00:00:04:16 - 00:00:46:02
Eric Stenson
I'm Erik Stenson with Guy Carpenter. Welcome to this episode of Fo[RE]sight: A Guy Carpenter podcast series, bringing you unmatched insights on trending challenges and our solutions, delivered by Guy Carpenter, experts on the vanguard of thought leadership within the reinsurance industry. Today, Guy Carpenter's Ariah Tough, from Strategic Advisory, and Risha Mahadeo, InsurTech and innovation expert joined their colleague, Jered Gusso, to discuss how Guy Carpenter's Regional and Mutual Company segment is supporting clients as they face continued uncertainty defined by the challenging insurance and reinsurance market environment.
00:00:46:04 - 00:00:57:16
Eric Stenson
The second focus of our conversation offers highlights on how regional and mutual clients can find their best path through the insured tech environment. Over to you, Jared.
00:00:57:18 - 00:01:20:24
Jered Gusso
Thanks, Eric. I'm Jered Gusso, and I serve as the liaison on the Guy Carpenter Regional Mutual Company segment, which is one of 12 segments that enable Guy Carpenter customized offerings based on shared traits among clients. The segment's committed to sharing thought leadership and market insights with our 120-plus segment specialists and 300-plus clients. I'm excited to be part of this discussion.
00:01:20:26 - 00:01:26:24
Jered Gusso
Before we get started, let's do some brief introductions. Araya, why don't you kick it off?
00:01:26:26 - 00:01:57:25
Ariah Tough
Hi, Jared. Thanks for having me here today. I am a property casualty actuary, and I've been with Guy Carpenter for two and a half years now, coming from nearly a decade in actuarial consulting. Strategic advisories involved in all sorts of problem-solving opportunities for our insurance clients, ranging from enterprise risk management to predictive analytics. We work with regional and mutual companies to provide custom capital models, pricing studies and growth game plans.
00:01:57:27 - 00:02:30:04
Ariah Tough
I specifically enjoy working with companies to manage and understand their strategic positioning entail risk through capital modeling. Risha?
Risha Mahadeo
Thanks Araya. I'm Risha Mahadeo, and I am part of Guy Carpenters InsurTech Center of Excellence. Over the last few years, we have been advising a number of clients—mostly regional mutual carriers—on how to navigate the InsurTech ecosystem. This includes categorizing different solution providers and how certain startups fit into the overall insurance value chain,
00:02:30:07 - 00:02:45:11
Risha Mahadeo
vetting companies, helping with the selection process for clients looking to partner with and/or purchase services offered by initial techs. And lastly, providing insights concerning innovation and how to create that culture within an organization.
00:02:45:13 - 00:03:01:23
Jered Gusso
Thanks, Risha. And speaking of insights Ariah, Guy Carpenter recently published our snare testing report through our partnership with NAMIC using AI confidence benchmark models. Could you explain why scenario testing needs to be top of mind in today's environment?
00:03:01:25 - 00:03:36:07
Ariah Tough
True, Jared. And to clarify for the audience, NAMIC is the National Association of Mutual Insurance Companies. Scenario testing can be a crucial component of the overall enterprise risk-management process. Regulators, ratings agencies, and management all want to ensure the longevity and solvency of an insurance company. A solid capital model, supplemented with scenario testing, is one way to show these stakeholders that management is proactively planning for the unknown future.
00:03:36:09 - 00:04:07:20
Ariah Tough
Creating a comprehensive capital model is a fast-tracked way to digest the various risks and interactions of those resources for an insurance company. Adding scenarios brings an additional dimension to capital modeling expanding, beyond the historical variance experienced for any one risk source. For example, during the last 35 plus years, insurance companies have been operating in a low-interest rate environment.
00:04:07:22 - 00:04:29:28
Ariah Tough
Running an insurance company amid high inflation entails a whole suite of new considerations—from asset allocation to claims handling. Viewing modeling results, an insurance company within the economic backdrop of high inflation can give management new insights into potential pain points for such an operating environment.
00:04:30:00 - 00:04:42:01
Jered Gusso
Yes, indeed. Management has certainly had to make more strategic decisions and monitor their portfolio more closely in today's environment. Is there a way for companies to measure how they perform relative to their peers?
00:04:42:04 - 00:05:19:11
Ariah Tough
Yes. It is important to assess how a company’s performance and sensitivities relative to their peer cohort. We segmented companies by four characteristics: size, region, line of business and ownership structure. These segments allow for peer-to-peer comparisons and insights into which company characteristics are most vulnerable to each of the scenarios we tested. We have been presenting results to many companies with their own bespoke peer list to see how they perform within the baseline and selected scenarios.
