Two areas of concern are particularly challenging to insurance industry leaders: higher property loss claims and a fast-changing cyber sector. Learn how insurers, insured parties, and self-insurers are responding.
Changing threats and evolving risks are inherent concerns in the insurance industry. Staying abreast of such developing issues is a constant priority for insurance companies, the businesses and individuals they insure, and companies with self-insurance or captive insurance exposure.
In recent years, two specific areas of concern have challenged customers while also demanding active and attentive management on the part of insurers, including organizations that are self-insured or covered by captive insurance companies as part of their risk management strategies.
One of these challenging issues is the ongoing volatility of the property insurance market; the second is the rapidly evolving field of cyber insurance and cybersecurity risk management. Although these are far from the only issues currently affecting the industry, they have been characterized by especially fast-changing developments that can significantly affect companies’ overall business models as well as their day-to-day operations.
One of the most pronounced trends in the insurance industry has been a steady increase in both the size and number of property insurance claims. A variety of factors contribute to this trend, and its effects can be seen in the form of significant – in some instances dramatic – rate increases over the past several years. Comparable trends also can be seen in both private passenger and commercial auto insurance, commercial general liability, umbrella insurance, and other liability lines of business, but it is the commercial and residential property insurance sectors that have been particularly volatile of late.
Of course, sharp rate increases are the inevitable consequence of steadily increasing insured losses. According to one leading reinsurance brokerage’s analysis, total global insured losses from natural catastrophes reached $118 billion in 2023.1 What’s more, although the losses in 2023 were up sharply, the year was not an anomaly. As another analysis shows, 2023 was the sixth year of the past seven in which insured losses topped the $100 billion mark.2
It is also important to note that major catastrophic losses are not the only factors at work here. Many of the losses in 2023 were driven by high-frequency and lower-dollar “secondary” catastrophe events rather than low-frequency and higher-dollar “primary” events such as major earthquakes or tropical cyclones that reached land.3
Multiple factors contribute to the rising levels of global insured losses. Some of these factors include a rise in exposure values and replacement costs due to continued construction in high-hazard areas and a general inflationary environment that continues to drive up both property values and repair costs. These pressures are exacerbated by growing population densities in areas that are subject to natural hazards – such as coastal communities and regions susceptible to wildfire risk – leading to a higher volume of exposed assets.
Several recent natural disasters demonstrate the compounding impact of these simultaneous trends. Examples include the August 2023 wind-driven wildfires on the island of Maui, which destroyed more than 2,000 structures and caused an estimated $4 billion to $6 billion in damages, 75% of which are likely to be insured.4 Only a few weeks later, a series of wildfires in British Columbia caused an additional $720 million in insured losses.5
Yet, as great as the 2023 losses were, they were overshadowed by the estimated $13 billion in insured losses from the devastating 2018 wildfire season in California.6 Examples such as these illustrate how a combination of inflationary pressures, population shifts, and increased construction in at-risk areas have contributed to rising rates and industry exposure.
Concerns over climate change add further complications, causing many insurers to rethink their risk strategies and pricing to reflect their concern that rising global temperatures create more significant potential for large losses. One change some insurers are implementing is an increased use of forward-looking predictive analytics to price future risk rather than relying solely on traditional risk modeling that depends primarily on historical data to identify near-term risk.7
Moreover, one group’s industry analysts report its modeled losses – that is, the losses insurers should reasonably expect to experience – exceed the actual losses the industry has reported to date. This analysis suggests the industry should be prepared for higher levels of losses in years to come. Using a methodology known as probabilistic catastrophe modeling, Verisk Analytics suggests insurers should expect to experience total insured losses from natural catastrophes well in excess of $100 billion every year, with annual losses greater than $200 billion now deemed “plausible.”8
Insurers’ perceptions of perils and trends are reflected in higher property insurance rates. The Council of Insurance Agents & Brokers, an association of commercial insurance providers, conducts quarterly surveys of its members, who place 85% of U.S. property and casualty (P&C) premiums annually. In its survey for the fourth quarter of 2023, the council reported commercial property premiums rose by 11.8%. As shown in Exhibit 1, that increase was down from the previous quarter, but it capped a year in which premiums rose by 20.4% in the first quarter, 18.3% in the second quarter, and 17.1% in the third quarter. Moreover, it was the 25th consecutive quarter of premium increases.
Source: Data excerpted from Council of Insurance Agents & Brokers commercial P/C quarterly market surveys, 2021-2023.9, 10, 11
Discussions with individual U.S. brokerages have confirmed these trends. Various insurers interviewed by Crowe report that catastrophe-exposed commercial properties – even those with good loss histories – have seen continual rate increases in recent years. Properties with unfavorable loss histories have been hit even harder, with anecdotal reports of premiums doubling within the past several years for accounts with poor loss histories.
Despite premium increases, however, the overall P&C industry is seeing continued pressure. As shown in Exhibit 2, the National Association of Insurance Commissioners reports the industrywide combined ratio in the first half of 2023 topped 100%, indicating P&C insurers’ underwriting operations were unprofitable for the first time since 2017.
Source: Data from National Association of Insurance Commissioners P&C insurance industry overview.12
Of course, the combined ratios of individual sectors within the overall industry varied considerably. Moreover, a recovery in the equity markets produced investment gains that more than offset the underwriting losses, enabling the industry to remain profitable overall.
Sound underwriting practices are essential for insurance companies, but they are even more critical in the current environment. Insurers should be especially alert to changing risks, make a special effort to stay informed about industry trends, and reassess their overall risk management strategies to verify they reflect the current reality.
