Introduction: A Continued Challenging Environment Calls for Resilience and a Strategic Approach to Risk
Lambros Lambrou
Chief Executive Officer, Commercial Risk Solutions
Even as the world continues to emerge from the global pandemic, 2022 proved to be another challenging year. Although we saw improvements in returning to a life that resembled pre-pandemic times, many communities, businesses, and economies experienced challenges stemming from other factors.
The onset of the war between Russia and Ukraine in February of 2022 proved to be a seismic geopolitical event with tragic direct and indirect consequences – most importantly, loss of life and senseless destruction. The conflict’s impacts spanned far and wide and are likely to continue for the foreseeable future. In addition, market volatility spiked as experts tried to anticipate the changing geopolitical landscape and social unrest unfolding as electorates expressed discontent at the economic and political state of play.
Also in 2022, economic difficulties grew as inflation – driven largely by the geopolitical environment – soared throughout the year. Inflation in the UK was at a 40-year high, while the US saw broad inflation unexpectedly accelerate to 8.6 percent in May. This worldwide inflation translated into high fuel costs, which in turn led to high energy costs, high food costs and an overall increase in the prices of goods and services. Governments and central banks took drastic actions to stem the tide, but the economic landscape is likely to remain fragile for some time.
These challenges, as well as others related to cyber, supply chain, food security, climate transition, energy security, ESG and public sentiment are likely to create new pressures on businesses over the medium to long term. Since these risk areas are evolving and highly interconnected – as we have seen firsthand with the geopolitical conflict – it is ever more vital that businesses commit to building resilience, including maintaining a well-informed, broad strategic approach to risk.
In 2022, the insurance market continued to see a deceleration of hard market trends. New capacity mobilized, either through new market entrants or expanded appetite in areas targeted for insurer growth. Scrutiny and rigor continued in underwriting practices as insurers focused on reducing volatility through best-in-class risk selection. Some placements renewed with increased limits as valuations were scrutinized and as a result of inflation-driven exposure increases. Some limits were restored from limit reductions that took place during 2020 and 2021, although client demand for restoring limits did not materialize at the pace expected. Coverage stability returned and broader terms were achieved in cases where insurers leveraged coverage as a differentiator. However, “soft market clauses” remained generally unavailable.
As market dynamics shifted, so too did client needs, and the need for the industry to innovate and invest in solutions to meet changing risk profiles has become increasingly clear. We have seen the need to innovate new products and extend existing products where increased demand has been driven by the geopolitical conflict as well as by new and emerging risks. In addition, we have seen the need for greater investment in data, analytics and risk modelling to identify alternative and traditional risk transfer solutions that are cost-effective and better suited for the digital world. And finally, we have seen a significant increase in demand for flexible, cross-industry facilities, as such solutions have proven invaluable in transferring risk across a range of exposures – from grain shipments to cyber-physical attacks – and they could also prove valuable for as-yet uninsurable risks surrounding the climate transition.
We welcome you to the final edition of Aon’s Global Market Insights report for 2022, where you can read more about the macro events that impacted the insurance market in the last quarter of 2022 and trends to watch in the coming year.
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