00:05:19:13 - 00:05:32:00
Jered Gusso
While I'm not surprised to hear each company is eager to see how their competition is performing, could you go into more detail on the report itself? Perhaps provide the listeners with a high-level overview of what the report actually covers?
00:05:32:02 - 00:06:08:10
Ariah Tough
I really encourage listeners to read the full report available to everyone and the Guy Carpenter and NAMIC websites. But here's the overall premise: we performed a stochastic capital model for each property casualty company using their underwriting and reserve performance and asset allocation as provided in their financial statements. After getting the baseline capital model—which is our best guess of what will happen in one year—we layered on additional stress metrics to rerun the capital model under various potentially adverse environments.
00:06:08:12 - 00:06:15:12
Jered Gusso
Okay. So, now we have an understanding of the methodology. Specifically, what scenarios did you model?
00:06:15:14 - 00:06:58:17
Ariah Tough
We chose five scenarios after speaking with our mutual and regional clients. Increased hurricane severity, severe convective storm with increased tensions, cyber sabotage, inflation and stagflation.
I'll share results covering the first two weather scenarios now. The hurricane scenario considered increased likelihood of category four and five hurricanes while keeping overall frequency consistent, as directed by our parent advisory team. This scenario resulted in $0.6 billion of loss to the industry and $0.2 billion of loss for mutuals.
00:06:58:19 - 00:07:38:22
Ariah Tough
For every dollar of surplus that stock companies stood to lose in the hurricane scenario, mutuals are expected to lose a dollar and $0.04. The speculate the storm, or STS scenario, showed the greatest negative divergence in performance for mutuals. It considered an increase in STS losses in line with the observed losses from 2019 to 2021, coupled with a 20% increase in retention for all property catastrophe reinsurance. Mutuals lost more than $2 of surplus for every dollar of surplus forfeited by stock companies in this scenario.
00:07:38:25 - 00:08:15:16
Ariah Tough
While that is a big difference in performance, the good news here is that the dollar amounts of loss are still significantly less than the economic related scenarios of inflation and stagflation. For STS, the industry is expected to lose $5.3 billion, with mutuals making up $3.2 billion of that.
Risha, what innovative solutions and tools are you seeing to help companies tackle the occurrence and cost of uncertain catastrophic events?
00:08:15:19 - 00:08:55:04
Risha Mahadeo
There are several ways insurance companies are managing for uncertain catastrophe events, and I think we can summarize this with three key approaches. So first, leveraging artificial intelligence, or AI, data and analytics today has become easier for insurers to access satellite imagery, geospatial and weather data, historical claims information and other relevant third-party data. Additionally, this is possible in real time to better understand, model and predict weather patterns and catastrophe risk, which, you know, ultimately aims to improve underwriting processes and help insurers achieve more accurate pricing.
00:08:55:07 - 00:09:01:27
Risha Mahadeo
Believe it or not, this has become a crowded space with over 100 InsurTechs offering these particular solutions.
00:09:02:00 - 00:09:08:19
Jered Gusso
While streamlined access and analysis of data is a clear benefit, Risha, what is a second key approach?
00:09:08:21 - 00:09:34:16
Risha Mahadeo
The second approach is developing new products. And when I say this, I'm thinking specifically of parametric insurance products. Parametric covers are based on predefined targets such as rainfall levels or sustained wind speed, for example. This type of product has been gaining traction, especially for weather-related events and regions where perhaps there is a lack of capacity or appetite from more traditional markets.
00:09:34:18 - 00:10:11:06
Risha Mahadeo
It is increasingly viewed as an important risk-transfer mechanism for addressing global protection gaps. One company that comes to mind uses proprietary machine learning algorithms on an incredible amount of weather- and ground-trade data to underwrite and provide reinsurance for policies or just parts of policies that cover specific wildfire risk. As the Parametric market continues to grow, enabled by great data capture, we will continue to see more emerging insurance solutions targeting other product segments and lines of business, such as agriculture and cargo.
00:10:11:08 - 00:10:47:04
Risha Mahadeo
And lastly, I just want to briefly mention claims. Parametric lends itself nicely to efficient and transparent claims settlement. However, for catastrophes, we also see almost instant disaster response and the utilization of drones and satellite imagery to assess damage in real time in honestly traditionally hard-to-reach areas that, unfortunately naturally fall victim to severe weather events.
