September 25, 2020 by Adam Malik
Social inflation is the top item of concern for an Aon reinsurance executive, even if it’s an issue being exacerbated in the United States rather than in Canada.
“I would bold and underline that — that is, I think, the Number 1 topic of discussion, typically in the U.S. insurance market,” emphasized Matt Wolfe, president of Aon Reinsurance Solutions Canada.
The United States represents about 50% of the world’s reinsurance premium, he explained during a recent Insurance Institute of Ontario webinar From the Great Fire to COVID-19: What’s next for the Global Reinsurance Market as part of its At the Forefront series. So when something is impacting our neighbours to the south, it has global ripple effects.
The reason why the U.S. accounts for such a high portion is partly due to its population — third highest in the world at nearly 330 million — and that it faces two regular and significant perils: Hurricanes in the southeast part of the country and earthquakes along the west coast.
“The U.S. market is hugely impacted on the worldwide market and the Canadian reinsurance market,” Wolfe said.
As it relates to social inflation, “you have massive claim cost inflation. A severe motor loss that 10 years ago would have settled for $2 million is now being settled for $8 million,” he said.
He listed other examples like slip-and-fall claims spiked from $10,000 to $100,000; product liability claims grew from $10 million to $50 million.
Why such growth? “We don’t necessarily know what it is, but it’s the single biggest topic of discussion when I sit with very senior reinsurance experts,” Wolfe said, speculating that it could be a generational thing in the sense that younger people are more willing to punish businesses and insurers.
“That’s a really, really big issue and there’s a fear by the reinsurers that premiums — both on the original insurance premium and on the reinsurance premium — are just not keeping pace with that impact on social inflation,” Wolfe observed. “So it’s a massive issue that, frankly, we could have a session on just that.”
And it doesn’t seem to be letting up any time soon, he added. “The short answer is: No matter who I talk to — smart people — nobody really seems to have an answer. But it’s just clearly showing up in the numbers and it’s clearly going to be an issue.”
As for what else is grabbing his attention, Wolfe highlighted autonomous vehicles during the webinar, saying that they’re “going to be a real interesting thing.”
Wolfe doesn’t believe we’ll see autonomous vehicles as soon as people think and even recent estimates have extended the timeline from the mid-2020s to around 2030. KPMG’s Automotive Institute’s 2020 Global Automotive Executive Survey saw 46% of executives (and 39% of consumers) pick 2030 for when they believe fully autonomous vehicles will emerge. The Automotive Industries Association of Canada estimated in a 2019 report with the Conference Board of Canada that full driving automation of vehicles is expected around 2030. Global data firm IHS Markit pegged the number of autonomous vehicles on global roads at 33 million by 2040 – compared to 51,000 by 2021.
But when they do come, there will be changes in the way auto insurance is handled, Wolfe predicted. “Ultimately, the insurance product of those cars is probably going to move from an individual operator’s liability — ‘I’m driving the car, I need insurance in case I make a mistake’ — to, if it’s a fully automated, zero-touch [vehicle], I’m not operating it so maybe it becomes more of a product liability policy,” he said. For example, “does the software screw up? Or something goes wrong and then there’s your claim.”
That would take the insurance product from being sold to millions and millions of people buying their insurance individually down “to, I would suspect, the manufacturer of that vehicle buying a corporate policy,” Wolfe said. “If that’s the case, $30 billion out of $60 billion in Canada is personal auto, so the impact of that long term is just staggering.”
Feature image by iStock.com/erhui1979