The P&C insurance industry has been caught in a rather perfect storm of ongoing challenges. In the wake of a global pandemic, the insurance industry now faces unpredictable, unprecedented weather events alongside rising costs, creating a risk environment that insurance leader Peter McMurtrie, a partner in West Monroe’s Insurance vertical, refers to as a “three-headed monster.” It’s a monster, unfortunately, with which the industry is well-acquainted.
A “trifecta” McMurtrie describes as “extreme weather inflating claims severity and loss costs, hyperinflation driving up labor and material costs, and social inflation bloating claims costs.”
It’s an appropriate name for what the industry is experiencing, as this three-headed monster is contributing to the widening protection gap and making some risks too expensive for consumers to insure and unsustainable for insurers to cover.
This creates a vulnerability to large-scale financial loss. Insurers are simply unable to provide adequate coverage at the rate that reflects the current uncertainty of the risk environment, while far too many consumers are canceling insurance policies or opting to lower coverage which has led to more people going underinsured or uninsured.
The Heads Threatening Insurance
The First Head of the Monster is Extreme Weather:
The unpredictability of Mother Nature is one thing, but the growing frequency and intensifying magnitude of unpredictable weather events are of even greater concern. A single hurricane or fire can pass through a residential neighborhood, and within weeks, another CAT event develops and hits weather-stricken areas. Just this past September, the US experienced Hurricane Helene which caused $250 million in damages, and less than two weeks later, Hurricane Milton wreaked havoc even further, and contributed to an additional $50 billion loss. Swiss RE reported global total insured losses topped $132 billion in 2022 alone from weather-related catastrophes, while Capegemini reported climate change is hurting the insurance industry and has been the driving force behind contributing to economic losses increasing 250% in just the last three decades.
The Second Head of the Monster is Hyperinflation:
As the global economy contends with the current inflation crisis, the insurance industry is not immune to its effects. Inflation is one of the leading contributors to the rise in insurance rates, and US insurers have experienced the highest cumulative inflation rate at 20.7% compared to other global markets. Inflation has diminished the buying power of money, meaning premium payments no longer go as far as before and thus necessitates insurers to raise rates even higher to keep up with increasing costs. It is this sustained increase in price levels of goods and services that has far-reaching effects on insurers. Inflation has driven higher claims payouts and operating costs, and increased premiums for consumers. This resulted in policyholders dropping coverage, reducing coverage, or switching carriers to save on insurance. The unprecedented percentage of consumers “shopping insurance” has hit record highs, and poses exposure to the risk of becoming victim to adverse selection as carriers cannot retain profitable customers who are now motivated to leave based on price.
The Third Head of the Monster is Social Inflation:
Per Swiss RE, social inflation is “defined by an increased severity of insurance claims beyond that which can be explained by economic drivers.” While inflation is abating, the pressures of social inflation do not indicate a let-up, as nuclear verdicts are becoming more commonplace, and impacted the rise in litigation costs to have increased 57% over the past decade. In fact, 2023 saw social inflation exceeding economic inflation in driving growth of US liability claims to 7% for the first time in two decades. Social inflation has led to underwriting losses, heightened uncertainty, and reduced insurance capacity. Litigation costs are now the key driver of liability claims in the United States.
Ultimately, it is these combined forces of this three-headed monster, in what McMurtie describes as, “the mighty factors causing carriers to adjust their pricing strategies, reduce or non-renew parts of their portfolios, and in extreme cases, exit certain markets.”
Evolving Landscape of Advanced Risk Assessment
Finding solutions to the challenges created by this three-headed monster is possible by taking advantage of the latest evolution of risk assessment that leverages unconventional behavioral insights that focus on your prospective or current policyholder. By utilizing the powerful combination of these insights and machine learning, insurers can supplement and enhance their current risk assessment alongside traditional variables such as an individual credit score and zip code. This empowers the insurer to more accurately predict future risk, even amidst the unpredictability of the current risk environment. Key benefits include:
- Enhanced Risk Selection: Personalized risk profiles enable smarter pricing, improved underwriting decisions, and a deeper understanding of the insured, leading to greater profitability and more inclusive, fair risk assessment.
- Proactive Risk Mitigation: Allows insurers to rethink their approach to risk management by focusing on preventing losses rather than reacting to them. By understanding the behaviors of policyholders that lead to costly risk occurrences, insurers are able to accurately predict risk and more adequately rate the individual policyholder. Future risks can be proactively mitigated or managed by having a more complete risk profile on policyholders.
- Improved Customer Experience: When applied to risk assessment, behavioral intelligence predicts future risk at an individual level, enabling personalized customer service tailored to the actual risk of each policyholder.
Pinpoint’s Commitment to Insurers
As the industry works to find solutions to the challenges driving the current risk environment. Pinpoint Predictive enhances insurers' risk assessment by using big tech for precise loss predictions and risk scores. CEO Scott Ham notes the company is “able to assess risk profiles with unprecedented precision using trillions of behavioral factors.” Pinpoint aids P&C insurers in managing risk by identifying risk costs, thereby improving loss ratios. The company’s predictions optimize underwriting, customer acquisition, claims, and renewals, offering deeper insights into customer behavior for a fairer insurance experience.
Pinpoint Predictive is a member of Guidewire’s Insurtech Vanguards program. Launched in October 2021, the Insurtech Vanguards is a community of select startups and technology providers, bringing transformative solutions to the P&C industry and making innovation more accessible. As part of the program, Guidewire identifies and highlights the hottest insurtech companies of interest to the P&C insurance industry and connects them with Guidewire customers.