As technology and globalization continue to drive the world’s economy forward, 2018 has brought stark reminders of the risks global companies face doing business—and it’s not even over yet. For commercial insurers, the events shaping the past year reinforced trends that present both acute challenges and opportunities to better serve their clients. We asked AXA XL CEO Greg Hendrick to share his views on notable developments in the commercial insurance sector in 2018 and what to expect as we head into 2019.
Q: The insurance industry has seen quite an increase in M&A activity this year, with more than $39 billion in deals during the first three quarters. What does this trend mean for commercial insurance customers? How does it intersect with general economic trends?
It’s true, 2018 has been a huge year for insurance M&A activity, especially in the property and casualty area. We saw a number of big deals as companies continue to push for consolidation across the industry, including AXA’s acquisition of XL Catlin for $15.3 billion and Marsh & McLennan’s recent announcement of its intention to acquire JLT for about $5.7 billion. Insurers want to build operational scale, grow their balance sheets and acquire as much talent as possible, because scale makes it possible to offer more innovative solutions in more geographies. This is critical because, despite protectionist rhetoric, we see the clients we serve continuing to expand, becoming larger players in the global economy, and we expect this trend to continue. With the AXA acquisition, we’re now the largest global platform for commercial property and casualty insurance, which further increases our ability to help our customers manage risk on a global scale.
Q: At $132 billion, 2017 marked the costliest year on record for insurers for weather disasters, with 60 percent of global insurance payouts caused by Hurricanes Harvey, Irma and Maria. With a few weeks of hurricane season remaining, we don’t know what this year’s losses will amount to, but we do know extreme weather events are generally increasing in frequency and strength. What can we learn from this year so far?
This year we’ve seen Hurricane Michael hit Florida, Hurricane Florence hit North Carolina, Typhoon Mangkhut in the Philippines and China, and those are just a few of the larger storms. Events like these continue to highlight the massive gap between insured loss and uninsured loss. Consider Hurricane Florence, which slammed into North Carolina in September. Insured losses from this storm are expected to range somewhere between $3 billion and $5 billion, while the total economic loss is expected to range between $6 billion and $11 billion. And while Michael is just the most recent, we’re already seeing preliminary loss estimates of insured loss at $6-10 billion. Florence and Michael are examples of the volatile nature of storms as some of the worst damage stems from heavy rains and floods, in addition to wind and storm surges.
Wildfires are another example of the increase in catastrophes and as the number of severe weather events increases, and the behavior of storms and wildfires becomes harder to predict, we expect insurance rates will eventually increase.
Q: So if we’re seeing more losses from extreme weather, why haven’t insurance rates risen already?
Because of another trend that really solidified in 2018—the validation of property catastrophe risk as a diversifying asset class for investors. Interest from investors—pension funds, sovereign wealth funds and wealthy families—has really taken off because interest rates have been so low and investors are looking for yield. In reality, it’s been more than 20 years that we’ve been using noninsurance capital to bear against insurance risks. The market started utilizing catastrophe bonds, or “cat bonds,” in the early 1990s to help insurance companies mitigate the risk of disasters such as hurricanes.
It took quite a while to get to a point where Investors started to consider looking at cat bonds, but the asset class finally turned the corner in 2012 and really accelerated after that.
Q: Looking ahead to 2019, are these sorts of property loss events the biggest risk concern for companies? Or is it something else?
Probably the No. 1 risk for our clients, which are middle-market and large corporations, is cyber risk. Corporate security isn’t getting better fast enough. We continue to look at ways cyber coverage needs to evolve and to design new products to meet our clients’ changing needs.
Hackers are getting bolder and more sophisticated, and governments are passing privacy laws that force companies to deal with these issues. For example, Europe’s General Data Protection Regulation (GDPR), which went into effect May 25, changes the risk posed by cyberattacks and the relevance of cyber insurance. All types of companies, even SMEs, that handle any form of personal data of EU citizens fall under the scope of the new rules, wherever they are based.
Q: Do you anticipate any significant changes in your strategies to helping clients mitigate cyber risks?
Our cyber insurance coverage has continued to evolve, and so have the preventive services we offer to help our clients stave off hackers or other security risks as well as respond post event. Because businesses of all sizes are susceptible to cyber risks, we are currently developing the first ever on-demand product for SMEs with our InsureTech startup partner, Slice Labs.
Q: What are some of the other trends or challenges affecting your strategy around risk management?
Well, for one thing, technology is allowing firms to become more autonomous, and insurers have to be ready to address the liability issues that emerge with more autonomy. Through a partnership with Oxbotica, an AI company specializing in autonomous technologies, we’ve been working to understand what liability issues will affect our clients’ operations as they grow more autonomous. We also established a multidisciplinary Global Autonomy Centre of Excellence.
This team of experts will provide a knowledge pool combining talent, expertise and capabilities in data analytics, underwriting, claims and risk engineering from around the world. Another trend is the growing importance of intangible assets. It used to be that 80 percent of a company’s market cap was represented by physical assets and 20 percent was represented by intangible assets, such as intellectual property and brand value. Now those numbers have flipped. The insurance industry does an excellent job insuring tangible assets like buildings and cars, we have a lot of experience doing that, but not much experience insuring the intangible.
How do you put a price on reputation and then price it with an insurance product? That has long been a challenge for the industry. The key to tackling the risk is having the right crisis response in place. We continue to grow our Crisis Management team insurance offerings and ancillary services, like our global risk consultancy, S-RM, to help our clients avoid trouble where possible, or else face a crisis head on.
Q: What are some of the company’s developments in areas such as AI, machine learning and big data? And how do these AI and big data innovations affect multiple insurance lines?
Artificial Intelligence will be a game changer for our industry, and we want to be at the forefront of this development. Insurance is a data and analytics business as we analyse our client risks and design risk management and risk transfer solutions.
To that end, we’re working with startup partners to explore how to best leverage AI. We’re specifically looking to use AI to capture and analyze data to create new insights into risk and to provide tailored risk solutions for clients, as well as to analyze loss reports more efficiently and much more quickly to predict future claims and make more-informed recommendations.
Q: What about something like the development of driverless vehicles? How does the insurance industry handle something like that?
Driverless vehicles will change the operational models of several industries, from manufacturing and transport to energy and agriculture. We’re in a challenging period right now because you have a mixed environment, autonomous and non-autonomous. So you have a mix of fault. But eventually there will be less fault on personal premiums and more on the manufacturer the vehicle—more of a system of product liability. In terms of accidents, of liability, the messy world is the one in between.
We intend to actively learn by designing and developing new risk and insurance solutions for this new world. Overall, new technologies will help us develop better products for our customers, build new digital distribution channels and create a step change in our technical capabilities.
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