One of my first articles having broad visibility at the international level was, "Will fintech newcomers disrupt health and home insurance?". Well, there is an insurtech that has tried. It is listed on the New York Stock Exchange, has a market cap of around $1 billion and has burned $628 million of cash since its foundation in 2015. (For reference, Lemonade has burned through $562 million).

How it started

"Hippo, a Mountain View, Calif.-based insurtech startup focused on smart home insurance, raised $14m in Series A funding [...] Hippo is to launch a home insurance product that can be purchased online, removing commissioned agents."

“Its loss-ratio performance is under the industry average, which [CEO] Wand attributes to its underwriting policies and its use of big data and artificial intelligence to monitor customers’ homes.”

How it's going

The distribution storytelling has evolved into a more pragmatic omnichannel approach, where "strongest growth is coming through partnerships, with attachment rates greater than 70% for embedded homeowners products offered through major developers"

I've posted in the past about their connected home approach and the embedded component [I like both these elements] and the bloody technical results of their book of business [I don't like them].

Hippo has recorded premiums of more than $600 million at the end of 2021. However, part of them comes from non-Hippo programs underwritten by Hippo's subsidiary Spinnaker. The size of the Hippo homeowners portfolio should be slightly above $500 million, compared with more than $300 million in 2020.

Each of these dollars of homeowner premiums written has cost Hippo more than $1.50.

It seems that the main problem - even worse than what we discussed about Lemonade and Root - is the loss ratio. The amount to be paid for claims is even higher than the premiums charged to clients.

An interesting article from Matthew Queen provided an optimistic perspective about the evolution of Hippo's loss ratio: https://seekingalpha.com/article/4493487-hippo-long-run-getting-shorter

See also: 5 Questions for Matteo Carbone on Smart Homes

Looking at the geographical distribution on the Spinnaker annual statement. the bloody technical results seem pretty diffused.

An improvement is possible (if not probable). However, for sure there is no disruption around here, just maybe some more chances of surviving than other full-stack insurtech carriers have,

I remain positive about the potential of the smart home approaches in the U.S. homeowner insurance portfolios. I believe there are many opportunities for creating an impact using smart home data, but it is necessary to move beyond the gadget approach.

One great example comes from one of the members of my IoT Insurance Observatory: State Farm. They are scaling a smart home insurance portfolio. My exchange (below) with their VP, innovation and venture capital, Haden Kirkpatrick, shows the first results they are achieving.

Matteo: We have known each other for more than six years, and we have frequently exchanged thoughts about insurance incumbents' ability to innovate. State Farm is the first large carrier scaling a smart home program in the U.S., and I've been impressed by the 20,000 monthly installation rate shared by your tech partner Ting at the IoT Insurance Observatory plenary session last December. I would like to ask you to share your smart home innovation journey: "how it started" and "how it;s going."

Haden: Matteo, what a journey it has been. You and I have discussed for some time how “home telematics” is the new “mobile telematics” and will further change the game for the insurance industry.

We at State Farm have a complete innovation ecosystem, and Ting is a great example of that ecosystem at work. Ting was initially brought to us through State Farm Ventures, our corporate venture capital unit; we invested in Ting in 2019 and have been an advocate of them ever since. Throughout our time working with them, we are confident that we have saved more than 1,000 homes from electrical fires. Now, we are panning back to explore other loss types and connected home devices to see what else is possible in this exciting space. Our team is prototyping and testing with customers while we engage broadly in strategic partnership discussions and tactical go-to-market planning for a wider range of offerings, within which Ting will be central.

Matteo: This approach uses IoT data for preventing a risky situation and avoiding a claim from happening. I've always considered these smart actions an extraordinary opportunity for insurers, because they affect directly the core of the portfolio technical profitability. Could you share the results already achieved in the electrical fire risk reduction through this smart home solution? 

Haden: Today, we have 132,000 customers enrolled in the program. Since launching the program, Ting has been able to detect several hazards within our customers’ homes. We’ve seen problems with main panels, faulty heating blankets, sump pumps and even old Christmas decorations. The feedback from our customers who had hazards discovered has been overwhelmingly positive.

 A benefit that we didn’t expect initially was the value provided by Ting in uncovering hazards that occur outside the home. These hazards occur when there is a problem with power coming into the home from the utility provider. In these cases, the customer works with the utility company to resolve the issue. This not only benefits our customer but the utility customers in the neighborhood.

From Risk Transfer to Risk Prevention from Matteo Carbone

Matteo: I'd expect that this new State Farm service offered to the homeowner policyholder is also increasing the frequency of interaction with them. Insurance has always been something relevant but not frequent in the daily life of people. So, smart home insurance seems a great opportunity to be more present for the insurers. Would you like to share any facts and figures about the customer engagement?

Haden: Our thinking on your core comment (the relevance vs. frequency of engagement) and the challenges of “passive engagement” is shaping our future.

Customers receive an email each week that provides a summary of their Ting monitoring and any events that have occurred. In addition to that, they get a monthly email with helpful hints and tips along with real stories where Ting has saved the day.

State Farm’s mission is to help people manage the risks of everyday life, recover from the unexpected and realize their dreams. While insurance is core to how we achieve our mission, we see so many more opportunities to help people. The simple fact of the matter is that consumers overall are exposed to risks that limit their ability to live complete and fulfilled lives. State Farm has been the industry leader for decades, and we’ve always recognized our responsibility to go beyond insurance and find ways to build stronger and safer communities for customers and the communities where they live.

Beyond helping to mitigate losses in the first place, this is a way to have a more meaningful relationship with our customers and the broader market to help them be safer and better protected overall. That will be the focus of our innovation efforts going forward.

Matteo: Promotion of less risky behavior among the insured portfolio has always been part of the sector philosophy. You have just shared how State Farm is doing it in a faster, more effective and more precise way. I love it! However, I'm now curious to hear your vision for the future. What is the role that you see for the insurance sector in the (smart) houses in 10 years? What's next in your home insurance innovation journey?

