Lighthouse #22
by Ron Arnold
Curating the best insurance, insurtech, innovation and leadership content for you.
Ron Arnold
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“The secret of change is to focus all of your energy, not on fighting the old, but building on the new."
Socrates
Insurance TSRs: 2024 Insurance Total Shareholder returns study by BCG is quite an interesting read.
Some headlines that caught my eye:
> Despite 11% TSR in 2023, the industry has mostly delivered returns below the cost of equity over the last 10 years
> The insurance industry delivered solid TSR in 2023 but lags most industries on a five-year horizon
> Size does not propel the TSR of the 100 largest listed insurers
Source: BCG
AI Risk: Swiss Re Institute's new white paper ranks the insurance industry as the 6th most exposed to AI risks today. Key AI risks include data bias, cyber, algorithmic and performance risk, ethical lapses, intellectual property and privacy risks. Other points:
> The insurance industry has an opportunity to provide AI risk solutions but also faces vulnerabilities.
> These risks will grow for sectors like mobility, transportation, and healthcare.
> Frequency and severity of AI-related incidents will vary across industries.
> Insurance companies can address AI risks through existing policies and new products.
Source: SwissRe
Insurance Affordability Deteriorating: The Actuaries Institute have released their latest report on Home Insurance Affordability. Key findings are:
> The proportion of "affordability-stressed" households - those facing insurance premiums of more than four weeks of gross household income – rose to 15% or 1.61 million households in the year to March 2024. This is up from 12% in 2023 and 10% in 2022.
> Affordability-stressed households spend an average of 9.6 weeks of their gross income on home insurance - seven times more than non-stressed households.
> Home insurance premium increases are primarily a consequence of increased reinsurance costs during 2023, driven by rising costs of perils.
> Decreasing home insurance affordability has implications for the banking sector, as lenders require borrowers to purchase insurance. An estimated 5% of Australian households with mortgages are experiencing insurance affordability stress, representing $57b of loan balances and 3% of all home loan assets.
There are perhaps no surprises here. A series of poor home insurance profitability years has seen prices spike. Although, this year both IAG and Suncorp have reported very solid profits. Government levies on premiums are not helping affordability either!
But the reality is that many homes are exposed to "high risk". A recent SMH article reported:
> More than 32,000 homes, or 0.3 per cent of all Australian homes, face a high risk of bushfire, equating to $31 billion worth of property according to this article.
> Almost 141,000 homes are at high risk of riverine flooding - a flood is likely once every 33 years or roughly the duration of a residential mortgage. Those homes total $99.1 billion in value.
The unfortunate reality is many assets are now considered to be in the wrong spot. Granular insurance pricing is shining the light on these assets - go back only 10-15 years and these risks were somewhat disguised thanks to "cross-subsidies". Forward planning and building standards are critical. However, I am afraid this will do little to help the exposure of many assets.
Source: Actuaries Institute , SMH
More Insurer Pricing Scrutiny Coming? The recently announced UK government review into dynamic pricing following the Oasis ticketing outrage, combined with a recent AFCA decision in Australia, underscores the importance of getting pricing practices "right" in the insurance industry. And I don't mean "technically" right, I mean it is essential to ensure that these practices are transparent, fair, and ethical. And then there is AI!
Amongst the things to be considered where an insurer is using techniques like dynamic pricing, behavioural pricing, pricing optimisation etc include:
> Ethical Implications: Does the pricing disadvantage certain consumers?
> Transparency: Are pricing practices clearly communicated to customers?
> Defensibility: Can pricing decisions be justified and explained in a way that is understandable to consumers?
> Legal: Does it meet the tests and requirements which normally revolve around fairness, transparency and explainability?
And a great question to ask yourself: Would you be happy for it to be done to your dad, mum, son or daughter?
Disruption is a term overused and misunderstood: All too often leaders define it is an event or a big bang. That is rarely the case. This is a very good article that provides a better way to think about disruption. My takeaways:
> Leaders must grasp a fundamental truth about disruption: it's constant, happening everywhere, in various sizes and forms.
> The term is often misused, with people failing to recognise it.
> Disruption isn't solely tied to technology; it can manifest in diverse ways.
> Look for signs in your market leader's behaviour – if they imitate disruptors, it may indicate a need for change.
