2022: A tipping point for insurance

2022 will go down as a pivotal year for the (re)insurance industry. Three major events have permanently upset the balance of our sector. The first, in order of appearance, is of course the war in Ukraine. This high-intensity conflict, unprecedented in Europe since the end of the Second World War, is turning European geopolitics upside down and having a devastating impact on Ukrainian civilians, with whom we stand in solidarity as they embody the values of freedom and democracy that Europe holds dear. Even if everything may seem minor beside the human tragedy, this war is also impacting the (re)insurance industry. It is doing so directly through its repercussions on people and property, such as the seizure of aircraft by Russia, but also indirectly with the rise in the price of energy and particularly of gas, which has accelerated the inflationary trend already present in Europe at the end of Covid.

The second major event of the year was the end of the low interest rate environment. And for the insurance industry, that’s a big change. Because of inflation, central banks have changed their doctrine and are no longer absorbing the supply of government bonds to artificially maintain a low-rate environment. Quantitative easing is over. Interest rates are rising, inflation is rising, and so in the short term, the cost of risks and claims is rising too. At the same time, higher interest rates also mean better returns on the invested assets we manage over the medium term. If inflation lasts and wages don’t increase fast enough, that will fuel social risks. Finally, there will be more risk for public finances if the most vulnerable countries in the Eurozone can’t withstand the rise in rates.

In the third change for the sector, 2022 demonstrated that the increased economic and insurance cost of climate change is not cyclical. For the second year in a row, insured losses linked to natural disasters exceeded USD 100 billion, compared with a ten-year average of USD 72 billion[1]. The mismatch between premiums and observed risks has never been so strong.

The (re)insurance industry will not stand still against this backdrop.

Of course, rates will have to adjust to the new environment. But we must go further and collectively invest in prevention, prepare our clients for the challenges raised by the paradigm shift we have entered, and innovate by developing new tools. One example of these is parametric insurance, which guarantees that an insured will receive a pre-determined sum of money if certain thresholds set out in the insurance policy are crossed. This facility has become more relevant with the increasing granularity of available data, and more accessible thanks to technological advances. It is particularly useful in providing rapid assistance to the countries most affected by the impacts of climate change, which are often also the most economically vulnerable. This is what we are doing in Fiji, for example, to protect local farmers against the risk of cyclones and torrential rains, and in Kenya, Ethiopia and Pakistan to protect local shepherds and farmers against the risk of drought.

In this world where uncertainty has become the norm, insurance has a major social utility.

It allows us to project ourselves into the future by pooling risks over time and space. Risk pooling is a real driver of solidarity: if everyone takes out insurance, each person is covered. And that coverage costs less, because the smooth functioning of the system means that the more risks are covered, the lower the rates become. This is a key issue, particularly for agricultural crop insurance and cyber insurance where pooling mechanisms are prevented from working efficiently by the fact that insureds don’t buy enough cover in these areas. The economic model of insurance is built around this value of solidarity. Insurance provides a social foundation that makes it possible to organize life within a society.

That’s why, in a world where risk is increasing, governments should develop legislation to encourage economic actors to better prevent risks and better insure themselves. Going forward, this will be the best way for the community to lower insurance rates and enable economic agents to take risks. The development of a social and solidarity-based economy is essential: our values have a price, as two renowned economists have illustrated perfectly[2]. As for insurers, they must — through technology, the expansion of their customer base and a keen appreciation of market trends — provide a service that is, more than ever, in the public interest.

References

[1] Source: Howden (NOVA)

[2] Le Prix de nos Valeurs (The Price of Our Values); A. Landier and D. Thesmar

This article is also published in French in Le Monde and translated on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.