Organisations must grapple with accelerating and known threats, such as climate change and pandemics, in addition to new sources of volatility, including complex supply chains, environmental and social governance, according to Aon’s “Global Market Insight Q4 2021”.
These new and old sources of volatility are driving the insurance industry to innovate and develop solutions, although caution remains.
Rhonda Jenn, global leader, colleague data and analytics, at Aon Commercial Risk Solutions, spoke to Intelligentinsurer.com to discuss the report’s findings.
Jenn said: “When I think about volatility in the industry, I approach it sequentially. Back in 2020, the only word we heard more than COVID-19 was ‘uncertainty’. The insurance industry is in the business of anticipating catastrophic events, and we have models to help us anticipate and quantify risks and events that have precedent, but the pandemic and its related impacts were unprecedented.”
This, she said, created widespread uncertainty and served to exacerbate market conditions that were already relatively volatile from hard-to-predict risks, such as climate change, civil unrest and social inflation.
“This confluence of circumstances led to widespread conservatism generally, and in the insurance market, to insurer conservatism. No-one could predict how bad or challenging things would become so insurers pulled back capacity, tightened their underwriting, introduced new coverage restrictions and introduced or mandated significant price increases in most cases.”
However, with the rollout of vaccines and the beginnings of economic recovery, this uncertainty has given way to optimism.
Jenn said there was a collective sigh of relief across the industry as “the losses that were expected didn’t materialise, and probably weren’t going to materialise”.
But, while the threat of COVID-19 became more understood, the pressure to understand, quantify and manage other emerging and evolving threats remains.
“The insurance industry is racing to innovate and develop solutions to help organisations be as prepared as possible for what lies ahead,” she added.
“Insurers have reached the conclusion that either pricing adequacy has been achieved or the trajectory is very favourable.”
Rhonda Jenn, Aon Commercial Risk Solutions
Caution and optimism
Jenn said that, over the last few quarters, insurers have become optimistic on the subject of pricing adequacy.
“The industry has gone through a number of cycles of a remediation focus and, over the last quarter or two, there has been a focus from remediation towards growth as insurers have reached the conclusion that either pricing adequacy has been achieved or the trajectory is very favourable,” she added.
While supply chain and climate solutions are areas of insurer caution, they’re also areas of insurer optimism.
“Anything with a US exposure will continue to draw increased caution, and natural catastrophe risk will always be something that insurers are very careful about,” Jenn said.
Aon’s February 2021 “Reprioritizing Risk and Resilience for a Post-COVID-19 Future” report found that, at the peak of the pandemic, 77 percent of the global business community experienced costs and losses associated with supply chain disruption.
On the climate change front, another Aon report, “2021 Weather, Climate and Catastrophe Insight” found economic losses as a result of natural disasters—many of which were exacerbated by climate change—hit $343 billion, 27 percent above the 21st century average.
Jenn said: “There is a recognition that the industry needs to innovate solutions for these risks. Insurers are looking intensely at how we can innovate to develop solutions that will help clients manage volatility around supply chain and climate in particular.”
“We’re seeing an appetite for expansion in some geographies.”
Additionally, insurers are demonstrating a clear cautiousness in terms of where and how much they deploy limits. Jenn added: “What we’re seeing is that insurers have a limited amount of capacity they can deploy so they want to direct that capital to best-in-class risks, and they’re careful about how much they deploy on any given risk.”
This, in turn, is leading to more layers and co-insurance per placement, meaning that there are “more insurers participating on placements, as insurers look to reduce or limit their max limits deployed per risk”.
Additionally, in some lines of business, Aon is seeing deductible increases. While this isn’t across the board, said Jenn, there is still attention on deductibles where insurers are looking at “specific risks or lines of business and looking to move away from those working layer losses”.
On the directors and officers (D&O) front, Jenn noted that there has been a shift in the market from a “strong remediation focus to more of a growth focus”.
“In some geographies the trajectory isn’t as steep or strong as in others but there’s definitely a shift in the D&O space towards growth. Pricing does continue to increase but, depending on the geography, it has moderated.
“New capacity has come into the market and we’re seeing an appetite for expansion in some geographies,” she concluded.
To view the full interview visit: intelligentinsurer.com
Images, from top: Shutterstock / wee dezign
