Climate/Change/Sustainability/ESG
Global insurance market facing a combination of climate, AI & regulatory challenges, GILC
A new report from Global Insurance Law Connect (GILC) showcases that natural disasters linked to climate change, cyber security, artificial intelligence (AI) and regulations related to consumer protection are the “biggest challenges” facing insurers across 2024.
GILC’s annual Risk Radar report is a collection of insights from law firms across 27 different countries. Each firm provides details on the key changes to the insurance market in their region and provides an outlook for the coming year in that country.
Focusing on the U.S. insurance market, the report reveals that it finds itself at a critical juncture, “grappling with multifaceted challenges stemming from climate change, infrastructure vulnerabilities, and escalating cybersecurity threats.”
In particular, climate change is continuing to present a variety of challenges due to the increased frequency and severity of natural disasters.
“As a result, insurers are under pressure to adapt their risk management strategies, incorporate climate science into underwriting practices, and collaborate with policymakers to develop sustainable solutions that ensure affordability and availability of insurance coverage in a changing climate landscape,” the report reads.
Aon launches comprehensive carbon capture and storage insurance solution
Aon has developed a new insurance product for international transport and storage companies engaging in storing carbon dioxide.
According to the firm, this new product will provide cover for key risk exposures associated with Carbon Capture and Storage (CCS).
It is also aimed at advancing the role of insurance in de-risking global CCS projects, which will reportedly open up access to capital providers and investors; address a significant protection gap for these developments; and change the perception of what is insurable.
“Carbon Capture Utilisation and Storage addresses aspects of environmental, social, and governance (ESG) by reducing carbon emissions and allowing energy and other emitting industries to meet their net zero goals and objectives,” Aon explained.
The firm added that its energy transition product was created through its role as an insurance broker to Eni UK, the lead company in the consortium delivering the innovative low carbon and hydrogen HyNet North West project, and the Northern Endurance Partnership (NEP), comprising of bp, Equinor, and TotalEnergies.
News
Memorial Day 2024: Facts, Meaning & Traditions
[Editor's note: As we celebrate Memorial Day 2024, we thank and honor service of all those; past, present and future, and especially those making the ultimate sacrifice to protect our freedoms. 'Connected' will resume on Tuesday, May 28th]
Memorial Day is an American holiday, observed on the last Monday of May, honoring the men and women who died while serving in the U.S. military. Memorial Day 2024 will occur on Monday, May 27.
Originally known as Decoration Day, it originated in the years following the Civil War and became an official federal holiday in 1971. Many Americans observe Memorial Day by visiting cemeteries or memorials, holding family gatherings and participating in parades. Unofficially, it marks the beginning of the summer season.
Research
S&P predicts 40% of Americans will continue driving older vehicles through 2028
More than 110 million vehicles in the U.S. are between six and 14 years of age, reflecting nearly 38% of the fleet on the road, and that’s expected to continue growing to an estimated 40% through 2028, according to S&P Global Mobility.
The average age of passenger cars and trucks on the road is still 12 years, up by two months to 12.6 from 2023.
S&P says the increase is showing signs of slowing as new registrations normalize, which continues to improve business opportunities for companies in the aftermarket and vehicle service sector in the U.S., as repair opportunities are expected to grow alongside vehicle age.
“With average age growth, more vehicles are entering the prime range for aftermarket service, typically from six to 14 years of age,” said Todd Campau, aftermarket practice lead at S&P Global Mobility, in a news release. “Consumers have continued to demonstrate a preference for utility vehicles and manufacturers have adjusted their portfolio accordingly, which continues to reshape the composition of the fleet of vehicles in operation in the market.”
Vehicle scrappage rates, S&P’s measure of vehicles exiting the active population, continue to hold steady at two passenger cars scrapped for every new passenger car registration. As of January, the scrappage rate was 4.6%, largely unchanged from 4.5% in January 2023.
Looking at the mix of the fleet, since 2020, more than 27 million passenger cars exited the U.S. vehicle population, while just over 13 million new ones were registered, according to S&P. More than 26 million light trucks, including utilities, were scrapped and nearly 45 million were registered.
The country’s vehicle fleet surged to 286 million vehicles in operation (VIO) in January, up 2 million over 2023.
Vehicles under the age of six accounted for 98 million vehicles in 2019, or about 35% of VIO. Today they represent less than 90 million vehicles and aren’t expected to reach that threshold again until 2028, when they will represent about 30% of VIO, according to S&P Global Mobility estimates. The estimates are driven by the impact of the COVID-19 pandemic and subsequent supply chain shortages that disrupted vehicle supply and registrations following historically high volumes from 2015-2019.