Ariah Tough
Wow. There are so many solutions to aid in insurance companies’ risk selection and monitoring. With catastrophe exposure continuing to be a concern for the industry,
00:10:47:06 - 00:11:01:12
Ariah Tough
I can see why these tools are attractive for a number of companies. From a capital modeling perspective, we plan to continue scenario testing new weather possibilities as a source of uncertainty for the industry.
00:11:01:14 - 00:11:12:24
Jered Gusso
Thanks Ariah. Another growing source of uncertainty today is cyber. Could you talk to us about cyber sabotage scenario and the report? Is it really as dramatic as it sounds?
00:11:12:26 - 00:11:49:16
Ariah Tough
It resulted in $30 billion of loss for the industry and 12 billion for mutuals. The cyber sabotage scenario reflects the impact of a widespread cyber attack with the intent of causing significant damage. It was based on a vulnerability discovered in an open-source error logging code. The scenario considers what would have happened if this vulnerability fell into the wrong hands, causing losses of personal or commercial lines from things like manipulated smart home devices, autonomous vehicles, or inventory control systems.
00:11:49:18 - 00:11:58:18
Jered Gusso
Interesting stuff Ariah. Okay, we've covered severe weather and cyber sabotage. What about the last two scenarios, inflation and stagflation?
00:11:58:21 - 00:12:26:06
Ariah Tough
Now we're getting to the good news for mutuals. The two scenarios that took the lion's share of losses are also the two scenarios in which mutuals did best compared to stock companies. The inflation scenario considered the ramifications of higher-than-expected inflation rates impacting losses paid in the year, and reserve losses yet to be paid out. For every dollar of surplus stock companies lost compared to the baseline scenario,
00:12:26:08 - 00:12:59:29
Ariah Tough
mutuals lost only $0.58, which is an incredibly defensive position for mutuals in an uncertain economic environment. This was the second-largest scenario in terms of impact, resulting in $139 billion in loss for the industry and $38 billion of lost surplus for mutuals.
Risha Mahadeo
Wow, $139 billion in loss is four times the loss impact from the cyber scenario. Ariah, which types of companies did you find are most impacted by inflation?
00:13:00:01 - 00:13:33:18
Ariah Tough
Inflation was most concerning by region for national companies, followed by northeast-focused companies. Interestingly, by size—the smallest— those that write less than $20 million in premium are expected to lose the most surplus during the inflation scenario. We found, using AI, that the biggest predictor of pain from the inflation scenario was from a company's reserve leverage ratios, followed by their written premium as a proportion of policyholder surplus.
00:13:33:20 - 00:14:08:09
Ariah Tough
I'll tell you a bit more about our last scenario: stagflation. Stagflation was the most severe scenario, projecting a drop in policyholder surplus of $190 billion for the industry and $63 billion for mutuals. This scenario considered the impacts of an economic downturn partnered with high inflation rates. It had the biggest hit to both sides of the balance sheet, assets and liabilities, thus driving some pretty disastrous results for some companies.
00:14:08:11 - 00:14:43:14
Ariah Tough
Luckily for mutuals, they're better protected from this scenario than stock companies, only losing $0.73 of policyholder surplus compared to each dollar lost by stock companies.
Risha Mahadeo
$190 billion dollars is greater than I would have imagined. Given the potentially disastrous results you've been describing, Ariah, are insurance companies at an even greater risk of insolvency in this particular scenario?
Ariah Tough
Yes. Where only one-quarter of companies were expected to lose money in 2022,
00:14:43:17 - 00:14:58:06
Ariah Tough
that proportion raises to more than three-quarters in the stagflation scenario. Moreover, nearly one in eight companies are expected to lose more than 25% of their surplus under this scenario.
00:14:58:08 - 00:14:59:10
Jered Gusso
These are great insights, Ariah.
00:14:59:10 - 00:15:29:15
Ariah Tough
Risha, my team has been considering some worst-case adverse scenarios. What InsurTech solutions do you have in mind for insurance companies to protect themselves from these potential economic disasters?
Risha Mahadeo
I am sure no one will be surprised to hear that, unfortunately, there are no magical InsurTech solutions for inflation or stagflation. However, there are always areas for improvement when we think of operational efficiency.
00:15:29:17 - 00:15:56:24
Risha Mahadeo
Today, there exists an abundance of solutions targeting every single point in the insurance value chain. Insurers are leveraging technology solutions to streamline routine tasks and reduce manual work. For underwriting, there are many advanced solutions that enable straight-through processing, and layered on top of this, we now have the use of AI and machine learning to further improve underwriting efficiency, risk assessment and pricing accuracy.