A careful review of risk management strategies also is advisable for insured companies and individuals. Many insured businesses are reconsidering alternative strategies that can help hold down property insurance rates somewhat. These alternatives could include higher deductibles and first-dollar retention strategies, as well as captive formation in some instances.
However, these strategies can be complicated by outside factors, such as lenders’ requirements that property owners (both homeowners and commercial property owners) maintain A-rated insurance coverage as a condition of financing. In addition, the insurer and the insured should monitor building value increases and increasing replacement costs to maintain updated insurance in line with the property’s value in the event of a total loss.
Compared to other long-standing P&C sectors or business lines such as auto and health insurance, insurance against cybersecurity losses is still a relatively young and specialized market. As this sector continues to mature, rates have stabilized somewhat over the past 18 to 24 months, yet cyber insurance remains a relatively volatile market where new threats can emerge quickly.
In a recent webinar for insurance professionals conducted by Crowe, nearly three-quarters (71.5%) of the participants reported they had experienced some sort of cybersecurity risk issue, either as insurance companies or the insured.
Source: Crowe survey of webinar participants, Dec. 13, 2023.
As shown in Exhibit 3, phishing schemes were the most frequently encountered issue, with 28.5% of respondents listing them as the driving factor behind their cybersecurity-related losses. Significantly, a substantial number of participants (14.5%) said they had experienced more than one type of cyber issue.
Although the cyber sector has been profitable historically, it went through an unprofitable period in recent years due to increased catastrophic losses stemming from major cybersecurity breaches and depressed rates from competitive pressures. Consequently, loss ratios fluctuated significantly in 2020, 2021, and 2022.
Crowe recently performed an actuarial analysis of aggregated P&C industry annual statement data, based on the publicly available annual statements that all P&C insurance companies are required to file with state regulators. This analysis showed that loss ratios (incurred loss/earned premium) for cyber liability policies shot up dramatically in 2020 and 2021, before settling down somewhat in 2022 (see Exhibit 4).
Source: Crowe actuarial analysis of P&C industry annual state regulatory statements, 2023
In a similar pattern, rates for cyber coverage have begun stabilizing after sharp increases in 2021 and 2022. As shown in Exhibit 5, premiums increased by more than 20% for six consecutive quarters, beginning in the second quarter of 2021, and did not return to earlier levels until 2023.
Source: Data from Council of Insurance Agents & Brokers P/C quarterly market surveys, 2020-2023.13
Concurrent with the stabilizing rates, the cyber insurance sector is now returning to profitability. In addition to the significant rate activity of 2021-2022, other contributing factors include retention increases and refinements to coverage.
Although the cyber insurance sector has begun adapting through rate adjustments and other strategies, the cyberthreat landscape continues to evolve. As shown in Exhibit 6, recent Crowe actuarial analysis of industry annual statement data indicates the relative severity of incidents (as measured by incurred losses and reported claim counts) increased steadily during the three most recent years for which complete data is available.
Source: Crowe actuarial analysis of P&C industry annual state regulatory statements, 2023
In addition to increasing severity, the nature of attacks is evolving, especially in the area of ransomware attacks. Recent events indicate a disturbing trend in which ransom payments frequently do not result in the restoration of full access or protection against subsequent attacks.
In addition to adapting their rate structures to reflect evolving risks, insurance companies are pursuing a variety of strategies to help maintain the recent stabilization of the cyber insurance sector. One critical underwriting consideration involves establishing a balanced client base by spreading risks across various industry sectors and organization sizes. Policy limits and deductibles also can provide a level of control over risk exposures.
Careful monitoring of clients’ risk management practices also benefits insurers. For their part, insurers should be prepared to provide expertise and capacity, offering customers recommendations for cybersecurity risk management implementation and sound practices. Future technological innovations such as artificial intelligence, big data analytics, and machine learning – often referred to as “insurtech” – could also contribute to improved efficiency and performance in the cyber insurance sector.
Customers also can contribute to sector stability by staying abreast of evolving threats and recognized best practices for managing cybersecurity risk. Practices such as multifactor authentication, endpoint detection response, privileged account management, and ongoing backups should be coupled with continual training and awareness efforts to engage all personnel – not just the IT team – in the active management and mitigation of cybersecurity risk.
Organizations also must recognize that, when managing cybersecurity risk, one size does not fit all. Risk managers should understand the specific cyber risks associated with their organizations considering key variables such as remote work arrangements, use of the cloud for data transactions and storage, marketing and data collection policies, the specific types of data being held, and the regulatory landscape and geographies in which the organization operates.
Risk managers should have a clear and accurate understanding of their cybersecurity insurance coverages, including sublimits, deductibles, coinsurance, and coverage limits. In addition to understanding what is covered, it is equally important to recognize what risks are specifically not covered by existing policies and to incorporate cyber insurance into broader risk management considerations. Critical questions to be answered include:
As both cyber insurance and the overall P&C insurance sector continue to develop, staying abreast of changing threats and developing issues will remain a priority for both insurers and the insured – including organizations with captive or self-insurance exposure. By understanding and addressing the challenges directly through active and attentive management, all parties can do a more effective job of managing costs, mitigating risks, and navigating volatile markets.
1. Akankshita Mukhopadhyay, “Global Insured Losses From Natural Disasters Hit $118bn in 2023: Aon,” Reinsurance News, Jan. 23, 2024, https://www.reinsurancene.ws/global-insured-losses-from-natural-disasters-hit-118bn-in-2023-aon/
