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Assessing Future Risk

October 17, 2014

The macro-effects of the evolving business and social climate may have deep implications for insurers

For many, the financial crisis of 2008 served as a dividing line, ushering in a new era for insurers, marked by increased regulatory scrutiny and mounting cost pressures. The changes to business models resulting from recent economic and political events, however, may pale in comparison to the effects of broader societal changes that are underway.  Shifting demographics, technological advances, and environmental change, together with economic and political realignments could vastly alter the landscape for insurers, presenting new opportunities and new risks.

A PWC study titled Insurance 2020: Turning change into opportunity, looks at the broadest macro-trends occurring around the world and explores the impact they might have on insurers. Summarized below are five main categories of change and their potential implications to keep in sight.

Social Shifts A consumer-driven social structure may upend the old adage that insurance is “sold and not bought.” In a Coverhound survey of car insurance shoppers, 32 percent of respondents (and 50 percent in the percent in the 18 to 25-year old bracket) preferred to interact with insurers directly rather than through agents or other affiliates. Empowered by the increased connectivity of social networks, and easy access to information, social trends point toward consumers increasingly making self-directed and informed choices and setting their own expectations for transparency, simplicity, speed and service.

Technological Advances The accessibility of data, and increasing availability of tools for parsing that information has potential to equally empower customer and insurers. As consumers will be empowered to make more independent decisions, insurers will have more granular information available for measuring risks, targeting customers and even mitigating risks to improve outcomes.

Environmental Change Dwindling natural resources have the potential to increase the intensity and frequency of catastrophic events. Such changes would likely increase the unpredictability of natural disasters, making catastrophic modeling more complex and requiring increasingly sophisticated risk assessment tools.

Economic Realignment The growing economic and political power of emerging countries may increase the attractiveness of new geographic regions. Costly regulations and uneven growth in developed countries will have to be weighed against opportunities in newer markets, where investments in   construction, land development and transportation could all present insurance opportunities. In addition, in developed countries demographic trends points toward aging populations outnumbering the young. In emerging markets the potential workforce outnumbers the dependent population, presenting more economic opportunities.

Political Pressures Increasing regulatory pressures could result in different possible outcomes. Governments could succeed in harmonizing regulations across jurisdictions, promoting more globalization of the insurance industry, or regulations might develop very differently in different countries, crippling insurers’ abilities to enter new markets. In addition, governments will likely face mounting financial pressures on social security and other social welfare programs. If social welfare programs become insolvent, customers will likely resort to creating their own safety nets, presenting opportunities for insurers to fill the government void. Finally, rising incidences of terrorism will expose carriers to terrorism risk, requiring sophisticated modeling to understand the capacity requirements for terrorism coverage.

Different aspects of these pressure have the potential to impact insurance across the board, from personal lines to commercial insurance and individual life. Insurers will have to balance commoditization in some areas, with increasing unpredictability in others, requiring tools to automate basic processes and more acutely manage unique risks. These issues, not to mention talent shortages, pressure to automate underwriting and the ongoing need for greater loss control, will require insurers to continually reevaluate their changing companies and their evolving landscape.

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