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

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.