2020 has been a very unusual year for the global insurance industry.
Events such as earthquakes and floods have been with us for many years; events such as wildfires and hurricanes that are driven by climate change have become increasingly common and more widespread. However a global pandemic was an event that nobody could have predicted.
Investors worry about holding insurance company shares on fears of the large one off loss the industry will sustain on Covid and the increasing cost of covering losses from climate change events.
Global stock markets have been buoyant but not insurance stocks. There are reasons to believe insurance company shares might now become attractive to investors.
The global pandemic has significantly accelerated the insurance price cycle. The Marsh Global Insurance Composite Pricing Index shows prices increasing by 19% in Q3 2020 on top of a 14% increase in Q2 and 11% in Q1. This cycle will likely continue for another few years.
Insurers are in the risk business. They take on the types of risk that businesses and individuals will not or cannot take on themselves.
The relentless rise in risk and the emergence of new perils like climate change and a global pandemic has increased fear and has made having an insurance policy a ‘must have product’ rather than a ‘nice to have product’.
Uncertainty about future perils such as cyber events and working from home issues plus the fact that many insurance products are required to be held by law means insurers who price their risks correctly can look forward to earning a decent underwriting margin on their policies.
Finally, the tech giants who have successfully disrupted many other industries and sectors are unlikely to be able to take risk out of the market.