Sep 27, 2024: The community of Steinhatchee, Fla., returned to their small town after the Cat. 4 Hurricane Helene battered the West Coast of Florida, only to find it devasted by the storm's destructive winds and over ten-foot storm surge. The storm surge lifted structures off their fondations, leaving residents searching for a place they once called home. Photo: Brigida Sanchez/U.S. Army Corps of Engineers, Jacksonville District
With devastating force, hurricanes Helene and Milton left a swath of destruction across the Gulf of Mexico, totaling an estimated $70 billion in damages – a figure reported by Moody’s that reflects the season’s unprecedented intensity.
Property and casualty insurers have been left reeling, compelled to recalibrate their risk models and critically reassess their investment playbook in response.
Take Universal Insurance Holdings, confronted with a staggering gross loss of $600-$900 million. Or CNA Financial Corporation, expected to report a $143 million pretax net catastrophe loss for the third quarter of 2024.
For P&C insurers and reinsurers, the end of the traditional hurricane season no longer signals a downturn in insurer vigilance. Major insurers are reducing exposure in Gulf-of-Mexico regions and others may raise rates in future renewal cycles to attract sufficient capacity. After net investment income set a record in 2023 in the U.S., investment income will again be counted to offset underwriting volatility.
Looking into 2025, P&C asset owners will have to navigate uncharted waters and evolving market forces that influence P&C strategies, while having the technology and tactics at hand to counteract risk exposures.
Which market trends and regulatory currents should P&Cs monitor in 2025, and what tactics and technology will enable them to rise above the challenges ahead?
The significance of PBBD compliance for insurance portfolios
P&C asset owners face a confluence of climate, interest rate and liquidity risks, escalated by increasing compliance risk from evolving regulatory frameworks. Foremost among these is the NAIC’s Principles-Based Bond Definition (PBBD), the biggest accounting guidance change in three decades. The shift to a more transparent bond classification demands that financial markets continue to grow in complexity.
With this paradigm change, P&C insurers can expect additional scrutiny on insurer bond investments and bond transparency. NAIC is joining other financial regulators in calling for institutional investors to up-level their investment data management and technology and meet the challenges of today’s rapidly evolving market risks.
According to the NAIC, bonds made up more than 60% of insurer investment portfolios at the end of 2023. The rigorous financial reporting standards will tax financial teams, since they require a deeper understanding of the factors that inform their investment decisions. PBBD Compliance will demand major modifications to insurance companies’ rationale, influencing accounting, reporting, operations, and capital considerations.
While some compliance leaders are getting very granular, writing up memos to justify the classification for every single holding, others are adopting a broader, bucket-based categorization method. Chief investment officers are under pressure to modernize operational infrastructure and underlying data systems. If insurers rely on manual compliance processes and siloed investment data, they will be unable to run accurate, timely reporting.
Taming data complexity: Invest in investment data management
Legacy data governance and manual processes are not just transparency roadblocks. They obscure the insights that asset owners need to gauge portfolio risks for informed decision-making. The private credit boom will continue to flourish. Portfolio managers are rewriting their playbooks with complicated new product mixes, looking for yield and income wherever they can get it.
Many are blending public and private markets strategies. Compliance and data science leaders are striving to manage unheard-of volumes of disparate investment data—a lot of which is opaque—making portfolio accounting and reporting resource-intensive and prone to errors.
P&C portfolios include a wide range of different asset classes, from cash and commercial mortgage investments, to hedging instruments and derivatives like futures and cleared swaps. Even smaller insurers are investing in asset classes like derivatives and private debt. For asset owners to diversify, they also need to be able to generate a holistic view of activity for intelligent position management.
It’s investment accounting and investment controllership
If the Fed continues to cut rates, the pressure on insurers’ investment portfolios will increase that much more, with fixed-income products’ decreased returns.
We are seeing another trend toward investment controllership, in addition to investment accounting within P&Cs. Managers want to cultivate an advanced analytical approach; the idea is to streamline operations to enable investment teams to devote more time to analyzing portfolio results, manage asset allocation, and evaluate risk exposures.
The central tenet of advancing investment technology and compliance automation is that it will free up human ingenuity to pursue higher value tasks. Generative AI and large language models (LLM) are being deployed to optimize numerous functions. An analyst or compliance officer will be able to get instant portfolio information, from questions like, “Which LP went up in value? What’s the underlying holdings in the LP?”
However, to do so, they must pursue new ways to achieve efficiencies with obtaining the data, scrubbing the data, managing the data from various accounting systems for each different asset class. Thus, expert data mining becomes an imperative so analysts can transform raw data into actionable insights.
Automation as the necessity in compliance and reporting
Investment data governance and management are foundational for solving these challenges. Yet, insurers, fresh from paying out claims for the hurricane and wildfire season, may hesitate from investing in data, accounting, and reporting technology initiatives.
Allocating capital to operational upgrades or technology modernization – while payouts use cash reserves – may seem counterintuitive, but the potential return on investment is much larger than most P&Cs might realize, a reality that many P&C firms have yet to fully embrace.
Complicating matters further, U.S. regulators are increasingly demanding that automation become integral to compliance, reporting, and accounting practices. The complexity of today’s financial markets and strategies leaves little room for legacy systems or manual-based processes.
Under the new PBBD guidelines, insurers will be required to enhance data collection and documentation to support the classification of securities under the new definitions. This includes information on issuer types, collateral details, covenants, and cash flow sources.
For P&C companies, the time to transition is here. CIOs and CFOs are under pressure to increase yields and succeed in a competitive market. Those poised to win are the ones who seize command over their data, gain deep insights into the risks with every changing condition, and consistently deliver timely, compliant reporting to regulatory agencies and internal stakeholders.
Rick Smith is head of insurance solutions at Clearwater Clearwater Analytics. Smith has over 30 years’ experience working in the investment areas of leading insurance companies and providing consulting services to them. He is a proven leader, with a successful track record of leading investment middle and back offices through transformation change.
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