General insurance might scream more grudge than glamour purchase. Yet in an ever-evolving world, no can dispute that the sector helps manage change and all the risks associated it.
From the Grenfell fire and recent terrorist attacks to cyber security and the growing number of natural disasters, the insurance sector is behind the scene helping pick up the pieces.
Anyone who has experienced a car crash, where the liabilities could be widespread, or faced a health crisis can tell you that nothing in life is certain. It is this possibility of risk and uncertainty that makes people buy insurance.
A multifaceted sector
As the risks to an individual and a company differ greatly, the sector is split into two areas: personal and commercial lines insurance. Within each is a number of different categories ranging from pecuniary to liability.
These policies can be brought either through an insurance broker or directly from an insurance provider. Direct general insurance lends itself to the new digital arena where consumers want instant quotes at the click of a button.
Traditionally, insurance companies were owned by the policy holders they worked to protect, but over recent years many of these companies have demutualised and been converted into stock companies.
In addition to established policies offered by insurance companies, some businesses and individuals may present with unusual or risky exposures and this is where Lloyd's of London comes into play.
What began as a coffee house in the 1600s, where the shipping industry gathered to trade ocean cargo insurance, is now a marketplace where expert underwriters and brokers who cover more than 200 territories come together to do business.
Amongst the most famous things to be insured at Lloyd’s were the legs of actress Betty Grable for $1m each in the 1940s. They are also the first and only insurers of Richard Branson’s Virgin Galactic private spaceship.
Some risks are so large that insurers may seek cover for some of it from other insurers – a practice known as reinsurance. This allows the insurer additional security for its equity and solvency and more stable results when unusual and major events occur.
What affects the sector’s share prices?
As insurance companies invest most of the premiums from policyholders they are not immune, like so many other sectors, to the fluctuations in interest rates and this affects their generated income.
The UK insurance sector is responsible for investments of £1.9 trillion, equivalent to 25% of the UK’s net total worth.
One of the biggest challenges to the sector is climate risk. This not only affects investment opportunity, but also presents solvency issues. Assets can be directly damaged by floods, droughts and severe storms, but portfolios can also be harmed indirectly, through weaker growth and lower asset returns.
According to a report from ClimateWise, a global network of 29 insurance industry organisations, there is an urgent need to address the growing $100bn annual climate risk 'protection gap.'
It highlighted that since the 1950s, the frequency of weather-related catastrophes, such as windstorms and floods, has increased six-fold with total losses increasing five-fold since the 1980s to around $170bn today.
Research by the Economist Intelligence found that a rise in temperature of 6oC by 2100 could result in losses for global assets of $43 trillion. This is 30% of the world’s entire stock of managed assets.
What can make one company buck the trend?
Any insurance company that has responded positively to the digital revolution will continue to buck the trend according to James Dalton, Director of General Insurance Policy at the ABI.
In a recent speech at the JP Morgan European Insurance Conference, he said that digitisation is rewriting the rulebook for all elements of insurers’ businesses and is delivering huge change from customer relationships to to claims.
He added that insurers need to get prepared for changing consumer demands and expectations.