Haden: More so than in most categories, our research shows that consumers expect the insurance industry to lead the way as it pertains to helping people prepare for and mitigate the risks that we see increasing in the macro environment. When customers are presented with areas of opportunity on which they care deeply (sustainability, security, etc.), they have a desire and are willing to take action, but they simply may not know what to do, and nobody is helping them to facilitate the process in a safe, trusted manner by which they can get engaged and drive change among themselves and their community.

Interestingly, these customers often reference their insurance carrier as the trusted source to help with these issues. With State Farm’s strategic assets (brand, financial strength, agency network, etc.), we are better positioned to deliver here and, by extension, help lead the industry toward a better future for our customers.

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While COP26 in Glasgow may not have resulted in the level of government commitments that had been widely advocated before the latest UN climate summit, one thing it most definitely did was shine a light on the expectations for the financial services industry in moving to net zero.

The summit late last year was the first COP that the private sector has attended en masse, and there was widespread recognition of the need for issues to be addressed in a joined-up way across the public and private sectors. Perhaps the most visible demonstration was that the group of 450 banks and insurers that are part of the Glasgow Financial Alliance for Net Zero (Gfanz) committed $130 trillion to tackle climate change by 2050. 

The calls for greater finance sector transparency and an end to "greenwashing" as part of the conference’s Coal, Cash, Cars and Trees message resounded around many sessions and plenaries.

On the one hand, (re)insurers around the world can expect a further raft of climate-related regulatory and reporting obligations in the coming months and years, while COP26 will also almost certainly ramp up the pressures for action that were already building from a broad church of stakeholders, including employees and potential recruits.

But to focus only on climate "sticks" is to miss the point. 

Fundamentally, addressing climate change by reducing greenhouse gas emissions is a big opportunity for the insurance industry from several perspectives, as already recognized in the formation of the Net Zero Insurance Alliance, including how it generates investment income, how it underwrites risks and how it makes available contingent capital, and as a source of broader customer engagement and reputation enhancement. Commitments coming out of COP26, such as the goal of doubling spending on adaptation and resilience and initiatives such as the U.S., U.K., E.U. Green Infrastructure commitment are positives for the insurance industry. 

So, what can insurers be doing in the shorter term to get prepared and to capitalize on climate-related opportunities.

Climate transition steps

On the road to navigating climate transition, WTW believes it is important to:

• Develop a climate strategy and a transition plan
• Roll out the strategy through product mix and new products for life and non-life, underwriting, reserving, capital modelling, investment and other policies and associated governance
• Quantify – carry out a comprehensive climate risk assessment
• Monitor, report and improve by including climate risk and ESG (environmental, social, governance) criteria in the risk management framework

See also: Time to Move Climate Risk Center-Stage

Six areas for action

Build on the current understanding of the effects of physical and transition risk on both assets and liabilities and lay foundations for future assessment

Quantification of the risks is fundamental, and having a framework that appropriately reflects the nuances of climate risk is critical. Climate risk exposures vary depending on the level at which risks are assessed, and insurance is a classic case where assessing risk at industry, individual company and individual asset level may result in materially different risk exposures. 

In addition, individual company carbon footprints may be low, but climate risk exposures will vary depending on the nature and location of the investment or underwritten business. For example, where an insurer insures a windfarm, the operating carbon footprint may be low (although the overall carbon footprint will also depend on the materials sourced and construction footprint), but the asset will still be exposed to physical climate risk. When assessing the investment risk associated with a windfarm asset, consideration needs to be given to both the physical and transition risk at individual asset level as well as the wider macro-economic and credit risks from climate change. 

Insurers need to integrate proven analytics tools, natural catastrophe vendor models and methods that reflect the latest science to quantify their enterprise-level climate risk. Examples of potential outputs include hazard and climate-risk scoring and mapping, determination of hazard and climate-adjusted financial losses, and integration of analysis into existing tools and models to support areas like underwriting (life and non-life), risk management, reserving and the actuarial function. 

The key is to start the quantitative scenario analysis journey today but recognize that modeling techniques are evolving in parallel with climate science – so there should be flexibility and agility in the work to capture the connectedness of physical and transition risks and avoid analytical black boxes.

Understand the difference in commonly known large losses and losses related to climate

In one sense, climate risks are not new to insurers; they map onto existing categories of financial and non-financial risk such as credit, market, business, operational and legal risks that insurers have been managing for many years. But, because climate risks are so systemic in nature, risk and opportunities registers will need to be updated with explicit consideration of physical climate risks, transition risks and, potentially, any foreseeable changes in legal and liability risks. 

Insurers will also benefit from starting to consider more the role that stewardship can play, particularly on the asset side of the balance sheet, for example driving enhanced and robust ESG disclosures and using voting rights.

Integrating climate risk into wider enterprise risk management

Because climate change intersects with so many risk categories, insurers’ and reinsurers’ risk-management frameworks will need to be holistic, establishing climate risk appetite and tolerance to provide the guiding principles when balancing the needs of different stakeholders. Climate-tilted enterprise risk management (ERM) frameworks will include:

Governance — including the board’s role in providing oversight of climate risk responses and defining management responsibility for climate risk and ESG integration. 

Risk identification — identifying the key channels through which climate risks can affect the company, including its reputation, and how these are articulated, monitored and communicated on a continuing basis. 

Risk appetite and tolerance — forming a view as to the acceptable levels of risk (e.g., tail risk), including whether climate risk should be considered as a separate element or part of aggregate risk and whether aggregates are sufficient. 

Risk measurement and reporting — including how to incorporate climate risk into financial risk models and reports and deciding on relevant data and metrics for decision making and monitoring. 

Active management of risk exposures — aligning underwriting and investment strategies with both the near-term and long-term risks and opportunities. This could include dedicated investments in companies deemed to have a credible transition plan or developing innovative products to provide coverage for green industries, many of whicj are in their infancy. 

Adaptation impacts — assessing how business risks and opportunities may evolve through low carbon transition, based on future climate scenarios.

