According to a new study by Conning, theproperty & casualty insurance industry faces unprecedentedchallenges including alternative capital, changing technology,emerging risks and a decline in the relevance of the industry’straditional products.

The study, "Innovation in Property-Casualty Insurance:Responding to a Changing ValueProposition," warns that, if the P&Cindustry doesn't respond now, it will face a future of diminishedrelevance.

"The value proposition of the insurance industry rests on thetwo foundations of managing information about risk and providing alarge pool of capital to absorb risk—both of these are underattack," said Jerry Theodorou, Vice President, Insurance Researchat Conning. "First, quantitative and qualitative technologyadvances that make data increasingly available enable new marketentrants or customers themselves to absorb risk that insurers wouldotherwise handle. Second, new, much larger and more efficientcapital providers entering the industry are siphoning off premiumthat ordinarily would flow to insurers. If insurers do not respondeffectively to the data and capital challenges, the property &casualty industry may diminish in size and do so at an acceleratingrate."

Technology advances

The potential for decline in the insurance industry's size andrelevance is magnified by the accelerated pace of technologyadvances. New industries are being created and others aredisappearing. Businesses and individuals are cycling faster thanever through new technologies and communications platforms.

In today's climate, businesses face new risks as well arisingfrom new and larger loss exposure and unprecedentedinterconnections of risk. Innovative products and processes,including cyber activity, drones, robots, and 3D printers,introduce risk whose nature and magnitude are not yet fullyunderstood.

Insurance policy wordings designed decades ago are ill-equippedto cover today's and tomorrow's changing face of risk.

What's more, new capital providers with a lower cost ofcapital who are participating in the insurance industry exacerbatethe competitive pressures on traditional insurers. Alternativecapital from pension funds and other sources already has radicallytransformed the property reinsurance sector.

Traditional reinsurers have adapted to this new environment byfinding ways to offer solutions for clients. Reinsurers haveresponded to the challenges posed by the strong influx of newcapital with innovation. They are offering new products and novelrisk transfer options, often by affiliating with insurance-linkedsecurities (ISL) funds or becoming investors themselves. As aresult, reinsurers are well positioned given their extensiveresources, expertise, and unique market access.

Reasons for optimism

Ultimately, the study's conclusion is optimistic: Asconservative as the industry may be, historically it has respondedbest when confronted with challenges that have shaken it to itsfoundations, whether a massive earthquake, a terrorist event, or afinancial crisis. Small, medium, and large insurers arecurrently engaged in structured processes to evaluate emergingrisk, to develop new solutions, and to take advantage of richerdata and analytics capabilities. Insurers are not standingstill.