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ECONOMY| 12.11.2023

Navigating a Changing Risk Landscape: What Actions Can Insurance Companies Take?

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The pandemic, climate change, the new geopolitical landscape, and cyberattacks—the expanding list of new risks presents a challenge for insurance companies. This is particularly noteworthy given that financial losses in these cases frequently surpass the companies’ capacity for absorption.

The pandemic, climate change, the new geopolitical landscape, and cyberattacks—the expanding list of new risks presents a challenge for insurance companies. This is particularly noteworthy given that financial losses in these cases frequently surpass the companies’ capacity for absorption.

This has opened a gap between what stakeholders expect of the industry and the practical capabilities of insurance companies, as emphasized in The Geneva Association’s report, “The Value of Insurance in a Changing Risk Landscape”.

“With the onset of the Covid-19 pandemic, we observed the emergence of a global and systemic risk that impacted individuals and businesses worldwide simultaneously. This underscores a stark reality about the insurance industry and society: although insurance remains pertinent for a broad spectrum of risks, there are others of such magnitude in terms of financial losses that insurance companies cannot bear the burden alone. Regrettably, this roster of significant risks shows no signs of abating,” explains Jad Ariss, General Manager of The Geneva Association.

Insurance companies have long been associated with absorbing financial risks, but as risks become more complex, customers are now seeking products that go beyond serving as mere safety nets. In response, The Geneva Association conducted a survey examining perspectives across six major insurance markets: the United States, China, the United Kingdom, Japan, France, and Germany. The survey, comprising a representative sample, includes input from individual customers, large enterprises, and industry professionals.

The findings underscore the importance of insurability, with respondents expressing apprehensions about the accessibility and cost of specific types of coverage. This is particularly evident in areas related to longevity, natural disasters, and cybersecurity. Seventy percent of respondents mention potential challenges in securing a pension plan, while fifty percent highlight concerns about insufficient savings for retirement and protection against natural disasters.

The findings also indicate substantial potential for additional risk services, particularly those focused on prevention and assistance. When it comes to choosing insurance, price remains the pivotal factor for individual customers, and all signs point to this continuing in the future.

The importance of risk assessment

Risk assessment becomes particularly important in this context, especially when confronting systemic risks such as climate change and intangible risks. Regarding the latter, the organization specifically identifies factors that encompass reputational loss, sociopolitical instability, and common cybersecurity risks such as data breaches.

“Insurance companies are expected to augment their value proposition by offering risk assessment services that bolster resilience against catastrophes. This includes providing insights into scenarios that encompass both physical and transition risks,” the report indicates.

Built upon a thorough risk assessment, predictive services are assuming an increasingly important role within the insurance sector. These forecasts aid companies in making more precise decisions related to pricing and risk management strategy, outperforming processes that rely on complicated actuarial formulas.

The report further underscores that customers derive direct benefits from these predictive services, particularly in terms of personal safety or healthcare services. Nevertheless, the scarcity of data concerning natural disasters and cyberattacks renders such predictions highly challenging, as explained by Ricardo González García, Director of Analysis, Sectorial Research and Regulation at MAPFRE Economics, during the podcast Economics Café (Spanish version).

“There is a lack of data and limitations in predictive models for extraordinary events that allow for pricing and reserves, whether related to cyber risks or natural disasters. Currently, addressing these breaches remains complex and requires public-private collaborations,” says González.

What actions can insurance companies take?

To sustain their societal relevance in this context, The Geneva Association proposes three pathways that augment their core role of absorbing financial risk:

  • Providing supplementary risk services, including assessment, prediction, prevention, mitigation, assistance, and education.
  • Offering risk and investment products that foster sustainable development.
  • Engaging in public-private collaborations to address the most substantial and intricate risks confronting modern societies.

The survey conducted by the association also offers valuable insights for insurance companies regarding their relationship with customers. Notably, there is a preference for in-person interactions over virtual ones, highlighting the significance of this aspect for companies in the sector.

“The conclusion for the industry is evident: its value proposition is evolving in response to changing risks. Customers and society appreciate insurance companies playing a role beyond mere claims payments, and there is evidence suggesting the sector is poised to meet those expectations,” comments Ariss.

To download the full report click here

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