Define data requirements as part of the wider considerations around risk management, underwriting, investment and reporting

As in so many other areas of insurance these days, data quality (at the "right" level) is central to effectively manage climate risks. Insurers will need to (or will need help to) identify both relevant sources of internal data and the external data that align with climate strategy and that support business operations in the transition. Tools that WTW has developed to assist with bringing a climate lens to underwriting and investment include Climate Transition Value at Risk, Climate Transition Pathways (CTP) and the Climate Transition Index.

The risks of insuring or reinsuring a coal mine as a single risk may be clear, although integrated action is still needed because simply declining cover may exacerbate unemployment and social inequality. But what about the majority of smaller risks or, for reinsurers, proportional reinsurance? You cannot successfully measure a portfolio and credibly say you are contributing to net zero if you only make your own portfolio zero. Insurers have to measure the change they engender as part of that. 

In this context, it is absolutely crucial to define a measurable data requirement for ESG criteria, to define who will be in charge of populating these into the existing data warehouse system and to adapt the data warehouse for access and monitorability.

Map out a structure for oversight of climate risks and opportunity

Climate risk is an enterprise risk for insurers and is going to involve action across the people, risk and capital dimensions of its strategy. So, it needs executive ownership across the business to develop a coherent strategy, as well as specific goals (e.g. compensation targets) to assist in driving the delivery of net zero and wider ESG objectives. 

That’s not to say that insurers can do everything in one year – far from it. But there’s certainly the opportunity to clarify responsibility and authority for aligning the business to its climate and ESG targets. As this will also involve focusing on whether the business culture and values support these goals, it will make sense to get the groundwork on taking your people with you toward net zero under way.

See also: Navigating Climate Risks and Opportunities

Report and engage on climate

A good first step is, from our point of view, the production of an initial TCFD (Taskforce for Climate-related Financial Disclosure) report. The G7 conference prior to COP26 agreed that this should be mandatory by the end of 2025 – and some countries are ahead of that schedule already. A real, perhaps under-appreciated, benefit of working through the TCFD reporting framework is that it forces companies to address many of the points we’ve raised in this article in a structured manner with a defined deadline, including the use of scenario analysis to understand the future changing nature of risk from strategy.

For many insurers, ESG transparency will also give momentum to building engagement with policyholders. Typically, there is rather limited contact with a policy holder - when taking out the policy, renewing it or making a claim. The bonding between company and policyholders might enter a different level based on climate and ESG engagement. It could be used to generate two-way interactions with customers and other stakeholders who expect business to step up and do its part in climate transition.

End of greenwashing

COP26 may not have achieved everything it was supposed to, but it did mark some milestones in attitudes to tackling climate change. There were concrete commitments to reduce greenhouse gas emissions by 45% by 2030, as compared with a 2010 baseline; the review of countries' commitments to reduce emissions was shortened from every five years to every year; and the words "net zero" were included in the final accord for the first time. Perhaps most of all, COP26 signaled that any question of a phony war on climate is over for companies and institutions.

For insurers, it has reinforced wide ranging changes in the way businesses will need to be managed in the future. So, it’s time to focus on getting the basics right - things like who is in charge, what data and scenarios to access, what models to use, and what policies to adopt - so that individual companies are ready to take their climate journey.

While the existence of climate change may still be a point of contention in the U.S. public, there appears to be a consensus among property and casualty (P&C) insurers that, not only does it exist, but it is a problem that needs to be addressed.

The lack of predictability of extreme local weather events and the increasing frequency and severity of natural catastrophes is supported by any number of internal findings and external reports by agencies like NICB, which have highlighted the 2% increase in hail claims from 2018 through 2020. While that may not seem significant at first glance, consider that damage from wind and hail alone account for roughly 43% of all property claims and that the NOAA’s National Centers for Environmental Information highlights a 95% decade-on-decade increase in U.S billion-dollar disasters.

Extreme weather events are predicted to account for the largest amount of compensation insurers’ will have to pay out over the next 10 years.

Such trends will require modeling that assists insurance providers to better assess climate risk at the property level, as well as mechanisms that help organize collaborative action among insurance carriers, state regulators, communities and homeowners to reduce climate risk. As it always has, a company that anticipates business disruptions such as climate change is better prepared to mitigate any negative impact on their business.

First Steps

Insurers have already taken steps in the right direction, starting with limited solutions such as overlaying topographical maps with the results from existing models to underwrite properties. Yet, this simple approach does not leverage the data that insurance carriers can quickly access. They have massive databases from simulation models and satellites when it comes to weather and climate. The problem is figuring out how to use them to their full potential. As a result, scientists have turned to computer vision to identify hail-bearing storms.

So far, damage prediction has been done manually. Insurance carriers would undoubtedly profit from the forward-thinking strategy of exploiting property attributes, both in terms of location-level risk management and prudential capital needs.

Quick Weather Data Feeds Drive Risk Control Decisions

Insurers need to understand the gaps in the understanding of physical processes and the inadequacy of weather information required for high-resolution modeling of extreme weather events. This would allow models to better factor in the year-on-year effect of global warming on the local and global weather as well as predict extreme weather risk. Insurers could then assess climate exposure to their book roll, which would lead to identifying structural inadequacies on a single policy. They could then enforce risk control measures like requesting changes, and, in case of non-compliance by the policyholder, increase the premium or reject policy renewal.  

Forecasting the data well in advance along with analyzing the existing property condition can be a good indicator of potential claims. Adjusting policies to account for risk-control measures that can be accounted for before the extreme weather conditions intensify will only benefit both the insurer and the policyholder.

See also: Extreme Weather, COVID, Home Claims

An integrated approach 

For this all to work, underwriters and data scientists will need to integrate weather data with property insights derived from internal and external sources. For example, weather variables such as low-level moisture, convective instability and vertical wind shear all have been linked to hail formation. What does the historical data indicate? Now factor in data on building construction to predicting the risk of hail damage. 

Similarly, when predicting flood risk to a property, most carriers rely on the flood insurance risk map that divides the U.S. into low/moderate/high flood zones. However, the premiums should be based on the actual flood risk to a property structure rather than the zone it is located in. Although some carriers do take into account the design of the structure, age of the structure and elevation or if the foundation is subgrade or not, the premiums in most cases do not reflect actual risk. Case in point: The majority of properties in Houston flooded by Hurricane Harvey in 2017 were in “low-risk” flood zones.

