The UN Sustainable Development Goals (SDGs) are a group of 17 global goals aimed at reducing poverty and protecting the planet for the future. The SDGs were born at the United Nations Conference on Sustainable Development in 2012 and are linked to the 2030 Agenda for Sustainable Development, adopted by 193 countries. While the SDGs describe some of the greatest challenges for governments across the world, achieving them will require collective action including governments, civil society, the private sector, and individuals and communities.
Insurers can tap into new opportunities as both risk underwriters and as investors to support the UN SDGs, a set of globally shared social and economic expectations, which are increasingly being used by both insurers and corporations across a wide range of sectors as a guiding compass for developing their Environmental, Social, and Governance (ESG) strategies. However, insurance’s potential role in achieving SDGs and advancing ESG more broadly has been underestimated, particularly for broader climate and sustainability initiatives.
The Insurance Information Institute recently collaborated with Non-Resident Scholar, Susan Holliday, and her partners at The World Bank Group on a report, Insurance’s Role in the Sustainable Development Goals, which discusses how the insurance industry can support governments and corporations achieving progress toward the SDGs.
Although the SDGs only mention insurance once, the sector has an important role to play, especially in the areas of climate, safe cities, health, and reducing inequality. However, to develop this fully the sector must be more involved in high level working groups on how to make progress towards the SDGs and collaborate to produce consistent global data to demonstrate the role insurance can play.
Consumer skepticism about the connection between credit history and future insurance claims appears to decline when the predictive power of credit-based insurance scores is explained to them, a recent study by the Insurance Research Council (IRC) suggests.
This is just one of the IRC’s encouraging findings. Others include:
Consumers are generally knowledgeable about credit, credit histories, and credit scores.
Nearly all believe it’s important to maintain good credit history, and most believe it would be easy to improve their credit score.
Among nearly all demographic groups, paying for auto insurance is not considered a burden for most households.
Concerns have been raised about the use of credit-based scores and certain other metrics in setting home and car insurance premium rates. Critics say it can lead to “proxy discrimination,” with people of color – who are more likely to have less-than-stellar credit histories – sometimes being charged more than their neighbors for the same coverage.
Confusion around insurance rating is understandable, given the complex models used to assess and price risk, and insurers are well aware of the history of unfair discrimination in financial services. To navigate this complexity, they hire teams of actuaries and data scientists to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.
As the chart below shows, insurance claims tend to decline as credit scores improve. The fact that race frequently correlates with lower credit scores highlights societal problems that must be addressed through public policy, including financial literacy education. If anything, apparent racial disparities in insurance availability or affordability related to credit quality lend force to arguments for policy change.
In a study published last year, nearly half of respondents said financial literacy education would have helped them manage their money better through the pandemic. The study, which surveyed 1,047 U.S. adults, found that 21 percent felt insurance was the subject they understood least.
While the IRC study found non-Hispanic Black respondents were more likely than other groups to say their credit scores were below average and that it was important to improve their scores and would be easy to do so, they also were less likely to believe credit is a reliable indicator of paying bills or filing claims. Similarly, they were less likely to say it was okay to use credit history in lending, renting, or insurance settings.
All ethnic and racial groups, however, agreed that a person who has maintained good credit should benefit in the form of lower insurance rates.
“Many studies have shown that credit-based insurance scores are predictive of claims behavior,” the IRC report says, adding that recent studies using driving data from telematics devices “show a link between specific driving behaviors, such as hard braking, and variations in credit-based insurance scores.”
Any rating factor that can predict losses and claims helps insurers fairly price insurance by charging individual drivers rates that closely align with their risk. In the absence of these factors, less risky drivers would pay higher rates to subsidize the insurance of more risky drivers.
The property/casualty insurance industry’s underwriting profitability is forecast to have worsened in 2022 relative to 2021, driven by losses from Hurricane Ian and significant deterioration in the personal auto line, making it the worst year for the P&C industry since 2011, actuaries at Triple-I and Milliman – an independent risk-management, benefits, and technology firm – reported today.
The quarterly report, presented at a members-only webinar, also found that workers compensation continued its multi-year profitability trend and general liability is forecast to earn a small underwriting profit, with premium growth remaining strong due to the hard market.
The industry’s combined ratio – a measure of underwriting profitability in which a number below 100 represents a profit and one above 100 represents a loss – worsened by 6.1 points, from 99.5 in 2021 to 105.6 in 2022.
Rising rates, geopolitical risk
Dr. Michel Léonard, Triple-I’s chief economist and data scientist, discussed key macroeconomic trends impacting the property/casualty industry, including inflation, replacement costs, geopolitical risk, and cyber.
“Rising interest rates will have a chilling impact on underlying growth across P&C lines, from residential to commercial property and auto,” he said, adding that 2023 “is gearing up to be yet another year of historical volatility. Stubbornly high inflation, the threat of a recession, and increases in unemployment top our list of economic risks.”
Léonard also noted the scale of geopolitical risk, saying, “The threat of a large cyber-attack on U.S. infrastructure tops our list of tail risks.”
“Tail risk” refers to the chance of a loss occurring due to a rare event, as predicted by a probability distribution.
“Russia’s weaponization of gas supplies to Europe, China’s ongoing military exercises threatening Taiwan, and the potential for electoral disturbances in the U.S. contribute to making geopolitical risk the highest in decades,” Léonard said.
Cats drive underwriting losses
Dale Porfilio, Triple-I’s Chief insurance officer, discussed the overall P&C industry underwriting projections and exposure growth, noting that the 2022 catastrophe losses are forecast to be comparable to 2017.
“We forecast premium growth to increase 8.8 percent in 2022 and 8.9 percent in 2023, primarily due to hard market conditions,” Porfilio said. “We estimate catastrophe losses from Hurricane Ian will push up the homeowners combined ratio to 115.4 percent, the highest since 2011.”
For commercial multi-peril line, Jason B. Kurtz, a principal and consulting actuary at Milliman – a global consulting and actuarial firm – said another year of underwriting losses is likely.
“Underwriting losses are expected to continue as more rate increases are needed to offset catastrophe and economic and social inflation loss pressures,” Kurtz said.
For the commercial property line, Kurtz noted that Hurricane Ian will threaten underwriting profitability, but that the line has benefited from significant premium growth. “We forecast premium growth of 14.5 percent in 2022, following 17.4 percent growth in 2021.”
Regarding commercial auto, Dave Moore, president of Moore Actuarial Consulting, said the 2022 combined ratio for that line is nearly 6 points worse than 2021.
“We are forecasting underwriting losses for 2023 through 2024 due to inflation, both social inflation and economic inflation, loss pressure, and prior year adverse loss development,” he said. “Premium growth is expected to remain elevated due to hard market conditions.”
“After a sharp drop to 47.5 percent in 2Q 2020, quarterly direct loss ratios resumed their upward trend, averaging 74.2 percent over the most recent four quarters,” Porfilio said. “Low miles driven in the first year of the pandemic contributed to favorable loss experience.”
Since then, Porfilio continued, “Miles driven have largely returned to 2019 levels, but with riskier driving behaviors, such as distracted driving, and higher inflation. Supply-chain disruption, labor shortages, and costlier replacements parts are all contributing to current and future loss pressures.”
Overall, loss pressures from inflation, risky driving behavior, increasing catastrophe losses, and geopolitical turmoil are leading to the need for rate increases to restore underwriting profits.