The global insurance market is feeling healthy. In general, rates are hardening and for many the market looks more promising than for several years. But look far enough ahead and every silver lining has a cloud.
The pace of social and economic change has, if anything, been accelerated during the Covid-19 outbreak and the pandemic itself has brought about permanent changes and new challenges in some sectors. And even lines that are expanding rapidly are suffering growing pains as the market adjusts.
So where are the pressure points? And what markets and insurance lines are experiencing stretched business conditions or shrinking – or even facing extinction?
Business interruption and SMEs
The pandemic and widespread national lockdowns threw business interruption (BI) insurance into meltdown. A legal case brought by the Financial Conduct Authority and eight leading insurers sought to clarify the liabilities of insurers with respect to BI policies and went to the Supreme Court before being finally settled.
While this resolved many immediate disputes, the outcome still left some businesses feeling sore. Janthana Kaenprakhamroy, chief executive of Tapoly, which specialises in small and medium enterprise (SME) insurance, says: “Consumers are being more wary about buying and knowing what is covered and what is not, and we will see fewer renewals.”
Sanjiva Perera, managing principal at Capco’s insurance practice, concurs with this assessment: “The SME sector is about $1tn globally in terms of premium. SMEs are no longer willing to trust insurers. The market does need a fundamental rethink.”
Interruptions to normal business may have wider effects. A general loss of trust between SME and their traditional insurers may accelerate the inroads being made by fintechs and other business service providers into the SME sector.
Aviation
The dramatic drop in global travel during the pandemic, with fewer passengers, fewer flights and grounded aircraft, has led to a collapse in passenger revenues – with a drop of $314bn from 2019 to 2020 predicted by the International Air Transport Association last year.
Insurers’ premium income plunged by an estimated 30%, but naturally so did claims. The longer-term question is whether passenger aviation will return to pre-pandemic levels or whether there will be a lasting reduction in air travel requiring a fundamental rethink of underwriting portfolios.
Capco’s Perera says: “Aviation underwriters might have to shift their focus if there is a pull-back in terms of business travel.”
It’s not all bad news, however. “We’ve seen companies like DHL and UPS really surge because we have relied on logistics firms, and we forget that those firms have some of the biggest fleets out there,” Perera adds. “As an aviation underwriter you might have to shift in that direction. But if everyone is shifting their focus, what does that mean in terms of competition and rates?”
Fossil fuels – the ESG factor
The Lloyd’s market has faced widespread criticism from environmental campaigners for being slow to adopt environmental standards, but late last year it announced that it would not provide insurance cover for new coal, oil sands and arctic energy projects from 2022 onwards. It plans to pull out of these sectors entirely by 2030.
In May this year, Allianz announced a similar plan to dramatically reduce its business exposure to fossil fuels across property and casualty insurance and its investment business.
However, the transition away from fossil fuels across the entire insurance market may start to show its effects sooner than the 2030 targets of many organisations. Underwriters will have their own ESG targets, and some insurance giants such as Allianz have trumpeted their integration of ESG standards in their own underwriting business.
As fossil fuel industries shrink and insurers look to their own ESG profile and reputation, the market for insuring fossil fuel industries and projects is likely to be squeezed and premiums could rise. Underwriters that have specialised in London’s large fossil fuel sector will need to adjust their portfolios.
Capco’s Perera says fossil fuels may even at some point become uninsurable in traditional markets. “If insurers can’t insure these activities at some point, will we see some alternative mechanism to cover those risks?”
Renewables
With energy transition now an irreversible trend, the renewable energy sector is booming and certainly not facing an existential risk. But moments of transition create strains even among the winners.
Just as a shift by insurers and underwriters from passenger to freight aviation insurance may lead to increased competition and pressure on rates, renewable energy is experiencing a similar effect as economies and industries rebalance away from insuring fossil fuel industries.
Fraser McLachlan, chief executive at GCube Underwriting, says: “We’ve been around the renewable sector for 20-odd years. When we got involved, people told us it was a complete waste of time. We’ve now got to a position where every insurance company wants to be in renewables. There’s been a huge influx of capacity.”
McLachlan adds that this influx has led to pressure on rates that is not quite in line with potential liabilities in solar or wind turbine projects. With multiple units spread over wide areas, these are by their nature prone to losses from extreme weather and other external risks.
“If you’ve got 1,000 turbines across 40-60 acres, the exposure to things breaking is that much more than a traditional power plant,” McLachlan says. “The market sees power generation as all the same, so they have not built this kind of thing into their business planning.”
Renewables are set to be a major segment of the insurance market in the future, but if McLachlan is right about risks being mispriced in the renewables rush, there is likely to be a shake-up at some point and business casualties along the way.
Motor
Autonomous vehicles, or self-driving cars, have been a long time coming – but they are coming.
In April, the UK government announced plans to permit “Level 3” autonomous vehicles on British roads. This allows the driver to take their full attention off the road, leaving an autonomous lane-keeping system (ALKS) to keep the car on course.
Widespread use of fully autonomous vehicles may still be years away, and the change-over will be incremental. However, the developing sector still poses a threat to about hundreds of billions in premium income worldwide.
Says Capco’s Perera: “This is undoubtedly a threat to motor lines as we know them.”
The most commonly predicted development is a shift from a personal lines insurance policy for the driver to a product liability policy for the manufacturer. But this may not be a complete substitute for lost premiums from drivers. If autonomous vehicles reduce accidents as significantly as many predict (94% of accidents are due to driver error), then the total risk being insured will still decline.
Even before autonomous cars become commonplace, other trends in driving, particularly in developed urban markets, may start to nibble away at those personal driver policies.
The think tank Centre for London reported in 2020 that, although car ownership has not declined significantly, daily trips by car drivers were down 23% since 2013/14.
The decline in daily commuting post-Covid and the rise on online shopping and entertainment may accelerate these trends and translate into more people deciding that owning a car full-time may not be cost effective. Meanwhile, ride sharing and on-demand car rental services are growing in popularity in urban areas.
There is plenty of life in the private car yet, but those with an eye towards 2030 and beyond can see the writing on the wall.
As Covid-19 has demonstrated, the risks and liabilities of the modern world can change in a very short space of time – but grand trends in business and society also have clear long-term implications.
Covid-19 has created some clear challenges for certain lines and sectors, most notably in the SME business market with business interruption cover being centre stage.
It is also clear that some major and seemingly now irreversible shifts in technology and sustainability – particularly environmental concerns – will reshape business and daily life over the long term.
Insurers and underwriters focused in those areas most affected will need to adapt to this shifting risk environment.