00:15:56:26 - 00:16:01:26
Jered Gusso
Interesting, Risha. What can you tell us about from a claims perspective?
00:16:01:29 - 00:16:30:02
Ariah Tough
From a claims perspective, insurers are now able to create what we call a touchless claims environment. This involves different levels of automation at each stage of the claims-handling process, from vast numbers of loss, all the way through to create a seamless experience for policyholders. Think instant responses through AI chat bots, efficient claims, triaging immediate damage estimates, using computer vision and even effective fraud detection.
00:16:30:04 - 00:17:04:13
Ariah Tough
Insurers are also now achieving a reduction in IT costs by using cloud computing to store and access data more efficiently, whilst also improving collaboration among different teams. In summary, embracing technological advancements and innovative solutions ultimately saves on the costs of inefficiencies we see in the business. The hope here is that this hyperactivity can counteract market factors that are more challenging to control, just like inflation.
Ariah Tough
Risha, hmm, AI chat bots, cloud computing, touchless claims…
00:17:04:15 - 00:17:26:16
Ariah Tough
these all sound so interesting, but also overwhelming. Do you have any advice or guidance for companies who are not as far along on their innovation journey?
Risha Mahadeo
I do, absolutely. There are a number of pitfalls and challenges we have seen clients work through over the last few years. And it may be helpful for our listeners to take away a few key factors for success:
00:17:26:18 - 00:17:59:15
Risha Mahadeo
Firstly, it is imperative to have a clear digital-transformation strategy and also have leadership buy-in and support, with the understanding that a return on investment for these initiatives may be a few years way. Leaders and managers need to embrace and encourage a culture of continuous improvement and innovation within the organization. Failing fast does not only apply to Silicon Valley startups. Becoming more agile and adaptable to changes and drivers of competition is advantageous.
00:17:59:18 - 00:18:28:15
Risha Mahadeo
But continuously monitoring and evaluating progress is also a key part of that journey. Also, invest in technology that complements your business model. Rather than blindly adopting every shiny InsurTech solution, carefully select the tools that will improve your operations, but that can also be tailored to your current infrastructure, technology needs and available resources. One final point I will make is to remain focused on Customer Experience.
00:18:28:17 - 00:18:57:07
Risha Mahadeo
By definition, customers could be both the policyholders of a carrier, as well as independent agents and brokers out in the field. In our industry, Customer Experience is the crux of the business and a major indicator for success.
Ariah Tough
Thanks, Risha. And if all else fails, our clients certainly know who to seek out for advice!
Before we close, I'd like to go back to the topic of scenario testing and note some key takeaways for listeners:
00:18:57:09 - 00:19:32:03
Ariah Tough
First, a solid capital model supplemented with scenario testing, is one way to show regulators and rating agencies that management is proactively planning for an unknown future. Second, adding scenario testing as a dimension provides new insights, expanding beyond the historical variance experienced for any one risk source. Third, mutual and regional companies are more vulnerable to the hurricane and STS scenarios and outperformed in the inflation and stagflation scenarios.
00:19:32:05 - 00:19:44:01
Ariah Tough
And last, these results demonstrate the value of capital models based on the company's own financial statements and peer-to-peer analysis for strategic insights.
00:19:44:03 - 00:20:04:12
Jered Gusso
Well, we've covered a lot today! Thanks, Ariah and Risha. This has been an interesting discussion on topics that are definitely top of mind in management meetings across the board. With the investments Guy Carpenter has made in our Strategic Advisory and InsurTech Center of Excellence, it's clear to see that Guy Carpenter is well positioned to support companies with their strategic initiatives.
00:20:04:14 - 00:20:15:17
Jered Gusso
Whether it's scenario or stress testing, capital modeling, volatility growth, or navigating the ever-changing insurer tech space, we are here to serve our clients and provide solutions.
00:20:15:20 - 00:20:41:04
Eric Stenson
Well, thanks very much, Jered, and thank you to Ariah for sharing insights into scenario testing and how it affects the mutual segment. And to Risha, for telling us about technical solutions and how they help insurers in their underwriting and claims activities. Anyone wanting to learn more can reach out to their Guy Carpenter representative, or visit GuyCarp dot com and click on Explore Solutions.
00:20:41:07 - 00:20:59:21
Eric Stenson
Please look for the next episodes in our series as we address additional themes connected with climate, cyber and other key issues affecting the reinsurance environment. And thank you to our audience for sharing this time with us and listening to Fo[RE]sight: A Guy Carpenter Podcast Series.
