Beyond Fire

Everyone in insurance has heard the “Creation” story, how the industry grew from the ashes of The Great Fire of London – an event that destroyed most of the historic city back in 1666. Today, property and casualty insurers are some of the oldest and most established companies in Canada, and the world.

For years, the industry has served to safeguard businesses and individuals, allowing them to take the risks necessary to grow and prosper. But these days, while p&c insurers still work to help businesses and individuals flourish, they certainly have a lot more to think about than simply protecting against the risk of fire.

The 2014 EY Canadian property and casualty insurance outlook urges insurers to understand and focus on new and emerging risks – from unpredictable weather and catastrophes to digital technology to regulatory and accounting changes – to successfully position themselves for growth going forward.

UNPREDICTABLE WEATHER AND CATASTROPHES

It is no secret that unpredictable weather is on the rise. Last year was a record claim year for Canadian insurers, as the industry was literally turned upside down as a result of a series of significant catastrophes in this country. From flooding in Alberta to ice storms in Southern Ontario that stretched right through to Eastern Canada, the industry saw it all.

And looking just below the surface of these disasters, the reality is worse. The current infrastructure cannot handle these events. Roads, power lines and trees are causing even more issues for homes and businesses, and, unfortunately, there is no easy fix.

For insurers, the confusion surrounding what was covered after the Alberta flooding highlights the need to better communicate with policyholders what exactly is, or – more important – is not covered. In Alberta’s case, many insurers were forced to pay claims for overland flooding – a risk that is not a default coverage in Canada – because the opportunity cost of a damaged reputation for denying these claims was simply too high.

Similarly, the risk of an earthquake in Canada is real, but most Canadians do not have earthquake coverage. As with overland flooding, this may not be obvious to the average policyholder.

A devastating earthquake in one of Canada’s susceptible areas could cripple the insurance industry if companies were forced to pay for uncovered damage, as they were in Alberta.

Those in the insurance industry likely know about the weather’s impact better than most, and so it makes sense that this industry is leading the charge to manage that risk. Still, the weather cannot be controlled and insurers need to learn how to better predict and underwrite associated risks to minimize their losses.

DIGITAL TECHNOLOGY

Harnessing new technology and ever-increasing amounts of data is a hot topic these days – in the insurance sector, and beyond. For p&c insurers, new technologies are creating opportunities to better predict risk, improve underwriting and offer innovative products like never before. But, as always, where opportunities abound, risks lurk.

EY’s outlook notes that with advancements in satellite mapping, for example, insurers can use predictive modelling and geographic maps to determine where risks for natural disasters are more likely to happen. Armed with that information, they can drastically improve their underwriting of those property risks.

Learning to align the right technology and advanced analytics can help insurers realize better underwriting results in other lines of business, too.

Take vehicle telematics, for example. With data about how customers are driving, underwriting can be based on real numbers versus predictions.

While using things like satellite mapping and sensor technology can provide more cost-effective and targeted risk protection, insurers need to ensure they have solid safeguards in place to accurately and confidentially use and store that information. It is critical that insurers review underwriting guidelines to ensure that, even with all this information, they still offer consumers a product at a price they can afford.

These examples are just the tip of the iceberg when it comes to digital. Insurers are the first to admit that legacy technology is holding them back. Looking internally, the right investments can help enhance operating capabilities, and easily provide the kind of business and regulatory information required for strategic, operational and compliance purposes. As noted in a previous report issued by EY, Insurance in a digital world: the time is now, insurers have been slow to embrace digital across the globe (see chart opposite, Top inhibitors of digital growth in insurance market).

That is concerning because building out a comprehensive digital strategy is one of the greatest potential opportunities for insurers today to better meet customers’ changing needs, drive retention and, ultimately, improve bottom line performance.

Whether insurers looking to digital to better predict risk or enhance internal operations, having a customer-centric model needs to be at the forefront of these investments. Once the customer is at the core, aligning the right technology and advanced analytics can help insurers come out on top.

REGULATORY AND ACCOUNTING CHANGES

From corporate governance to cybersecurity to solvency, new regulations are challenging p&c insurers. But the trend towards more, rather than less, regulation seems to be holding, and those insurers that find ways to efficiently manage these requirements will be in a better position to focus on their customers and seize opportunities to grow their business.

Many new regulations are focused on managing risk, which is hardly surprising. Canada’s Office of the Superintendent of Financial Institutions’ Corporate Governance Guideline, for example, is intended to enhance the effectiveness of financial institutions’ boards of directors, through measures such as developing a risk-appetite framework and clarifying the roles of the chief risk officer and audit committee.

Insurers, in the business of risk taking, after all, should be leaders in complying with these kinds of risk-related regulations. New requirements around data quality, data governance and the level of detail provided by reporting systems, however, will require more attention.

Complying with these changes and making sure that their systems, people and data are a focus can only help the business.

NEXT ERA IN P&C INSURANCE

In 2014, risks have undeniably evolved from the threat of fire. The potential impacts of new risks are serious, while the rapid pace of technological innovations is changing the face of the industry.

With widespread adoption of things like cloud computing, mobile technology, social media and other cyber-related exposures – and with demands for transparency stronger than ever before – businesses and individuals are left open to a range of privacy and reputational risks.

In this regard, insurance companies have an opportunity to provide increased coverage, but also services to help insureds mitigate these risks, using analytics and other technologies.

Property and casualty insurance companies need to continue to explore new approaches to risk management and mitigation when it comes to everything from weather to technology to regulation. Those insurers that harness the right strategies to assess and manage these emerging risks can take advantage of opportunities not seen since fire ripped through London almost 350 years ago.

And by leveraging technology and focusing on the customer with these new risks, insurers can imp rove bottom line growth and set the stage for an exciting new era in p&c insurance.