed conflict. For immediate impact on the P&C industry, we are focusing on existing conflicts, first the war between Ukraine and Russia and second the Houthis’ attacks off the coast of Yemen.

We identified three key scenarios that are already unfolding and warrant serious attention from the insurance industry: the conflict in the Taiwan Strait, issues in the South China Sea, and the continuing situations with Russia and the Houthis.

While the U.S. security apparatus has contingency plans for potential escalations in Taiwan and the South China Sea, the current conversation suggests that strategic nuclear weapons may be the only way for the U.S. to uphold its commitment to protecting Taiwan against the PRC. If such a scenario unfolds, we would face far greater challenges beyond just economic concerns.

By focusing on the conflicts with Russia and the Houthis, we can bypass the need to convince people of their plausibility and instead concentrate on how they directly affect us. Both situations are significantly affecting two out of the three major international shipping routes in and out of the Mediterranean Sea: the first by disrupting Black Sea shipping through the Turkish Straits, and the second by disrupting shipping off the coast of Yemen and the Gulf of Aden leading to the Suez Canal.

As a result, to determine the impact of both conflicts on any industry and the P&C industry in particular, it becomes crucial to examine what goods are being transported through these shipping routes, their origins, and their destinations to understand the full implications for the insurance industry and the global economy.

Paul Carroll

What are the potential impacts on various insurance categories if conflicts escalate in the Turkish Straits or the Strait of Gibraltar or with the Houthis off the coast of Yemen?

Dr. Michel Leonard

The Turkish Straits and the Strait of Gibraltar are two of the three key entry and exit points in the Mediterranean Sea. If conflicts were to escalate in these regions, it could have significant implications for the insurance industry.

The Turkish Straits, consisting of the Bosphorus and the Dardanelles, are particularly critical. Any disruption in this area would likely prompt the government, security apparatus, and Department of Defense to plan for contingencies. While there are currently only minor skirmishes and no continuing conflicts, the situation warrants close monitoring.

It's important to assess how different categories of insurance might be affected under these scenarios. The potential impacts could vary depending on the specific line of business and the extent of the conflict. For the P&C industry, shipping disruptions in the Turkish Straits ultimately lead to increased replacement costs for commercial property, and disruptions by the Houthis off the coast of Yemen increase replacement costs for homeowners insurance content.

Paul Carroll

What is the impact of the conflict in Ukraine on global food supply and prices, particularly in relation to the disruption of grain shipments through the Turkish Straits?

Dr. Michel Leonard

The conflict in Ukraine has significantly disrupted the export of grain and concrete bonding agents from the country's Black Sea ports. Out of Ukraine's five main ports, only one or two are fully operational, and even then, peaceful transit through the Black Sea is not guaranteed.

This food supply disruption has far-reaching consequences for the rest of the world, leading to food scarcity and famines in many regions. While the U.S. is relatively fortunate in that food is still available, albeit at higher prices, many other countries face a more dire situation.

The impact of the disrupted grain shipments from Ukraine is particularly severe in Central American countries like Guatemala and Nicaragua, contributing to increased immigration and refugees seeking to enter the U.S. from the Southern border. These grain shipments, which would typically pass through the Turkish Straits and the Strait of Gibraltar to reach the East Coast of the U.S., particularly the Port of New York and New Jersey, have been significantly affected.

As a result, food prices have increased, and the cost of bonding agents used in construction has also risen, which has implications for the insurance industry.

Paul Carroll

What are the main impacts of the disruptions?

Dr. Michel Leonard

The disruptions in the shipping routes are affecting the property and casualty insurance industry in two primary ways. First, in the Black Sea and Turkish Straits, the disruption in the supply of concrete bonding agent is directly affecting commercial construction, as concrete is a crucial material in this sector. This is causing issues with both price, availability, and quality.

Second, the disruption of shipping routes through the Gulf of Aden and the Suez Canal is affecting the supply of consumer goods, particularly those from countries such as Thailand, Indonesia, Malaysia, Pakistan, Bangladesh, and India. These goods, which include textiles, garments, and some furniture, are commonly used in homeowners' content. As a result, this disruption is affecting the cost and availability of replacement goods for homeowners' insurance.

In terms of the magnitude of these impacts, our stress tests estimated that P&C replacement costs across all lines could increase by an average of around 7 percent for the affected goods, with a range of up to 3 percent in the best-case scenario and up to 12 percent in the worst-case scenario.

It's important to note that, unlike during the pandemic, the current disruptions are not significantly affecting the supply of automobiles or consumer electronics, as these goods typically come through different routes or directly from other regions.

Paul Carroll

What are you finding as you talk to insurance executives about your geopolitical risk scenarios? Are they buying into the exercise and prepared, or might they be caught by surprise?

Dr. Michel Leonard

It's important to distinguish between headlines risk and business risk when discussing geopolitical issues with insurance executives. While topics like political unrest, civil wars, and terrorism generate interest, they don't always directly translate to operational impacts for insurers.

To establish credibility, we focus on specific, actionable information. For example, in our Taiwan Black Sea or Yemen scenario analysis, we concentrated on identifying major shipping routes, goods exported and imported, and primary ports of entry into the United States. By moving away from the headlines and drilling down to operational specifics, we gain credibility and engage in more productive conversations.

Just recently, I had a conversation with a senior insurance executive who initially questioned our focus on Taiwan. After I explained our approach and provided specific details, the conversation shifted to actionable insights. We discussed potential changes in homeowners’ insurance, such as the allocation of coverage between content and structure, and how the industry can prepare and educate consumers in light of these trends.

Paul Carroll

What are your thoughts on the state of the commercial real estate market? Do you believe more clarity is emerging, particularly regarding interest rates, office space usage, and potential conversions to residential properties? How might these factors affect insurance companies as investors and underwriters?

Dr. Michel Leonard

The level of uncertainty in the commercial real estate market remains the same as a few months ago, but we do have a better sense of direction. The recovery for commercial real estate will likely involve transferring these properties to residential commercial, with large landlords managing the properties. The coverage of these properties by commercial property carriers will depend on how they define their business. We are closely monitoring this trend, which has yet to begin in earnest.

The trigger for this trend was always the Federal Reserve cutting or reducing interest rates and adopting a more dovish stance, which it has done. However, the current market conditions and unemployment levels are, in our opinion, a consequence of the Fed waiting too long by about six months. While we don't anticipate a recession, economists were surprised by the recent numbers, as they crossed thresholds that call for different monetary policy reassessments.

We don't expect the Fed to accelerate its original easing plan, but it is a prerequisite for any revival or recovery in both commercial and residential housing. Good news in either sector, including the conversions we discussed, is needed.

Regarding unemployment, my current expectation is that the decrease in interest rates and the market's expectation of continued Fed action will inject life into residential real estate. Any resulting bump in construction employment should help bring overall unemployment back from the concerning levels economists are currently observing.

Paul Carroll

Enlightening as always. I always feel smarter after we talk.