Eric Stenson
I'm Erik Stenson with Guy Carpenter. Welcome to this episode of Fo[RE]sight: A Guy Carpenter podcast series, bringing you unmatched insights on trending challenges and our solutions, delivered by Guy Carpenter, experts on the vanguard of thought leadership within the reinsurance industry. Today, Guy Carpenter's Ariah Tough, from Strategic Advisory, and Risha Mahadeo, InsurTech and innovation expert joined their colleague, Jered Gusso, to discuss how Guy Carpenter's Regional and Mutual Company segment is supporting clients as they face continued uncertainty defined by the challenging insurance and reinsurance market environment.
00:00:46:04 - 00:00:57:16
Eric Stenson
The second focus of our conversation offers highlights on how regional and mutual clients can find their best path through the insured tech environment. Over to you, Jared.
00:00:57:18 - 00:01:20:24
Jered Gusso
Thanks, Eric. I'm Jered Gusso, and I serve as the liaison on the Guy Carpenter Regional Mutual Company segment, which is one of 12 segments that enable Guy Carpenter customized offerings based on shared traits among clients. The segment's committed to sharing thought leadership and market insights with our 120-plus segment specialists and 300-plus clients. I'm excited to be part of this discussion.
00:01:20:26 - 00:01:26:24
Jered Gusso
Before we get started, let's do some brief introductions. Araya, why don't you kick it off?
00:01:26:26 - 00:01:57:25
Ariah Tough
Hi, Jared. Thanks for having me here today. I am a property casualty actuary, and I've been with Guy Carpenter for two and a half years now, coming from nearly a decade in actuarial consulting. Strategic advisories involved in all sorts of problem-solving opportunities for our insurance clients, ranging from enterprise risk management to predictive analytics. We work with regional and mutual companies to provide custom capital models, pricing studies and growth game plans.
00:01:57:27 - 00:02:30:04
Ariah Tough
I specifically enjoy working with companies to manage and understand their strategic positioning entail risk through capital modeling. Risha?
Risha Mahadeo
Thanks Araya. I'm Risha Mahadeo, and I am part of Guy Carpenters InsurTech Center of Excellence. Over the last few years, we have been advising a number of clients—mostly regional mutual carriers—on how to navigate the InsurTech ecosystem. This includes categorizing different solution providers and how certain startups fit into the overall insurance value chain,
00:02:30:07 - 00:02:45:11
Risha Mahadeo
vetting companies, helping with the selection process for clients looking to partner with and/or purchase services offered by initial techs. And lastly, providing insights concerning innovation and how to create that culture within an organization.
00:02:45:13 - 00:03:01:23
Jered Gusso
Thanks, Risha. And speaking of insights Ariah, Guy Carpenter recently published our snare testing report through our partnership with NAMIC using AI confidence benchmark models. Could you explain why scenario testing needs to be top of mind in today's environment?
00:03:01:25 - 00:03:36:07
Ariah Tough
True, Jared. And to clarify for the audience, NAMIC is the National Association of Mutual Insurance Companies. Scenario testing can be a crucial component of the overall enterprise risk-management process. Regulators, ratings agencies, and management all want to ensure the longevity and solvency of an insurance company. A solid capital model, supplemented with scenario testing, is one way to show these stakeholders that management is proactively planning for the unknown future.
00:03:36:09 - 00:04:07:20
Ariah Tough
Creating a comprehensive capital model is a fast-tracked way to digest the various risks and interactions of those resources for an insurance company. Adding scenarios brings an additional dimension to capital modeling expanding, beyond the historical variance experienced for any one risk source. For example, during the last 35 plus years, insurance companies have been operating in a low-interest rate environment.
00:04:07:22 - 00:04:29:28
Ariah Tough
Running an insurance company amid high inflation entails a whole suite of new considerations—from asset allocation to claims handling. Viewing modeling results, an insurance company within the economic backdrop of high inflation can give management new insights into potential pain points for such an operating environment.
00:04:30:00 - 00:04:42:01
Jered Gusso
Yes, indeed. Management has certainly had to make more strategic decisions and monitor their portfolio more closely in today's environment. Is there a way for companies to measure how they perform relative to their peers?
00:04:42:04 - 00:05:19:11
Ariah Tough
Yes. It is important to assess how a company’s performance and sensitivities relative to their peer cohort. We segmented companies by four characteristics: size, region, line of business and ownership structure. These segments allow for peer-to-peer comparisons and insights into which company characteristics are most vulnerable to each of the scenarios we tested. We have been presenting results to many companies with their own bespoke peer list to see how they perform within the baseline and selected scenarios.
