How Property/Casualty Insurance Is Becoming Less Valuable
I wrote about this some months ago and received many interesting comments. I decided to follow up on the same subject because it is so important.
Value is a relative term often specific to a given asset. For example, if the price of gold declines from $1,800 to $1,200 an ounce, as it has been hoovering, then gold becomes less valuable. The price of insurance is materially set to decline over the next 10 years. This means the declines will happen every year for 10 years. Whether the decline is 90 percent the first year and 1 percent each of the next nine years or the decline is 10 percent per year or 1 percent each of the first nine years and 90 percent the last year, I do not know. I suspect the decline will begin slowly, accelerate, and then slow again with the full decrease being realized by the end of year 10. The overall decrease will be material.
One reason that insurance companies have been so profitable over the last decade is premiums have increased materially faster than claims. If premiums were even softer and matched claims, insurance would already be less valuable. Here is some toxic proof of my point:
The combined ratio (including 2017’s cat claims causing the combined ratio to be tied for the second highest combined ratio in the last 15 years) is only 98.3 percent (unweighted) versus a long-term median of 101.9 percent. The industry is profitable, and one reason is the world is a safer place. They just do not have as many claims, and severity is not increasing enough to offset the decreased frequency.
Going forward, less insurance, relative to GDP, will be required for many reasons including:
- The world will continue to get safer, at least relative to insured property. Much of the concern regarding the world becoming less safe involves perils that are not typically covered.
- Whether it is sharing cars, sharing rooms, or automakers providing insurance when consumers rent a vehicle for a month, the cost of insurance decreases on a mass basis. Insurance costs less per person. Insurance is less valuable.
- Automated water shut off devices will greatly reduce property claims.
- The workplace sensor environment will greatly improve workplace safety.
- The shift from manufacturing and transportation to being desk jockeys is a safer workplace environment overall.
- The safety features on vehicles make driving safer even if driverless cars never arrive.
The world is just going to become a safer place relative to insurance perils making insurance less valuable. The trends shown above will continue showing a safer and safer world. On a GDP basis, the number of claims filed is 25 percent less than two decades ago. That is a huge decrease.
Cyber insurance will take up some of the slack, but until producers learn enough about the coverage to sell it and sell it correctly, and companies buy enough, which will not happen until they understand this complex coverage more completely (and that may never occur), then in the best case scenario, cyber is a small bandage. Insurance simply is and will become less valuable and less important.
Insurance is for a dangerous world. The less dangerous the world is, the less important it is to protect oneself.
Over 10 years (do not be Aesop’s frog in boiling water waiting for the 10th year to do something), the result will be considerable consolidation at the carrier level as they begin matching the consolidation on the distributor level. An interesting unknown is whether leadership at carriers and brokers can adapt to an environment in which insurance is less valuable. I haven’t seen many leaders present a reasonable strategic plan for dealing with this inevitable reality. (Those readers that just can’t fathom insurance becoming less valuable, if you at least agree with the bullet points above, then the only way insurance does not become less valuable is a serious catastrophe, natural forces or financial markets crashing, because the industry now has around $750 billion in surplus, so “little” catastrophes of $5 – $10 billion do not have much effect.) The solutions, when carefully thought through and executed well, work even if I am wrong.
When a person is facing the inevitable, the earlier a plan is built, the better.