Therefore, a view of the current property condition plus plugging in real-time weather forecasts can be leveraged for a more active approach to claims management. For example, the path followed by natural catastrophic events and their intensity can be clubbed with property attributes for the scheduling of SIUs and fraud detection. In this way, properties that might have poor roofs and have been in the eyewall of the storm can be prioritized and triaged accordingly.

Conclusion

Tracking the effects of climate change on extreme weather events such as hailstorms, floods and hurricanes requires a thorough understanding of climate risk change and high-resolution modeling of the property. The adoption of these new technologies will influence how insurers engage with consumers and how their brands are viewed.

By investing in these technologies, insurers can greatly benefit by reduced loss ratios due to decreased premium leakages, identification of high-risk properties (severely affected roofs) and effective claims triaging. Furthermore, with environmental, social and governance criteria becoming an increasing priority for the insurance industry, it becomes ever more important for insurers to take steps to identify climate exposure as a core part of their business strategy.

Using image-based detection along with real-time weather data will aid in determining the veracity and extent of property damage, as well as provide more precise estimations of claim count and amount across regions of interest.

The international shipping industry is responsible for carrying around 90% of world trade, so vessel safety is critical. The sector continued its long-term positive safety trend over the past year, but Russia’s invasion of Ukraine; the growing number of costly issues involving larger vessels; crew and port congestion challenges resulting from the shipping boom; and managing challenging decarbonization targets mean there is no room for complacency, according to marine insurer Allianz Global Corporate & Specialty SE’s (AGCS) Safety & Shipping Review 2022.

The shipping sector has demonstrated tremendous resilience through stormy seas in recent years, as evidenced by the boom we see in several parts of the industry today. Total losses are at record lows – around 50 to 75 a year over the last four years compared with 200-plus annually in the 1990s. However, the tragic situation in Ukraine has caused widespread disruption in the Black Sea and elsewhere, exacerbating supply chain, port congestion and crew crisis issues caused by the pandemic. 

At the same time, some of the industry’s responses to the shipping boom, such as changing the use of, or extending the working life of, vessels also raise warning flags. Meanwhile, the increasing number of problems posed by large vessels, such as fires, groundings and complex salvage operations, continue to challenge ship owners and their crews.

The annual AGCS study analyzes reported shipping losses and casualties (incidents) over 100 gross tons. During 2021, 54 total losses of vessels were reported globally, compared with 65 a year earlier. This represents a 57% decline over 10 years (from 127 in 2012), while during the early 1990s the global fleet was losing 200-plus vessels a year. The 2021 loss total is made more impressive by the fact that there are an estimated 130,000 ships in the global fleet today, compared with some 80,000 30 years ago. Such progress reflects the increased focus on safety measures through training and safety programs, improved ship design, technology and regulation.

According to the report, there have been almost 900 total losses over the past decade (892). The South China, Indochina, Indonesia and the Philippines maritime region is the main global loss hotspot, accounting for one in five losses in 2021 (12) and one in four losses over the past decade (225), driven by factors including high levels of trade, congested ports, older fleets and extreme weather. Globally, cargo ships (27) account for half of vessels lost in the past year and 40% over the past decade. Foundered (sunk/submerged) was the main cause of total losses over the past year, accounting for 60% (32). 

While total losses declined over the past year, the number of reported shipping casualties or incidents rose. The British Isles saw the highest number (668 out of 3,000). Machinery damage accounted for over one in three incidents globally (1,311), followed by collision (222) and fires (178), with the number of fires increasing by almost 10%. 

Ukraine impact: safety and insurance

The shipping industry has been affected on multiple fronts by Russia’s invasion of Ukraine, with the loss of life and vessels in the Black Sea, disruption to trade and the growing burden of sanctions. The industry also faces challenges to day-to-day operations, with knock-on effects for crew, the cost and availability of bunker fuel and the potential for growing cyber risk.

The invasion has further ramifications for a global maritime industry already facing shortages. Russian seafarers account for just over 10% of the world’s 1.9 million workers, while around 4% come from Ukraine. These seafarers may struggle to return home or rejoin ships at the end of contracts. Meanwhile, a prolonged conflict is likely to have deeper consequences, potentially reshaping global trade in energy and other commodities. An expanded ban on Russian oil could contribute to pushing up the cost of bunker fuel and affecting availability, potentially pushing ship owners to use alternative fuels. If such fuels are of substandard quality, this may result in machinery breakdown claims in future. At the same time, security agencies continue to warn of a heightened prospect of cyber risks for the shipping sector such as GPS jamming, automatic identification system (AIS) spoofing and electronic interference. 

The insurance industry is likely to see a number of claims under specialist war policies from vessels damaged or lost to sea mines, rocket attacks and bombings in conflict zones. Insurers may also receive claims under marine war policies from vessels and cargo blocked or trapped in Ukrainian ports and coastal waters.

The evolving range of sanctions against Russian interests presents a sizeable challenge. Violating sanctions can result in severe enforcement action, yet compliance can be a considerable burden. It can be difficult to establish the ultimate owner of a vessel, cargo or counterparty. Sanctions also apply to various parts of the transport supply chain, including banking and insurance, as well as maritime support services, which makes compliance even more complex.

A burning issue: fires on board

During the past year, fires on board the roll-on roll-off (ro-ro) car carrier Felicity Ace and the container ship X-Press Pearl both resulted in total losses. Cargo fires are indeed a priority concern. There have been over 70 reported fires on container ships alone in the past five years, the report notes. Fires often start in containers, which can be the result of non-/mis-declaration of hazardous cargo, such as chemicals and batteries – around 5% of containers shipped may consist of undeclared dangerous goods. Fires on large vessels can spread quickly and be difficult to control, often resulting in the crew abandoning ship, which can significantly increase the final cost of an incident.