Commentary/Opinion
How Long Can State Farm Lose Money? A Long, Long Time!
When I last wrote about State Farm, I suggested they had somewhere between $75-100B of excess capital. I commented at the time that their excess capital alone would make them the largest US insurer outside of Berkshire.
Since then, State Farm has proceeded to post larger and larger underwriting losses each year. Seemingly, they are trying to find out how quickly they can blow through all that excess capital.
But a funny thing happened along the way to trying to blow up the company. They kept growing surplus.
That’s right. Even though they lost $6B last year (on $14B of underwriting losses!!!), they managed to grow surplus over $3B – because of investment gains.
While they are still below the ’21 high of $143B, their current surplus of $135B is up since ’20.
For context, State Farm has lost $32B cumulatively on underwriting from these three years. That is not a typo. THIRTY TWO BILLION!!!
And yet surplus grew! How is this possible?
First, cumulative investment income was over $15B. Then, there were $19B of gains on investments. Add on a few billion of earnings from life insurance and other miscellaneous businesses and you net out to a gain in surplus.
So does that mean this level of underwriting losses is sustainable? Let’s explore in more detail.
Excess Capital First, let’s do an update on State Farm’s excess capital. Two years ago, I suggested State Farm needed no more than $50B to support its operations. Since then, it has grown premium $20B (~30%) which requires additional capital.
I’ll show quick math below, but I’ll update my required capital to <$60B, including the life and other businesses. That means excess capital is still $75B!
Let’s assume State Farm grows premium 5%/yr going forward (which will be ambitious once pricing flattens) and that this consumes $2B of capital annually.
Underwriting Profit Target If State Farm targeted a 100 CR, they would seem to meet the goals of its policyholders. They should have lower than industry pricing while not destroying the capital of policyholders.
However, State Farm unfortunately isn’t run for the policyholders. It’s run for the management. And managements tend to like to run bigger companies and to hire famous athletes for their commercials.
The best way to be a bigger company is to lower prices! Normally, this leads to bankruptcy, but when you have as much capital as State Farm, you don’t need to worry about such things.
Munich Re president and CEO on the challenges facing reinsurance
Dr. Marcus Winter (pictured), president and CEO of Munich Re North America Property and Casualty and Reinsurance, recently shared his insights on trends impacting the reinsurance industry – and its challenges.
“The industry has become very numbers-driven,” Winter noted in an AM Best interview. “Twenty-five years ago, we focused more on the legal aspects and contracts’ wording. Now, it’s mainly around numbers, data, and insights. Companies have become larger and more specialized. Overall, the marketplace seems to have become more competitive.”
He highlighted Munich Re utilizing their data and insights to offer clients stability and longevity, two factors he described to be highly sought after in the industry.
“This has fueled our growth [globally] over the last five to 10 years,” said Winter.
Allianz Global Insurance Report: Navigating growth and challenges in a rapidly changing world
The only way to make sense out of change is to plunge into it, move with it, and join the dance, wrote the philosopher Alan Watts. This rings true both personally and in business environments. Amid market shifts, technological advancements, and evolving consumer needs, the insurance industry saw its fastest growth since 2006. Yet, this impressive growth is also a story of transformation, influenced by high inflation and the necessity to adapt swiftly to a changing world. Allianz Research’s new report explores how the insurance industry performed in 2023 and what the future holds…
2023: A year of significant growth
In 2023, the global insurance industry grew by an impressive 7.5%, the fastest rate since the pre-Global Financial Crisis (GFC) era. Insurers worldwide amassed EUR 6.2 trillion in premiums across life (EUR 2,620 billion), property and casualty (P&C) (EUR 2,153 billion), and health (EUR 1,427 billion) segments. However, high inflation contributed decisively to these gains, the real growth rate has been a modest 0.7% since 2020.
Unlike 2022, where growth was primarily driven by the P&C segment, 2023 saw more balanced growth. The life segment led the charge, contributing 46.9% of the total increase, with P&C and health following at 32.7% and 20.4%, respectively. Notably, the life segment rebounded significantly, driven by Asia, the world’s largest life market.
Property and Casualty (P&C) insurance
The P&C segment grew globally by 7.1 %. North America, primarily the U.S., remained the largest market with a 54.2% share. Western Europe saw a 4.5% increase, led by Germany at 6.8%. Asia's P&C market grew by 5.3%, with China at the forefront. Other markets, holding a 7.9% global share, saw nearly 19% growth, driven by significant inflation-related increases in Eastern Europe and Latin America.
