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The Biggest Insurance Payouts in History

When the unforeseen strikes, insurance practices everywhere are left holding their breath as they lie in wait for the dreaded number – the damage loss estimates – to come in. These numbers are astronomical, to say the least. Almost 70% of all business financial losses arise from only ten circumstances – just ten! with the single largest identified cause being losses resulting from fires followed by aviation crashes and human-related errors.

Last year saw several natural catastrophes that triggered high insured loss amounts, including the California wildfires, and tropical cyclones that passed through Japan, the Philippines, the US and China. Now, insurers around the World are growing increasingly anxious, given the alarming frequency of occurrences in the past decade alone. The economic costs of last year’s 394 natural catastrophe events came up to $225B with insurance covering $90B of the overall total, creating the fourth costliest year on record of insured losses!

Munich Re NatCatSERVICE

Regrettably, when the unforeseen strikes there is a severe loss to both life and property – and hence the substantial loss claims they create. While these figures are in no doubt staggering, they are merely to illustrate the incredible gap between those described above and the largest insurance payouts ever recorded. Here are the top five payouts, in order of value.

  1. The Tohoku Earthquake & Tsunami of 2011
    In March of 2011, at closer to three following noon, a 9.1 magnitude earthquake struck off-the coast of Japan. Within the next 30 minutes, while the aftermath of destruction was still being felt, 133 ft. waves rocketed into the sky from the ocean and travelled 10km inland, taking the lives of over fifteen thousand people. While the damages, for the earthquake alone, were estimated over $210B, only $35B was insured and ultimately paid out. The total combined payouts could be much higher.
  1. 9/11 Tragedy
    One of the most infamous and tragic terrorist attacks on a nation’s sovereign soil that will forever be entrenched in mankind’s memory. Soon after, ‘terrorism risk insurance’ became incredibly risky to cover for insurers. Congress reacted by passing the Terrorism Risk Insurance Act in 2002, which provided an assurance of government support after a catastrophic attack. The tragedy caused far-reaching damages that were difficult to estimate, triggering insurance payouts as much as $40B.
  1. Lehman Brothers Collapse
    At one point, the fourth largest investment bank in the U.S, the 158-year-old firm declared bankruptcy in 2008 after their involvement in shorting subprime mortgage loans through mortgage-backed securities sold in the secondary market from where the risk spread everywhere else. They filed for Chapter 11 protection after an exodus of most of its clients, and the devaluation of its assets by credit rating agencies. The insurance payouts to creditors, taxpayers and private investors totalled over $100B.
  1. The Three Hurricanes of 2005
    Three fierce, category-5 hurricanes: Katrina, Rita, and Wilma – hit the U.S., along with 28 other storms in 2005 causing massive damage across the lower half of the country. The storms moving at speeds exceeding 205km/hr caused damages to the tune of $169B. The insurance payouts for Hurricane Katrina alone totalled $45B. It is still one of the costliest natural disasters ever recorded in American history, with a total insurance payout of around $130B.
  1. The Financial crisis of 2008
    The global recession of 2008, that spread worldwide from the epicentre of the financial collapse in Wall St. triggered the greatest losses to both companies, individuals and families ever seen in the last hundred years. There is said to be a direct line between the actions of Lehman Brothers in the subprime mortgage crisis to the financial bedlam that endured worldwide, soon after. The payouts incurred by American insurers during that time, although a financially guarded secret, is believed to be as much as $21T – yes that’s T as in, a whopping ‘Twenty-One Trillion Dollars!’

Alliance Global Corporate & Specialty Report 2019

While $89B of the overall insured total of $90B was borne from weather-related disasters, insurers are actively monitoring climate change reports to take in a bigger view of the changes the planet is undergoing – following two back-to-back years of mega catastrophe-event losses.

The ‘Insurance Protection Gap’ or uninsured losses (the lower this value, the better), is a global problem that affects emerging nations and developed countries alike. Properties and economies with high insurance penetration recover much more quickly after a natural disaster than economies that rely on governments for their recovery.

The re/insurance industry continues to withstand the payouts backed up with $595B of capital. However, their focus will be on managing the cost of climate change and weather events by helping to further reduce the current protection gap of 60%.

