Heightened Volatility Shaping Insurance Market Trends, Risk Decisions

Growing Indicators With Boat Sea Sky Waves

February 16, 2022 |

Growing Indicators With Boat Sea Sky Waves

In its final Global Market Insights Report for 2021, Aon notes the impact of increased volatility on organizations, noting that the impact of that volatility on insurance market trends and risk agendas is readily apparent.

According to Aon's Q4 2021 Global Market Insights Report, while rate increases continued during the fourth quarter of 2021, those increases have moderated and volatility has stabilized, with cyber insurance being the most notable exception. Aon reports fourth-quarter price increases of 1 percent to 10 percent in North America, Latin America, and the Asia Pacific regions, and increases of 11 percent to 30 percent in Europe, the Middle East, and Africa (EMEA) and the United Kingdom.

New capacity has entered the market and insurers are deploying it strategically, with an eye toward reducing volatility, the report says.

With insurers focusing on profitable growth, their underwriting appetite is expanding, according to Aon, though the quarter saw underwriting discipline and scrutiny continuing to increase and risk differentiation continuing to increase in importance.

While most risks renewed with limits at expiring levels during the quarter, there was a growing trend toward insurers reducing the maximum limits they offered, leading to more layers and more coinsurance per placement, Aon says. There was pressure on sublimits for high-hazard risks.

Deductibles stabilized, though the Aon report says that more adjustments will be needed in market segments in which underwriting performance remains strained.

After policies were modified to include exclusionary language at recent renewals, coverage has now stabilized across most lines, Aon says, though climate change and sustainability remain coverage areas to watch.

The Aon report notes that the cyber-insurance market is becoming increasingly complex and volatile as the frequency and severity of losses continue to challenge both insurers and their clients.

"Market conditions remain difficult, with rigorous underwriting along with significant rate and deductible increases," the report says. "Some insurers are imposing coverage restrictions, sublimits, and capacity limitations on ransomware. Global aggregation of losses is a key concern, causing a contraction in global capacity."

In an introduction to the Q4 2021 Global Market Insights Report, Richard Waterer, global risk consulting leader at Aon, identifies several areas of volatility and their impact.

  • While insurance price increases, conservative underwriting, and capacity constraints that resulted from uncertainty around the COVID-19 pandemic have subsided to a large extent, economies and businesses continue to recover from the pandemic. Meanwhile, pandemic-related exclusionary insurance policy language remains.
  • Cyber risks—particularly ransomware—continue to grow and become more complex and volatile. As insurers' risk appetites adjust, coverage options and pricing for cyber insurance continue to evolve.
  • After being challenged by loss frequency and severity, in addition to low interest rates, insurer profitability is strengthening in some market segments, leading to changes in insurers' risk appetites and deductibles.
  • Insurers are becoming more focused on environmental, social, and governance (ESG) issues, looking at both their own ESG exposures and those of their client and business partners.

The Aon report notes that organizations are increasingly challenged by a combination of accelerating and changing known risks such as climate change and pandemics, in addition to new sources of volatility such as complex supply chains, ESG, the growing prominence of intangible assets, and a widening health gap.

While at first glance many exposures like ESG, reputation risk, supply chain, and cyber risk might seem to be unrelated, the Aon report suggests that a closer look reveals shared characteristics. Among other things, one can envision a scenario in which a systemic cyber attack in an organization's supply chain could lead to a business interruption that ultimately damages the organization's brand and reputation.

The report notes that there are often different and limited data sets for these emerging sources of volatility. "Our tendency to rely on [historical] loss data as a measure of future exposure is far less achievable for the risk profile of new forms of volatility," the report says. "However, alternative data sources can be used to develop a view of exposure—whether through the capacity or utilization of a key supplier or changes in public sentiment from key stakeholders—when measuring reputation risk."

Aon offers several recommendations for organizations in this volatile climate.

  • Organizations should assess and reassess exposures, using scenario quantification techniques and stress testing to better understand exposures and guide investment in risk mitigation, management controls, risk financing, and risk transfer solutions.
  • Organizations should broaden their insurance market strategies, as many insurers who experienced favorable results in 2021 may be willing to reconsider risks they'd previously declined or offer more favorable terms. Insurance buyers should explore their options with both local and international insurers.
  • With insurers becoming more selective, organizations should look to differentiate their risk from others by providing sharp detail about the organization's business profile and its investments and risk management efforts.
  • Organizations should begin preparing renewal strategies and goals early, before engaging with insurers, and allow sufficient time to consider alternatives, structure placements, and negotiate terms with underwriters.

Mr. Waterer notes that some of the new forms of volatility are arising from established risks as they change or accelerate, while others are genuinely new exposures.

"For business leaders and risk professionals there is pressure to understand, size, and treat these risks," he says. "For the insurance industry and other providers of capital, there is a race to innovate and develop solutions for the growing proportion of the risk portfolio that is uninsurable."

February 16, 2022