Category Archives: Insurers and the Economy

Growing P/C Innovation Amid InsurTech, Trump Disruption

The pace of innovation in the U.S. property/casualty industry will accelerate in 2017, as technology advances and the growth of InsurTech raise customer expectations for greater innovation and new business models, according to a new report by Ernst & Young.

In its 2017 U.S. Property/Casualty Insurance Outlook, EY says the industry is at an inflection point, as continued economic headwinds provide little support for insurers plagued by shrinking investment incomes, escalating claims costs and rising regulations.

A new Trump administration raises the prospect of further economic and regulatory change and with the P/C industry in flux, this is a good time for CEOs to think through their future business strategies, EY suggests.

As insurers look to adapt to disruptive market shifts, EY expects companies will do more to develop a culture of innovation in 2017:

“The Internet of Things, telematics, artificial intelligence, driverless cars and blockchain have the potential to transform industry fundamentals and even redefine the nature of risk. In the future, competing for market share will be increasingly dependent on technology, data and analytics.”

With more than 1,000 InsurTech startups in operation, the pace of P/C innovation will speed up next year.

For example, in 2017 InsurTech startup Trov plans to roll out on-demand insurance that will enable customers to use their smart phones to turn coverage for personal belongings on and off. Trov is an example of how product innovation directed towards millennials could disrupt the P/C insurance model, EY says.

“Incumbents will be watching this space closely, creating venture funding groups that are actively monitoring and investing in InsurTech initiatives.”

Insurers will take digital transformation to the next level in 2017, expanding their use of robotics and advanced analytics across most aspects of their business, from claims handling and underwriting to customer relationship management (CRM) systems and risk management, according to EY’s outlook.

See our earlier blog post for latest data on the InsurTech sector.

Read about the top InsurTech deals of the year as reported by Insurance Networking News here.

Insurance Helps Break Cycle of Extreme Disasters and Poverty

The human and economic costs of extreme natural disasters on poverty are much greater than previously thought and insurance is one of the resilience-building tools that could help, according to new analysis from the World Bank.

In all of the 117 countries studied, the report finds that the effect of floods, windstorms, earthquakes and tsunamis on well-being, measured in terms of lost consumption, is larger than asset losses.

It estimates the impact of disasters on well-being in these countries is equivalent to global annual consumption losses of $520 billion, and forces 26 million people into poverty each year. This outstrips other estimates by 60 percent.

But resilience-building interventions, including universal early warning systems, improved access to personal banking, insurance policies and social protection systems (like cash transfers and public works programs) could lessen climate shocks.

The report finds that these measures combined would help countries and communities see a gain in well-being equivalent to a $100 billion increase in annual global consumption, and reduce the overall impact of disasters on well-being by 20 percent.

As World Bank Group President Jim Yong Kim, says:

“Severe climate shocks threaten to roll back decades of progress against poverty. Storms, floods, and droughts have dire human and economic consequences, with poor people often paying the heaviest price. Building resilience to disasters not only makes economic sense, it is a moral imperative.”

Efforts to build resilience among poorer communities are already gaining ground, the report shows.

For example, Kenya’s social protection system provided additional resources to vulnerable farmers well before the 2015 drought, helping them prepare for and mitigate its impacts.

And in Pakistan, after record-breaking floods in 2010, the government created a rapid-response cash grant program that supported recovery efforts of an estimated 8 million people.

Check out the Insurance Information Institute issues updates on microinsurance and emerging markets here, and on catastrophes and insurance issues here.

Growing Insurance Resilience to Disasters

Latest estimates from Aon Benfield that just 50 percent of the U.S. losses from Hurricane Matthew are covered by public and private insurance renews the spotlight on the growing risk protection gap and disaster resilience.

In its latest Global Catastrophe Recap report, Aon Benfield’s Impact Forecasting unit expected total economic losses from Matthew would range up to a high of $10 billion. Public and private insurance losses were considerably less, estimated as high as $5 billion.

The reason for this is that a large portion of the inland flood loss in North Carolina went uninsured due to low take-up of the federally-backed National Flood Insurance Program (NFIP), Aon said.

A post over at Artemis blog reports:

“Once again this demonstrates the insurance and reinsurance protection gap is not simply an emerging market issue, rather it is evident in perhaps the most mature property catastrophe insurance market in the world in the United States.”

