Five ways insurance can stabilise an unstable world

Predictability has power. The world thrives on it, but we are living in exceptionally challenging and unpredictable times with negative developments converging at one time on a global scale. This is creating instability on unprecedented levels.

While it is true to say that the world is mostly in recovery mode following the COVID-19 pandemic, for some the impact is still very real. At the same time, we saw stalling economies in major markets, political instability, volatile financial markets, rising inflation and interest rates and an energy crisis fueled by war that combined has brought devastation to the front door of so many households and businesses. That’s in addition to the climate crisis, which stops for no one.

The world is crying out for signals of stability; small fragments of light that represent hope. It is at such times that the role of insurers and re-insurers becomes particularly important.

In the simplest terms, insurers mutualise risk and provide an important safety net to people and businesses. They provide stability and more.

Insurers exist to allow people to follow their ambitions and dreams confident that the consequences of an adverse event can be mitigated. They provide a degree of certainty by safeguarding assets and providing protection. They provide a level of predictability in an uncertain world. They do so as expert risk managers — but also as long-term thinkers, reflecting the nature of the obligations they agree with their clients.

The goal moving forward must remain the protection of customers as a constant. But at the same time, insurers cannot take the traditional business model for granted. In an increasingly individualistic world, in some cases, the willingness of all parties to agree to be part of mutualisation is decreasing. Insurers need to promote mutualisation of comparable risks, while also ensuring there is sufficient incentive for the individual or enterprise to take actions to reduce that risk.

In the past decade, new and devastating events have emerged on the radar introducing whole new dynamics that forced the insurance industry to pause and think.

We have seen cataclysmic events with massive impact: pandemics, significant widespread weather events, cyber risk and terrorism to name a few. Many have impacted millions of people at the same time, where the law of big numbers must be taken seriously. Therein lies a dilemma. While technically, under the normal rules of the road, these risks should be part of mutualisation, the reality is that the insurance industry cannot fly solo to cover these risks. Pooling systems need to be created between insurers, re-insurers and governments, and collaboration needs to happen now on a scale unseen before.

Among the other stabilising characteristics insurers have, which distinguishes them from other sectors in challenging times, is their role as investors. As long-term large-scale investors they can play the role of ‘referee’ in the move towards more sustainable investments. By investing well in the right assets at such a critical time in the climate crisis, and by moving away from ‘harmful’ asset classes, insurers can make a massive difference.

The choices insurers make matter. There is a lot at stake and their role in influencing the choices made by customers and suppliers as they make their own transition towards a more sustainable world is important too.

Insurers are experienced in working in partnership. They make things happen through collaboration around topics that are critical, particularly at this time: infrastructure investments, preventative measures around ESG topics and the big societal challenges that play to an insurers’ strengths. These include ageing society, health and pension provisions — all places governments are coming under pressure.

Collaborating more closely with government bodies struggling to maintain social security provisions and search for other solutions provides an opportunity for public and private sector cooperation in the future. Insurers are well placed to share their expertise in managing risk and investing for the long-term.

In challenging times, anticipating and predicting trends that could have an impact on insurers’ own business and also on customers is a constant. But there is de facto no ‘catch all’ programme that can predict with 100% certainty everything that will come our way.

Few could have predicted with specificity the COVID-19 pandemic, and likewise the outbreak of war in Ukraine and its devastating impact around the world. While it may not be perfect, insurers do have a duty of responsibility to their customers to keep thinking long term, constantly monitoring beyond the horizon to predict what comes next. This applies to many other industries too. The insurance sector’s approach toward predicting risk can and should be mirrored by other industries.

While insurers are clearly not immune from the impact of events, they do have a role to play in providing stability to markets, people and societies — more so than almost any other industry.

The challenges of delivering stability are immense, but they have also prompted a period of reflection within the industry that should spur further action.

Insurance is a safety net. It provides core protection, predictable outcomes and smart sustainable investments. Insurers are expert collaborators and long-term thinkers: a fragment of light that represents hope.