Insurers and Climate-Driven Extreme Weather, CAT Losses Dominate Headlines  July 20th 2023

Insurers and Climate Change

General Insurance Leader at PwC UK Mohammad Khan says: "It's clear that the ongoing impact of climate change will significantly shape how the sector will choose to manage and absorb risks"

Analysis from PwC suggests extreme temperatures could lead to increased subsidence insurance payouts of up to £1.9bn (US$2.48bn) by 2030

As global temperatures continue their upward rise as a result of climate change, analysis from PwC indicates insurers will be increasing their subsidence payouts by up to £1.9bn (US$2.48bn) from 2030, as a result of sustained heat, flooding and heavy rainfall. 

Heat waves hitting insurers’ pockets

In particular, PwC’s data suggests subsidence-related insurance claims will increase rapidly during sustained periods of heat throughout the summer months. 

Not only this, but extreme winters are likely to have a significant impact on subsidence payouts, with PwC indicating that payouts could soar to £500m (US$653m) by 2050 if flood management approaches and expenditures remain unchanged.

Extreme winter weather across 2019 and 2020 saw insurers lose £333m in subsidence payouts, so it seems perfectly reasonable to assume the average payout figure will rise to significant levels by 2050. 

Furthermore, PwC notes that in the UK alone, the economic average cost of flooding could increase up to 18% for fluvial flooding and 43% for coastal flooding by 2050.

Heavy weather losses forecast for P&C insurers' Q2 2023 earnings season | S&P Global Market Intelligence

Most of the largest publicly traded US property and casualty insurers are set to report year-over-year revenue gains in the second quarter, although combined ratios are also expected to worsen, according to an S&P Global Market Intelligence analysis.

An analysis of the 20 largest property and casualty (P&C) and multiline insurers by total assets that trade on major US exchanges found that 17 are predicted by sell-side analysts to record higher revenues year over year, while 13 should see revenues rise sequentially.

American International Group Inc., Old Republic International Corp. and Kemper Corp. are expected to report year-over-year declines in revenues. The companies expected to book sequential declines in revenues are The Allstate Corp., The Progressive Corp., Arch Capital Group Ltd., Cincinnati Financial Corp., Axis Capital Holdings Ltd., Assured Guaranty Ltd. and The Hanover Insurance Group Inc.

Earnings are expected to be more mixed, with 12 carriers projected to post year-over-year improvement and eight expecting sequential improvement.

Allstate and The Travelers Cos. Inc. are both expected to book year-over-year declines in earnings per share, as are The Hartford Financial Services Group Inc., W. R. Berkley Corp. Assurant Inc., American Financial Group Inc., Old Republic and The Hanover.

Insurers expected to record sequential losses in earnings are AIG, Travelers, Allstate, CNA Financial Corp., Arch Capital, Cincinnati Financial Corp., Axis Capital, American Financial, Old Republic, Assured Guaranty and Selective Insurance Group Inc.

Above-average global natural catastrophe insured losses reach estimated USD52 billion in H1 2023

US thunderstorms and global impact from El Niño’s arrival drive higher losses

• H1 2023 insured loss 18% higher than decadal average**
• Severe convective storms (SCS) account for 65% of all H1 2023 insured losses with USD34 billion bill to date after highly active multi-month series of outbreaks across the US.

The first six months of 2023 featured above-average natural catastrophe losses as the National Oceanic and Atmospheric Administration (NOAA) and the World Meteorological Organization (WMO) declared the official arrival of El Niño, which is poised to have further influence on global weather / climate events through the end of the year.

Led by US thunderstorms and global impacts from El Niño’s arrival, total direct economic losses from natural hazards for the first half of the year were preliminarily estimated at USD138 billion, according to global reinsurance broker Gallagher Re’s H1 2023 Natural Catastrophe Report, published today.

A.M. Best: Workers’ Comp Outpacing Rest of Property/Casualty Commercial Sector

Workers’ compensation insurers’ underwriting results continued to outpace the rest of the U.S. property/casualty (P/C) commercial sector in 2022, as they benefited from the long-term decline in workplace accidents and a reduction in fraudulent claims, according to an AM Best report.

Favorable prior year loss reserve development continued to bolster the insurance industry’s carried loss reserve position in 2022, as a result of the long-term declines in claims frequency, said the Best’s segment report titled “Workers’ Compensation Remains a Profit Engine for the P/C Industry.”

The workers’ compensation segment has experienced a softer market compared with other commercial lines of coverage, particularly auto and general liability, the report said, noting that pricing has declined since 2015, except for the post-pandemic period, from the second quarter of 2020 through 2021, when modest increases became the norm

The report highlighted several trends occurring within the segment, including:

• The segment reported a combined ratio of 87.8 in 2022, almost 15 percentage points lower than the overall P/C segment’s 102.4. The segment’s combined ratio for 2022 includes favorable loss development on older accident years totaling $6.5 billion, which reduced the reported combined ratio by approximately 13.5 percentage points.
• The segment, in which premiums are based on payroll levels, has benefited from the largest U.S. wage growth in over 25 years, coupled with strong job growth, which has helped increase its overall premium to pre-pandemic levels.
• Medical and indemnity severity increased, but the magnitude of these increases was less than the increase in wages. The higher payroll exposure base for workers compensation insurance kept the increase in claim severity manageable.

IRC: U.S. Auto Claim Severity Surged During Pandemic

While U.S. auto claim frequency has declined over the past 20 years, claim severity increased and then surged since the global pandemic began in 2020, according to a newly published report from the Insurance Research Council (IRC), a division of The Institutes.

