Plethora of challenges face the insurance industry on the road ahead
From underinsurance to inflation, these are some of the major challenges facing P&C insurers today and into the future.
A large and growing set of challenges is facing the insurance industry. New risks and threats are emerging, while others are becoming more complex. Loss frequency and severity continue to plague P&C insurers’ balance sheets and drive rate increases. At the same time, many policyholders are unaware of their true risks and underinsuring of their exposures. New regulations that create liabilities for employee benefits producers are going unrecognized by P&C producers. These are just a few of the challenges the industry has on its road ahead. Solving these will require the insurance industry to think differently about how it deploys its resources.
Risks today are similar to the tax code; they’re becoming more complex and harder to understand. Addressing ongoing and emerging risks requires a deeper analysis and higher-level thinking to develop solutions. This is true of most big-picture challenges, and until now the insurance industry has not fully grasped the need to reallocate its intellectual resources to meet them.
Let’s consider some of these challenges, and what they may mean for the insurance industry. For example:
Policyholders face more threats and risks. Cyberthreats are increasing, along with property damage and business interruption risks as well as growing exposure to litigation. The insurance industry has an opportunity to lead policyholders to a better understanding of these threats and risks, and think about the best ways to mitigate them. Selling more types of coverage is possible, but only if the industry is committed to helping policyholders increase their risk awareness.
Policyholders, and even some producers, are not reading policies. This is a bigger problem for the industry than it may seem at first glance. When policyholders are ignorant of the terms and conditions in their policies, they are more likely to have a dissatisfying experience when claims arise. Not reading policies also can lead to coverage gaps, a situation that is compounded if producers also aren’t reading policies. Excess liability policies are notoriously variable in whether they follow the form of the underlying coverage. Assuming all excess policies follow form is a recipe for uncovered losses — and an invitation for angry policyholders to seek reimbursement from the producer’s errors and omissions liability insurance.
Adverse weather is increasing, yet many older properties are underinsured. Flood, windstorms, wildfires and other disasters are occurring with alarming frequency, and the insurance industry is paying for a lot of the damage those events cause. According to Aon’s “2021 Weather, Climate and Catastrophe Insight,” global insured property losses exceeded $100 billion in four of the past five years and were $130 billion in 2021. Winter weather alone caused $17 billion in insured losses, the most expensive year on record. An unsettling trend for property owners and their insurers is the prevalence of inaccurate property valuations. Too often, property owners fail to take into account inflation in the price of building materials and market appreciation. That mistake leaves many without adequate replacement cost coverage.
Another wrinkle in rising property risks is a lack of ordinance or law coverage for expenses relating to required demolition or removal of property. For example, one hurricane-damaged hotel in southeast Florida came up nearly $1 million short of the funds to rebuild, due to additional expenses required under a local ordinance.
New regulations are creating liability exposures for benefits producers. In April 2021, the U.S. Department of Labor introduced new cybersecurity rules for benefit plan sponsors, fiduciaries and record keepers regulated under the Employee Retirement Income Security Act (ERISA). For benefits producers that provide advice to ERISA-governed retirement plans, that means additional liability exposure in the event of a data breach. Customarily, benefits producers and P&C producers do not interact much, but this is a clear opportunity for that practice to change. Most P&C producers are keenly aware of cyber risks and the coverages available to protect against cyber liability.
Cognitive biases are costly for policyholders and insurers. Another troublesome challenge for the insurance industry is overcoming cognitive biases, such as recency or legacy biases. These biases cause policyholders to believe that because nothing bad has occurred, nothing bad will occur — until of course it does. Underappreciation of loss occurrence leads to underinsurance and a lack of resilience. Both are unfortunate, yet preventable.
These challenges are significant, and they need careful analysis to solve. It’s long past time to elevate the profession. One way to do this is to redeploy its resources and intellectual capital to the complex responsibilities and rely on external partners to handle the simpler, routine tasks. This will enable a sustainable competitive advantage for all stakeholders in the insurance profession to assist with identifying risks and threats to insureds and helping them to make intelligent and intentional decisions. Otherwise, insureds will continue to unknowingly face the risks of adverse financial events that could change their lives for generations to come.
Frank Pennachio (fpennachio@resourcepro.com) has spent more than 30 years in the insurance industry as an agent and producer. He now serves as practice leader, growth solutions at ReSource Pro, helping independent insurance agents and insurance carriers develop risk management expertise and drive new business.
Opinions expressed here are the author’s own.
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