Effectively mediating risk doesn’t happen in a vacuum. It involves keeping an ever-watchful eye on market change and knowing the right method and moment to change with it. At Centurisk, we’re always looking ahead for risk and insurance trends, to help our customers protect their interests from fluctuations and better curtail the pain and drama of a potential risk event. Currently, our industry interactions have us noting the following trends:
1. The hard market is still here, and it isn’t packing its bags yet
Global inflation, the pandemic, economic instability, supply chain disruptions, labor shortages, catastrophic weather and the property damage it has created: all have been catalysts for the current hard market. And while some of these factors have eased over the past year, the original hard market issues have unleashed a cascade of new challenges, causing this market to overstay its welcome. Insurance industry market cycles typically run from two to ten years, but risk and insurance experts at this years’ RIMS conference suggested this hard market may last a decade or more. It’s this market that has spawned some industry trends of its own, such as…
2. Lower competition for insurers means hard-to-get coverage and higher premiums
One current challenge in this hard market is the availability and affordability of insurance/reinsurance. With wildfires, an increase in severe convective storms, and flooding, underwriters have incurred significant losses over the past five years. In 2022 alone, there were eighteen different billion-dollar disastrous weather- and climate-related risk events at a cost of over $165 billion. As a result, insurers have become more choosy about their insureds, working to balance their portfolios with property in less high-risk areas in order to mitigate loss. But these increased weather events also mean the demand for insurance and reinsurance has increased. Insurers no longer must compete to attract quality insureds, so premiums have skyrocketed, too. As a result…
3. Some insureds are losing their insurance placements
Because securing and retaining insurance has become more competitive, not only are entities with property in high-risk zones losing their placements, insureds without current valuation data are also struggling to retain all the coverage they might need. At Centurisk, we hear from organizations regularly saying their broker warned them that if they didn’t get a new appraisal done — and swiftly — they might lose their insurance placements. It’s simply a level of risk they’re unable to take.
But valuation cost calculations have changed a lot over the past five years, too. With inflation affecting the cost of materials, and labor shortages increasing the cost of construction projects, replacement costs have grown significantly. In the US, from January 2019 to January 2021, the rate of valuation growth was between about 1% and 5%. However, starting in 2021 and continuing through 2022, the labor shortages, tariffs/trade challenges, and supply chain issues drove property valuation trends above 15%.
But because of this flux and uncertainty, many organizations haven’t adjusted their property values during this time, unsure how to compensate for all the change. And this is in an industry where property was already dangerously underinsured. A 2017 Verisk global data analytics study showed that approximately 75% of all commercial properties were uninsured. And by 2022, studies in the UK showed that more than 90% of UK properties were underinsured, securing just 68% of the coverage they truly needed.
So this is why…
4. Risk managers are losing sleep over their property valuations
With greater demand for insurance/reinsurance, organizations looking to mediate property risk face some uncomfortable possibilities. They need to secure the right amount of insurance coverage for their property at the best rates possible, and that becomes more challenging when insurers have their pick of portfolios to choose from. It’s no wonder that property risk managers are losing sleep over how to manage the fluctuations and secure complete coverage. It’s enough of a challenge these days to find a credible valuation services firm that can even fit them in their schedules. It’s a race against time, and depending on an organization’s portfolio size, thorough property valuations don’t typically happen overnight. And thorough, trustworthy data is what’s needed right now. That’s why in the property risk and insurance industry…
5. Organizations are more focused than ever on capturing accurate property data
At Centurisk, we’ve noticed the change. Anecdotally, even just a few years ago, our appraisers noted a detail gap between the property data we knew insurers looked for to best mitigate risk and the data some organizations had on hand for their insurance statement of values. Where we focused on critical details like accurate square footage, ISO construction classifications, COPE and CAT data, organizations were still understanding how collecting that information could support their risk mitigation initiatives and insurance coverage.
Today, insurers are increasingly proactive with insureds about the data they need and why, and our customers come armed with lists of information they wish us to collect. It’s a refreshing shift, and it helps us do our best for our clients, offering them the most complete and accurate data profile. This helps them become more attractive to their insurer, establishing a reputation for consistency and trustworthiness. And that means they’re less likely to become lost in the underinsurance gap.
6. Parametric insurance is disrupting the insurance market
While parametric insurance isn’t a new concept, at RIMS 23, the topic got some fresh attention. Where regular insurance pays out a replacement cost when specific proven damage has occurred, parametric insurance operates differently, and it’s this difference that is causing it to gain in popularity among insurers and insured alike. Parametric insurance pays the insured a predetermined amount of money when certain parameters are achieved, and this is independent of any actual loss. For instance, parametric insurance might pay a farmer when a predetermined amount of rainfall hasn’t occurred during a certain growing cycle, assuming that lack of rainfall will be damaging to crop production. Or the parametric policy might pay out to a company because hurricane winds reached a certain velocity in the location of their insured property. With parametric insurance, the loss is automatically assumed, so both insurer and insured avoid the time-consuming documentation and costly claims processing.
An advantage of parametric insurance is the fast payout– often in mere days. That means insureds can replace and repair any damaged property more quickly. It also means insurers spend less time analyzing costs and approving claims because it’s all triggered by an objective, pre-determined data point, like a tracked rainfall total or wind velocity.
The downside of parametric insurance is determining a credible information source for the data and the appropriate objective data point upon which to trigger the premium. For example, determining what the right wind velocity or number of days without rain should be to trigger the payout, and which data tracking authority to use. It becomes more about predicting risk and damage, rather than assessing it retrospectively. And that makes it hard to determine an appropriate premium.
Another downside to parametric insurance is when the insured incurs more damage from the risk event than the insurance is set to pay. Because it’s not compensating for the actual loss but a predetermined amount, this can leave some insureds with more damage than they can afford to fix.
Time will tell whether insureds find the benefits of parametric insurance outweigh the risks.
What else is on the horizon?
The past five years have changed the face of the risk and insurance industries. What trends are you and your organization focusing on? Is there anything we missed that you’d like to see us blog about? Message us at communications@centurisk.com. We may just feature it as an upcoming topic!