Bring up the insurance industry as fodder for cocktail party conversation, and the universal response is oftentimes a collective yawn. But for those in the know, the insurance sector — with a domestic surplus approaching three-quarters of a trillion dollars — is massive, dynamic, ever-changing and the target of significant disruption; a far cry from humdrum, for sure.
And with 2018 now upon us, the intrigue continues. Here’s a countdown of the top five trends that, in my view, will have the biggest impact upon the industry this year.
No. 5: Mergers and Acquisitions
Expect even more ramped up activity in the M&A market.
There is an enormous amount of capital (particularly, private equity and venture funding) looking to be invested in the insurance business, and so long as brokerages remain profitable, last year’s accelerated rate of purchase and sale transactions likely will continue. Consequently, we will keep seeing large-scale consolidation of a tremendously fractured industry.
No doubt, it is a seller’s market, and the numbers bear this out: through Q3 2017, there were a total of 457 brokerage M&A deals — a record pace that looks to be matched or exceeded in 2018 given the untapped supply of available acquisition targets and interested buyers flush with cash. At the same time, attention will likely also shift somewhat from brokerages to more esoteric assets, such as captive insurers and companies offering back-office services, reinsurance structuring and catastrophe management.
No. 4: The Growth of Cyber Insurance
The data breaches keep on coming.
The most recent one of significance involved the giant consumer credit reporting agency Equifax. Hackers infiltrated Equifax in July 2017, putting at risk the private information of upwards of 143 million American consumers. To put the number in perspective, that is nearly half the population of the U.S. Incredibly, the 2013 hack of Yahoo was even bigger, with every one of the web service provider’s three billion accounts compromised, as announced last October by Yahoo’s parent company Verizon.
Unfortunately, cybercrime is pervasive, which is why — along with the Equifax and Yahoo data breaches — WannaCry, Not Petya and Russian hacking in the 2016 presidential election made headlines.
But the fact is, small businesses are also susceptible to cybercriminals. Statistics suggest that more than half of small businesses nationwide have experienced multiple data breaches; events that can damage reputations and put customers and employees at risk.
In response, the market for cyber insurance is evolving rapidly. And with more and more insurers offering coverage for a business’s liability stemming from data breaches involving sensitive customer information — stolen Social Security, credit card, account and driver’s license numbers — which is typically excluded from general liability policies, the implications of the next big hack will increasingly be borne by those companies underwriting cyber insurance.
No. 3: Marijuana Coverage, It’s All the Buzz
The numbers are undeniable: 29 states plus the District of Columbia have legalized medical marijuana; eight states (along with D.C.) permit the recreational use of pot; an estimated 230,000 people are employed in the “budding” marijuana industry in the U.S.; 64 percent of adults in this country support decriminalizing cannabis; and annual sales generated by the business approached $7 billion in 2017 (projected by some to balloon to $30 billion by 2021).
The upshot is that marijuana is a major industry — one that requires insurance coverage at the commercial and personal lines level.
The good news for forward-thinking insurance and reinsurance companies is that insuring cannabis-related risks is in its infancy. In November 2017, California was the first state to admit a carrier to write policies and offer coverage for marijuana business owners. There are billions of dollars at stake, and proactive insurers have the opportunity to invent the market.
At the same time, federal law makes any form of pot use illegal, making it a bit problematic for would-be players to jump into the business of providing marijuana coverage. This is particularly true given Attorney General Jeff Sessions’ recent reversal of the policy adopted under the Obama administration that mandated non-interference by the federal government with marijuana-friendly state laws. Now, Sessions has ordered federal prosecutors across the country to decide individually how to prioritize resources to crack down on pot possession, distribution and cultivation of the drug in states where it is legal.
Notwithstanding the hiccup resulting from this chilling decision, the momentum toward legalized marijuana is undeniable, and there are likely to be some very interesting developments, insurance-related and otherwise, in 2018.
No. 2: Insurance and Technology – a Match Made in Heaven
The insurtech explosion and resulting marketplace disruption is sure to continue with a vengeance in 2018.
Funding is pouring into the space — nearly $1 billion in Q2 2017, according to Willis Towers Watson and CB Insights — providing good reason to expect ongoing innovation with perhaps one or two major new companies emerging from the dust with truly revolutionary ideas.
The focus now looks to be on customer engagement and a growing demand for greater customization of insurance products driven by the sharing economy, millennials and a desire for single-asset coverage.
The opportunities are abundant. Some examples?
Airbnb hosts who derive income from their residences have created the need for limited commercial coverage without the necessity of comprehensive commercial policies — an offering ripe for insurtech entrepreneurs.
Millennials — those most likely to purchase insurance through an app with a few taps on their smartphones — drive less than previous generations, thus establishing a hot market for lower cost, pay-per-mile automobile insurance. And despite the proclivity of this demographic to shun homeownership (and, with that, the need for homeowners coverage), they do own assets that they want insured. Insurtech is poised to satisfy their coverage cravings.
This is exciting stuff. Along with industry disruption and technological advancement comes an ever-expanding smorgasbord of policy options, which will continue to become available to tech savvy, price conscious consumers raised in an era of instant gratification.
Can it be long before Amazon’s Alexa starts facilitating policy placement? The possibilities are endless.
No. 1: Reinsurance Rate Escalation
Between Hurricanes Harvey, Irma and Maria and record-setting wildfires in California, 2017 will be remembered as one of the costliest catastrophe years ever.
With reinsurance rates relatively stagnant for as long as people can remember, this may finally be the impetus for a change. More specifically, for reinsurers, these disasters may provide the necessary cover to hike rates and tighten terms. Hardening of the reinsurance markets, as industry players look to take back some margin after years of oversupply and lean returns, is likely. Of course, it remains to be seen whether primary markets will be able to pass all, or even some, of the projected rate increases on to the insurance-buying public.
The “perfect storm” of 2017 has only been exacerbated by recent changes to the tax code. Under the new law, large insurers may suddenly be saddled with a tax on reinsurance premiums ceded to offshore affiliates, which will undoubtedly erode already lean margins, drive up primary rate, and allow alien reinsurers to ride on the rate taken by the U.S.-domiciled holding company systems. The result: larger insurance bills. And while no one relishes those, industry experts will probably agree that this shakeup is a good thing.
As reinsurance surplus suffers, so does the stability of the global financial system. Indeed, the stability of financial markets depends on the stability of the global reinsurance business. So, as much as it may pain me to say it: “let them take rate.”
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