Growing volatility in a tough marketplace
In the United Kingdom, we have seen the casualty insurance market undergo major shifts in recent years.
Across the market, insurance rates are showing signs of falling to potentially unsustainable levels amid heavily exposed risks, and we are shifting from a hard market into the beginning of the soft market cycle, with the US as a focal point, especially with respect to liability. Due to these combined factors, today’s market is becoming significantly more volatile and harder to navigate, with market behaviors and outcomes becoming increasingly unpredictable.
What is a soft market cycle?
A soft insurance market is a “buyer’s market” with low premiums, broad coverage, and high competition among insurers. Insurance buyers (policyholders) can relatively easily obtain insurance in a soft market.
At the other end of the spectrum, a hard insurance market is a “seller’s market” with high premiums, strict underwriting, and reduced coverage availability. Sellers—or the insurance companies—have the advantage as insurance becomes expensive and harder to find. It’s a cycle because one phase leads to the other. High profits in a hard market attract competition, creating a soft market. The subsequent low profits and high claims of a soft market force insurers to raise prices, triggering a new hard market.
Auto insurance, a major type of casualty insurance, is a great example of this unpredictability and has seen significant change with the rise of artifcial intelligence (AI) and electric vehicles. In the United States especially, losses from car accidents are difficult to predict, as they can vary greatly depending on the state where the accident happened, the time it happened, the court assigned to the case, and the court’s jury. It is not uncommon for relatively minor accidents to result in substantial losses.
Impacts of inflation and social trending factors
I spoke with Sally Roberts, Head of Corporate Casualty in London, about growing volatility, unpredictability, and the economic and social factors affecting the industry. Our discussion was captured on the inaugural episode of Sompo’s new podcast, “Redefining Risk with Sompo.”
On the podcast, we cover the continuing pressure of “social inflation” in the United States and Europe; insurance rates may be falling but rising inflation has continued to have a wide-ranging impact. When general prices go up, insurance claims costs are sure to follow, especially in liability and property insurance, due to underlying impacts on materials, products, and associated expenses resulting in everything costing more. In fact, claims costs have been outpacing the average rate of economic inflation. This phenomenon is known as “social inflation” in the insurance industry. It is a major risk factor, and it is essential that this is reflected in our actuarial models when pricing business.
Redefining Risk with Sompo podcast
Sompo’s experts unpack the trends, challenges, and opportunities shaping the global insurance market. Each episode delivers practical insights and meaningful discussions designed to empower our audience to confidently face the future. Listen to the conversations at Redefining Risk with Sompo.
Besides inflation, the effect of trending social factors has been growing more pronounced over the past few years. The attitudes of younger generations has changed compared with previous generations; they are more empowered, aware of their rights, and willing to seek redress when they feel wronged. That mindset will certainly have an impact on casualty insurance claims moving forward.
Envisioning the future of insurance with AI
In any discussion about market dynamics today, we cannot ignore AI. It raises fundamental questions for us in the insurance industry. What will the industry look like in the future? How will it affect people’s lives? The impact of AI is yet another source of unpredictability in the marketplace.
AI has incredible potential for increasing efficiency. For almost every organization, the automation of manual tasks will free up more time to do business and our clients want to know how AI will be integrated in insurance products, and how that will change risk profiles.
However, the application of AI more broadly is already making insurance coverage much more complicated. In the podcast, we touch on the example of autonomous vehicles. If the AI used to manufacture these vehicles is a source of a car accident, how do we draw the lines on liability? It gets potentially even more serious; what happens if a network for controlling the autonomous vehicles is hit by a cyberattack, and that results in road accidents? Would that sit under a cyber claim, casualty or somewhere else? These kinds of scenarios raise questions about how to handle bodily injury and property damage claims. AI is blurring a lot of lines, so we in the insurance industry will need to define those lines more clearly together with our clients and brokers.
Devising solutions while upholding integrity
During the podcast, we discuss the major challenges posed by market volatility, social inflation, and AI. Far from feeling daunted, we look forward to tackling these challenges head on: Working in the “gray space” to find the best solutions for clients is what drives us.
In practice, this means engaging directly with clients, brokers, and people handling claims and risk engineering to try to fully understand whatever problem we are dealing with and then creating the best coverage solution. We both love the creativity and innovation that goes into this process.
The importance of maintaining our principles, particularly in times when everything is so unpredictable is paramount. Integrity is one of the values that guides everyone across the Sompo Group.
It was fascinating discussing these topics and more on the podcast with Sally Roberts and I encourage you to listen to the full episode.