00:05:19:13 - 00:05:32:00
Jered Gusso
While I'm not surprised to hear each company is eager to see how their competition is performing, could you go into more detail on the report itself? Perhaps provide the listeners with a high-level overview of what the report actually covers?
00:05:32:02 - 00:06:08:10
Ariah Tough
I really encourage listeners to read the full report available to everyone and the Guy Carpenter and NAMIC websites. But here's the overall premise: we performed a stochastic capital model for each property casualty company using their underwriting and reserve performance and asset allocation as provided in their financial statements. After getting the baseline capital model—which is our best guess of what will happen in one year—we layered on additional stress metrics to rerun the capital model under various potentially adverse environments.
00:06:08:12 - 00:06:15:12
Jered Gusso
Okay. So, now we have an understanding of the methodology. Specifically, what scenarios did you model?
00:06:15:14 - 00:06:58:17
Ariah Tough
We chose five scenarios after speaking with our mutual and regional clients. Increased hurricane severity, severe convective storm with increased tensions, cyber sabotage, inflation and stagflation.
I'll share results covering the first two weather scenarios now. The hurricane scenario considered increased likelihood of category four and five hurricanes while keeping overall frequency consistent, as directed by our parent advisory team. This scenario resulted in $0.6 billion of loss to the industry and $0.2 billion of loss for mutuals.
00:06:58:19 - 00:07:38:22
Ariah Tough
For every dollar of surplus that stock companies stood to lose in the hurricane scenario, mutuals are expected to lose a dollar and $0.04. The speculate the storm, or STS scenario, showed the greatest negative divergence in performance for mutuals. It considered an increase in STS losses in line with the observed losses from 2019 to 2021, coupled with a 20% increase in retention for all property catastrophe reinsurance. Mutuals lost more than $2 of surplus for every dollar of surplus forfeited by stock companies in this scenario.
00:07:38:25 - 00:08:15:16
Ariah Tough
While that is a big difference in performance, the good news here is that the dollar amounts of loss are still significantly less than the economic related scenarios of inflation and stagflation. For STS, the industry is expected to lose $5.3 billion, with mutuals making up $3.2 billion of that.
Risha, what innovative solutions and tools are you seeing to help companies tackle the occurrence and cost of uncertain catastrophic events?
00:08:15:19 - 00:08:55:04
Risha Mahadeo
There are several ways insurance companies are managing for uncertain catastrophe events, and I think we can summarize this with three key approaches. So first, leveraging artificial intelligence, or AI, data and analytics today has become easier for insurers to access satellite imagery, geospatial and weather data, historical claims information and other relevant third-party data. Additionally, this is possible in real time to better understand, model and predict weather patterns and catastrophe risk, which, you know, ultimately aims to improve underwriting processes and help insurers achieve more accurate pricing.
00:08:55:07 - 00:09:01:27
Risha Mahadeo
Believe it or not, this has become a crowded space with over 100 InsurTechs offering these particular solutions.
00:09:02:00 - 00:09:08:19
Jered Gusso
While streamlined access and analysis of data is a clear benefit, Risha, what is a second key approach?
00:09:08:21 - 00:09:34:16
Risha Mahadeo
The second approach is developing new products. And when I say this, I'm thinking specifically of parametric insurance products. Parametric covers are based on predefined targets such as rainfall levels or sustained wind speed, for example. This type of product has been gaining traction, especially for weather-related events and regions where perhaps there is a lack of capacity or appetite from more traditional markets.
00:09:34:18 - 00:10:11:06
Risha Mahadeo
It is increasingly viewed as an important risk-transfer mechanism for addressing global protection gaps. One company that comes to mind uses proprietary machine learning algorithms on an incredible amount of weather- and ground-trade data to underwrite and provide reinsurance for policies or just parts of policies that cover specific wildfire risk. As the Parametric market continues to grow, enabled by great data capture, we will continue to see more emerging insurance solutions targeting other product segments and lines of business, such as agriculture and cargo.
00:10:11:08 - 00:10:47:04
Risha Mahadeo
And lastly, I just want to briefly mention claims. Parametric lends itself nicely to efficient and transparent claims settlement. However, for catastrophes, we also see almost instant disaster response and the utilization of drones and satellite imagery to assess damage in real time in honestly traditionally hard-to-reach areas that, unfortunately naturally fall victim to severe weather events.
