Year of Challenges Brings Growth, Innovation and Change

By | October 19, 2020

Despite a year of challenges, uncertainty and a halting global economic recovery, the insurance industry remains strong and stable. Though below pre-COVID forecasts, major indicators point to positive rates of growth and a positive return on equity for 2020, which will be welcomed by an industry that has grappled with exposures related to COVID-19, hurricanes, wildfires and outbreaks of civil unrest across the country.

COVID-19 has had material impacts throughout the property and casualty side of the business, resulting in a deceleration in premium growth. It has also produced a sharp decline in the industry’s capacity on a global scale. Certain types of insurance were hit harder than others. Workers’ compensation experienced a sharp decrease in payroll exposure — resulting directly from the loss of 22 million jobs as businesses were forced to shut down. Personal and commercial auto also experienced reduced exposure because people and businesses were driving less and transporting fewer goods, while aviation and marine insurance saw reduced exposures due to travel restrictions and the economic slowdown. At the same time, aggressive actions by the Federal Reserve Board have pushed down interest rates and will have a long-term effect on the industry’s ability to generate material growth in investment earnings.

Despite shrinking by more than one-third during the first and second quarters of 2020, the global economy is making a strong comeback. In the end, the relatively short duration of the 2020 recession will leave the economy in considerably better shape than the financial crisis of 2008 and 2009 and leave the insurance industry on solid financial ground with new learnings setting us on a course toward innovation and change.

A Pandemic, Natural Disasters and Civil Unrest

By mid-2021, we can expect the industry to work through most of the immediate economic and financial impacts of COVID-19. That said, there will be ongoing litigation issues arising from business interruption coverage disputes that could last for years. While early court decisions have generally been decided in favor of insurers, there are roughly 1,100 outstanding COVID-related lawsuits.

We are halfway through the 2020 hurricane season, and we are certain to surpass the insurance CAT losses of 2019. With the continuing wildfires in the West and significant claims arising from civil unrest, these losses will likely reach several billion dollars.

Storms and wildfires will calm as the seasons change, and a vaccine will eventually come for COVID-19. But, there is no season or vaccine for civil unrest. Political uncertainty lies ahead of us, and that’s a wild card in terms of future civil unrest.

What Does It All Mean for the Industry?

With a contentious presidential election looming, many may be wondering what a change in the White House could mean for the insurance industry. According to my research examining the past 70 years, there is no correlation between return on equity (ROE) for the P/C insurance industry and the political party of the president — primarily because hurricanes, earthquakes, wildfires and tornadoes don’t care who is in the White House. These changes do, however, present opportunities for learning and innovation. Once the COVID-related litigation, legislation and regulatory changes are resolved, we will see a burst of innovation. Just look back to the Terrorism Risk Insurance Act (TRIA) passed after 9/11; insurers were spurred to develop terrorism-related solutions for businesses.

Beyond the changes we will see in terms of new products and innovation, we’ll also see changes to the makeup of the insurance workforce. We are seeing efforts in many companies and organizations like the Insurance Industry Charitable Foundation to build a diverse workforce. From my perspective at the University of South Carolina, I see universities actively working to increase minority enrollment across the industry. At USC, which has one of the country’s largest risk management and insurance programs, African-American freshman enrollment is projected to grow by 28 percent over last year, and it has more than doubled since 2016. Hispanic freshman enrollment is up 55% since 2016. As a result, insurers seeking to recruit talent will have access to a diverse pool.

Despite the challenges of 2020, the industry should enter 2021 financially strong. Time and again, when we are hit by large scale events, we emerge with our financial strength intact and will for years to come.

About Robert Hartwig

Dr. Robert Hartwig is Clinical Associate Professor of Risk Management, Insurance and Finance in the Darla Moore School of Business at the University of South Carolina and Director of the school’s Center for Risk and Uncertainty Management. More from Robert Hartwig

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Insurance Journal West October 19, 2020
October 19, 2020
Insurance Journal West Magazine

Agency Technology & InsurTech; Markets: Habitational / Dwellings, Commercial Property