Property and casualty insurance (P&C) is the most commonly held type of insurance worldwide. P&C insurance represents the coverage provided on physical assets (such as cars or homes) and against the risk of damage to persons while using those assets. If you harm someone with your car, cause damage to a rental unit, or have someone slip, trip, or fall while in your home, P&C insurance is what you’ll need. 

Given that P&C insurance is a legal requirement in many areas – it’s generally not wise to drive uninsured! – it should come as no surprise that the market for P&C insurance was worth around $2.9 trillion in 2021. 

Life and health insurance (L&H) is an even bigger player in the insurance game. Whereas P&C insurance covers the risk associated with owning and using tangible assets – for example, damage to your property or repairs on your car – the life and health insurance industry deals in hypothetical risk. Life insurance, critical illness insurance, and health insurance all make up the $5 trillion life & health insurance market

Evaluating Risk in the Property & Casualty Industry

Risk is more tangible in the P&C industry compared to L&H insurance. Assessing the potential cost of damage from an accident or from lawsuits following a claim is less predictable than paying out a death or critical illness benefit.  Although P&C claims tend to be smaller in size, this unpredictability means P&C firms need to have more financial cushion (and a less risky asset mix) than L&H firms. 

Although there is no shortage of demand for P&C insurance, profit margins tend to be slimmer and costs can vary. When assessing the P&C risk, insurers look at factors such as:

• The type of asset, its use, and it’s location. For example, a new driver on a brand new car, or a home built in an area known for hurricanes, or the number of safeguards against negligence or risk on a property.
• The claims history of the insured, and sometimes the credit history, in order to assess whether they are likely to file a claim. 

Managing the risk when underwriting a P&C policy also includes premiums. Profit margins can be slimmer in P&C thanks to unpredictability. Policies also tend to cover a shorter term, so the P&C insurer can’t cover off as much of their ‘downside’ with investments as the L&H insurer. 

As an example, imagine a P&C company evaluating a home insurance policy in an area built on a floodplain. The insurance company predicts that 50 out of every 1000 policyholders in houses like these will file a claim, and claims are usually for water damage costing $3000. 

The cost of insuring the homes is then estimated at $150,000 ($3000 for 50 policyholders). If 1000 homeowners pay $800 per year, the insurer should make money, even if they don’t reinvest premiums. This is why P&C premiums make up 77% of the money that Canadian insurers bring in.

However, imagine a year where water damage leads to mold – leading to lawsuits, medical records, and medical experts supporting a class action claim. Too many of these will erode profits entirely: which is why insurers are so careful when underwriting a P&C claim. 

Evaluating Risk in the Life & Health Industry

Life insurance risk is one of the more complex areas of underwriting. Actuaries assess this life insurance risk and help L&H companies stay profitable. Imagine a company offers a 30 year term life insurance policy with a $150,000 death benefit. It charges premiums of $500 per year, so after 30 years, the company will have collected $7500 in premiums. 

In the scenario above, the insurance company “loses” when it fails to predict the early death, which is why actuarial professionals use careful judgment in their underwriting. If the policyholder does not survive the term, the benefit is paid to dependents or families of those insured.

Life and health insurance is based on the idea of pooled risk. This means that even though life insurance companies know they will need to pay out $150,000 in some scenarios, they are ‘willing to bet’ that there will be more scenarios than not where the company will collect premiums but not repay. 

For example: a life insurance company offers the above life insurance policy to 1,000 people. To assess the risk, the company uses an AI tool to look at the number of deaths in the population as a whole, and estimates 2%, or 20 people. This means:

• Insuring 20 people would cost $150,000 each for a cost of $3 million. Policy premiums collected during the period total $7.5 million. 
• The company earns $4.5 million from the policy.

The life insurance company might also invest its $7,500 from premiums in a 30 year Treasury bond. This is also part of planning for risk. The average rate for treasury bonds is around 4%, so assuming this remains consistent in this hypothetical timeframe, its $7,500 investment would grow to over $24k. 

While L&H and P&C insurance are both leading industries worldwide, they aren’t the same. Risk from a hypothetical event is fundamentally different from risk from a physical asset, although some of the general principles will agree. This is why P&C insurers (and L&H insurers) will have different perspectives, and need different tools, when underwriting each claim.