It is Not Just Banks -- P&C Insurers Face Challenges as Well

This past week felt like the world rewatched the existential movie “The Financial Crisis of 2008”. On March 10, insurers watched as banks struggled. But, insurers are co-stars in this feature and the script is unfinished!

There are fundamental differences between 2008 and the current confidence crisis, but the resulting impacts are similar:

• The business environment is riskier
• Expectations for economic growth are lower
• Optimal macroeconomic policy is less clear.

The impact on P&C insurers differs according to their business mix:?

• Personal lines insurers (especially those with a significant auto book), already burdened with inflation and increased severity, face another barrier to profitability. Uncertain economic conditions slow purchases of homes and cars and, thus, reduce consumer demand for personal insurance.
• Commercial and Specialty insurers issued policies based on a very different risk environment. Given the likelihood that many businesses will be under increased financial strain, existing pricing and/or terms & conditions may not be sufficient to yield acceptable profits.
• Insurers with reinsurance contracts (basically all of them) will face even more difficult renewal discussions. Reinsurance pricing will rise as providers factor in the financial crisis.

Immediate steps that P&C insurers should take to protect profitability:

• Re-examine commercial lines policies based on current financial conditions and identify pricing and/or terms & conditions actions that should be taken as soon as possible.
• Review letters of credit (LOC) to identify counterparty risk; work with customers to identify steps to take if loss layers are breached and a “weakened” LOC holder is involved.
• Adjust loss ratio expectations based on new macroeconomic expectations (especially true for personal lines firms).?

Medium term adjustments to align insurance business processes with these volatile times include:

• Implement a continuous financial review process into individual underwriting decisions and reinsurance negotiations (facultative, treaty, LOC, etc.).
• Compliment backward-looking, historical indicators such as agency ratings with immediate data from diverse sources. This mix of data should then feed real-time scenario models and provide a continuous picture of risk.

In the long term, leading insurers will:

• Introduce advanced analytics and AI tools into their predictive analyses of risk at both the policy and the company levels.
• Allow machine learning algorithms to identify previously undiscovered loss patterns to develop more accurate loss forecasts.

I am confident that, as in 2008, insurance regulation and reserving practices will help the industry make it through these challenges. As in any crisis, there will be those that thrive as they take steps to strengthen their firms and position themselves to gain a greater share of profits going forward.

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PS. This is an active area for me, so please reach out or drop a note in the comments. Thanks!

PPS. Special thanks to Amanda Wise for her assistance. As always, appreciate the mentorship from Jonathan Kalman , Karlyn Carnahan , Bryan Falchuk , Sai Raman CPCU, AIAF , Craig Weber Chris Reavis and Patrick Schmid

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