The top risks for the insurance industry reflect the sector’s rapidly changing nature while at the same time reinforcing its critical role in protecting global businesses, communities and governments, according to Beinsure data.
Even organizations able to navigate such issues are forced to confront the looming threat of climate change and natural catastrophes, which, coupled with regulatory difficulties, present a host of challenges.
According to Aon`s Global Risk Management Survey, growing cyber threats have created uncertainty for insurers who want to grow in this space but must also manage exposure to systemic catastrophic losses. Beinsure Media has overview of the key risks for insurance and reinsurance companies.
Insurers confront challenges related to the cost and availability of reinsurance, potentially impacting their capability to offer cover profitably. To navigate this, insurers are emphasizing the optimization of their capital through portfolio differentiation using robust data, establishing stronger relationships with reinsurers, and diversifying their capital sources.
The survey identifies the top five industry risks as cyber attacks or data breaches, the challenge of attracting or retaining top talent, weather and natural disasters, regulatory or legislative changes, and an economic slowdown or slow recovery.
These risks collectively highlight the complex and intersecting nature of the insurance risk landscape. The survey reveals a 3% increase in risk readiness compared to 2021, alongside a 2% rise in income loss associated with the top 10 risks, according to Cyber Security Top Trends.
Despite appearances of enhanced readiness, the growth in income loss indicates an overestimated sense of preparedness, as actual risk materialization has not yet occurred. This is further evidenced by the decrease in quantified risk from 29% in 2021 to 23% in 2024, underscoring a discrepancy between perceived and actual risk management effectiveness.
Current Risks for Insurance Sector
Cyber attack or data breach is the number one risk for insurance organizations. It also occupied the industry’s number one spot in our 2021 survey and ranked number one overall in the 2024 survey.
Not only do insurance companies have large stores of sensitive data that make cyber attacks exceptionally damaging, but many organizations are also working with old and outdated systems that may no longer have adequate security measures in place.
This also serves to explain why tech or system failure, ranked #7, appears on the industry’s top 10 list - Cyber Risks, Climate Change Main Challenges for Insurance. Given how expensive and disruptive system transformations can be, companies that have opted not to update their cyber infrastructure are now contending with the consequences.
Top 10 Current Risks for Insurers
1/ Cyber Attack or Data Breach
2/ Failure to Attract or Retain Top Talent
3/ Weather and Natural Disasters
4/ Regulatory or Legislative Changes
5/ Economic Slowdown or Slow Recovery
6/ Damage to Brand or Reputation
7/ Tech or System Failure
8/ Increasing Competition
9/ Climate Change
10/ Failure to Innovate or Meet Customer Needs
Insurance companies possess extensive sensitive data, making them particularly vulnerable to cyber attacks, a situation exacerbated by many relying on outdated systems lacking modern security measures.
This vulnerability explains why technological or system failures rank as the seventh most significant risk in the industry’s top 10 concerns. The high costs and disruptions associated with system upgrades lead some companies to postpone updating their cyber infrastructure, facing significant risks as a result.
Insurers are actively determining the bounds of insurable catastrophic cyber loss, agreeing that cyber attacks on essential services like power, water, and internet exceed the coverage scope due to the challenges in quantifying and pricing such risks.
Cyber incidents involving nation-states also fall outside standard coverage parameters, with ongoing discussions about defining these attacks more clearly.
The U.S. government, particularly the Department of the Treasury and the Department of Homeland Security, is assessing the impact of cyber attacks on critical national security infrastructure, including the financial sector, to evaluate the need for a federal insurance response.
Emerging technologies on the horizon such as artificial intelligence (AI), quantum computing and augmented/virtual reality present additional new challenges for insurers.
Weather and natural disasters, ranked number three, as well as climate change, ranked number nine, are currently posing massive challenges to organizations. Global insured losses from natural disaster events have reached $88 bn as of the time of writing in 2023, 17% higher than average.
These losses were driven in the third quarter by severe convective storms in the U.S. and Italy as well as the Maui wildfire, according to Aon’s Catastrophe Insight. This can have long-term ripple effects on the economy, which could in turn prompt legislators to put new regulations in place — a fear reflected by the number four ranking of regulatory or legislative changes.
Current Risks for Insurance Sector
Another dimension of this is damage to brand or reputation, ranked number six. As insurance companies move out of vulnerable areas and become subject to more legal and regulatory scrutiny, premiums could rise for consumers. This could, in turn, negatively impact consumers’ perceptions of insurers and cause reputational and brand damage.
The challenge of securing and maintaining top-tier talent is the second most significant issue, underscoring the growing necessity for a more diverse and specialized workforce.
As firms strive to keep abreast of advancements in information and environmental issues, the demand for professionals in data and climate science becomes increasingly critical. Moreover, an aging workforce exacerbates the pressure on insurance companies to fulfill their fundamental talent requirements.
In light of evolving trends, insurance providers must recruit and nurture individuals with novel competencies, knowledge, and expertise essential for fostering innovation. Now more than ever, it is imperative for insurers and reinsurers to employ subject matter experts across various risk domains and industries, alongside talents capable of revolutionizing their operations in domains such as data, artificial intelligence, and business adaptation.
The current recruitment pace falls short of meeting these needs. The industry urgently requires individuals endowed with the appropriate mindset and skills suited to a rapidly transforming business landscape.
Although advancements in AI are enhancing efficiency across multiple facets, including decision-making support for humans, the sector is in dire need of innovative and forward-thinking talents in significant numbers.
This necessity persists even in areas where machine learning technologies find application, for example, in streamlining workflow processes. The role of underwriters exemplifies this need distinctly, given their requirement to adapt to the evolving risk profiles they insure.
Underwriters must gain a deeper insight into the business risks clients seek to mitigate. Anticipating future trends is equally crucial as reflecting on past data.
The rapid obsolescence of risk models in the insurance sector, especially in contexts like cyber and weather risks, illustrates this point vividly. In particular sectors like energy, where renewable technologies are advancing swiftly, there is an immediate demand for engineering expertise.
Solving this challenge will require transformation throughout the enterprise. Achieving cohesion and collaboration between colleagues with different skills and backgrounds is a big cultural challenge that calls for a renewed focus on engagement and belonging.