> Detecting disruption involves considering its impact and scale, crucial for investors seeking significant rewards.
> Open-mindedness is key; disruptive ideas may initially seem foolish.
> Disruption doesn't always lead to extinction; adapting is crucial for continued success.
> Recognising disruption early allows for effective adaptation and strategic decision-making in the face of change.
Source: Entrepreneur
“Forced transparency” – the industry needs to prepare!: Forced Transparency - this is one of the emerging themes that we are talking to Boards and insurance executives about.
Insurance is a data, analytics and insights heavy business. This applies everywhere from pricing and underwriting through to claims acceptance and fraud. How insurers arrive at outcomes may not always be clear - at least in the eyes of the consumer. Throw in digital and automated processes and things can be even more opaque.
The industry is currently under enormous pressure and scrutiny about its performance. These pressures are likely to persist, and developments overseas in the UK and the US indicate there will be growing focus on the data, algorithms and insights that are driving and informing decisions.
Duncan Minty provides a great overview and some very useful references in this article about these issues - and the risk of “biased or unfair outcomes” or even unintended outcomes. It is a must read.
Boards and Executive teams really must make sure that they have the mechanisms in place to ensure their practices stack up in a world of “forced transparency”. Source: Duncan Minty
Will the cost of insurance stymy the growth in EV sales?: EV sales are booming in many countries, but buyers look like they are about to get a big shock....Insurance costs are going one direction, and that is up! Great article looking at some of the factors driving EV insurance costs. Some key quotes:
"A lack of engineering expertise often means the battery has to be written off. Batteries can cost up to half the purchase price of the car. A Jaguar I-Pace BEV is priced close to £70,000 (US$86,000) in Britain after tax and a replacement battery will cost about £35,000.
BEV incident claims are currently about 25.5% more expensive than their ICE equivalents and can take some 14% longer to repair. Road collisions involving a BEV can be catastrophic for the vehicle as understanding and competence in rectifying the damage continues to develop,
The most significant challenges originate from the high voltage battery. Although there is a relatively small number of BEVs in the market, there is an understandable but concerning lack of affordable or available repair solutions and post-accident diagnostics,
Thatcham Research data showed that in 2022, 9,400 vehicles were potentially involved in collisions damaging the battery in the U.K. This is estimated to reach up to 260,000 vehicles annually by 2035, and without meaningful change claims will continue to rise disproportionately." Source: Forbes
Car insurers – what business are you really in?: Most auto/car insurers think they are in the game of "insurance". However, they are really part of much bigger game - the game of "mobility". And there are massive changes going on in the mobility game.
Mobility is changing and fast. New ownership models are emerging, micro-mobility and electrification is evolving. And there are new mobility start-ups, rental companies, and banks entering to offer targeted financial products and services. According to McKinsey & Company, European Mobility Finance is a 25 billion euro growth opportunity!
Insurance will be an important aspect of these offerings, and dare I say it, but it is likely to be well embedded, taking advantage of the digital and data foundations of these new offerings.
Insurers should make sure they are actively involved in looking at the opportunities (and threats) these new mobility finance offerings provide. Source: McKinsey & Company
Quite a good embedded insurance summary: Embedded insurance is one of those topics that is attracting more and more interest. It tends to polarise opinions. Some arguing against it, suggesting a lack of competition and transparency for consumers. Others argue it brings convenience and simplicity to a product that people have limited interest in – insurance! This is quite a good summary of “embedded insurance” - what is it, how does it work, what is needed, the plusses and minuses. Source: Medium
Education powered by telematics can improve drivers: CMT's study has confirmed a significant link between telematics program engagement and crash reductions. The study covered 100,000 drivers for three months. It found that high telematics engagement dramatically improved driving safety. Risky drivers who were highly engaged with their telematics program reduced their likelihood of a bodily injury claim by 5.5%.
The study also found that these risky drivers with high engagement improved distracted driving by 20%, hard braking by 9%, and speeding by 27% from month one to month three. This research highlights the importance of program design for usage-based insurance (UBI) programs. Not only will well-designed programs help insurers better segment risk, but they'll also help them reduce it.
Australian and NZ insurers are at best dabbling in this space. It seems like a no-brainer for the motoring clubs to implement these programs.
Source: CMT
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