References & Further Reading
https://www.agcs.allianz.com/news-and-insights/news/global-claims-review-2018.html

https://www.munichre.com/en/media-relations/publications/press-releases/2019/2019-01-08-press-release/index.html

https://www.insurancejournal.com/news/international/2019/01/22/515420.htm

https://www.mckinsey.com/industries/financial-services/our-insights/claims-in-the-digital-age

https://www.agcs.allianz.com/content/dam/onemarketing/agcs/agcs/reports/AGCS-Global-Claims-Review-2018.pdf

https://www.insurancejournal.com/news/international/2018/01/17/477266.htm

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Retention playbook for Insurance firms in the backdrop of financial crises

4 minutes read

Belonging to one of the oldest industries in the world, Insurance companies have weathered multiple calamities over the years and have proven themselves to be resilient entities that can truly stand the test of time. Today, however, the industry faces some of its toughest trials yet. Technology has fundamentally changed what it means to be an insurer and the cumulative effects of the pandemic coupled with a weak global economic output have impacted the industry in ways both good and bad.

Chart, line chart

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Source: Deloitte Services LP Economic Analysis

For instance, the U.S market recorded a sharp dip in GDP in the wake of the pandemic and it was expected that the economy would bounce back bringing with it a resurgent demand for all products (including insurance) across the board. It must be noted that the outlook toward insurance products changed as a result of the pandemic. Life insurance products were no longer an afterthought, although profitability in this segment declined over the years. Property-and-Casualty (P&C) insurance, especially motor insurance, continued to be a strong driver, while health insurance proved to be the fastest-growing segment with robust demand from different geographies

Simultaneously, the insurance industry finds itself on the cusp of an industry-wide shift as technology is starting to play a greater role in core operations. In particular, technologies such as AI, AR, and VR are being deployed extensively to retain customers amidst this technological and economic upheaval.

Double down on digital

For insurance firms, IT budgets were almost exclusively dedicated to maintaining legacy systems, but with the rise of InsurTech, it is imperative that firms start dedicating more of their budgets towards developing advanced capabilities such as predictive analytics, AI-driven offerings, etc. Insurance has long been an industry that makes extensive use of complex statistical and mathematical models to guide pricing and product development strategies. By incorporating the latest technological advances with the rich data they have accumulated over the years, insurance firms are poised to emerge stronger and more competitive than ever.

Using AI to curate a bespoke customer experience

Insurance has always been a low-margin affair and success in the business is primarily a function of selling the right products to the right people and reducing churn as much as possible. This is particularly important as customer retention is normally conceived as an afterthought in most industries, as evidenced in the following chart.

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        Source: econconusltancy.com

AI-powered tools (even with narrow capabilities) can do wonders for the insurance industry at large. When architected in the right manner, they can be used to automate a bulk of the standardized and automated processes that insurance companies have. AI can be used to automate and accelerate claims, assess homeowner policies via drones, and facilitate richer customer experiences through sophisticated chatbots. Such advances have a domino effect of increasing CSAT scores, boosting retention rates, reducing CACs, and ultimately improving profitability by as much as 95%.

Crafting immersive products through AR/VR

Customer retention is largely a function of how good a product is, and how effective it is in solving the customers’ pain points. In the face of increasing commodification, insurance companies that go the extra mile to make the buying process more immersive and engaging can gain a definite edge over competitors.

Globally, companies are flocking to implement AR/VR into their customer engagement strategies as it allows them to better several aspects of the customer journey in one fell swoop. Relationship building, product visualization, and highly personalized products are some of the benefits that AR/VR confers to its wielders.  

By honoring the customer sentiments of today and applying a slick AR/VR-powered veneer over its existing product layer, insurance companies can cater to a younger audience (Gen Z) by educating them about insurance products and tailoring digital delivery experiences. This could pay off in the long run by building a large customer base that could be retained and served for a much longer period.

The way forward

The Insurance industry is undergoing a shift of tectonic proportions as an older generation makes way for a new and younger one that has little to no perceptions about the industry. By investing in next-generation technologies such as AR/VR, firms can build new products to capture this new market and catapult themselves to leadership positions simply by way of keeping up with the times.

We have already seen how AR is a potential game-changer for the insurance industry. It is only a matter of time before it becomes commonplace.

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