Are Insurers Longing For Risk? | FT Rethink

Key Concepts

• Risk vs. Uncertainty: Distinction between known potential outcomes with assignable probabilities (risk) and unknown outcomes without assignable probabilities (uncertainty).
• GLP-1 Drugs (Weight Loss/Obesity Drugs): Significant market growth projected, with potential to alter life expectancy and insurance payouts.
• Climate Change: Systemic threat impacting insurance payouts, natural disaster costs, and potentially leading to insurers opting out of climate-linked risks.
• Systemic Change: Broad transformations in global systems (e.g., healthcare, climate) requiring adaptation from industries like insurance.
• Reactive Underwriting vs. Proactive Risk Mitigation: Shift in insurance strategy from responding to events to actively preventing them.
• New Economic End State: Vision of a future economy that is net-zero, nature-positive, socially constructive, and digitally enabled.

Risk vs. Uncertainty in Insurance

The fundamental difference between risk and uncertainty lies in our knowledge of potential outcomes and their likelihood. Under conditions of risk, we can identify what might happen and assign probabilities to each outcome. In contrast, under conditions of uncertainty, the possible outcomes are unknown, and therefore, probabilities cannot be assigned. This distinction is crucial for the insurance industry, which traditionally operates within a framework of calculable risk.

Impact of Systemic Changes on Insurance

The insurance industry is facing significant challenges due to impactful changes occurring across global systems. These changes, both large and small, are transforming how these systems operate and, consequently, the nature of risks and uncertainties faced by insurers.

1. Weight Loss Drugs (GLP-1 Market)

• Key Point: The emergence and rapid growth of GLP-1 drugs, also known as obesity drugs, represent a major systemic change in healthcare.
• Data: The market for these drugs is forecasted to reach over $471 billion by 2032.
• Impact on Insurance: The primary concern for the insurance industry is not simply whether these drugs will be covered by health insurance, but rather how they will alter life expectancy.
• Potential Outcome: A large-scale adoption of GLP-1 drugs could lead to longer lifespans for a significant portion of the population. This, in turn, could result in a "completely different set of potential payouts" as the population ages, potentially against current actuarial predictions.
• Strategic Implication: The transcript suggests that "investing in systems change rather than fighting it may be the only way to deal with these unpredictable outcomes."

2. Climate Change

• Key Point: Climate change is identified as a systemic threat with profound implications for the financial system, particularly the insurance sector.
• Data (UK): Property insurance payouts in the UK have reached a 20-year high.
• Data (Global): Globally, natural disaster catastrophes typically cost the insurance industry more than $100 billion a year. However, in the past year, this cost trebled.
• Consequences: Regulators are issuing warnings that banks and governments may face difficulties managing "soaring insurance costs."
• Potential Insurer Response: Some insurers might choose to "opt out of ensuring climate-linked risks," even if government guarantees are offered to encourage their participation in these markets.
• Call to Action: There is a "critical need for the insurance industry to adapt by moving from reactive underwriting to proactive risk mitigation."

The Need for Adaptation and a New Economic Vision

The transcript argues that deep systemic changes are transforming markets, industries, and society. For long-term investors, these transformations present an opportunity to shape a new economic future.

• Proposed Future State: This envisioned "new economic end state" is characterized by being:
  • Net-zero: Achieving a balance between greenhouse gas emissions produced and removed from the atmosphere.
  • Nature-positive: Contributing to the restoration and enhancement of natural ecosystems.
  • Socially constructive: Promoting societal well-being and equity.
  • Digitally enabled: Leveraging digital technologies for innovation and efficiency.

Synthesis and Conclusion

The YouTube video transcript highlights the critical distinction between risk and uncertainty and argues that the insurance industry is increasingly facing the latter due to profound systemic changes. The rapid growth of GLP-1 drugs and the escalating impacts of climate change are presented as prime examples of these transformative forces. These developments necessitate a fundamental shift in the insurance industry's approach, moving from reactive underwriting to proactive risk mitigation. The transcript concludes by framing these challenges as an opportunity for long-term investors to contribute to and benefit from a future economic paradigm that is sustainable, equitable, and technologically advanced.