Retreat from globalism: What it means for the modern insurer?

The property and casualty (P&C) insurance industry is facing a challenge it has never confronted before – a massive shift from the last 35 years of globalized mass production of goods and services back to fragmented, protectionist production networks and supply chains.

True, carriers are accustomed to weathering storms. When disaster strikes, the insurance industry is there to provide a safety net and help rebuild what has been lost. They have done this at speed and scale, and (relatively) low cost in part by relying on distributed global production systems. 

But the era of dependable, low-cost abundance is coming to an end. 

Now, supply chain disruptions are sending shockwaves everywhere, and insurers are no exception. For example, trade volumes in the Suez Canal experienced a 50% decline in January and February compared to the preceding year, while Panama Canal trade saw a 32% reduction. These and like events have a real impact on insurance. 

Picture a scenario where a severe storm hits a community. It happens often. From January 2013 to January 2023, 88.5% of U.S. counties experienced the declaration of a natural disaster. In those cases, suddenly there is a surge in demand for materials and tools to rebuild homes, for motor vehicle parts, and for all sorts of personal property items. What happens when those materials are scarce? Simply, insurers must still meet their contracted commitments and costs go up, losses accumulate, claimants experience long delays. Everyone loses.

The root causes of the changes to supply chains are twofold: demographics and nationalism. 

China is grappling with a declining birth rate that threatens to impact its workforce, and in 2023 alone, China's population declined by 2 million.  South Korea, Japan and Germany all have rapidly aging workforces and are global manufacturing centers; they will all see reduced working populations and therefore reduced production. Other countries are following along – for example, even with large positive immigration flows the U.S. population will hit its peak in 2080 and decline from there.  

Meanwhile, the resurgence of nationalism, present-day conflicts such as the wars in Ukraine and the Middle East, anti-globalization sentiments in the U.S. and "de-risking" in Europe have ushered in a new era of geopolitical uncertainty. The once-unquestioned dominance of a global trade network is giving way to a fragmented landscape of protectionism and threats of conflict. While this is a return to historical norms, it is also a complete reshaping of the modern supply systems that allowed mass, low-cost replacement of insured goods for the last several decades. It will impact the industry and the industry's customers.

Compounding these challenges are diverging demand for insurance overall versus the ability to supply it. Increasing frequencies of losses are driving increased demand for coverage. These losses (and some regulators' unwillingness to allow adequate pricing) reduce insurers' capacity to accept similar risks. Supply chain disruptions and increased costs to settle claims exacerbate this imbalance, driving insurers to leave markets even as the need for insurance increases. 

How can insurance companies adjust?

The solutions are simple to explain, but hard to execute. To manage this evolving landscape, carriers must commit to:

1. Fast, sophisticated changes to pricing and underwriting
2. High-impact, low-cost risk mitigation solutions
3. Negotiated supply chain agreements 

All of these are achievable with focus.

• Speed to underwrite. The combination of supply chain issues, climate change and regulatory roadblocks can make geographic regions or risk segments uninsurable in very short time frames. In those scenarios, insurers must be able to react quickly and precisely with eligibility actions. 

• Speed to price. The 2020s have proven that we need to be much faster to respond to risk and price changes. But we also need to be more sophisticated when it comes to using available data. Pricing is mushrooming and insurers that can't add new highly predictive variables to rating swiftly will suffer adverse selection. Speed used to mean years; now it is months, and for leading insurers, it's weeks.  

• Balance risk mitigation. Risk mitigation options continue to expand. In a world with more expensive replacement costs and longer replacement timelines driven by deglobalization, the economics of risk mitigation versus loss replacement is becoming increasingly attractive. 

• Manage supply chain agreements. Take a proactive approach to managing the claims ecosystem to ensure readiness in high-risk areas and with high-demand items. This could entail innovative inventory management strategies, such as stockpiling critical components to mitigate supply shortages, or hedging strategies with suppliers of specific types of goods for specific geographies. 

With the rise of deglobalization, the world is changing. Insurers (and other industries) have tools to deal with this change, but it won't be easy. It will require dedicated resources, thoughtful strategy, and a clear-eyed, proactive approach.