Ariah Tough
Wow. There are so many solutions to aid in insurance companies’ risk selection and monitoring. With catastrophe exposure continuing to be a concern for the industry,
00:10:47:06 - 00:11:01:12
Ariah Tough
I can see why these tools are attractive for a number of companies. From a capital modeling perspective, we plan to continue scenario testing new weather possibilities as a source of uncertainty for the industry.
00:11:01:14 - 00:11:12:24
Jered Gusso
Thanks Ariah. Another growing source of uncertainty today is cyber. Could you talk to us about cyber sabotage scenario and the report? Is it really as dramatic as it sounds?
00:11:12:26 - 00:11:49:16
Ariah Tough
It resulted in $30 billion of loss for the industry and 12 billion for mutuals. The cyber sabotage scenario reflects the impact of a widespread cyber attack with the intent of causing significant damage. It was based on a vulnerability discovered in an open-source error logging code. The scenario considers what would have happened if this vulnerability fell into the wrong hands, causing losses of personal or commercial lines from things like manipulated smart home devices, autonomous vehicles, or inventory control systems.
00:11:49:18 - 00:11:58:18
Jered Gusso
Interesting stuff Ariah. Okay, we've covered severe weather and cyber sabotage. What about the last two scenarios, inflation and stagflation?
00:11:58:21 - 00:12:26:06
Ariah Tough
Now we're getting to the good news for mutuals. The two scenarios that took the lion's share of losses are also the two scenarios in which mutuals did best compared to stock companies. The inflation scenario considered the ramifications of higher-than-expected inflation rates impacting losses paid in the year, and reserve losses yet to be paid out. For every dollar of surplus stock companies lost compared to the baseline scenario,
00:12:26:08 - 00:12:59:29
Ariah Tough
mutuals lost only $0.58, which is an incredibly defensive position for mutuals in an uncertain economic environment. This was the second-largest scenario in terms of impact, resulting in $139 billion in loss for the industry and $38 billion of lost surplus for mutuals.
Risha Mahadeo
Wow, $139 billion in loss is four times the loss impact from the cyber scenario. Ariah, which types of companies did you find are most impacted by inflation?
00:13:00:01 - 00:13:33:18
Ariah Tough
Inflation was most concerning by region for national companies, followed by northeast-focused companies. Interestingly, by size—the smallest— those that write less than $20 million in premium are expected to lose the most surplus during the inflation scenario. We found, using AI, that the biggest predictor of pain from the inflation scenario was from a company's reserve leverage ratios, followed by their written premium as a proportion of policyholder surplus.
00:13:33:20 - 00:14:08:09
Ariah Tough
I'll tell you a bit more about our last scenario: stagflation. Stagflation was the most severe scenario, projecting a drop in policyholder surplus of $190 billion for the industry and $63 billion for mutuals. This scenario considered the impacts of an economic downturn partnered with high inflation rates. It had the biggest hit to both sides of the balance sheet, assets and liabilities, thus driving some pretty disastrous results for some companies.
00:14:08:11 - 00:14:43:14
Ariah Tough
Luckily for mutuals, they're better protected from this scenario than stock companies, only losing $0.73 of policyholder surplus compared to each dollar lost by stock companies.
Risha Mahadeo
$190 billion dollars is greater than I would have imagined. Given the potentially disastrous results you've been describing, Ariah, are insurance companies at an even greater risk of insolvency in this particular scenario?
Ariah Tough
Yes. Where only one-quarter of companies were expected to lose money in 2022,
00:14:43:17 - 00:14:58:06
Ariah Tough
that proportion raises to more than three-quarters in the stagflation scenario. Moreover, nearly one in eight companies are expected to lose more than 25% of their surplus under this scenario.
00:14:58:08 - 00:14:59:10
Jered Gusso
These are great insights, Ariah.
00:14:59:10 - 00:15:29:15
Ariah Tough
Risha, my team has been considering some worst-case adverse scenarios. What InsurTech solutions do you have in mind for insurance companies to protect themselves from these potential economic disasters?
Risha Mahadeo
I am sure no one will be surprised to hear that, unfortunately, there are no magical InsurTech solutions for inflation or stagflation. However, there are always areas for improvement when we think of operational efficiency.
00:15:29:17 - 00:15:56:24
Risha Mahadeo
Today, there exists an abundance of solutions targeting every single point in the insurance value chain. Insurers are leveraging technology solutions to streamline routine tasks and reduce manual work. For underwriting, there are many advanced solutions that enable straight-through processing, and layered on top of this, we now have the use of AI and machine learning to further improve underwriting efficiency, risk assessment and pricing accuracy.
