I was fortunate
enough to be able to attend Guidewire's Insurance Forum in Sydney on Friday
last week and was able to see Bryan Falchuk discuss
the current challenges in the insurance industry and particularly the fact that
the number of people uninsured or under-insured has tripled in recent years. It
was particularly good to see the analysis he did of the industry's last 20
years of financials. As an industry, we have reduced expenses on average by 3%,
increased premium by over 100%, but are still seeing a combined ratio reduction
of just 1.5%. All that increased premium has been swallowed up by costs. The take away is that reducing expenses is
not the path to success for our business, and if you don't have a path to
addressing loss ratios beyond expense reduction your business will not succeed.
Bryan proposed three
main ways to address the loss ratio challenge -
1. Risk Selection
2. Pricing
Optimisation
3. Resilience /
Mitigation
Now all of this
going to be a familiar prescription for those of us who have been in the
industry for a while. I would go so far as to suggest that there has not been a
single time in our 200+ year history where Risk Selection and Pricing have not
been part of an insurance business’s strategy to succeed. It makes perfect
sense that your business should be focused on picking the best risks and
pricing it appropriately at all times as a basic hygiene task. However, neither
of these strategies is going to address the challenge of society having too
many uninsured or under-insured citizens. Focusing exclusively on risk
selection and pricing in a world of skyrocketing increases in premium will only
result in a race-to-quality for insurers (i.e. competing only for the best
risk) exacerbating the problem and insuring even less of the population. The situation in California with the recent
wild-fires seems to be emblematic of the shortcomings of this approach.
So, that leaves
resilience / mitigation. It was great to see the interview Bryan did with the
QBE CEO Andrew Horton discuss
resilience directly. It is a strategy that has been much spoken about across
the industry, but it is hard to see much progress being made. This is all
pretty predictable however. Mitigation
is expensive from an upfront perspective and requires long-term investment in
customers.
As much as we might
like to discuss rebuilding customer's properties in a way that will reduce risk
in the longer run (e.g. different roof types, more fire proof materials) in the
short term this will just increase loss ratios. General insurers are focused on annual
insurance contracts and annual profitability, so how many are genuinely interested
in making such long-term investments in society. How much is an insurer really willing to
invest in higher upfront repair costs when that results in higher premiums and
there is no guarantee that the investment made in reducing risk for a customer
will be realised if they subsequently change to a lower cost insurer on next
renewal.
To prevent
competitive advantage we could try to mandate collective action among insurers though
an industry body like the ICA (Insurance Council of Australia). The ICA has put significant thought into this
and you can read about what they have agreed through the Resilience
Investment program they are working on with multiple
levels of government. However, it’s
still hard not to see this a socialised bail-out of the market, and one that is
unlikely to be sustainable in the face of continued rising risks and costs due
to climate change. Government
re-insurance pools fit into the same bucket of unsustainable socialised fixes
over the long term
So what else could we do? How can we incentivise insurance business’s to make long-term investments in their customers? Are there insurance products out there that reward investments in resilience in the short term that while driving long-term profitability? What is driving the rise in claims costs - is it all Climate Change or is there something bigger at play. I'm going to dig into a few of these topics over the next few weeks on my blog.
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