Fires have also become a major loss driver for car carriers. Among other causes, they can start in cargo holds, caused by malfunctions or electrical short circuits in vehicles, while the open decks can allow them to spread quickly. The growing numbers of electric vehicles (EVs) transported by sea brings further challenges, given that existing counter-measure systems may not respond effectively in the event of an EV blaze. Losses can be expensive, given the value of the car cargo and the cost of wreck removal and pollution mitigation.

When large vessels get into trouble, emergency response and finding a port of refuge can be challenging. Specialist salvage equipment, tugs, cranes, barges and port infrastructure are required, which adds time and cost to a response. The X-Press Pearl, which sank after it was refused refuge by two ports following a fire – the ports were unable or unwilling to discharge a leaking cargo of nitric acid – is one of several incidents where container ships have had difficulty finding a safe haven. Meanwhile, the salvage operation for the car carrier Golden Ray, which capsized in the U.S. in 2019, took almost two years and cost in excess of $800 million. 

Too often, what should be a manageable incident on a large vessel can end in a total loss. Salvage is a growing concern. Environmental concerns are contributing to rising salvage and wreck removal costs as ship owners and insurers are expected to go the extra mile to protect the environment and local economies. Previously, a wreck might have been left in situ if it posed no danger to navigation. Now, authorities want wrecks removed and the marine environment restored, irrespective of cost.

Higher salvage costs, along with the burden of larger losses more generally, are a cost increasingly borne by cargo owners and their insurers. "General average," the legal process by which cargo owners proportionately share losses and the cost of saving a maritime venture, has become a frequency event, as well as a severity event, with the increase in the number of large ships involved in fires, groundings and container losses at sea compared with five years ago. General average was declared in both the Ever Forward and Ever Given incidents. The large container ship Ever Forward ran aground in the U.S. in March 2022 and was stuck for over a month before it was freed, almost a year to the day after its sister vessel Ever Given blocked the Suez Canal.

See also: Ukraine: How Exposed Are Insurers?

Post-pandemic world brings new risk challenges

While the COVID-19 pandemic resulted in few direct claims for the marine insurance sector, the subsequent impact on crew welfare and the boom in shipping and port congestion raises potential safety concerns. Demand for crew is high, yet many skilled and experienced seafarers are leaving the industry. A serious shortfall of officers is predicted within five years.

For those who remain, morale is low as commercial pressures, compliance duties and workloads are running high. Such a work situation is prone to mistakes – 75% of shipping incidents involve human error, AGCS analysis shows.

The economic rebound from COVID-19 lockdowns has created a boom time for shipping, with record increases in charter and freight rates. While this is a positive for shipping companies, higher freight rates and a shortage of container ship capacity are tempting some operators to use bulk carriers, or consider converting tankers, to transport containers. The use of non-container vessels to carry containers raises questions around stability, firefighting capabilities and securing cargo. Bulk carriers are not designed to carry containers, which could affect their maneuvering characteristics in bad weather, and crew may not be able to respond appropriately in an incident. 

With demand for shipping high, some owners are also extending the working life of vessels. Even before the pandemic, the average age of vessels was rising. Although there are many well-managed and maintained fleets composed of older vessels, analysis has shown older container and cargo vessels (15 to 25 years old) are more likely to result in claims, as they suffer from corrosion, while systems and machinery are more prone to breakdown. The average age of a vessel involved in a total loss over the past 10 years is 28.

Shipping bottlenecks and port congestion

COVID-19 measures in China, a surge in consumer demand, and the Ukraine invasion have all been factors in unprecedented port congestion which puts crews, port handlers and facilities under additional pressure. Loading and unloading vessels is a particularly risky operation, where small mistakes can have big consequences. Busy container ports have little space, while the experienced labor required to handle the containers properly is in short supply. Add in fast turnaround times, and this may result in heightened risks. 

Climate change: transition problems

With momentum gathering behind international efforts to tackle climate change, the shipping industry is coming under increasing pressure to accelerate its sustainability efforts, given its greenhouse gas emissions grew by around 10% between 2012 and 2018.

Decarbonization will require big investments in green technology and alternative fuels. A growing number of vessels are already switching to liquefied natural gas (LNG), while other alternative fuels are under development, including ammonia, hydrogen and methanol; electricity-powered ships are also in the works. The transition to alternative fuels will likely bring heightened risk of machinery breakdown claims, among other risks, as new technology beds down and as crews adapt to new procedures.

If you’re a regular consumer of television, you’ve no doubt seen at least one, or perhaps multiple, commercials from accident lawyers promising big-dollar settlements against rich insurance companies. The number of such commercials has only increased over the past several years, as a phenomenon called “social inflation” has taken root in our legal system.

Since the term social inflation first emerged in the 1970s, it has grown and expanded into a catch‑all of sorts to describe a host of deleterious cost drivers that involve litigation and that chip away at insurers’ books of business, increase their operating costs and eventually metastasize in the form of higher premiums for policyholders. Unusually large or so‑called nuclear verdicts catch our attention, but the underlying causes are broader and deeper. Many of these cost drivers have existed in some capacity for decades, yet the past several years have demonstrated that the insurance industry really needs to understand the social inflation landscape so we can begin to address it.

Some insurers may be wondering why they should be concerned about social inflation when so many more pressing matters are threatening the profitability of their businesses. Social inflation hasn’t had an impact on businesses and insurers the way COVID‑19 did in 2020. Instead, the progression of social inflation has been slow and almost imperceptible, making it harder to identify and address. While some insurers have not observed an upward severity trend in their books of business, chances are that social inflation is quietly making inroads right now.

Actuarial, claims and legal professionals are often the first to spot a shift in loss severity through the emergence of nuclear verdicts, rising compensatory demands or an upward movement in losses. How early and deep the impact is depends, in part, on the insurer’s classes of business and territories, so some carriers may not yet have seen the signs. To learn more about how social inflation is affecting the property/casualty insurance industry, Gen Re has partnered with NAMIC to find out what those on the front lines of social inflation - actuaries, claims, legal and emerging issues - are witnessing, to share with readers a multipart analysis of social inflation, starting with this overview.

