Speaking at their firm’s briefing in Monte Carlo today, Brandan Holmes, SVP at Moody’s Ratings, and Joe Melly, Head of Casualty and Financial Lines at Moody’s Insurance Solutions, warned that insurers are navigating an increasingly interconnected and uncertain emerging-risk landscape.
They said risks are crossing traditional lines of business and becoming more difficult to model, price and manage. With exposures increasingly concentrated in casualty and financial lines, they stressed that insurers need to deepen their understanding of emerging risks while balancing the need to grow and innovate.
In his opening remarks at the briefing, held at the 68th edition of the Rendez-Vous de Septembre (RVS), Holmes suggested that the centre of gravity on insurance emerging risks is shifting.
According to him, the emerging risk landscape no longer sticks to traditional lanes.
Rather, risks are becoming more interconnected and difficult to model, potentially holding back insurers’ ability to unlock new opportunities.
“The cost of not fully understanding how these risks interact together and impact insurers is significant. Financial and systemic risks are interconnected and interact together,” Holmes observed.
He continued, “Macro environment, geopolitics, private credit, they don’t stay in their lanes. Their impact radiates out into the real economy. These risks become insurance risks.
“We expect economic growth to be steady, but rather tepid. In part, there is a disconnect between developed markets, where growth is relatively low, at 1.5%, and emerging markets, where growth should be closer to 4%.
“Low growth in developed economies, where the vast majority of insurance capital resides, creates or intensifies competition among insurers and suppresses pricing power.
“Insurers may want to tap into growth in emerging markets or new areas of risk, but uncertainty is high, and too many insurers don’t have the tools to understand the risks and grow meaningfully into these new areas.”
Reiterating that the centre of gravity is changing, Melly noted that risks are becoming increasingly concentrated in casualty and financial lines.
Melly continued, “The walls between these risks are becoming more blurred, so I think it’s really important to start asking ourselves some big questions. It doesn’t matter where we sit in the value chain.
“What does this emerging risk landscape mean for our organisational design? What does it mean for the skills that we have within our businesses to understand and manage these risks? What does it mean for how our departments are going to interact as these risks start to interact through the transaction chain?
“The second point I really wanted to highlight here is that it’s common to think about severity when we think about risk, and it’s important. But almost more important is the uncertainty dimension, and emerging risks are inherently uncertain.
“What tends to happen across the industry when we don’t have that complete understanding of risks is we price them conservatively, we put more capital behind them, or we run away from them. All those three things are attacks on uncertainty. But are they attacks on growth and innovation too?
“I think the biggest prize for the insurance industry, both our responsibility and our performance as a business, comes from understanding these risks and leaning into them where we have a responsibility to do so.
Melly added, “I’ve not had a meeting without talking about social inflation at the conference so far, and this is really super important.
“The Institute for Legal Reform is now measuring the U.S. tort system at north of $500 billion. The engine that sits underneath that is $15 billion or more in litigation funding. This is a really important asset class, which is impacting the insurance industry, and juries are delivering $30 billion of nuclear verdicts.
“In recent years, this is showing the impact, and it’s a pretty unfair battle at the moment between the insurance participants and these new asset classes.
“So, social inflation is clearly going to continue; it’s well above trend on inflation. I wanted to double-click on one of these bubbles called harmful products, because there’s an awful lot in that.
“I think when we think about the traditional property risks, where we’ve seen physical climate risk, really that’s a neat list of five or six perils which we’ve spent the best part of 100 years understanding very, very well, and we price and manage that risk accordingly.”
Melly said the “harmful products and harms to the natural environment” category encompasses thousands of potential risks, ranging from opioids and PFAS to wellness products, addictive software design and AI liability.
He added that the list is effectively endless, with Moody’s tracking these emerging harms and the connections between them.
“I’m just going to double-click on a couple which we should be mindful of. PFAS. I think for probably 20 years this has been seen as a U.S.problem. However, we had the EU Product Liability Directive changes coming into effect in December, which is going to make it much easier for claimants to see potential activity and rewards when it comes to things like PFAS.
“I think there’s a huge uncertainty as to what that means in the years coming ahead. But I know a lot of people in this room will be watching it.
The second thing, which is making headlines in the news, is the Meta case. Maybe not significant insurance issues today, but the concepts are important.
“This is one branch of AI liability. This is about addictive software design, and we’ve seen settlements of $12 billion to $18 billion, depending on whether you count the fixed or the variable.
“What this says is that the organisation was pretty concerned about how far that runway could have gone, and they spent billions on defending those claims. There are not many organisations that have the resources to do that in proximity.
“I think there’ll be a bunch of people watching this case to plan and to think. Whether it’s the online gambling platforms, the video game producers, the prediction markets platforms.
“When we go broader to AI liability, it’s really like cyber. It’s not one risk. There are probably ten different perils which sit under AI liability, which would impact both P&C classes of business moving forwards.”
In light of these findings, Moody’s has launched its Diverging Risks Radar, a tool designed to give insurers a clearer view of how emerging risks are developing and where they could have the greatest impact on the industry.
The firm said the radar tracks around 20 risks across factors including severity, time horizon and affected insurance subsectors, while also showing how risks can cut across multiple domains and interact through different transmission channels, including underwriting, investments, and strategy and operations.
Moody’s said the aim is to help insurers better understand interconnected and uncertain risks and, in turn, identify where they can respond to emerging threats while also pursuing new areas of growth.
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