From the Covid-19 economic downturn, to hard asset markets, to volatility in macroeconomic conditions, it is increasingly difficult for insurers to adequately protect against the risks posed by this landscape.
Traditional prevention strategies and risk management tools are still important, but often insufficient.
As a result, we are witnessing a widening of the so-called protection gap, i.e., the gap between risk transfer needs and available capacity. This year alone, pure asset accounts have seen modest risk increases of between 10 and 20 percent, and CAT-exposed accounts have seen price increases of at least 25 percent.
Some have seen triple-digit increases.
More problematic for some is the high limitation of natural peril coverage, leaving them vulnerable to losses that could hurt their bottom lines more than premium increases. And the loss of natural disasters is increasing, especially in weight – in the accumulation of values, often low, in risk-prone geographies.
This increase in risk exposure is an example of factors that are further tightening the property market. Industry experts continue to expect a tough market for the next few quarters, meaning less capacity, higher deductibles and a need for more expanded insurance solutions.
The insurance industry has responded to the increased exposure to natural disasters and other risks with new offerings such as parametric and structured insurance that can complement traditional insurance programs. These techniques have been tried and tested for years but were not widely appreciated when traditional risk transfer insurance was widely available at attractive prices.
Today, these techniques and others are being considered by many organizations. Additionally, with more sophisticated modeling and more robust data sets available, risk finance can move away from buying off-the-shelf products and into integration with an organization’s strategic financial plan.
Data-driven approaches help to better understand insurance portfolio costs
Companies are looking for ways to manage risks more proactively. Data-driven approaches can help provide insight into insurance portfolio costs, allowing companies to better understand their overall risk profile and better understand the trade-off between risk retention and risk transfer – regardless of risk transfer techniques.
In the real estate space, there has been a significant increase in natural disasters in recent years, with 2022’s Hurricane Ian further adding to the need for an innovative approach to risk assessment.
At Aon, we’ve got tools like our Business Intelligence (BI), Asset BI and Asset Assessments that enable companies to unlock data insights that give customers a clearer picture of their full risk exposure. Not only does this provide a more comprehensive picture of their insurance needs, but it also provides actionable insights to quantify the overall cost of risk and analyze their risk transfer options.
of Aon Risk finance decision platform (RFDP) is an example of advanced modeling mentioned above, and another example of innovation to help manage and close customer retention gaps.
The platform goes through three key steps to support companies making decisions that impact their risk transfer portfolio based on their risk profile and risk exposure. With this tool and its intuitive troubleshooting, customers can instantly compare their current insurance portfolio against a myriad of other options, allowing them to measure the benefits of an insurance program against its costs.
This tool provides the flexibility to mix and match different insurance structures in real time, regardless of the risk transfer technique and regardless of the market risk – insurance, reinsurance or capital markets.
Non-traditional supplies fill gaps for weather-related hazards.
As weather events and other evolving risks become more common, there are new coverage gaps that can cost more than the uninsured.
For example, the The National Hurricane Center said Hurricane Ian was the costliest hurricane in Florida history, and the cost continues to be reported six months after the disaster. Today, Florida faces historic flooding, and it will take time to calculate the true costs and determine the depth of flooding across the region.
All of these costs add up even more, as conventional insurance can take months or years for a claim to be processed and paid, especially during a coverage or appraisal dispute.
But for weather events like Florida’s recent flooding, firms using parametric insurance often receive risk transfer revenues and therefore can be very important in a few weeks.
Parametric solutions can be particularly useful for these types of “grey swan” situations, or for events that are known and likely to occur, but are assumed not to occur.
Parametric insurance adjusts coverage gaps for different risks.
This provision is based on pre-measured criteria – such as wind speed, temperature or rainfall – that trigger payment when conditions occur. This allows companies to tailor their protection to their needs and provides protection even when traditional insurance is unavailable or scarce.
This type of non-traditional provision is particularly useful for weather-related perils such as extreme heat or storms.
By providing a type of coverage that is otherwise difficult to obtain, parametric insurance can help companies manage their operations and financial losses more effectively through these events.
Parametric insurance can provide additional risk transfer income if traditional coverages expire due to large losses or high deductibles.
In addition, parametric solutions allow companies to better understand and predict the cost of damage from weather events, allowing them to budget and plan more effectively for the future.
Using real-time data from satellites, sensors and other sources, insurers can make accurate estimates of potential losses before they happen – giving companies invaluable insight into how much protection they need to protect themselves financially from these risks.
New insurance products are here to stay.
While our current threat landscape is rapidly evolving, the industry is evolving and evolving at an equally rapid pace – a critical shift in mindset from defensive to offensive.
Many of the major innovations on the market today focus on flexibility, increased visibility of costs and coverage options and the horizon of “grey swan” events. Collectively, these speak to a shift to offensive thinking, and provide quick and flexible solutions to risks arising from weather events and market conditions.
By comparing insurance portfolios in real-time through RFDP or addressing coverage gaps with parametric solutions, companies can use tools today to deliver more sustainable predictability and security to their businesses tomorrow. &