The Hirigoyen Group

Insurance trends: Factors shaping society are changing insurance

New technology, climate change, economic upheaval, social unrest — the factors driving change throughout the United States and the rest of the world in 2016 will have huge ramifications for the commercial insurance industry as well.

With all of this change, who will be the winners and who will be the losers? The even money is on first that modify their business models ahead of the curve, as well as those firms that have built flexible, nimble models and can adapt quickly to seismic business, cultural and political shifts.

Here are eight trends to watch in 2016 that will shape the future of this business:

1. By the end of 2016 there will be fewer commercial insurers than there are today.

Two mergers shaped the industry in 2015: XL Ltd’s $4.3 billion acquisition of the Catlin Group and ACE Ltd.’s $28.3 billion acquisition of Chubb Corp. Analysts predict more merger and acquisitions as companies try to match their competitors in size. Insurance Information Institute (III) President Robert Hartwig said factors that will spur more consolidation include an abundance of capital in insurance and reinsurance, a strong dollar that devalues premiums outside the United States, low interest rates along with low debt financing costs, and limited prospects for organic growth.

For U.S. businesses, this is likely to mean lower insurance costs. For commercial insurers, this could mean end of some familiar household names.

2. The industry may be tested by cyber risk.

Screen Shot 2016-01-06 at 4.47.34 PMCyber insurance – coverage for risks from such Internet-based risks as data destruction, extortion, theft, hacking, and denial-of-service attacks – is viewed as a growth opportunity for insurers. Such risks are typically not covered in commercial general liability policies, and an estimated 50 U.S. insurers offer stand-alone cyber insurance policies. It’s estimated that cyber insurance premiums will increase by 300 percent over the next five years

In December, however, Stephen Catlin, executive deputy chairman of XL Catlin, voiced serious concern about the industry’s ability to insure such risk. Cyber, he said, “is the most systemic risk that I’ve ever encountered in my insurance career.” He foresaw situations where a “collapse” of the Internet would jeopardize transportation, the flow of global capital and other vital commerce. He called for a “CyberRe,” a reinsurance backstop similar to the U.S. federal terrorism insurance backstop.

Rating agency A.M. Best said that global cyber security risk could cost the insurance industry “multiples of what a nuclear loss would cost.” Insurers have yet to be tested by a possible cyber risk catastrophe.

3. Terrorism insurance will remain a growth business.

Screen Shot 2016-01-06 at 5.09.27 PMTerrorist attacks in Paris, San Bernardino and on the Colorado Springs Planned Parenthood clinic have led to an upsurge in terrorism purchases among U.S. businesses. Although 63 percent of U.S. businesses have some form of terrorism insurance, “Nothing sells insurance against a tragedy like a tragedy,” says III’s Hartwig. With a requirement that property damage from such an attack exceed $5 million to trigger coverage – a threshold not met in recent attacks, as well as in the 2013 Boston Marathon bombing – the utility of such coverage may be questioned, but III foresees a continued spike in purchases of the coverage, especially in smaller cities.

4. Workers’ compensation insurers will make progress with the opioid problem.

For many years, the use of opioids has been a major concern for workers’ compensation insurers, as opioid prescriptions for injured workers to treat pain has led to addiction and abuse.

Screen Shot 2016-01-06 at 5.11.17 PMThis month, the U.S. Centers for Disease Control and Prevention reported that deaths from opioid drug overdoses tripled between 2000 and 2014, the most recent year for which data is available. It added that 61 percent of all drug overdose deaths in 2014 involved some type of opioid.

This year, the federal government will issue long-awaited guidelines for opioid prescriptions. Relief may also come from another source: medicinal marijuana, which has been approved in several states. The state of New Mexico has allowed the prescription of medicinal marijuana as “pain reducing,” and the Governor of Massachusetts has indicated he is open to the idea. Until the federal government – which still considers marijuana illegal – changes its stance, insurers who operate nationally will continue to refuse to pay for such prescriptions in workers’ comp cases.

5. “China’s Warren Buffett” and other Chinese tycoons will acquire more insurers.

Regulatory approvals are nearly complete for the acquisition of Southfield, Michigan-based Meadowbrook Insurance Group by Fosun International. Fosun is a Chinese conglomerate headed by Chairman Guo Guangchang, often called “China’s Warren Buffett.” Guo has spent $4 billion on insurance companies in Bermuda, Portugal and the United States. Fosun is also close to completing the acquisition of a German private bank. With a slowing economy beginning to drive capital out of China, watch for cash-rich Chinese companies to take advantage of U.S. market conditions and acquire more insurers in this country.

6. Companies will begin to prepare for the decline of auto insurance.

Screen Shot 2016-01-06 at 4.45.10 PMAuto and technology firms in the United States, Europe, China, Japan and elsewhere are racing to develop self-driving cars. Accounting and advisory firm Ernst & Young predicted in 2015 that one consequence of this change will be the reduction in the size of the auto insurance market by 60 percent within 25 years. We are entering a period where insurance costs may be lowered – or even eliminated – for auto owners who yield control of their vehicles to autonomous systems, while those who continue to drive will see their costs increase.

With such a technological advance, more of the risk of automobiles eventually may be borne by manufacturers, in product liability insurance costs. Insurers contacted for this blog gave little, if any, indication of what they’re doing to prepare for this, other than taking a “wait and see” approach. In the end, the future of auto insurance may rest in the hands of consumers willing to give up the steering wheel.

7. The reinsurance business will undergo major challenges – among them, a new business model.

Screen Shot 2016-01-06 at 6.57.10 PMReinsurers provide insurance capacity to insurers, cushioning the impact of major losses on insurance companies. The lack of major weather events since Superstorm Sandy in 2012 (and, prior to that, Hurricanes Katrina, Rita and Wilma in 2005) have led to lower property reinsurance rates – another boon to insurers. Munich Re recently reported that the cost of natural disasters in 2015 was the lowest since 2009.

Analysts predict reinsurance rates will fall by 10 percent in 2016. A.M. Best has said that conditions are actually worse for reinsurers than they appear, as reinsurers have released reserves to compensate for deteriorating results.

Also attracting attention have been moves by Warren Buffett to reduce his holdings in major global reinsurers. Buffett’s company, Berkshire Hathaway, still has an appetite for risk; for example, making a new initiative to sell commercial insurance online. But his emphasis on insurance has led many to question the long-term future of some reinsurance companies.

8. The biggest change: the role and purpose of insurers

Perhaps the most dramatic trend evolving in the insurance industry is occurring in the very role of insurers: from companies that pay for losses, to companies that are paid prevent them. This is predicted to result from development from the “Internet of Things,” in which technologies will monitor risk, hazards and exposures, and provide the data needed to adjust systems and take protective measures – whether on a cargo ship, in a factory, an office complex, a restaurant, a home or an employee. For example, this week insurer AIG announced it had invested in a wearable technology startup that is developing tools to help predict and prevent workplace accidents.

Risk management and loss prevention have long been functions of insurers. Now, as they utilize such technologies as telematics to monitor driving habits, they are becoming more involved in monitoring risks. As technologies advance, their role is evolving to place a greater emphasis on preventing losses, rather than compensating for them.

The insurance industry touches many aspects of our lives, and enables entrepreneurs and other risk-takers to launch new ventures and create new innovations. If it is to continue to fulfill that role, it will need to be ready to respond to dramatic — and even unforeseen — changes in society.