What will the insurance industry be like in 15 years?
The future will arrive whether the industry is ready or not. And while even so-called experts are no better than the average person in predicting it, what’s most important about thinking about what the future will hold is just that – thinking, according to Greg Rubel, SVP- Binding Authority at the excess and surplus lines insurance carrier, Ace Westchester.
“The actual predictions are not important, it’s more about the process. Getting us to think … about how we’re going to react if they came true and what we need to do today in order to be ready to get there early,” Rubel said during a presentation at the annual meeting of the Texas Surplus Lines Association in November 2015.
Clarifying that his views of the future are his own and not necessarily those of his company, Rubel said there are mega trends that many experts generally conclude are coming. Among those trends that are bound to impact the insurance industry are big data and its use, autonomous vehicles and creative financing of catastrophe risks.
“There’s so much data out there. … It’s incomprehensible for the human mind. Without a computer would we have concluded [the best way] to make traffic better, flow better during rush hour? And to make it safe it was actually better to increase the speed limits instead of decrease them? That’s the type of thing that big data can provide,” Rubel said.
Currently there are a lot of questions about how regulators will allow big data to be used in the insurance industry but there is opportunity there for wholesalers, according to Rubel.
“In terms of submission data, who has it? Is it the carriers first or is it the wholesalers? This is one thing that maybe gets me in trouble with my fellow carrier brothers but I think in the future wholesalers will assemble that data and sell it to the carriers they represent,” Rubel said.
He added that if he were an insurance wholesaler, the first thing he would do is look at his agency contracts to make sure that he owns the rights to that data.
“To me it doesn’t make sense if I’m a wholesaler to take the data I’m getting and type it into a carrier’s portal. Instead type it into your own portal, gather it, and then sell it in some way to the carriers you represent,” he said.
More and more, in order to survive as independents, brokers will need to become specialists. That’s one of the areas where the importance of data can’t be ignored.
“There’s all that data to be digested and wholesale brokers likely in the future will become more of a specialist in a particular industry, where they know healthcare or they know transportation,” he said.
And at some point “binding producers are going to use the data they have gathered to become more of a coach to the carriers they represent,” Rubel said.
Changes that are occurring in transportation now and those that are coming in the future will undoubtedly affect insurance markets.
“Autonomous cars, drones, something called mag-lev technology on the trains – those are coming. There’s very little doubt about it, it’s just a matter of when,” Rubel said.
One area in which the insurance industry is likely to feel the earliest and biggest impact will be in commercial trucking.
Already Daimler Corporation has made significant strides in auto pilot technology, Rubel said. “They are truly so much farther than we imagine. … They’re going to start selling [autonomous vehicles] within 8 to 10 years.”
They “will be safer, there will be fewer accidents and the other big thing, [they] will keep the equipment moving,” he said.
“But these vehicles are expensive. What I think you’re going to see is larger fleets comprising fewer risks. You’ll also see fewer accidents. You’ll probably see lower loss costs and that in turn will drive insurance rates down,” said.
Because of these changes there will be a potential for lower revenues for firms that specialize in trucking.
“It’s something to be aware of if you’re a company that specializes in long haul trucking. … Supply and demand is going to drive those rates down,” he said.
Tradeable Cat Exposures
“Is today’s property market hard? No – it’s soft. What if I told you in 15 years we’re going to look back and say this was a good market? Wouldn’t that be kind of depressing?” Rubel asked
But at some point there are bound to be changes in the way catastrophe bonds are sold and that will have a huge impact on property insurance markets, he said.
Right now cat bonds are sold in billion dollar increments and they cover large areas of exposure – such as the East Coast or from the Texas coast to Mississippi. They are highly illiquid, but at some point someone’s going to figure out a way to make them less so.
“If you look at the history of the stock market, it’s the same type of thing. A long time ago in order to buy stocks you had to buy in 100-lot shares. That meant if a stock costs $50 and you had to buy a hundred you had to buy $5,000 of that stock,” Rubel said.
He said there may be derivative-type instruments that will allow insurers to trade wind exposures. Or it may be that in the future there will be mutual funds that specialize in buying coastal wind exposures.
“There’s no reason you couldn’t use this model for hail exposures in Oklahoma and earthquake in California. … It could be a lot like what we saw in the housing market and the selling of mortgages. The possibility exists. And so we could end up with all that capital coming in because it’s just another investment alternative,” he said.