Ticking Upward in Commercial Auto

When a jury awards $50 million in a non‑fatal, single-victim auto accident, insurers take note and label it an anomaly but don’t necessarily see it as cause for alarm. Yet, when awards and settlements for such accidents routinely top $10 million, often coupled with an insurer bad faith component, it’s time for insurers to take notice.

Gen Re and NAMIC, along with other insurance companies, first observed an uptick in loss values in the commercial auto line starting in 2015. Prior to that, the industry had been reserving commercial auto in a loss ratio range that was consistent with historical performance. By 2015, it became clear that the line was performing worse than expected, and the actual results climbed to more than 10 points above industry reserving picks for the preceding five years. It took nearly five years of development before the divergence between the actual and projected loss ratio became apparent, and that is a relatively short-tail line. The industry continued to underestimate loss experience on the line despite significant rate adjustments that chased but never caught up with trend. In short, commercial lines insurers missed the loss inflection point - something hard to spot and costly to miss.

More recently, the American Transport Research Council shared its research on the verdicts that underlie the insurance industry’s numbers. It highlighted an increase in verdicts over $1 million starting in 2010 and an average verdict size sharply rising in 2017.

Insurers are no doubt wondering if social inflation has migrated to other lines of business, most notably general liability, umbrella (non‑auto) and personal auto. There is early evidence of some unusual loss activity in premises liability, but nowhere as pronounced as in commercial auto. To evaluate the threat to other lines of insurance, this project seeks to analyze the drivers of social inflation seen in commercial auto and other areas and gauge how they may affect premises, products and general liability business.

See also: How Social Inflation Affects Liability Costs

Severity Drivers

Although a few economic and demographic trends are unique to auto, most trends cross over to other liability lines. Bodily Injury is certainly the defining element in large auto losses, but serious injuries also occur in premises and products liability. Some of Gen Re’s clients, particularly in the claims departments, have observed early notices of losses, attorney tactics and unexpected trial outcomes first‑hand.

Specifically, below is a list of likely causes of social inflation, identified by Gen Re and its clients, which have resulted in an undermining of profitability in the commercial auto and liability lines in recent years:

• More Miles Driven/Personnel Shortages - With the economic recovery following the Great Recession (2007‑2009), more trucks have been on the road, yet there are fewer experienced drivers to pilot them (subject to a COVID pause in activity).
• Distracted Driving - Smartphones and other distractions contribute to higher accident severity.
• Litigation Funding - The stronger cases are well-funded and under pressure to produce higher settlements and verdicts.
• Widening Wealth Gap - Jury backlash against “rich corporations” reflects a wealth disparity gap that has expanded by disproportionately higher COVID-related job losses in low-wage occupations.
• More/Earlier Attorney Involvement - This is indicated by an increasing number of first notices of loss where an attorney is already involved.
• Increasing Plaintiff Bar Sophistication - This trend has crystallized through trial bar networking, training, technology and techniques to improve success rates on a nationwide scale.
• Defense Bar Complacency - Insufficient preparation and financial incentives weaken the ability to counter aggressive trial bar efforts.

Previous research on the relationship between wealth disparity and loss ratios has found that, all else being equal, jury awards are higher in geographic areas with greater levels of income inequality. However, studies connecting causes and social inflation, or quantifying its impact on insurers, are few and limited in scope. That absence means insurers must draw lessons from their own loss experience and from their reinsurers, who have a broader, national view of the market. Even with insurers and reinsurers sharing perspectives, pricing for social inflation is incredibly challenging. The industry’s experience with commercial auto tells that story.

Addressing Social Inflation

Over the last few years, commercial lines results have experienced an upward inflection point driven by social inflation. It is nearly impossible to detect this kind of inflection point in real time, but carriers should be vigilant, identifying trends and reacting quickly when the industry around them starts to shift. Staying alert to underwriting and claim developments - and listening to colleagues both internally and externally - can provide valuable insights. Social inflation is a complex issue for even the largest carriers with rich data and vast resources.

Throughout this series on social inflation, specialists from various disciplines - actuarial, claims, legal and emerging issues - will share the latest data and perspectives. While COVID claims may be dominating the focus of management now, social inflation remains a critical issue that deserves a much higher degree of attention going forward.

Global insurer AIG has become the latest large insurance organization to spin off part of its company, announcing in late March a rebranding of its life and retirement business as Corebridge Financial. With a valuation of more than $20 billion and $410 billion in assets under management, Corebridge is the largest company to publicly file for an IPO this year in the U.S. This split echoes past divestitures, particularly MetLife’s spinoff and rebranding of Brighthouse Financial several years ago, and signals a trend in the insurance industry of larger organizations breaking into smaller companies, in part to simplify compliance and capital requirements and in part to keep pace with insurtechs. 

From a technology perspective, these spinoffs will likely be perceived as positive by life and annuities teams, as they simplify governance structure and technology investment decisions by segments facing vastly different compliance issues and competitive forces. While process improvements and innovations that result from these spinoffs are certain to provide opportunities for the life and retirement business that would be impossible in the larger organization, they do not come without a host of technology challenges and considerations. 

Scope Management

Large company spinoffs undoubtedly trigger a series of major enterprise architecture projects, if only to understand the nature of the entanglement of systems. Managing all the architecture projects and software procurement initiatives that will likely ensue becomes a key challenge. Some of these projects will result in simply segmenting systems, but some legacy systems and technologies will need to be replaced for the new entity. Careful scope management of these projects and software procurement initiatives will be required, as stakeholders will view it as a catch-all opportunity to fix all accumulated frustrations with incumbent systems. Focus and prioritization will be critical.

Untangling Segmentation

Segmentation of previously aggregated reporting lines and determining where technical “debt” will reside in the segmented entities becomes a key challenge in spinoffs from large, established companies. Disentangling and segmenting the reporting across all the internal systems from a large, well-established carrier will likely take years. The upside is that each entity can better focus on and optimize the technology for their respective lines of business.

