June 16, 2021 / by Sean Cam / In blog

The Future of the Catastrophe Insurance Industry: Challenges, Threats and Opportunities

The insurance industry has always been perceived to be a slow player in the transformation space, yet present and future challenges faced by the industry mandate a transformation for survival.

We spoke with Bao Cam, MD and founder of Symfos Ltd, about what he expects to play out over the next 10 years.

1. Can you share with us what you found when you arrived at the insurance industry?

“Business processes as well as IT processes were very siloed with countless inefficiencies” Bao said.

Starting his professional career in the banking industry, Bao moved to insurance as the more interesting sector that he felt was, at the time, “more grounded and more relevant to society as a whole”.

By the end of the 20th century, the Catastrophe Insurance industry began transforming into model-centric businesses, managing risk with complex computer models from the likes of RMS and AIR. However, despite this technological advancement, the industry was still operating with sub-optimal performance.

“The combination of the lack of capabilities and inefficiencies at times would force underwriters to write risks without knowing what impact this will have on their (company’s) overall portfolio, whether they will remain within their risk tolerances or not”.

Yet, just as the industry embraced a technological revolution four decades ago, so too does the industry today face a watershed in the history of catastrophe risk management.

2. What do you feel will be the biggest change in the industry over the next 10 years?

“There will be considerable digital disruption, especially from the nimbler insurers. Through technological innovation, non-traditional and newer players will enter the market force and threaten legacy carriers’ share of the market” said Bao.

Inoperable systems pose a considerable challenge for enterprises attempting to adapt to modern technologies. Current systems have an inherent inability to adapt to the implementation of new tools and operating models. A Genpact survey reports that 68% of insurance companies see legacy systems as the biggest obstacle to digital transformation.

As such, Bao believes that “insurers with large legacy systems will need to spend heavily to transition to an ecosystem approach that can combine their in-house capabilities and partnering with insurtechs such as Symfos”.

The friction between incompatible and outdated legacy systems represents what Bao believes a “primary concern” for limiting growth opportunities within the industry.

Moody’s have reported than the average insurer has between 10 to 14 core systems installed to run their entire risk management, with their data scattered in non-integrated silos or within disparate data architectures and applications. New utilisation of insurtechs such as Symfos’ Orchestra platform have and will continue to help (re)insurers to improve their company operations, flexibility and adaptability to better meet the demands of the market.

3. What exciting developments are coming to the industry?

“The industry is in a position in the creative destruction cycle for great disruption, particularly with AI technology” said Bao when asked what exciting developments he believed were coming to the industry.

As data sources keep growing, organisations will need to adapt to become more data-centric, either by developing or acquiring the necessary tools to analyse their data with. AI technology serves as a not so unfeasible solution.

McKinsey reported that AI technology has the capability to “transform every aspect of the (insurance) industry” by helping to “enhance decision making and productivity, lower costs, and optimise the customer experience”.

A handful of insurers are already embracing the capabilities of AI technology. “Insurers like Lemonade in the US are already using AI tech to detect fraud and simplify coverage and claims” said Bao. Across the Pacific, Chinese insurer Ping An is pioneering AI-powered “disease management” whereby customers share their medication details to reduce health risks and insurance premiums simultaneously while UK start-up Zego, which specialises in vehicle insurance for gig-economy workers such as Uber drivers, are already offering a product that monitors customers after they have bought cover and promises a lower renewal price for safer drivers.

“Once the contentions surrounding AI tech have sufficiently surpassed and public appetite increases, I believe it [AI tech] will rise as a cornerstone of the insurance industry” Bao claims.

4. What do you believe is the biggest challenge for the industry?

When asked what he thought posed the biggest challenge to the industry, Bao did not hesitate to answer.

“Climate change will certainly prove to be the biggest challenge faced by the industry, especially for catastrophe insurers” said Bao.

Stronger and more frequent natural disasters are destroying homes and businesses at record-breaking rates. Hurricane Harvey in 2017 resulted in a total damage of £125bn while the 2019-20 Australian bushfires killed more than 1bn animals and caused more than $4.4bn in damage.

One federal regulator in the US went so far as to suggest that the potential damage from climate change could end up being as severe as the fallout from the mortgage crisis triggering the 2008 financial crisis.

“When climate change reaches the point where the weather and natural disasters increase significantly in frequency and severity, current catastrophe models will be rendered out of date and inaccurate. With increasing uncertainty of climate change, how much can insurers trust existing models and their vendors? And more importantly, how can they accurately price their risks?”

With multiple models side-by-side, insurers can access different views of risk for increased and improved perspective on climate change and navigate new, uncertain environments.

“This makes it even more important that insurers embrace an ecosystem approach allowing them to seamlessly integrate with different models/vendors in order to bolster insurers’ capabilities to manage increasing risk”.

5. How can insurers prepare for change?

“I think the key focus for all insurers, start-up or enterprise, is to focus on investing in new solutions sooner rather than later to futureproof their businesses” said Bao.

As insurtechs proliferate, so too will collaboration and investment opportunities for incumbents who are looking for strategies to respond to change.

“It isn’t just preparing for future unknowns, but also the inevitable” said Bao, “yes there are challenges ahead to consider, but insurers must also close the innovation gap and establish firm foundations for efficient risk management in order to face the future with confidence”.

Innovating new solutions takes time, money, and management focus, so being able to partner with insurtechs is a viable approach to addressing and closing the innovation gap. Embracing and building what Bao earlier described as an “ecosystem” of insurers and insurtechs is imperative to stay ahead of the competition.

“There’s no way of knowing exactly where we will be in five, ten years but the challenges the industry faces are clear as day.”