2023: Predictably Unpredictable

I have read several “2023 Recap” notes over the past few weeks. It’s fascinating to see how leaders in industry, government, and even sports converge on similar themes while simultaneously diverging enormously on what they deem to be the most impactful events and trends of the year. From geopolitics to the Federal Reserve to Taylor Swift, there are many worthy candidates for the key drivers of 2023.

From my vantage point at Kalepa, I continue to observe two secular trends that intersected with many of the critical events of the year: the entirely predictable “unpredictability” as the world only continues to grow in complexity as well as the rapid rise and evolution of technology in general and AI in particular.

Several predictions for 2023 did not come to pass: a recession in the US and the continued collapse of the equity markets, rapid growth in China after its Covid re-opening, intensifications of geopolitical conflicts in Europe or East Asia, and Aaron Rodgers leading the Jets to victory in the AFC East.  In contrast, the Fed and other central banks have, surprisingly, appeared to have steered the economy towards a soft landing, the S&P 500 is almost at a record high, the Chinese economy has sputtered under misguided policies, the center of geopolitical tension returned to the Middle East after Hamas attacked Israel in October, and Aaron Rodgers’ Achilles tendon abandoned him 4 offensive snaps into his Jets tenure. Forecasting is not an easy sport.

It is precisely because of this “unpredictability” that the insurance industry only continues to grow in importance and impact year after year. This trend towards greater complexity, more volatility, and outliers becoming the new normal continues to define the evolution of our industry – and will increasingly do so in the year ahead.

Despite cooling in a few commercial sectors, most notably public D&O and cyber, the hard market has continued unabated with rate increases keeping apace or exceeding loss trends. 2023 is poised to be the hottest year on record and the trail of natural disasters, from a devastating fire in Maui to Hurricane Hilary maintaining storm force while tracking across California to wet-bulb temperatures becoming a part of the lexicon, has continued to result in double-digit increases in property rates, the departure of several players and subsequent changes in rating regulation in California, and a difficult reinsurance renewal season.

The continued growth of the MGA (24%, once again outpacing the P&C market) and E&S markets (15.9%, now comprising ~9% of all P&C premium) is also driven by the need for nimbleness and adaptability. As the standard market reduces risk appetite or exits sectors which are increasingly difficult to underwrite and rate, MGA and E&S markets have flourished. Continued social inflation, the expanding scope of exposures such as PFAS, and welcome tort reforms in Florida have all continued to drive rapid change and volatility in casualty lines.

Adding to the mix, the pace of change in technology is at a record high with weekly breakthroughs in all facets of artificial intelligence since the release of OpenAI’s GPT-4 model in March. Technology has had a massive impact on the entire insurance value chain over the past few years. New AI technologies will accelerate and expand the impact of this transformation.

AI presents a unique opportunity for the insurance industry to cope with ever-increasing complexity. When utilized appropriately, it can be the most powerful weapon in the arsenals of insurers to enable their highly qualified staff to deal with the challenges of today and those of the future. However, as with other overly-hyped technologies of the near past (remember Long Blockchain Corp?), there is a lot of noise obscuring the critical elements of value creation. Separating the wheat from the chaff when it comes to AI, Generative AI, Reinforcement Learning, and Large Language Models makes the difference between delivering a significant return on equity – rapidly growing, highly profitable books of business -- and disappointing customers, employees, and shareholders after the only metric that improves is the number of proof-of-concepts (POCs) conducted.

At Kalepa, we always focus on the fundamentals. Our mission is to help insurers bind risks with confidence. Our Copilot platform is designed to help underwriters of any commercial line to identify the most lucrative opportunities, deliver the highest efficiency and level of service to distribution partners and insureds, and ultimately build the most profitable and fastest growing book of business. This has been our goal since day 1 and, in 2023, just like every year, we incorporated many developments at the cutting edge of AI to help us advance towards that objective.

• We launched full support for Management Liability lines. Underwriting D&O, EPL, Fiduciary Liability, and crime for public and private companies continues to become more complex and time-consuming. In light of a softening market, the ability of Copilot to enable underwriters to simultaneously maximize their productivity and profitability has been a game changer for our clients.
• We expanded Copilot’s risk capabilities with a brand-new Risk Analyzer experience, novel insights for construction projects, CAT-exposed property, commercial fleets, workers compensation, excess layer management, and many more AI-powered analyses of exposures and controls for each of the risks that our underwriter clients evaluate every single day.
• We were recognized for the second year in a row as one of the most innovative InsurTechs in the world by FinTech Global’s InsurTech 100 committee.
• We expanded our global footprint by appointing Naohiko Oikawa, a leading executive in analytics, innovation, and technology in Japan, to Kalepa’s Advisory Board as we expand to the Japanese market.

2023 has been a year of tremendous growth for Kalepa. We are honored to continue to support our clients as they deliver on their promises to protect individuals and businesses, and to foster risk-taking and innovation in the economy. It is a privilege to work with some of the most forward-looking organizations and executives on the planet as they embrace the power of AI to truly deliver material value to their customers, partners, and shareholders. As always, we thank our customers and partners for their trust, feedback, and support.

Wish you a Happy and Prosperous 2024!

Paul Monasterio

CEO and Co-Founder, Kalepa