Operational Specialization

With a key goal of a spinoff being to keep pace with insurtechs, the importance of operational specialization and industry-specific technology excellence is paramount. AIG’s partnership with investment management company BlackRock to manage a portion of the life and retirement assets as well as to provide the world-class Aladdin investment platform is a prime example. As companies look to divest portions of their business, choosing partners that are equipped with both the technology solutions and the industry expertise becomes a key differentiator. 

See also: Despite COVID, Tech Investment Continues

Combining the Best of Old and New

While the ability to be nimble and employ cutting-edge, industry-specific technology is certainly a major benefit of a spinoff such as Corebridge Financial, the importance of the stability and established distribution systems of its traditional parent carrier cannot be overlooked. Although customers have grown accustomed to conducting more transactions online during the pandemic, U.S. consumers continue to favor purchasing life insurance in person through an agent. 

Conclusion

Perhaps the most important take-away is that traditional players are far from being pushed aside by big tech or insurtechs and will continue to see strong growth, particularly through key divestitures and strategic technology partnerships. These spinoffs demonstrate a continued focus on life insurance assets in the U.S. and the viability of life insurance assets as attractive, long-term investments. Mindful consideration of technology challenges and implications associated with insurance line divestitures will go a long way toward reaping the benefits of process improvements, innovations and growth opportunities.

With almost 25 years of experience in the insurance industry, I have seen and experienced a lot of challenges, successes and changes, including when it comes to diversity and inclusion (D&I). However, some of the most important lessons I’ve learned about D&I came from my time in the military. 

My nine years in the U.S. Navy and Navy Reserve showed me that there is truly something special about a community that brings people from so many different walks of life together toward a common goal. When I chose to enter the insurance industry, I felt that the industry could benefit from a similar experience. I also felt there were military veterans who could benefit from having allies within the industry. While I made the transition from the military to the corporate world successfully, that transition would have been facilitated by connections to a community of people who had walked a similar path.

Today, I hope, our industry has made it easier for military veterans and others from all backgrounds to make those workplace connections with members of their own communities. After many years of talking about D&I, insurance organizations have taken concrete steps over the past decade to begin to create a culture of inclusion that provides a safe and welcoming space for all.

While every organization is at a different level of maturity in their D&I journey, I see plenty of encouraging signs. I’ve noticed the D&I panels I sit on are more diverse these days. So, too, are many corporate boardrooms. Yet there is still plenty of work to do. Taking these five steps can help organizations further their D&I efforts to push our industry forward.

1. Make a concerted effort and dedicate resources.

The organizations within our industry that have enjoyed the greatest level of D&I success all share one thing: They put a concerted effort behind creating a more inclusive culture. A key is having strong support from senior leadership. Another is naming a single leader to be responsible for the success of all your D&I efforts. This will help develop a high level of accountability. In fact, according to LinkedIn data, over the past five years, the number of people with the head of diversity title more than doubled, and there has been a 71% increase in all D&I roles. 

At Markel, our leaders have been busy working with our team members to build, maintain and enhance initiatives to develop a more diverse and inclusive workplace and to support our community. For example, we are working to encourage and attract more diverse talent through scholarships to colleges and universities with diverse populations. Those scholarships have been augmented by internships and an underwriting training program that has brought more diverse leaders to Markel.

2. Create opportunities for communities to connect.

The military exposed me to a diverse community where I experienced the power of people coming together. I couldn’t wait to translate that experience into the corporate world. Early in my career, I helped form the Markel Veterans Network, which was one of our first employee resource groups (ERGs).

The Markel Veterans Network started humbly—our first meeting had four participants. But I knew immediately that it would be beneficial. It gave me a way to meet other veterans who were working in the organization. Because we shared the experience of serving in the military, we could speak the same language and develop a strong network of support for one another both inside and outside the workplace. 

Over the past several years, ERGs have become a powerful way for employers to show their support for employees and for D&I initiatives. Support for ERGs has become widespread throughout the insurance industry and beyond. In fact, 90% of Fortune 500 companies today have at least one ERG.

I’m proud to say the Markel Veterans Network remains strong today and stands alongside six other ERGs, including networks for Black associates, Asian associates, female associates, newer associates, LGBTQ+ associates and Hispanic-Latin associates and an inclusion network supporting associates in our international operations. Each one has an executive sponsor and commits to meeting at least once a month. Markel leadership supports anyone within the organization who sees the need to start an ERG. 

See also: Where a Customer-Focused Culture Starts

3. Provide mentorship.

Companies should provide an environment that encourages a mentoring atmosphere, whether it is formal or informal. There are many benefits to providing mentorship. It is a two-way street that supports the growth of both the mentor and the mentee. Mentorship programs are also beneficial for businesses. They increase employee engagement, retention and inclusion, as well as training for employees to rise up and fulfil internal roles.

The best thing about mentorship is that everyone can participate. To me, mentorship offers an opportunity to give back to our industry and advance our D&I efforts. During my career, I have picked diverse mentors and would encourage others to do the same. In addition, my mentees frequently come from different backgrounds and cultures than I do, which allows me to learn as much from them as they do from me—sometimes even more. I challenge all leaders in our industry to make time to become a mentor today. Doing so will help introduce your colleagues and your company to new perspectives.

4. Measure your progress.

D&I isn’t always easy to measure. Sometimes, you can find quantitative data. For example, at Markel we know that female leadership within our senior management team increased by 50% from 2019 to 2021. But many other measurements are qualitative. Employee engagement surveys offer one potential way to learn how much buy-in your D&I efforts have achieved.

According to Harvard Business Review, while employee sentiment is important to tracking progress, measurements are only effective if the organization has a clear definition of what they are measuring. It is important to ask questions such as, “What does diversity mean within my organization,” or “How do we define inclusion?” Only once there is a universal understanding of these ideas can progress truly be tracked.

Another idea: Start a conversation. I love grabbing a cup of coffee or lunch with different people and teams and asking them, “How do you feel we’re doing with D&I?” By asking this question, you’re showing your colleagues that your organization is a safe space where all opinions are welcome. Once you set that foundation, you’ll get the purest level of feedback possible. 

