Opportunities for premium growth and for greater relevance are waiting to be tapped by insurers willing and able to cover corporate “giga losses” and take shares of U.S. mortgage credit risks, according to a new report from Aon Benfield.
The reinsurance intermediary highlights seven coverage areas ripe for opportunity in the next five to 10 years, as well as 13 countries that had double-digit growth in the last five. (See related sidebar—”Where Can P/C Insurers Grow?“—for a summary of Aon’s analysis by region.)
The seven growth areas identified in the report titled “Global Insurance Market Opportunities” include some commonly cited by other experts: cyber risks, coverage gaps created by the Ubers and the Airbnbs of the sharing economy, and terrorism, for example.
Adding some more novel ideas, however, Aon Benfield offers the two ends of the risk spectrum: microinsurance and macro corporate liability risks. And rounding out the list with two more unusual prospects, the report highlights yet-to-be designed coverage for damaged reputations or brands and recently available opportunities opening up for insurers to take on mortgage credit risks.
Macro, a.k.a. ‘Giga’ Risks
Focusing on the macro corporate liability risks—liability settlements exceeding $1 billion, referred to as “giga losses”—the report offers the following data points:
- Since 1989, there have been 86 “giga loss” settlements, or 3.3 per year.
- Each year, 2.5 corporate liability settlements can be expected to exceed $2 billion, and 0.5 can be expected to breach the $10 billion level.
- The modeled frequency now attached to a $100 billion event is 5 percent. That $100 billion loss amount is greater than the entire insurance industry’s estimated exposure to U.S. asbestos losses, which comes in at only $85 billion.
The idea of a single accidental corporate event causing such a loss would have been considered incredible before the Deepwater Horizon oil disaster or the Fukushima nuclear event, the report notes. Aon Benfield adds that nearly 50 percent of giga losses result from potentially insurable causes, such as environmental liability, products liability, premises and operations liability.
Yet they aren’t covered now. “As is often quoted in the press, the industry has ‘lost relevance’ in the giga loss liability space,” the report says.
Data and analytics are key to surmounting the challenges of covering giga losses. These events often cluster, with the potential for multiple claims from a single event. But systemic risks and unexpected linkages are among those becoming more tractable with analytics, the report says.
A detailed analysis of pricing for potential coverage for the energy sector included in the report suggests that rates-on-line (premium-to-limit ratios) in the 3-7 percent range could be attractive to buyers and insurers.
Supplying Capital for Mortgage Credit Risk
The report begins with the following observation: “When data and analytics capability are bundled with capital, we have an insurance company. When it is bundled with demand, we have an advisor or broker.”
Expanding on its discussion of the supply and capital side of the insurance company bundle, Aon Benfield suggests that mortgage credit risk offers a “unique opportunity for growth and a way to put insurance capital to work in a new, but well understood and well modeled, risk class.”
“Mortgage credit risk, while new to the insurance industry as an underwriting opportunity, has been studied extensively as an asset class,” Aon Benfield says. The report adds that the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac “have publicly shared individual loan performance data to facilitate the exploration and modeling of the risk and, similar to natural catastrophe risk, there is an industry of modeling firms dedicated to quantifying the risk of mortgage credit default.”
Describing more specifics of the opportunity, the report points out that GSEs (now under U.S. government conservatorship), began sharing credit default risk on their recently acquired mortgages with both the capital markets and the insurance industry in mid-2013, with innovative risk sharing structures. The risk sharing was mandated by their regulator, the Federal Housing Finance Agency. Starting in November of 2013, new insurance programs have come to the market with 12 deals, Aon Benfield reports.
While the prospect of participating in mortgage credit risk sharing structures for the GSEs may seem like a narrow opportunity, Aon Benfield notes that those 12 deals amount to $2.2 billion of limit placed to date. It goes on to predict that future transactions could create an annual opportunity to place more than $6 billion of limit generating as much as $2 billion of premium.
“Historically, insurance opportunities were largely limited to first loss on high LTV mortgages that were supported by monoline mortgage guaranty insurance,” the report says. “This is the first opportunity that the insurance market has had to insure the broad U.S. housing market.”
Added benefits for insurers: “The insurance transactions completed to date cover loans recently acquired by GSEs that are 30-year, full documentation, fixed-rate mortgages with high credit quality and nationwide geographical diversification.
“Every pool of loans subject to a transaction is known in advance and can be reviewed for underwriting quality before commencement of transaction,” the report says.
Branding Cover on the Horizon?
Yet untested—except in limited circumstances—is the prospect of providing coverage for damage to a company’s brand or reputation.
The report explains that reputation and brand insurance coverage offerings out in the market today are typically limited to reimbursing costs of services like public relations management and social media campaigns—rather than “true indemnification for the value loss to the brand”—a value that is difficult to quantify.
“Some cyber insurance policies also include reimbursement for brand expenses in their coverage,” Aon Benfield says. “So far, the take-up of these policies is quite low, suggesting that the ‘content’ or creativity of the industry has not yet brought demand and supply together in a compelling way.”
In fact, the only compelling example shared by the reinsurance broker in the report involves an unnamed insurer providing direct indemnification for brand damage to farmers and fisherman. While the report does not reveal the insurer or any specifics on how brand value is determined, it does reveal the loss trigger—”a specified number of negative comments, for example, about rotten or polluted fish—in conjunction with a mentioned brand name on an Internet message board.”
“Loss adjusters monitor the message boards to validate the claims,” the report says.
Aon Benfield offers to work with insurers to overcome design challenges with other innovations, “possibly leveraging reinsurance capital to address businesses’ deep concerns about reputational and brand risk.”
How likely is brand damage for insurance customers?
An Oxford Metrica study, sponsored by Aon, found there is an 80 percent chance of a company losing at least 20 percent of its market value…during a five-year period” as a result of the failure to adapt to changes in the business environment, customer mismanagement and poor investor relations, the report says.
Why Look at These New Areas?
But insurers might ask, aren’t there opportunities to grow with existing risk products?
The answer would seem to be no, based on Aon Benfield’s analysis within the report of loss trends in several major lines.
“Losses in many existing risk lines are decreasing. For example, road fatalities in Europe dropped nearly 40 percent on average since 2000,” said Stephen Mildenhall, Global CEO of Analytics for Aon, in a podcast introducing the report on the Aon Benfield website.
In the United States, the trends are even more pronounced in the workers compensation and commercial general liability lines. There, the Aon Benfield report displays graphs showing that loss frequencies have plummeted roughly 60 percent (for workers comp lost-time claims and GL occurrence claims) since 1990.
“Over the last decade, we have seen favorable developments in risks. Technology, data and better risk management are making the world safer,” Mildenhall notes.
“This risk management success means the industry needs to embrace emerging risk in order to grow ahead of GDP, especially in the developed world,” he says.
The Aon executive ended his summary with a list of five steps for insurers to take today to become more relevant in five years’ time. (See related article, “Five Steps to Relevance.”)