Page 29 - Insurance Times December 2021

A faster pace of Innovation and New Product Development under losses faced the additional whiplash of natural
&Introduction is therefore a strategy and the new normal catastrophes with 2011 becoming the costliest year in terms
any company that needs to protect its portfolio book. of catastrophe related losses. In the year 2011 alone, the
Innovation today is not just the result of a direct market Nat-Cat losses were pegged at $ 386 billion. What made this
need but also the desire to provide higher levels of service year a study in itself was the fact that almost 70% of this
efficiency while also tapping the customer's hidden and loss was concentrated in the Asia region (floods in Thailand,
indirect requirement for personalized attention. As an earthquakes in Japan and New Zealand, and tsunami in
example car insurance recently saw a new product Japan). In the US region, the insured losses were at a much
innovation. Pay-as-you-go car insurance created a market higher number than before - $ 35 billion - stemming from
in a vacuum where people who used cars sparingly and would Hurricane Irene, Tropical Storm Lee, and a damaging
often not insure them due to their very short and infrequent wildfire in Texas.
car usage.
Cyber threats and sensitive insurer data breaches, trade
The winning combination of technology innovation using wars, geopolitical risks and more can wreck damage on the
telematics coupled with a tailor made insurance product insurance industry accounting books. A Swiss Re report titled
brought forth a need that can now be serviced while also 'Global Economic and Insurance Market Outlook 2020/2021'
resulting in higher compliance to the law of the land. published on November 13th 2019 on uninspiring prognosis.
Similarly, car insurance for those who are planning a new With a likelihood of recession in US for 2020 at 35%, and
vehicle or those who have multiple cars but drive only one weak leading indicators like PMI, the report forecast a flat
car at a time also are areas where companies are creating combined ratio for the global insurance industry with
products for markets that did not even exist. outlook parameter marked at "Cautious". The report further
predicted that for 2020/21 the number one risk for the
Many will argue that insurance, being a highly regulated insurance industry was trade war risk. However no
sector requiring large balance sheets and investment, often clairvoyant or crystal ball gazer could have forecast that the
works within a framework that is conservative. Since the real risk for the insurance industry in 2020/21 was the
buyer of the insurance (insured) is typically risk averse and outbreak of the Covid-19 pandemic.
in many countries dependant on brokers, insurance as an
industry is slow to change. Products have been introduced A natural corollary of such an outbreak such as the highly
only when they have cleared the dual hurdle of regulatory contagious Covid-19 is the onset of a declining interest rate
approval and acceptance from the insured. This naturally regime. A cut in interest rates usually happens in periods of
has taken time. However, in the VUCA world (volatile, ensuing economic downturns because the governments try
uncertain, complex, and ambiguous) that we live in today, to deter people from hoarding cash and try to incentivise
traditional insurance can no more operate with arcane purchases and loans. Therefore interest rates are cut.
models, unwanted products and legacy data. The need of However negative or low interest rates pose a problem to
the hour for all modern day Insurance Companies is a faster insurers, especially life insurers who offer endowment or
pace of introduction of innovative and transformative fixed interest rate policies. Due to mismatch or imperfect
products. This pace is dictated by changing customer pairing of asset-liabilities, such insurers suffer a long duration
preferences, changing economic microcosm, the availability gap. In Germany, insurers today face a duration gap
of cutting edge technology and the digital tailwind in the exceeding ten years. In a declining interest rate
wings of every insurer. environment the value of assets goes down while the
liabilities stay same. This causes a mismatch and threatens
Risks and Challenges of Insurance to cause serious solvency issues for the company. In such
scenarios, in the downturn, innovation from insurance
Innovation: companies suffers.
Macroeconomic headwinds often stall the efforts of a
company in its endeavours to go global with new product Insurance policies that are typically long tailed liability
innovation. In the recent past, many economic crises have businesses such as Occupational disease claims (asbestos
threatened to derail business operations of insurers. factory workers, environmental pollution exposed staff),
Challenges emanating from the 2008 economic downturn medical malpractice claims, discrimination claims and the
with the accompanying credit crunch caused the insurance like are particularly sensitive to long term risks. These are
industry to contract as sub-normal growth rates in the areas where claims can come in many years after the policy
economy dogged the world. The industry already reeling has lapsed. In such areas innovation is often absent or

The Insurance Times, December 2021 29