Insurance This Week: Cloud Risk Event and Macro Spoil 3Q Earnings

The AWS outage is this week’s event that laid bare the insurance sector’s vulnerability to operational risk. The event may prompt conversation and analyst questions on upcoming earnings calls. Also this week, macro trends manifested on early 3Q earnings calls in the form of charges to bolster reserves in the wake of higher-than-expected claims costs attributed, in part, to inflation trends. 

Event of the Week

On Monday, October 20, AWS suffered a significant outage. While this is not an event that will drive an increase in claims, the core operations of insurance companies such as claims, underwriting, new-business development, and analytics were subjected to significant disruption. The outage underscores material operational risk for the sector and may prompt related conversations during upcoming calls. There could be a positive impact on companies that offer alternatives to AWS, such as Microsoft / Azure, that would allow insurance companies to diversify supplier concentration to lower operational risk. 

Tracking Macro EPS Insight

We have highlighted the trend of rising inflation and suggested that insurance company earnings may be impacted by higher-than-expected claims costs. Specifically, auto insurance was cited as a line exposed to rising costs to settle claims as a result of tariffs on imported parts. Selective reported earnings on Wednesday, which included a charge to strengthen commercial auto reserves.

Details: Event of the Week

Here are select examples of AWS usage.

Liberty Mutual Insurance

One of the large global P&C insurers, Liberty Mutual previously announced significant on-premises workloads to AWS and adoption of a “serverless-first” policy for workloads. The company processes 100 million transactions a month and increased to running 50% of its workloads on AWS in 2020. Detailed FactSet data below shows claim volumes for one group at Liberty. Annually, Liberty must process hundreds of millions of claims just for one group.

Principal Financial Group

Principal uses AWS generative-AI and analytics capabilities and other cloud platforms such as Microsoft Azure. Aside from core functionality, Principal uses AWS to transcribe and review interactions in call centers, such as sentiment, call time, and other metrics.

Details: Tracking Macro for EPS Insight

Selective Insurance Group (SIGI) reported Q3 earnings results October 22. The company recorded $40 million of unfavorable prior year casualty reserve development related to general liability and commercial auto within its commercial lines. While SIGI’s disclosure doesn’t break out the EPS impact, the charge related to rising costs could be roughly estimated to have reduced reported earnings by about $.50 based on reported net income and shares outstanding.

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