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Sponsored: Lexington Insurance

Innovation at the Pace of Change

As the U.S. economy continues to evolve, no other insurance segment will be better able to meet the demands of a rapidly changing liability landscape than the E&S market.
By: | August 29, 2017 • 6 min read

The excess and surplus lines insurance market was once considered the market of last resort. It served as a safety valve for the broader property casualty industry in order to provide capacity and innovative solutions to risks that standard markets viewed as undesirable.

But much within this critical sector is changing.

The truth is that much of the property casualty industry has struggled to keep up with the pace of change in today’s technology and business environment.

“The largest companies in America at the beginning of the last century were largely manufacturers and producers of raw materials such as coal, steel and oil,” said Matthew Power, President, National Branch, Head of Wholesale Broker Engagement, Lexington Insurance Company. “These companies were fueling the engine of an unprecedented period of expansion and industrialization in this country. By the close of the twentieth century, the U.S. had evolved into a much more wealth-based economy led notably by consumer goods manufacturers and financial institutions.”

Many economists agree that the U.S. economy is quickly re-assimilating once again; this time toward a more knowledge-based foundation driven by the rapid paced convergence of technology, data and advanced information systems.

Matthew Power, President, National Branch, Lexington Insurance Company

Much of the insurance industry is adept at underwriting older, more established industries like manufacturing, real estate and construction because their associated risks are more tangible and well-known. Far fewer have prepared themselves to meet the demands of the emerging future state economy.

“Over the next 25 years, there will be new industries that challenge admitted market underwriters, like genomics, biotech, nanotechnology, robotics and alternative energy,” Power said. “How many insurers are prepared for the companies of tomorrow? Very few.”

As the U.S. economy continues to evolve and risk paradigms shift in tandem, no other insurance segment will be better able to meet the demands of a rapidly changing liability landscape than the E&S market. “With its freedom of rate and form, the excess and surplus lines industry is uniquely positioned to innovate and develop those products that will be requisite into the future,” Power said.

State of the Market

The excess and surplus lines industry is a $42 billion market that is trending toward modest growth in 2017. “The growth and aggregate profitability of the E&S sector has outperformed that of the admitted markets consistently since 2011, so we’ve seen several consecutive years of growth,” Power said.

But while composite growth remains solid, there remains an overflow of capacity and generally challenging market conditions.

“Core E&S lines are stressed,” Power acknowledged. “Part of the challenge is driven by admitted markets encroaching on the E&S space in search of growth opportunities. For E&S carriers, there is still plenty of opportunity in emerging industries — the industries of tomorrow. To achieve growth in a tough market, you need to innovate and create new market space.”

Micro-Segmentation

“The market doesn’t move in a single monolithic manner. Even in the midst of traditional soft market cycles, experienced underwriters are likely to identify attractive risk sub-segments that are performing well. Understanding the difference between those underlying segments allows you to build the best model for enhanced return for your organization,” Power said.

Lexington has taken that micro-segmentation approach by underwriting flood risk — an area many insurers choose to avoid.

“It’s an individual peril where we believe that we could make a market and have been able to build a really robust business,” Power said.

But focusing on a micro-market requires a high level of expertise in its specific risks, as well as a degree of patience. Understanding whether a segment will perform well for your book of business means watching it over a period of years to monitor loss trends and profitability potential. “We began focusing on flood risk over a decade ago, writing excess flood, building internal models, and creating a better understanding the peril and how it should be priced. There was a lot of learning that went on over the better part of a decade before we felt comfortable entering the market on a primary basis,” Power said.

Innovation

Achieving sustainable growth and preparing for the needs of tomorrow’s customer also requires an eye for innovation. Lexington Insurance has built a sustainable culture of innovation over the last 50 years, which is reflected in their ongoing Innovation Boot Camp Series. Innovation Boot Camp (IBC) is a 12-week immersion program designed to take 30-40 Lexington employees through an in-depth curriculum focused on innovation both within the insurance industry and in the broader economy. At the end of the program, participants are divided into groups and tasked with presenting an innovative idea, whether it’s a new product, new business, or new internal solution. Now on its 20th iteration, IBC has been successful in not only driving out-of-the-box ideas, but in cultivating a culture of innovation.

“It’s been an incredibly successful program, and a great model for us to think about how we can create new products, new income streams, and new sources of value for our customers.” Power said. “One of the core teachings in the IBC curriculum is that innovation is everybody’s job. In order to move the needle in our industry, everybody has to be thinking about it.”

Preparing for Risks of the Future

But innovation goes beyond products and services. Lexington has also harnessed the development of technology in data analytics, modeling and interconnectivity by strategically partnering with start-ups and accelerators focused on reducing risk.

New technologies that utilize rapid sequencing laser-aided photography to create 3D images of rooms and buildings are creating new risk mitigation techniques. On a construction site, those images provide contractors and engineers with the ability to memorialize key phases of the construction process in a way that allows users to examine actual work even years after completion.

New sensor technologies can track change in atmospheric conditions, temperature fluctuation, or moisture, and send an alert to stakeholders like the project owner, insurer and site foreman that conditions that may lead to damage or physical loss are present and require intervention.

With that data in hand, a loss can potentially be prevented before it occurs.

Emerging technologies like these, along with other technologies like safety wearables, can work together to make an entire work site safer while also improving product quality. “I think that’s really exciting because over time as these technologies are introduced, they will begin to shift the associated loss experience in those industries that adopt them,” Power said.

Power also described a recent start-up that equipped a van with sonar detectors in order to identify where underlying support in roads was weakening or washing away, indicating that a pothole was imminent. Such data could help public works departments fix problems before they emerge — and prevent a lot of damage.

“Think about what that could mean for an airport, or a commercial real estate company that has live roadway systems, or a municipality,” Power said. “I’m saying to these innovators, ‘have you thought about the insurance industry?’”

To learn more about Lexington Insurance, a member of AIG, interested brokers should visit http://www.lexingtoninsurance.com/.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.




Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]