What's behind the reducing growth and profitability of independent agents, brokers?
After experiencing record highs, 2024 has begun with the slowest growth rate for independent insurance agents and brokers since 2021.
According to Reagan Consulting’s quarterly growth & profitability survey (GPS), the independent insurance agent and broker channel reported an 8.4% organic growth rate for the first quarter of 2024 – the lowest growth rate in 11 consecutive quarters.
Despite expectations of continued high growth following a strong 2023, the latest results indicate a shift.
“Although growth and profitability are still strong by historical standards, we may be seeing the first indications that our industry, which has been red hot since 2021, is beginning to cool,” Reagan partner Tom Doran said.
Recent downward pressures on property and casualty rates have contributed to the slowed growth. Commercial P&C, which generates the most revenue for many agencies, saw its organic growth rate drop to 8.5% in Q1, down from 11.7% in the fourth quarter of last year.
Notably, for the first time in GPS history, personal P&C growth surpassed both commercial P&C and employee benefits. Typically, brokerages struggle to achieve 3% organic growth in personal lines. However, personal P&C grew by 9.9% in Q1 2024, a slight decline from Q4’s 10.3%.
AI in Insurance
AI brings a major change to insurance risk landscape | Swiss Re
As the adoption of Artificial Intelligence (AI) increases, the insurance industry must swiftly adapt to the evolving risk landscape. Explore two distinct viewpoints on how it can bolster its role as a societal risk mitigator in the future.
If, like me, you're intrigued by the societal shifts driven by emerging technologies, the insurance industry is an exciting place to be right now. The broad adoption of Generative AI this year is particularly transformative, raising urgent questions about the evolving risk landscape.
The insurance industry has long been at the forefront of managing risks, yet the rapid emergence of interconnected technologies is revolutionising the risk landscape at an unprecedented pace. Technologies like AI not only introduce new risks, such as algorithmic bias and decision-making errors, but they can also render traditional risk models outdated. This creates an imperative for the insurance industry to adapt swiftly to maintain relevance and efficacy.
Managing AI risks in the future
Against this backdrop, the latest report from the Swiss Re Institute, titled Tech-tonic shifts: How AI could change industry risk landscapes, is timely. It sheds light on the potential risks AI introduces across industries and illustrates how re/insurers can leverage this knowledge to tailor their business offerings.
The IT sector, as the initial adopter of AI, currently shoulders the majority of AI-related risks, out of ten industries SRI examined. Yet, as AI's influence expands, the risk dynamics are poised to shift. The health and pharmaceuticals sector, with a wide range of functions that could be undertaken by AI, is anticipated to face the most substantial loss potential in the coming eight to ten years, followed by mobility and transport also bracing for significant impact. Just imagine the damages that could occur from flawed AI-powered medical diagnoses, or autonomous vehicles that make the wrong choices due to poorly designed AI systems.
The Swiss Re Institute report signals a pivotal shift in the severity of AI risks. While intellectual property currently tops the risk chart, algorithm and performance risks are set to escalate as AI adoption broadens. Insurers play a crucial role in aiding companies to navigate these digital risks.
Pravina Ladva, Chief Digital & Technology Officer & Antonio Grasso, Entrepreneur, Technologist, Founder & CEO
Munich Re sees strong growth in AI insurance | Computer Weekly
Artificial intelligence (AI) promises to supercharge productivity, improve customer experience and drive new business models, but the limitations and risks that come with technology has also come under the spotlight.
Earlier this year, cloud-based financial and HR software provider Workday was accused of facilitating hiring biases through the AI screening tool in its software in a lawsuit while UnitedHealth faced allegations that its algorithm was denying patient claims in a class-action lawsuit late last year.
Amid the backlash, AI technology suppliers have started offering copyright shields while others are indemnifying their models for enterprise use to assuage customer concerns. However, some are also shunning away from responsibility with iron-clad disclaimers.
At a time when AI players are on different sides of the risk mitigation pendulum, Munich Re is trying to arm the industry with the good-old safety net of insurance. The company insured the first AI performance risk in 2018 and started to do so for large language models (LLMs) in 2019.
In an interview with Computer Weekly, Michael Berger, head of Insure AI at Munich Re talks up the evolution of the company’s insurance offerings for AI, how it assesses risks and the growth potential in covering legal risks arising from the use and development of AI tools.
Generative AI is still relatively new and full of debate – isn’t it risky to venture into this area? Also, is Insure AI for AI makers or users? Full Interview
Events
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