What can Europe learn from trends in the US insurance market?

Loïc Le Dréau, Paris operations manager at FM, took part in a workshop on key trends in the US insurance market at the latest AMRAE conference, which took place from 2 to 4 February. While they remain moderately optimistic about the economic outlook, the main concerns of US business leaders – like their European counterparts – are around coronavirus-related risks, inflation, supply chain disruption, labour shortages and geopolitical instability. How are US commercial property insurers adapting to the diversity of risks their clients are now facing? Some key learning points for European risk managers:

1. The overall trend in pricing on the US insurance market sometimes masks sharply contrasting situations from one company to another.

In general terms, the US economy seems to be recovering from the impact of the coronavirus pandemic faster than in European countries. It is benefiting from an upsurge in consumption and the Biden rescue plan, which includes investments in infrastructure of US$ 1.2 trillion. The effect of labour shortages and supply chain issues on the inflation rate in the United States could prompt the Federal Reserve to raise interest rates.

However, while low rates persist, US insurers are unable to achieve high yields on the investments they make. As a result, they are tending to focus on profits from their clients’ insurance policies.

Moreover, although price increases for commercial property insurance are now slowing, there continue to be real disparities between different sectors and geographical areas, which may be amplified, according to the claims history of each company.

In practice, if insufficient attention is paid to risk management, if there are recurring losses or if claims are concentrated in particular areas, price rises may continue at a significant level, with increases ranging from 15 to 50 or even 60% to cover certain risks. The food industry, heavy industry, waste recycling and the timber and paper sectors, for example, are subject to increased scrutiny from insurers, as are some geographical areas.

2. Prices on the US insurance market are also highly influenced by the change in the level of losses covered.

Natural disasters, in particular, generated significant losses for insurers in 2021. According to the German reinsurer Munich Re, they may have reached US$ 120 billion, making 2021 the second most expensive year for half a century. In addition, the pandemic’s impact on the availability of labour and materials has led to an increase in rebuilding costs following disasters. Finally, insurers have also seen an increase in cyber losses.

Emerging risks are mainly related to the climate, especially secondary events such as tornadoes, hail, torrential rain, etc., which are very difficult to model, as well as supply chain disruptions and the ongoing coronavirus pandemic. A reassessment of property prices and profitability under the combined effects of inflation, climate risks and increasing urbanisation should also be expected.

The increase in losses that may occur as a result of these increased risks may cause prices to oscillate between stabilising and hardening in the future. Different companies may see differing patterns of price rises. For those that are more resilient (i.e., those that manage their risks effectively, are located in less exposed areas or have had few claims in recent years), price rises could be limited to less than 10%.

3. The pandemic has increased the complexity of risks and their interconnection.

As we have just seen, the change in prices on the US market confirms that companies would be well advised to take steps to reduce the potential impact of the risks to which they are exposed, and to increase their resilience.

While there are still ongoing discussions in both the United States and Europe on how best to cover pandemic risks, it is clear that the overall risk landscape is becoming increasingly difficult to manage. In practice, companies are faced with a multitude of interconnected risks.

Climate, supply chain and cyber crime risks must now be anticipated by all companies. Climate change will continue to increase losses due to natural disasters, while the impact of global disruption on supply chains is already being felt.

The various scenarios being played out in the United States underline the importance of developing a holistic view of risk exposure. As a result, FM is working in partnership with its clients to identify possible gaps in their risk management strategy and offer solutions designed to increase the resilience of their businesses.

With this in mind, we are focusing on our cutting-edge research on prevention and our capacity for improving the effectiveness of data-driven decision-making, using tools such as our Resilience Index and Natural Hazard Maps. Our experienced team works alongside risk managers and management teams to help them identify and prioritise risks, and facilitate priority investment decisions to protect their companies’ resilience.

Our scientific and engineering-based solutions allow us to mitigate the effects of business disruption if disaster strikes. Access to these solutions is more essential than ever in a world of new, emerging and interconnected risks, so that businesses have adequate insurance cover and can limit the financial impact of disasters, in both Europe and the United States