Indeed, Swiss Re sigma has said the amount of financial loss caused by catastrophes not covered by insurance is growing.

This so-called global insurance protection or funding gap totaled $75 billion in 2014, according to Swiss Re.

A recent issue brief by Wharton Risk Center co-director Howard Kunreuther pointed to evidence showing that consumers tend to purchase too little insurance or purchase it too late.

As a result, it said, taxpayers wind up bearing substantial burdens for paying restoration costs from extreme events. The 2005 and 2012 hurricane seasons alone cost taxpayers nearly $150 billion.

The Wharton brief suggests there is much that can be done to better facilitate the role that insurance can play in addressing losses from extreme events, both natural and man-made.

To better meet its objectives, insurance must embody two guiding principles, first premiums must accurately reflect risk and secondly, to ensure equity and affordability, special financial assistance should be made available to homeowners who would no longer be able to afford their premiums.

More information on the protection gap problem in this Insurance Information Institute report Underinsurance of Property Risks: Closing the Gap.

I.I.I. facts and statistics on flood insurance are available here.

What IoT Cyber Attacks Mean for Insurers

The massive global distributed denial of service attack (DDoS) against internet infrastructure provider Dyn DNS Co. that left over 1,000 major brand name sites including Twitter, Netflix, PayPal and Spotify, inaccessible Friday has implications for insurers too.

While the nature and source of the attack is under investigation, it appears to have been (in the words of Dyn chief strategy officer Kyle York) “a sophisticated, highly distributed attack involving tens of millions of Internet Protocol addresses.”

As Bryan Krebs’ KrebsOnSecurity blog first reported, the attack was launched with the help of hacked Internet of Things (IoT) connected devices such as CCTV video cameras and digital video recorders (DVRs) that were infected with software (in this case the Mirai botnet) that then flooded Dyn servers with junk traffic.

The World Economic Forum (WEF) recently warned that failing to understand and address risks related to technology, primarily the systemic cascading effects of cyber risks or the breakdown of critical information infrastructure could have far-reaching consequences for national economics, economic sectors, and global enterprises.

As the IoT leads to more connections between people and machines, cyber dependency will increase, raising the odds of a cyberattack with potential cascading effects across the cyber ecosystem, the WEF noted.

While IoT connected devices have the potential to transform how businesses and individuals—and their insurers—conduct, manage and monitor their operations, workplaces and their homes, clearly there are embedded risks that insurers need to consider.

Over at Celent’s insurance blog, Donald Light, director of Celent’s North America property/casualty practice, says the Dyn DDoS attack has a number of potentially serious implications for insurers.

Light writes:

“An insurer with a Connected Home or Connected Business IoT initiative that provides discounts for web-connected security systems, moisture detectors, smart locks, etc. may be subsidizing the purchase of devices which could be enlisted in a botnet attack on a variety of targets. This could expose both the policyholders and the insurer providing the discount to a variety of potential losses.”

If the same type of safety and security devices are disabled by malware, homeowners and property insurers may have increased and unanticipated losses, Light suggests.

The Insurance Information Institute white paper on cyber threats and opportunities is available here.

Caribbean Catastrophe Pool Aids Hurricane Matthew Recovery

By tomorrow four Caribbean countries will have received payouts from the CCRIF PC (formerly the Caribbean Catastrophe Risk Insurance Facility) due to Hurricane Matthew, for a total of $29.2 million.

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The chart above shows a $20.4 million payout by the CCRIF to the Government of Haiti on its Tropical Cyclone (TC) policy as a result of Hurricane Matthew, and an additional payment of just over $3 million on its excess rainfall policy, for a total of $23.4 million.

The payments come just two weeks since Hurricane Matthew hit Haiti as a Category 4 storm, devastating the southern portion of the country and leaving more than 1,000 dead.

Barbados will also see a payout of just under $1 million on its TC policy for a total payment to the country of $1.7 million due to Matthew.

The excess rainfall policies of Saint Lucia and St. Vincent & the Grenadines were also triggered by Hurricane Matthew, resulting in CCRIF payments to those countries of $3.8 million and $285,349, respectively.

Including the Hurricane Matthew payments, CCRIF has now made a total of 21 payouts to 10 member governments totaling almost $68 million since 2007, all within 14 days of an event.

CCRIF is able to make quick payouts because it offers parametric insurance products to its member countries.

