Megacity aggregation challenge will test insurers’ robustness

An increase of megacities will create a flurry of new insurance distribution forms and buying groups and create new challenges due to an aggregation of risk which some insurers may fail to cope with, according to Allianz Global Corporate & Specialty.

Allianz defines megacities as urban areas exceeding 10 million inhabitants, and the number of such huge cities is increasing rapidly. A 2006 UN working paper documented that there were only two megacities in 1950: Tokyo and New York City. In 2015 there were 29 megacities recorded—around 30 percent above the UN forecast, according to the Allianz report Megacities—Pushing the Boundaries of our Industry.

Megacities could create new competition for traditional insurers. Where there is aggregation of business and personal consumers, insurance distribution forms and buying groups will be deliberately formed by an insurer or intermediary, or self-formed because of proximity, says the report.

In the digital age, Google, Amazon and Uber have been noted as distribution channels or even providers for insurance, which—because of their wide consumer appeal and databases—could threaten and disrupt the traditional players and business models, according to the report.

Megacities are also likely to exacerbate the risk exposure from earthquakes, cyclones, flooding, pandemics terrorism and cyber threats, creating the need for insurers to adapt their business models.

In the property line, megacities concentrate values in a more confined area and may cause a greater and faster spread of damage due to closer proximity between physical structures and operations. There will be greater interdependencies triggered by nat cat, according to Allianz.

Pandemic and terrorism risk-related liability claims are likely to increase due to emergence of megacities. Healthcare costs connected to a single infectious disease event are likely to rise, while densely populated areas will develop into prime targets for conventional terrorists. Overall there may be longer periods for loss recovery and returning to revenue generation.

At the same time, the increasing need for cover in megacities will go hand in hand with extremely competitive market conditions, which may result in some carriers failing to cope, the report concludes.