Insurance at an inflection point

Insurance is designed to give people and companies peace of mind that they’re prepared and financially protected should catastrophe strike. In a functioning system, the premiums paid by policyholders are well worth the transfer of risk to insurers, who profit from pricing the risk effectively.

But what happens when the underlying risk landscape shifts dramatically? When catastrophes that were once highly unlikely become more frequent? And when insurers struggle to accurately price risk?

The Era of Exponential Risk has introduced new challenges for the sector, with implications for homeowners, companies, and insurers.

Take extreme weather events and natural disasters, for instance. Insurance risk management has long focused on “primary” or peak peril risks – hurricanes and earthquakes. But due to climate variability, population patterns, and economic development, so-called secondary perils – like tornadoes, severe thunderstorms, wildfires, floods, and hail – have combined to become the leading cause of losses for insurers in recent years, challenging risk management efforts.

As Rob Stevenson of Moody’s writes, it no longer feels appropriate to call these events secondary, preferring the phrase “earnings perils” to reflect the profound impact on the insurance industry’s bottom line. While individually these events are relatively less severe than primary peril risks, they occur much more frequently and in aggregate can result in high losses for insurers. In other words, death by a thousand cuts.

2022 saw a momentous shift. For the first time, insured losses from earnings perils, at $73 billion, overtook primary threats, which stood at $63 billion. The trend continued in 2023 – a relatively benign year from the standpoint of major catastrophes, yet a year that saw over $100 billion in insured losses from earnings risks. According to Moody’s research, France saw over $5 billion in losses from such events in 2022, and Italy over $6 billion in 2023 – levels once unthinkable in Europe.

As is common in other industries in the Era of Exponential Risk, seemingly unrelated trends are accelerating and colliding – with potentially dire consequences for the insurance sector.

In the U.S., a myriad of factors including urban housing shortages, favorable tax policies, and the rise of remote work are causing more people to move to areas at higher risk of flooding, hurricanes, and wildfires – each of which is becoming more intense due to climate change. At the same time, increased labor and materials cost, plus persistent supply chain bottlenecks, has increased the cost of rebuilding in the wake of weather events, with litigation pushing the costs of insurance claims even further.
Read Risk^N in action. Hurricane Katrina

The constellation of threats has led some property and casualty insurers to halt their operations in Florida and California, or to scale back their coverage in other areas, leaving homeowners with fewer options when seeking insurance coverage. The current state of affairs isn’t ideal for anyone – particularly insurers, who ultimately make money through the process of underwriting policies, collecting premiums, and paying claims.

Maintaining the health of state insurance markets is a complicated affair involving many different parties, but clearly risk exclusion cannot be a long-term solution for insurers.

In the Era of Exponential Risk, the solution to death by a thousand cuts is mitigation through millions of datapoints. It means using more granular assessments that better anticipate risks so that insurers can protect businesses, homeowners, and their own bottom lines while identifying new opportunities for growth. And it involves higher-definition, dynamic risk models that empower the industry to better map and manage changes to the physical and digital world.

Moody’s Insurance Solutions address all of the above while providing customers a more holistic view of the changing landscape of today’s risks.

Moody’s leverages advanced physical models and analytics to help insurers understand the various risks associated with their portfolios – including natural and man-made catastrophes – and price them accordingly. These capabilities include detailed probabilistic models for a range of perils – from earthquakes, hurricanes, and flooding to tornadoes, severe thunderstorms, wildfires, terrorism and cyber-attacks – enabling customers to better understand potential losses across diverse and dynamic scenarios.

On top of catastrophe models, Moody’s also offers a suite of financial modeling and forecasting tools, providing insurers with forward-looking views of their financial health in the context of a range of market scenarios. Drawing on Moody’s extensive data and insights, the models incorporate variables like interest rates, inflation, and economic growth, helping insurers to make informed decisions regarding catastrophic events.

And of course, Moody’s seasoned team of analysts and experts contribute invaluable research on creditworthiness, macroeconomic trends, and emerging risks that stimulate thought-provoking discussion among insurance industry experts.

Taken together, Moody’s solutions enable insurance sector customers to transform new risk into value – informing intelligent underwriting decisions that generate growth while protecting policyholders.

As disruptive forces continue to collide in an increasingly interconnected world, the insurance industry will face down new challenges. Moody’s stands ready to collaborate with all key stakeholders – including insurers, reinsurers, brokers, investors, regulators, and policymakers – to create bold, clear, and perceptive solutions that allow companies and consumers to confidently adapt to changes in the underlying risk landscape.