00:15:56:26 - 00:16:01:26
Jered Gusso
Interesting, Risha. What can you tell us about from a claims perspective?
00:16:01:29 - 00:16:30:02
Ariah Tough
From a claims perspective, insurers are now able to create what we call a touchless claims environment. This involves different levels of automation at each stage of the claims-handling process, from vast numbers of loss, all the way through to create a seamless experience for policyholders. Think instant responses through AI chat bots, efficient claims, triaging immediate damage estimates, using computer vision and even effective fraud detection.
00:16:30:04 - 00:17:04:13
Ariah Tough
Insurers are also now achieving a reduction in IT costs by using cloud computing to store and access data more efficiently, whilst also improving collaboration among different teams. In summary, embracing technological advancements and innovative solutions ultimately saves on the costs of inefficiencies we see in the business. The hope here is that this hyperactivity can counteract market factors that are more challenging to control, just like inflation.
Ariah Tough
Risha, hmm, AI chat bots, cloud computing, touchless claims…
00:17:04:15 - 00:17:26:16
Ariah Tough
these all sound so interesting, but also overwhelming. Do you have any advice or guidance for companies who are not as far along on their innovation journey?
Risha Mahadeo
I do, absolutely. There are a number of pitfalls and challenges we have seen clients work through over the last few years. And it may be helpful for our listeners to take away a few key factors for success:
00:17:26:18 - 00:17:59:15
Risha Mahadeo
Firstly, it is imperative to have a clear digital-transformation strategy and also have leadership buy-in and support, with the understanding that a return on investment for these initiatives may be a few years way. Leaders and managers need to embrace and encourage a culture of continuous improvement and innovation within the organization. Failing fast does not only apply to Silicon Valley startups. Becoming more agile and adaptable to changes and drivers of competition is advantageous.
00:17:59:18 - 00:18:28:15
Risha Mahadeo
But continuously monitoring and evaluating progress is also a key part of that journey. Also, invest in technology that complements your business model. Rather than blindly adopting every shiny InsurTech solution, carefully select the tools that will improve your operations, but that can also be tailored to your current infrastructure, technology needs and available resources. One final point I will make is to remain focused on Customer Experience.
00:18:28:17 - 00:18:57:07
Risha Mahadeo
By definition, customers could be both the policyholders of a carrier, as well as independent agents and brokers out in the field. In our industry, Customer Experience is the crux of the business and a major indicator for success.
Ariah Tough
Thanks, Risha. And if all else fails, our clients certainly know who to seek out for advice!
Before we close, I'd like to go back to the topic of scenario testing and note some key takeaways for listeners:
00:18:57:09 - 00:19:32:03
Ariah Tough
First, a solid capital model supplemented with scenario testing, is one way to show regulators and rating agencies that management is proactively planning for an unknown future. Second, adding scenario testing as a dimension provides new insights, expanding beyond the historical variance experienced for any one risk source. Third, mutual and regional companies are more vulnerable to the hurricane and STS scenarios and outperformed in the inflation and stagflation scenarios.
00:19:32:05 - 00:19:44:01
Ariah Tough
And last, these results demonstrate the value of capital models based on the company's own financial statements and peer-to-peer analysis for strategic insights.
00:19:44:03 - 00:20:04:12
Jered Gusso
Well, we've covered a lot today! Thanks, Ariah and Risha. This has been an interesting discussion on topics that are definitely top of mind in management meetings across the board. With the investments Guy Carpenter has made in our Strategic Advisory and InsurTech Center of Excellence, it's clear to see that Guy Carpenter is well positioned to support companies with their strategic initiatives.
00:20:04:14 - 00:20:15:17
Jered Gusso
Whether it's scenario or stress testing, capital modeling, volatility growth, or navigating the ever-changing insurer tech space, we are here to serve our clients and provide solutions.
00:20:15:20 - 00:20:41:04
Eric Stenson
Well, thanks very much, Jered, and thank you to Ariah for sharing insights into scenario testing and how it affects the mutual segment. And to Risha, for telling us about technical solutions and how they help insurers in their underwriting and claims activities. Anyone wanting to learn more can reach out to their Guy Carpenter representative, or visit GuyCarp dot com and click on Explore Solutions.
00:20:41:07 - 00:20:59:21
Eric Stenson
Please look for the next episodes in our series as we address additional themes connected with climate, cyber and other key issues affecting the reinsurance environment. And thank you to our audience for sharing this time with us and listening to Fo[RE]sight: A Guy Carpenter Podcast Series.