Elisha Cheng, the COO of ReFocus AI sat through ten hours of presentations of Lloyd's of London's US Showcase this week to gain insight into major trends shaping the insurance market in 2021. Here is what we learned.
If someone asked you to list all the global catastrophes that took place in 2020, it would look something like this:
Global Pandemic COVID-19 & shutdowns, global supply chain disruption, natural disasters: largest fires in history in the western US & Australia, Midwest Derecho, historic Atlantic hurricane season, earthquakes in Puerto Rico, super typhoons in South East Asia, and civil unrest across the US.
Business as usual? Think again as the market is hardening:
- Catastrophic weather and fire events are contributing to reinsurance costs going up. In response, carriers are shrinking capacity.
- The economic instability and low interest rates make it difficult for insurance carriers to generate a profit from investments. So insurance companies are raising premiums to increase cash flow to offset some losses from investments. This is tied to the extended soft market over the last decade, which has caused the hardening market we see today.
The new Normal and Disruption
Business will have to operate differently in a hard market:
While everyone wants to capture new business, the pool of new potential customers is shrinking because of declining business revenue and consumer wages.
Communication & Relationships
- Retention and customer acquisition have always been the name of the game for insurance agents. While carriers want to retain and capture new business, the pool of new customers is shrinking and the appetite for renewal business is being reevaluated. With carriers reducing their capacity and rate hikes in the double digits, existing agent/broker & client relationships are being put to test. Depending on the carrier, underwriters working with large accounts may have greater flexibility to adjust pricing and coverage options. Therefore developing and maintaining strong relationships with carriers has always been and is increasingly becoming important.
- Agents that accurately communicate and share risk mitigation strategies that their client companies are taking with their carrier underwriters/wholesale counterparts will retain and capture more business because everyone in underwriting chain understands and has a better risk perspective.
- Traditionally during a hard market, insurance companies increase rates across the board. However, in an increasingly digitized industry, insurance companies armed with AI and machine learning are disrupting the playing field by utilizing their own data to identify the best prospective deals and sniping their competition's best clients by undercutting them with lower rates.
So when will the hardening market stabilize? No one knows at the moment. The rate in which the market will continue to harden depends on the amount of new capital that is coming into reinsurance. The capital is primarily earmarked to cover potential future losses because of pending legislation on COVID-19 liability.
- We expect to see more companies forming captives to reduce their insurance costs.
- New & emerging carriers that did well during the first wave of shutdowns have been capitalizing on this opportunity.
Great, now what? Well, there are new emerging risks:
- Political instability & civil unrest
- Hacking and ransomware attacks leading to greater need for cyber liability.
So what can we expect in 2021? With significant change comes great opportunity in the form of the greater utilization of technology to remedy the challenges. Without more innovation through the insurance industry, from the product offered to the technology used, insurance companies will have a hard time staying abreast of the change. With some key insights and strategic planning, companies who prepare can look forward to exponential revenue and market share growth.