An Assessment of the Evolving State of Complex P&C Insurance Risk Management
While risk management is at the core of any property and casualty (P&C) insurance company, the rapid pace of change the industry has felt in the past few years has shaken up the efficacy of some of the practices commonly deployed in managing that risk. As the insurance industry evolves, it’s becoming more crucial for underwriting organizations to proactively manage risk through innovations in technology that are powered by and that complement business changes. Organizations must not only innovate in their management of traditional risks, but also consider the impact of macroeconomic factors on their business and stay ahead of new, emerging risks.
ESG & Other Emerging Risks
One area that is becoming increasingly important for underwriters to consider is Environmental, Social, and Governance (ESG) risks. Climate change, for example, has the potential to affect virtually every industry, and insurers will need to understand the potential impacts on their portfolio in order to make informed decisions. This includes understanding the risks of certain industries, such as the insurance risks of coastal real estate and the risk of supply chain disruption.
Another emerging risk for underwriters to consider is cryptocurrency. As its use becomes more common, insurers will need to understand and manage the risks associated with this new asset class. This includes evaluating the risks of cryptocurrencies as an investment and pricing policies that provide coverage for theft or loss.
Cybersecurity is also a key concern, as the growing number of data breaches and cyberattacks highlight the potential impact on insurance companies and policyholders. Insurers will need to develop a deep understanding of the risks and offer policies that provide adequate protection.
Systemic Risks
As underwriting organizations navigate the evolving landscape of these specific risks and risk factors, it’s also crucial to consider the potential impact of systemic risks on their business. This includes factors such as supply chain disruptions, geopolitical instability, and energy scarcity. These risks can have a major impact on an underwriting business and should be factored into risk management strategies. For example, disruptions in global supply chains and inflationary pressures can drive up the costs of claims, making it more difficult for insurers to manage their risk.
Another systemic issue that underwriters will need to consider is the increasing frequency and severity of catastrophic losses. With climate change expected to lead to more extreme weather events, insurers will need to reassess their exposure and develop new underwriting strategies, as historical CAT models may not quite cut the mustard at predicting future losses.
To make these “external” factors worse, inside the insurance industry, there is a shrinking talent pool of underwriting professionals and a growing demand for expertise in this field. These stand to significantly impact an underwriting business. To address these challenges, insurance companies will need to invest in talent – recruiting, training, supporting, and retaining – all of which likely require investment in not only people but technology.
Dynamic Risk Management
Underwriting organizations that take the time to understand and manage the impact of emerging risks and macroeconomic factors will be better equipped to navigate the rapidly changing insurance landscape. The insurance industry is constantly evolving, and underwriters need to stay abreast of the impact of ESG factors, emerging risks, and systemic risks on their business, and put together strategies to mitigate and even capitalize on these factors.
To stay ahead of the curve, insurance companies must adopt a Continuous Strategy philosophy, where they are continuously surveying, planning for, and evolving their people, processes, and tools to capitalize on innovation as opportunities arise. This approach will enable them to stay ahead of the curve and not fall behind on macro trends and technology innovation. By focusing on the right factors, and continuously assessing and improving their operations, underwriting organizations can set themselves up for success in the years to come.