TC policies make payments based on hurricane wind speed and storm surge levels and do not include losses due to rainfall. To fill this gap, CCRIF’s Excess Rainfall (XSR) product was developed a few years ago. Under the excess rainfall policies, payments are triggered based on the volume of rainfall from a hurricane or other rain event.

Each government selects its own attachment point or deductible, so the individual country’s policies are triggered when the modeled losses surpass that point.

Most CCRIF members have purchased both TC and XSR policies and many members also have earthquake coverage.

Just last year, the CCRIF expanded its membership to countries in Central America as well as the Caribbean.

Artemis blog reports that the $29.2 million of payouts due to Hurricane Matthew  by the CCRIF will not come close to troubling its catastrophe bond coverage, but could result in the facility being able to call on reinsurance support for some of the loss.

It also predicts increasing uptake of parametric insurance for disaster protection and recovery funding as more corporate buyers become aware of the opportunities.

 

 

Hurricane Matthew: Early Loss Estimates and More

Early estimates put the insured property loss to U.S. residential and commercial properties from Hurricane Matthew at up to $6 billion.

While this figure covers wind and storm surge damage to about 1.5 million properties in Florida, Georgia and South Carolina, CoreLogic’s estimate does not include insured losses related to additional flooding, business interruption or contents.

Parts of North Carolina are expected to remain under dangerous flood risk for at least the next three days, according to the state’s governor Pat McCrory in a report by the Capital Weather Gang blog.

As Dr. Jeff Masters’ WunderBlog reminds us, the potentially huge cost of damage caused by inland flooding is still unfolding.

The WunderBlog post suggests:

“A roughly comparable storm, Hurricane Floyd in 1999, produced about $9.5 billion in U.S. economic damage.”

And given the ongoing flooding across the Carolinas and southeast Virginia, that is a fair starting point for Hurricane Matthew, according to Wunderblog’s account of a conversation with Steve Bowen, director and meteorologist at Aon Benfield.

Catastrophe modeler RMS expects the losses to commercial lines will be the primary driver of total flood insured losses, predominately through multi-peril or all-risks policies.

In a blog post, Tom Sabbatelli, RMS hurricane expert noted:

“We expect that the contribution to insured losses by residential claims will be limited because a proportion of the residential property losses will be covered by the National Flood Insurance Program (NFIP).”

As of July 31, 2016, there were approximately 417,000 NFIP policies in-force in Georgia, South Carolina, and North Carolina.

Penetration of NFIP coverage varies significantly by distance to the coastline, RMS said. While in coastal regions it can be as high as 25 percent in some areas, inland participation can be less than 1 percent.

“This means that although much of the storm surge-driven coastal flood losses will be covered to some extent by the NFIP, many flood-related losses further inland are expected to be uninsured.”

Ratings agency Fitch has said that the insured loss from Hurricane Matthew “is not expected to present a major capital challenge” to the industry.

Fitch estimates that if the storm results in insured losses in excess of $10 billion, a greater proportion of losses will be borne by reinsurers as opposed to primary companies.

More than 30 fatalities have been attributed to Hurricane Matthew in the U.S. alone, but in Haiti the rising death toll is now more than 1,000.

Hurricane Matthew became post-tropical on Sunday, after heading eastward from the North Carolina coast out to sea.

The Insurance Information Institute offer the following tips for filing an insurance claim in the wake of Hurricane Matthew.

 

Cybersecurity Among Biggest Presidential Challenges

Just days after the disclosure of a massive data breach at email provider Yahoo, believed to have been the work of a state-sponsored actor, it’s notable that cybersecurity made news during the first of three U.S. presidential debates last night.

As Democratic U.S. presidential nominee Hillary Clinton and Republican U.S. presidential nominee Donald Trump squared off, moderator Lester Holt, asked:

“Our institutions are under cyber attack, and our secrets are being stolen. So my question is, who’s behind it? And how do we fight it?”

In her response, Clinton described cybersecurity, cyber warfare as one of the biggest challenges facing the next president.

She said the U.S. faced two different kinds of adversaries: independent hacking groups that try to steal information so they can use it commercially to make money; and cyber attacks coming from states and organs of states.

Clinton noted:

“We need to make it very clear—whether it’s Russia, China, Iran or anybody else—the United States has much greater capacity. And we are not going to sit idly by and permit state actors to go after our information, our private sector information or our public sector information.”

