Transforming insurance technology to address evolving global perils

By Simon Fagg, product strategist, AdvantageGo.

Emerging perils—including climate change, terrorism, cyberattacks, and supply chain issues—have become an increasing concern in the insurance industry. Although science and technology are evolving, the application (in a production setting) to industry challenges is not at the level of sophistication that the modeling technologies can reliably support predictions, and planning in these areas is of particular concern.

Insurers must continue down a path of digitisation to improve these abilities, including the transition, harmonisation, and synchronisation of data in a way that is centralised and accessible to underwriters. Carriers also must invest in a wider range of appropriate modeling capabilities that are able to consider a future environmental uncertainty that doesn’t resemble historical patterns.

The growing risk of peril and multi-peril events

Insurers acknowledge that civilisation is facing a new landscape of emerging, connected risks. In addition to macro global threats, multi-peril events are driving huge losses for carriers due to a rapid intensification and a combination of perils—hurricanes combined with inland flooding, for example.

Insurers and insureds are widely unprepared for these dangers, which have been growing in their capacity for damage over the past decade. “Global economic losses resulting from natural catastrophes between 2011 and 2020 totaled more than $2 trillion, with only about 35% of these losses covered by insurance,” according to Bain & Company.  Primary perils such as hurricanes are seeing above average numbers in frequency – NOAA is predicting 18 Named storms, eight Hurricanes, and four major hurricanes in 2022, with the probability of the season being 60% above average.  Equally, a Deloitte/University of Cambridge report on Secondary perils cites six recommendations for industry participants to ensure improvements in resilience in underwriting best practices, which include diversification of modeling approach and dynamic underwriting of secondary perils.

Newer, evolved risks beyond accelerating natural disasters are also emerging. “The profile of risks also is changing … expanding in new areas, such as cybercrime and digital assets,” as Bain & Company describes, creates correlations that 10-15 years ago did not exist as compound risk between underwriting classes. Human-made risks such as cyberattacks, combined with the growing interconnectivity of lines-of-business dependencies through supply chains, means Insurers face an exponentially more challenging environment for prediction and underwriting activities.

Insurers lack accurate predictive models

Many of these evolving threats, especially cyberattacks, have new and untested unexplored threat profiles that can add direct or hidden risk to an insurer’s portfolio. For example, cyber threat modeling is still in its infancy from a loss classification and quantification perspective – the threat landscape is single-point-of-failure whilst, in recent years rapidly evolving across targeted products, infrastructure, and services. Contingent business interruption and supply chain risk assessments also remain elusive, despite some of the most significant losses in their history, driven by globally disruptive events such as the recent pandemic.

Insurers are questioning the adequacy of data and models in their coverage areas as a result. Fortunately, emerging technologies with multi-model, deterministic/probabilistic, and unmodeled views can help carriers become more sophisticated in their view of new risks. Although, the change of tact in climate change analysis is driving forward-looking views that bolster emissions projections, global inter-connected climate patterns, regional downscaling, hazard/financial damages modeling, and capital modeling outcomes.

7 key points for carriers

New enabling technologies for underwriters across all business lines hold the key to tackling these challenges, which only become more complex and interconnected over time. Even so, “many insurers are still modernizing their technology stacks and are at an early stage of the digitalization journey, leaving them susceptible to being overtaken by more nimble players,” as McKinsey describes.  Legacy systems/technology plays a significant part in restricting nimbleness of “Underwriting Excellence,” driving prudent underwriting decisions.

Here we review seven key points carriers should consider as they modernize their technology to meet these demands. Insurers may find that tools such as global exposure management solutions and feature-rich underwriting workbenches can help them master predictive capabilities, increase revenue opportunities, drive portfolio resilience and improve product satisfaction within these areas.

Asset classes are affected by a widening variety of risk factors. The interconnectedness of all nat-cat and non-cat cat perils will drive cross-class interdependent claims to unprecedented levels without further application (and merging) of science and technology to support risk to portfolio underwriting decision-making.

Climate change will impact all catastrophe perils and will continue to drive increases in primary perils such as hurricanes. But it will also escalate what is termed as secondary perils, such as wildfire, inland floods, hail and tornadoes, into the same level of severity/frequency and financial loss as primary perils, which collectively are responsible for increases of insured and uninsured losses across all continents.

Risk landscapes will expand and become more difficult to measure. Insurers may struggle to expand their modeling perspective – collate a single view-of-risk to quantify loss or unify deterministic, probabilistic, and unmodeled risk. Risk quantification must utilise increasing metrics across scenario analysis/stress testing that enable the complexity of the risk landscape to become single dimension where only high-quality, complete, and accessible data will drive improvements in risk evaluation.

Non-cat perils such as terrorism require a more dynamic approach. Carriers must shore up a typically conservative loss estimate delivered via deterministic terrorism blast radius through improvements in how they quantify PML blast waves and channel blast effect in built-up high-value target areas. The application of computer-aided fluid dynamics alongside building characteristics, blast metrics, and intelligence insights from correlated events with similar profiles will drive profitability and risk mitigation strategies.

Casualty/liability will continue to trend upwards. The gross written premium (GWP) of casualty has increased steadily over the last ten years. However, property, specialty and casualty are each approximately a third of the overall gross premium share for the global market.

Outside of new class entrants (such as cyber liability), regulatory and clash scenarios will continue to drive growth in the liability area. Emphasis on the growing correlation between cyber threats, ‘silent cyber’, and other emerging threats must be factored into carrier risk profiles to maintain a profitable portfolio.

Challenges associated with ‘clash’ will become more common. As the risk landscape gets increasingly complex, losses will continue to mount through threats as yet unidentified for new ‘silent’ risks that are yet to be excluded through contract terms and conditions, or tested in court. In the US, we have seen instances of COVID BI losses and historically cyber losses being driven from property contracts before the wording exclusions can be updated. The expectation is this trend shall continue, although Insurers can continue to lean on advanced algorithms interpreting their portfolio, evaluating wordings against benchmarks, reviewing recent changes to state law, and quantifying the impact of interconnected risk, which crosses the boundaries of traditional insurance lines.

Insurers still lack adequate probabilistic models that supply a global view-of-risk that is bespoke to their risk appetite. Model assumptions and data consistency drive the old adage ‘garbage-in/garbage-out”. The industry has made strides in data veracity; climate change is gradually being integrated across probabilistic models. But, collectively, insurers must strive for multiple views of risk and drive scenario modeling to evaluate any understatement of losses.

Next steps for tackling these risks

Carriers must become more sophisticated in how they balance risk appetite, capital allocation to market opportunities, application of science-technology and interweave legacy constraints that impact the risk profile by continual integration and assessment of risk at all levels of resolution and through extended model use and scenario development. They must also expand their ability to assess and benchmark claims activity to enable improvements in scenario loss projection to be factored into the underwriting rating process.

Insurers need to continue down the path of digitisation, which includes the transition, harmonisation, and synchronisation of data that is centralised and accessible through a data model that is driven by good governance, process, systems, and people that underpin all parts of pre/post bind underwriting. Evaluation and embracing of new technologies can help only as part of a holistic approach to risk, but there is broad agreement that the utilisation of a centralised data model, and multiple perspective views that consider new-age loss mitigation is essential for resilience.

Carriers must adapt or they may be eclipsed by nimble insurtech-driven MGAs/MGUs that are able to precisely target a market opportunity and execute using the latest in risk underwriting and mitigation techniques without the legacy burden. As McKinsey describes concerning emerging tech trends, “all of these factors should be a wake-up call for insurance executives to develop an understanding of where and how these trends may affect their core products and the competitive landscape.”

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