5. Share ideas and programs with others.

Taking a top-down approach to D&I is a good start. But the real change happens when we take individual and personal responsibility for including others and creating the diverse future we want. This is where allyship becomes key. It doesn’t take much to be an ally: Lending an ear or raising your voice for someone can make a difference in creating an environment where everyone feels safe and happy to come to work. When this happens, ideas flow, and innovation is fostered.

One potential way for you to step up: Join one of the Inclusion in Insurance Regional Forums that the Insurance Industry Charitable Foundation (IICF) is hosting this summer in New York, Los Angeles, Chicago and Dallas, and in London in September. When we as an industry get together and engage with organizations that create and foster inclusivity, we help create better work communities.

So, what does the future of D&I look like in insurance? My personal hope is that, in 10 to 15 years, D&I won’t need to be a driven topic of conversation but will be found at the foundation of every company culture. I genuinely believe we’re on the path to getting there if we continue to put the effort, time and budget into creating a more diverse industry.

The pandemic has altered life in so many ways over the past two years. One change that will likely stick around for years is the new workforce dynamic. The competition to attract top talent is as fierce as ever, as industries contend against the Great Resignation, the remote workforce, urban migration and a labor shortage. While talent challenges are nothing new to the insurance industry, new research shows that insurers are prioritizing talent strategies now more than ever before.

SMA’s new research report, “P&C Insurance Talent and the Workforce: An Imperative for Success in the Post-Pandemic World,” examines how the insurance workforce has evolved in recent years and how insurers are developing their talent plans for the future. The survey of industry executives reveals interesting differences in 2022 talent objectives between insurers with under 500 employees and over 500 employees. Large insurers are framing strategies to both attract new talent and retrain and retain existing employees, with four in five executives indicating these as primary talent objectives. However, small insurers are more interested in attracting new employees, highlighting the need for smaller carriers to be strategic with their hiring plans to stand out among better-known employers.

The evolving nature of insurance careers driven by digital transformation is also influencing insurers’ approaches to talent. There is very little doubt that transformational technologies like artificial intelligence will change industry roles over the next five years, with 72% of professionals expecting new jobs to emerge in business areas like underwriting and claims. In fact, signs of this are already being seen in the market as insurers seek talent with more technological skill sets.  

See also: Post-Pandemic: 4 Tips for Independent Agents

As the competitive talent market continues, talent and the workforce will become more significant focal points for insurance companies across industry segments. But, for insurers to thrive and become employers of choice, they must show commitment to meeting the changing needs of current and potential employees.

With the spring season known to bring the most dangerous storms and damaging tornados, the next few months are likely to see continual and damaging weather events across the U.S. 

Earthquakes, storms, floods and droughts — the number of recorded loss events resulting from natural disasters has been increasing for some years now. However, some insurers that are using more traditional risk assessment methods are finding the emerging risk landscape too unpredictable. 

Climate change is one of the most pressing issues in the insurance industry today, but forward-thinking insurers have found the way to combat it: AI.  

AI revolution 

In the last decade, artificial intelligence (AI) has emerged as the game-changing technology in the insurance sector. AI models are becoming more effective in the analyzing and processing of insurance claims, especially in the case of natural catastrophes. Visual data can accelerate inspection, underwriting and claims at the same time it helps with risk prediction and preparedness.

With AI taking the industry by storm, new aerial imaging capabilities are constantly being developed in the P&C space, meaning preventative measures are more accessible than ever. By using 3D property intelligence derived from aerial imagery, insurers can obtain more data points for more commercial and residential properties nationwide, from number of stories and roof geometry to secondary structures and liability risks. 

In the future, AI will become the norm for risk assessment. From insurers looking to streamline their operations, to those ensuring the safety of assessment teams, AI is the way forward.

Insights rather than data

Even when insurers can get hold of reliable data, the data alone is not enough. Insurers need more than just numbers to accurately estimate the total risk of a property – they need insights from that data. 

Insights are driving the data transformation, and the most significant impact lies in risk management. More detail on the condition of a property’s structure can completely eliminate manual intervention and help insurers access important property attributes. For instance, insurers can have access to the all-critical rooftop attributes, making risk selection and pricing faster and more efficient. Is the roof old and deteriorating, or is it new? Is it likely to be affected by inclement weather? Would the structure – the roof or the building as a whole – be expensive to rebuild? These, and many more, are the questions that insurers would be able to answer.

Given the technological capabilities available to insurers today, it is easier than ever to obtain critical insight. Because of this, there is now also an opportunity for insurers to predict and tailor their services to meet the needs of each consumer as an individual and secure long-term customer loyalty.

See also: How AI Is Moving Distribution Forward

The era of CX

Traditionally, insurers barely ever had hands-on interaction with clients, and relationship-building was non-existent. With the advent of AI innovation, all that could change. But how can insurers make sure they excel in customer experience when a natural disaster comes?

A Voxco study found that less than one-third (29%) of insurance customers are satisfied with their current providers, and 21% believe that insurers do not tailor their experiences at all. Insurers can enhance their customer experience every step of the way by having the AI tools to identify the right properties for their portfolio, and customize the interaction with each customer according to their relevant data.

To leapfrog competitors in this evolving market, it is essential to maintain high-quality customer experience during the surges brought on by a disaster, the time when the largest number of people rely most heavily on their insurance carrier.

A look ahead

In crises, insurance companies have an opportunity to become protectors, helping everyone to be better prepared for climate change and natural disasters. AI has the power to significantly reduce risk for customers who are victims of climate change-related disasters, by tracking and warning customers before an incident occurs. Dangerous weather events and pervasive climate change issues mean that preparedness is more important than ever. 

Insurers must make sure their customers not only expect to be covered if a natural disaster damages their house but are also protected from potential risk

Based on primary research, this report underscores the market changes and industry dynamics that have shaped the direction and strategies of companies and insurers who have faced an incredible amount of change in the last seven years. There have been more risks, new customer behaviors and expectations, emerging technology-driven capabilities and data sources, more channels and partners and an influx of capital to the InsurTech market. These changes have created a new generation of dominant buyers who are looking at everything differently. The strategic respones to these industry changes and buyer expectations have redefined where industry players stand in a competitive market.

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