Challenges Hedged with Optimism
Cyber issues remain a challenge for property/casualty carriers, but executives remain optimistic about growth and innovation in 2016.
At the Insurance Information Institute’s annual P/C Joint Industry Forum in January, former FBI Director Robert S. Mueller set the tone by highlighting cyber security as a top priority for national security and corporate America.
“Developing a cyber security strategy means understanding the threats,” he said, identifying China, Russia and Iran as nations most interested in gathering intelligence on American technology and military operations.
Threats also come from hacktivists aiming to make a political point, criminals seeking to sell stolen data for a profit, and terrorists wanting to cause harm, to name a few.
To manage these risks in the years ahead, the role of chief information security officer (CISO) will grow more prominent, Mueller said. Though he stressed that the head of any organization should not “delegate away” the responsibility of cyber security, a CISO can be dedicated solely to that task and serve as a direct liaison to the CEO.
Insurance companies are particularly vulnerable.
“Hackers know insurers have a motherlode of data.” — Adam Hamm, commissioner, North Dakota Insurance Department.
“Hackers know insurers have a motherlode of data,” said Adam Hamm, commissioner, North Dakota Insurance Department, and regulator representative on the U.S. Financial Stability Oversight Council (FSOC).
“If we don’t get cyber security right, it could critically wound the insurance industry as a whole.”
An estimated 100 million Americans have been affected by data breaches in the insurance industry. That has attracted regulators’ attention.
Speakers at the conference agreed that regulators will become more involved in cyber security in 2016.
The FSOC, for example, has already designated two insurers — Prudential and MetLife — as systemically important financial institutions, though Hamm said he “strongly disagrees” with those designations.
Though not much will change on the state level, Hamm said, companies need to keep an eye on data breach legislation potentially moving through Congress in 2016.
Other risks are coming from apps and services emerging as part of the new sharing economy, which have led to an exponential growth of data.
“Eighty percent of the world’s data was generated in the past two years,” said Hemant Shah, co-founder and CEO, Risk Management Solutions.
With much of that data connected across several platforms, keeping it safe and private presents a huge challenge for organizations, although speakers at the conference agreed that insurers have responded well with policy form adjustments.
Much more work remains, however.
A major barrier to providing more comprehensive coverage is there is limited knowledge of the cyber market, which was estimated at $2 billion written in premium at the end of 2015.
“We need a more granular view of what the cyber market looks like in order to determine premium volume, claims and loss data,” said Hamm.
Soon, carriers selling cyber coverage will be required to supply that information on financial reporting statements.
That granular view may also help insurers better allocate capital. Given the interconnectivity of cyber risk, there is an “accumulation of underlying exposure” that places an insurer at risk of deploying a large amount of its capital in connection with a single incident, Hamm said.
Speakers said the industry relies too heavily on past experience and should be thinking about risk and pricing coverage more from an exposure perspective.
Despite the challenges presented by the interconnectivity of data and its accompanying risks, speakers agreed that advancing technology offers opportunity for growth and innovation.
Executives participating in a panel discussion at the event noted that 2015 was stable for insurers, with 4 percent premium growth and a combined ratio of 97, despite continued poor performance in investment returns.
“This was the fourth-worst year [for investment performance] since 1926,” said Dinos Iordanou, chairman, president and CEO, Arch Capital Group.
“There is a difference between being smart and lucky, and we’ve been lucky.” — Tad Montross, chairman and CEO, General Re Corp.
This year could be worse, he said, due to “reserve redundancies scaling back and deficiencies starting to emerge.”
Despite poor investment returns, low losses in 2012 and 2013 resulted in a $14 billion positive runoff for the property/casualty industry in 2014, according to Tad Montross, chairman and CEO, General Re Corp.
“We are below the 10-year average for Nat CATS,” which has bolstered reserves, he said.
He stressed, however, that insurers should think proactively and price coverage on a prospective basis, rather than on the loss history of the last few years, especially when it comes to storm surge and flood risks.
“There is a difference between being smart and lucky, and we’ve been lucky,” he said.
Low losses and an influx of alternative capital have contributed to an excess of capital in the industry, spurring mergers and acquisitions as well as expansion activity. There have also been buybacks and increased dividends for shareholders.
But Iordanou said that keeping some excess capital available would be “prudent,” especially if 2016 turns out to be more volatile than last year.
Another opportunity for growth cited by executives was Chinese companies looking to break into Western markets over the next several years.
“China will continue to grow, but offers no ROE opportunity in the next five years. Maybe in 10 to 15 years,” said Stephen Catlin, executive deputy chairman, XL Catlin. “But do you want to sit and watch, or do you want to have your toe in the water?”