Data, new players challenging value proposition of p&c insurers

Barriers to entry into property and casualty insurance markets are being eroded, demanding that insurers innovate or face the potential that the p&c industry could diminish in size at an accelerating rate, cautions a new study by Conning.

This erosion is taking place as risk data becomes more widely available and as new capital sources disrupt traditional insurers, notes a statement this week from Conning, an investment management company for the global insurance industry.

Innovation in Property-Casualty Insurance: Responding to a Changing Value Proposition explores the relevance and value proposition of the p&c insurance industry in the face of challenges today, presents responses from many leading insurers, and offers scenarios for potential future outcomes and solutions.

The p&c insurance industry “faces unprecedented challenges, including emerging risks, changing technology, alternative capital and a decline in the relevance of the industry’s traditional products,” the report states.

“The value proposition of the insurance industry rests on the two foundations of managing information about risk and providing a large pool of capital to absorb risk – both of these are under attack,” Jerry Theodorou, vice president of insurance research for Conning, says in the statement.

Theodorou points out that quantitative and qualitative technology advances are making data increasingly available, allowing new market entrants or customers to absorb risk that insurers would otherwise handle. In addition, new, much larger and more efficient capital providers are entering the industry and “siphoning off premium that ordinarily would flow to insurers,” he reports.

“If insurers do not respond effectively to the data and capital challenges, the property-casualty industry may diminish in size and do so at an accelerating rate,” Theodorou cautions.

“The potential for decline in the insurance industry’s size and relevance is amplified by acceleration in the pace of technology advances. Businesses and individuals are cycling faster than ever through new technologies and communications media,” notes the report.

It points out that innovative products and processes, including cyber activity, drones, robots and 3D printers introduce risk whose nature and magnitude are not yet fully understood. “Insurance policy wordings designed decades ago are ill-equipped to cover today’s and tomorrow’s changing face of risk,” it adds.

Steve Webersen, Conning’s head of insurance research, says insurers recognize the threat posed by the entry of new capital, more widespread availability of data, and the proliferation of new risks. Some have responded “with structured programs to innovate in product development, emerging risk coverages and in the use of richer data and analytics,” Webersen points out.

Other ways traditional reinsurers have adapted to the strong influx of new capital include by “offering new products and novel risk transfer options, often by affiliating with ILS (insurance-linked securities) funds or becoming investors themselves,” the report states. “As a result, reinsurers are well-positioned given their extensive resources, expertise and unique market access.”

Advises Webersen, “As the industry responds to meet these unprecedented challenges from commoditization and disruptors, it will need to continually assess the value of its responses and reinvest in refining its business model.”

The report notes, though, that authors are optimistic. “As conservative as the industry may be, historically it has responded best when confronted with challenges that have shaken it to its foundations, whether a massive earthquake, a terrorist event, or a financial crisis.”