Trump and Clinton then went back-and-forth on whether Russia was responsible for the hacking of Democratic National Committee emails earlier this year.

Setting that discussion aside, both nominees appeared to agree on the enormity of the cybersecurity challenge, as Trump said:

“We have to get very, very tough on cyber and cyber warfare. It is — it is a huge problem… The security aspect of cyber is very, very tough. And maybe it’s hardly doable.”

The just-disclosed 2014 Yahoo breach, in which 500 million accounts were compromised, highlights concerns around the number of state-sponsored cyber attacks, according to this article by the Wall Street Journal.

While organizations should consider the purchase of cyber insurance to manage the financial consequences of an attack, a 2015 Ponemon study found that a more popular approach to managing the risk of a nation state attack is a government-subsidized insurance policy (see below).

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What do you think?

Some 17,475 IT and IT security practitioners located in all regions of the U.S. participated in the Ponemon survey.

The Insurance Information Institute’s latest white paper on cyber risk threats and challenges is available here.

Charlotte Unrest and Business Insurance

Ongoing civil unrest and protests in Charlotte, North Carolina following the police shooting of Keith Scott are reported to have caused significant property damage to businesses in the central area of the city.

The Charlotte Observer reports that entertainment complex EpiCentre faced looting and sustained significant damage Wednesday night. Numerous businesses were damaged, including Sundries EpiCentre, CVS, Enso and Fleming’s Prime Steakhouse, it said.

The NASCAR Hall of Fame was among other sites hit by vandals, with adjacent restaurants and hotels also damaged after officials declared a state of emergency for the city.

As clean-up gets underway it’s important to note that most commercial insurance policies generally include coverage for losses caused by riots. civil commotions and fires.

The definition of rioting covers looting by people who steal merchandise or other property from a premises. Vandalism is also covered.

According to The Charlotte Observer, a possible curfew for Thursday night is being discussed by city officials.

The Insurance Information Institute (I.I.I.) notes that if a business has to suspend operations or limit hours due to rioting, business interruption coverage is only covered if there is direct physical damage to the premises, forcing a business to suspend operations.

A “civil authority provision” in a business policy provides coverage for lost income and extra expenses in the event the police or fire department bars access to a specific area as a result of the danger caused by a riot or civil commotion.

In April 2015, looting and arson in Baltimore, Maryland, following the funeral for Freddie Gray, a 25-year-old who died after suffering a severe spinal cord injury while in police custody, resulted in estimated property damage of about $24 million, according to the I.I.I..

Five of the costliest civil disorders in the U.S. occurred in the 1960s. Here’s they are:

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Growth Potential of Sharing Economy, and Insurance

If, like me, you’ve taken a ride to the airport with Uber, or looked into renting a holiday home via Airbnb, did you take a moment to think about your insurance coverage?

If the answer to that question is “no,” you’re not alone.

A recent public opinion survey from the Insurance Research Council (IRC) found that 56 percent of all adult Americans who said they have participated in the sharing economy indicated that they did not consider their insurance coverage at the time.

This is despite the fact that more than half of all respondents said that the sharing economy exposes the general population to increased risk.

Some 71 percent of respondents to the same survey reported little familiarity with the sharing economy, with 46 percent saying they were “not at all familiar” with the sharing economy, while 25 percent reported being “not too familiar.”

Survey respondents gave numerous reasons for not participating in the sharing economy. Unfamiliarity was cited most frequently (65 percent), while lack of need was cited by 60 percent and lack of interest by 54 percent.

However, a lack of insurance was the least cited reason for not participating.

Elizabeth Sprinkel, senior vice president of the IRC, noted:

“The substantial number of people with little experience or familiarity with the sharing economy suggests tremendous growth potential in the years ahead.”

And for insurers, too, we would add.

Check out a recent Insurance Information Institute (I.I.I.) presentation on the role of insurance in the sharing economy.

Other I.I.I. resources include information on car sharing and peer-to-peer car rental insurance as well as peer-to-peer home rental and homeowners insurance.

The IRC report, The Sharing Economy: Public Participation and Views, presents findings from an online survey conducted by GfK Public Affairs & Corporate Communications on behalf of the IRC.

A total of 1,105 online interviews were conducted for the study, using a sample drawn from GfK’s Knowledge Panel. Survey data were weighted to the U.S. population of adults aged 18 and above.