"As (auto) claim frequency leveled off and claim severity accelerated, the average payment per insured vehicle for most coverages began to climb steadily until the 2020 drop due to #COVID19."

The IRC report, Trends in Personal Auto Insurance Claims 2002–2022, showed that claim severity accelerated beginning in the mid-2010s. During the pandemic years (2020–2022), claim frequency plummeted but claim severity skyrocketed, especially for vehicle damage claims, due in part to enormous inflationary pressures on replacement parts and auto body repair labor costs.

Claim frequency for both physical damage liability and bodily injury claims declined more than 2 percent annualized over the 21-year period from 2002 to 2022, the IRC report indicated.

“During the first half of the study period, the combination of declining frequency and increasing severity left average loss costs relatively unchanged,” said Dale Porfilio, FCAS, MAAA, president, IRC. Porfilio also serves as chief insurance officer of the Insurance Information Institute (Triple-I).

Porfilio added, “However, as claim frequency leveled off and claim severity accelerated, the average payment per insured vehicle for most coverages began to climb steadily until the 2020 drop due to COVID-19. By 2022, average loss costs for nearly every coverage had surpassed the 2019 level.”

Other key findings of the IRC report included:

• Claim Frequency: Long-term declines in auto claim frequency, spurred by safety innovation, levelled off in mid-2000s, and the number of claims per insured vehicles generally stayed within a narrow range through 2019. Claim frequency plummeted during the COVID pandemic and remained below pre-pandemic levels in 2022.
• Claim Severity: The average payment per claim for most coverages increased steadily over the study period, with both physical damage (PD) and bodily injury (BI) claims growing more than 4½ percent annualized.
• Average Loss Costs: The average payment per insured vehicle increased more than 2¼ percent for both BI and PD claims over the study period, as increased severity more than offset declining frequency.

This update to the IRC’s longstanding Trends series uses data from the National Association of Insurance Commissioners, the Fast Track Monitoring System, and other sources to describe personal auto insurance trends at the national and state levels. The full report, Trends in Personal Auto Insurance Claims 2002–2022, is available as a complimentary benefit for IRC members and for purchase by non-members.

Global Insurance Survey 2023

The challenges that insurers face today will be familiar to institutions across the financial services industry. Customer engagement and retention in a digitalized, post-COVID world that has reshaped expectations and needs. Ongoing cost pressures that are now only exacerbated by inflation and the current market downcycle. The imperative to modernize legacy systems and architectures while maintaining operational stability and a high quality of service across multiple channels day-to-day. The commercial threat both from existing competitors and external disruptors, be those new players or game-changing technologies such as today’s increasingly powerful AI models.

As insurers survey this dynamic and uncertain future landscape, data is one of the levers available to enact change and ensure their relevance to their customers. High quality data is the engine of transformation: giving form to opportunities, both current and emerging; illuminating behaviors and attitudes; and validating strategic and investment choices.

For the insurance customers surveyed in our latest research, data is something they are overwhelmingly prepared to share to gain benefits: cheaper cover, more tailored policies and services, smoother processes and interaction. Data, and the hyper-personalization of products and omnichannel experiences it facilitates, are key to enhanced customer satisfaction and loyalty.

The central challenge facing insurers is how to extract maximum value from their data to support appropriate nudges and tailor products. Many are already working on building modern data platforms based in the cloud and built on the curation of high-quality data products. Development of these products, and the uplift in operating models to use them effectively, will be key to enhancing digital experiences as part of personalized customer journeys and outreach, and to improving fraud monitoring and management of the claims supply chains. These are all important priorities as insurers look to seize tomorrow’s opportunities across the key vectors of customer satisfaction, commercial growth and competitive differentiation.

Capco

Carriers prioritize customer experience in digital transformation

Improving customer experience has emerged as a pivotal focus for carriers and brokers in their digital transformation journey, according to data from Digital Insurance's "State of Insurance Digital Transformation 2023" report.

Other primary tech-oriented goals for carriers and agents include driving underwriting efficiency and overcoming tech talent shortages.

According to Digital Insurance research, 85% of carriers and brokers named customer experience as one of their top three goals for digital transformation, and 47% identified it as their first priority.

"Insurance companies say improving customer experiences is a top priority – making it simpler and taking out the hurdles," said Ellen Carney, principal analyst at Forrester. "From a digitization and technology standpoint, that includes straight-through processing. If you have a parking lot accident, we wouldn't need to send out an adjuster and we could just pay the limits. Ask the customer how they want the payment, like Venmo or PayPal, and make it super simple."

Forrester's research echoes insurers' sentiments surrounding customer satisfaction, with 77% of insurers saying that improving the customer experience is their top priority overall. Straight-through processing enables automated underwriting processes or claims handling, with the goal of minimizing manual intervention and reducing processing time.

"The numbers that we've heard about straight-through processing are really ambitious, with 70% to 75% [of carriers saying they plan to use] straight-through processing in underwriting in the case of life insurance and claims in P&C," said Carney.

Insurtech is expected to have the biggest impact in customer experience, as well, according to 36% of respondents. Though this dropped from 41% last year, customer experience is still top of mind for industry expectations of insurtechs when compared to underwriting, claims, distribution and product development. Among insurtechs and vendors, 54% responded they are targeting customer experience with their products or services, which is second only to the 67% focusing on underwriting.

Among carriers and brokers, the technologies they have implemented or plan to invest in over the following 18 months include digital payments (70%), chatbots and customer interaction technologies (58%), robotics and intelligent automation (45%) and telematics, IoT, or sensors (29%).