Insurance Sees Opportunity As Tech Creates New Risks

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F ederal and private workers were fleeing offices early, grocery shelves were scavenged bare, and public transportation systems planned to power down for the weekend around Washington D.C. on Friday, as forecasters expected a massive snowstorm to smother the region overnight.

Property and casualty insurers were on their guard, with damage from downed trees and power lines, frozen pipes, collapsed roofs and, of course, auto accidents all likely to be part of the weekend's tableau.

Beyond natural threats like snow, hurricanes, earthquakes and hail, technology is also opening the door to new types of risk that spell opportunity for insurers.

High profile cyberattacks, like those againstSony ( SNE ),Target ( TGT ) andHome Depot ( HD ) have made cyber-liability a viable market. More cybersecurity insurance is going to be written in 2016 vs. 2015, according to Charles Sebaski, vice president of equity research for BMO Capital Markets.

Sebaski says the category will continue to grow in future years as insurance companies likeAmerican International Group ( AIG ),Travelers ( TRV ) and other traditional insurance providers expand their grasp of the market.

But cyberattacks present a lot more grey areas than standard areas of liability.

If consumer information tied to 4 million credit cards is stolen, could the company have done more to prevent the data breach? What is the value of the information? Unless there are specifically identified thefts, the loss amounts aren't clearly defined, Sebaski explained.

Driverless cars are another new area for insurance companies.Tesla Motors (TSLA),Alphabet 's (GOOGL) Google,General Motors (GM) and others are working on autonomous vehicles. Fully autonomous cars likely won't be around for another decade, but insurance companies are not just preparing for the future, but advocating for change.

Allstate Insurance (ALL) CEO Thomas Wilson said at a conference in December that automated cars remove driver issues related to the majority of auto accidents: texting, falling asleep, intoxicated driving and other distractions. The result, he says, will be fewer car accidents.

Too Much Capital

Last year was a calm hurricane season for the U.S. But 5 of the 10 costliest hurricanes in history, based on insured losses, occurred in the last 10 years, according to the Insurance Information Institute. Those included hurricanes Katrina, Rita and Wilma in 2005.

But recent benign hurricane seasons have lulled insurance buyers into a risky sense of security. Other insurance events included the winter storms that battered Boston and other New England cities in early 2015 and worsening wildfire challenges across the West.

"Hopefully it \ will be another profitable year," said Steven Weisbart, senior VP and chief economist at the Insurance Information Institute. "It's been relatively mild for a couple of years, and that has contributed to profitability, but you never know what Mother Nature has in mind."

The traditional property and casualty insurance industry shifts between hard and soft market conditions. During a soft cycle, premium rates are stable or fall, and insurance is easily available. During a hard cycle, rates rise, standards tighten and insurance is tougher to get -- that boosts insurer profits. Hard markets are sometimes caused by a lack of capital in the industry.

The industry saw hard cycles in 1975 to 1978, 1984 to 1987, and 2001 to 2004, according to the Insurance Information Institute.

"It doesn't look like we will see a hard market anytime soon," Weisbart said. "Sometimes hard markets are caused by a relative lack of capital in the industry, but there is almost too much capital right now."

Currently the industry isn't in a hard or soft cycle -- instead, Sebaski thinks it's in uncharted waters.

"In a more traditional insurance cycle, I think we would be more likely encroaching on a soft market," he said, explaining that the insurance industry has historically made the bulk of its profits from the asset and investment sides of its business.

"Today, the industry finds itself in the position of an imbalance of too much capital, while simultaneously having very low yields on investments," he said. "Together this is a new operating challenge."

Rising Pressure To Consolidate

The Insurance-Property/Casualty/Title group was ranked No. 42 on Friday out of the 197 industry groups tracked by IBD. The group is home to large-cap names like Travelers, Allstate andProgressive (PGR), as well as midcap firms likeCincinnati Financial (CINF) and small caps includingAtlas Financial (AFH).

The soft market has created rising pricing pressure, leading many insurers to seek greater scale in order to survive. Earlier this month, Switzerland-based ACE paid $29.7 billion to acquire New Jersey'sChubb (CB), the largest insurance deal on record -- aside from the government's 2008 bailout of American International Group.

On Thursday, Travelers reported a 5.5% drop in quarterly earnings to $2.90 per share, but it beat views by 25 cents. Revenue climbed 0.5% to $5.86 billion, under views for $5.94 billion. Travelers said its quarterly results took a hit from low interest rates and falling oil prices .

Allstate is expected to announce quarterly results Feb. 4.

The combination of weak pricing and relatively low interest rates makes investment income even more critical. A bump in interest rates would be a positive. But even with current rates, Weisbart sees a "modestly profitable year" for property and casualty insurance companies. Auto insurance could be a bright spot as record new car sales in 2015 mean more people need insurance to cover their expensive, safer, new cars.

Certainty Vs. the Unknown

Still Sebaski said the industry is a "defensive sector until the economy takes off or interest rates really start normalizing."

Regulatory issues will likely take the spotlight for the next five or six years, as regulators look to put in place mechanisms that would prevent another financial crisis, said Weisbart.

"Some of those ... are coming in the form of new regulations, more capital requirements and other things that will be costly for the industry," Sebaski said.

In the EU, the Solvency II Directive came into effect on Jan. 1 and regulates the amount of capital that EU insurance companies must hold.

Leigh Ann Pusey, the president and chief executive officer of the American Insurance Association, said in a statement Monday that she believes that the negotiations between the U.S. and Europe on whether the U.S. will be deemed equivalent in insurance matters should start soon.

"2016 is going to be the year that real things happen ... when a lot of things become clearer," she said.

Predictions for the future of insurance can be hard, as the industry itself is designed to deal with unforeseen circumstances.

"I guess there is always some unknown thing, as insurance is the ability to substitute some financial certainty for things you aren't sure are going to happen," said Weisbart. "Like asbestos, when it came up decades ago, has been a multibillion dollar problem for the industry, and no one saw that one coming."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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