The Notebook: No crystal ball? How insurers are predicting risk in an increasingly unpredictable world

Where the City’s thinkers get a few things off their chest. Today, Mike Steel, general manager at Moody’s RMS, takes the Notebook pen.

Past performance is no guarantee of future results

At the bottom of investment adverts or brochures, the community uses the well-trodden disclaimer ‘past performance is no guarantee of future results’ to underline the potential for risk volatility.

Perhaps this disclaimer is also useful when insurers access their wealth of historical data to look ahead. Property and casualty insurers face annual global insured losses that now move across the $100bn (£77.8bn) line, even in years without a major natural disaster.

With weather events displaying distinct climate change signatures, relatively small losses from frequent events such as rainfall, wind, hail, and storms all add up, eating into an insurer’s earnings.

Today’s life insurers, after a 102-year hiatus since the last global pandemic in 1918, had the 2020 global Covid-19 pandemic on their watch.

Historical experience from a time before either global travel or effective vaccines was not helpful. While life expectancy has increased in most countries, a mix of pathogens on one side, and blockbuster medical breakthroughs on the other, makes the future hard to predict with confidence.

Reliance on historical insurance claims experience, or past climate or life expectancy records, in the face of events departing from the historical norm, is not sufficient to make predictions about future events. If the past can’t be relied upon to effectively assess risk, a different approach is required.

With sustained investment in research and development, together with powerful cloud-computing platforms, there is a revolution happening in risk modelling allowing the ranges and variances of outcomes to incorporate future predictions.

As the infamous saying states, ‘never make predictions, especially about the future’, but those who must look into the future need the right tools to able to enhance their view of risk.

GenAI and digital transformation

Generative AI (GenAI) will reach into many industries, and insurance is no exception. Insurance has always been a data-intensive industry, and connecting data throughout the insurance cycle improves understanding of the risks and delivers better products to the customer. Technologies such as cloud-native platforms, integrated applications and GenAI have great potential to bring data together, and unearth insights which have previously been difficult to realise.

Cyber risks

There are projections of 20 to 30 per cent year-on-year growth in cyber insurance. To capitalise on this, businesses need to better understand this dynamic risk. There is a lot to consider: from the motivations of ‘threat actors’ to initiate cyber-attacks, to IT infrastructure vulnerabilities, like unpatched operating systems or back doors to enter software applications. Better understanding of these risks will strengthen confidence in cyber for businesses, investors and insurers.

Catastrophe bonds

The fourth quarter of 2023 was a record breaker for insurance-linked securities (ILS) issuance, including the launch of new cyber catastrophe bonds. ILS is attractive as a differentiated investment within a portfolio. Risks such as hurricanes have been a mainstay for catastrophe bonds, even after the market was tested in 2017, following Hurricanes Harvey, Irma and Maria. To build continued market confidence bondholders need to stay informed of the full extent of the risk and opportunities.

Learnings from earthquakes

After last year’s earthquakes in Turkey, what might be less obvious from outside the insurance industry is how the likes of insurers mitigate future risks. The global scientific community, government agencies to construction engineers, all come together to advance the industry’s understanding and absorb new learnings. When a major event occurs, the insurance industry partners together to develop better insights and understanding.

What I’ve been listening to

Since 2019, Mark Geoghegan has led ‘The Voice of Insurance’ podcast, and some 200 episodes later, the podcast is a must-listen for the industry. It attracts a broad range of leaders who want to discuss how to move the insurance industry forward, challenge conventions and embrace change.

Mark is respected in the industry as he has been an insurance and reinsurance broker and then went on to insurance journalism, and his knowledge and perspectives run through his interviews. To get under the skin of the insurance industry, the core issues, and where the industry heading, this podcast is a great resource.