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Sponsored: Lexington Insurance

Market Changes are Coming

Recent catastrophes combined with pre-existing soft market conditions stand to spark rapid market changes. Best-in-class insurers will emerge stronger.
By: | January 8, 2018 • 5 min read

The third quarter of 2017 showed no mercy. Hurricane by hurricane, wildfire by wildfire, natural disasters destroyed countless properties and disrupted business operations from the Caribbean to California.

In the past, outlier CAT seasons such as this produced significant changes in both risk transfer markets as well as approaches to risk mitigation and claims management.

“Quarter after quarter of consecutive reductions have left us at the lowest pricing point in the market in the last 18 years. This low point coupled with significant catastrophe losses likely signals an inflection point,” said George Stratts, President and CEO of Lexington Insurance Company, AIG’s excess & surplus lines insurer. “We’re at a point where the market is most vulnerable to dramatic shifts.”

Though no two CAT seasons are the same, there are some historical examples that provide insights into how the current market may respond.

“Market conditions now are very similar to what we experienced in 1999. At that time, we were experiencing a prolonged soft market. Then a series of catastrophes occurred in the following years, including the 9/11 attacks and the devastating hurricane seasons of 2004 and 2005,” Stratts said.

Fast forward to today, and the situation looks very similar. Guy Carpenter’s Global Property Casualty Rate-On-Line Index reflects the current low pricing point; in 2017, the index value was at its lowest point since 1999.  Then the tumultuous third quarter of 2017 heaped significant losses on the industry.

While no one can predict how the 2017 CAT season will impact the market landscape or price of risk transfer, it seems clear that changes are coming. This is, after all, the first time that alternative capital is being tested in a major way. How that capital responds and whether it returns remain to be seen.

But it’s not just about risk transfer. Increasingly, companies are just as concerned about their carrier’s ability to mitigate their risk. Regardless of how the risk transfer market responds, best-in-class carriers who have developed the analytical tools and engineering expertise to educate clients about their risks are the ones who survive and thrive through market disruption.

What’s Next for Risk Management?

George Stratts, President and CEO, Lexington Insurance Company

One proven maxim is that a more granular view of risk is a better view of risk. In the past, the carriers who invested time and resources to develop their own view of risk were better prepared to respond to catastrophic losses.

After Hurricane Andrew, for example, carriers were challenged to reevaluate their coastal property exposure, adopt more stringent underwriting, and focus on building resilience. Leveraging data, analytics and machine learning to build on old approaches will be the way forward.

“The first generation of widely-used catastrophe models established a technical baseline in the marketplace, which provided a guide to price the volatility of some of the risks we assume and better account for them in a long-term, sustainable way,” Stratts said.

“But as we move forward, broad-based market changes become much more nuanced and tailored to individual risk characteristics. Have carriers developed their own proprietary views of risk based on their experience, the experience of their portfolio, and insights garnered via data analytics and engineering? That’s what we’ll learn in the year ahead.”

Lexington invested in building out catastrophic risk capabilities, leading to CAT models that were adapted to the carrier’s own book of business and exposure and much more detailed than industry standard models.

In addition to fine-tuning existing tools, best-in-class carriers develop their own analytical tools to better evaluate risk.  Lexington did this for one of the most difficult areas of risk to insure – flood.

Lexington dug deeper than standard flood maps and again built a more granular view of its flood exposure. In many cases, it was able to inform clients of exposure that they hadn’t been aware of because they were located outside of a flood zone as demarcated on standard maps. Or, the carrier determined that some locations were actually at a decreased level of risk.

Lexington demonstrated the success of its proprietary flood models in the response to Hurricane Harvey.

“As the events of Harvey were unfolding, the early message from many markets and modeling firms was that they couldn’t accurately estimate the loss because flood is so tough to model. But we were able to tell pretty quickly the impact on our portfolio, which meant we could respond to claims much faster,” Stratts said.

Claims Commitment

In the end, businesses need an insurance partner who help them rebuild. Risk engineering and analytical tools can help build resilience, but the strength of the claims team is what gets companies back on their feet.

“The commitment I see from our claims people to be able to take on Harvey, then Irma, then Maria, then the wildfires in California, all while traditional loss activity hasn’t stopped, is incredible. They haven’t skipped a beat,” Stratts said.

Paying claims quickly is even more urgent following natural catastrophes because businesses can’t begin repairs without access to working capital.  Recognizing that need, AIG developed its ‘Property Claims Promise,’ which assures policyholders that they will receive a payment of up to 50 percent of the agreed total loss estimate within seven working days after coverage is confirmed. The funds can assist with cleanup costs, property repairs, and extra expenses incurred during the rebuilding process.

One of AIG’s larger clients in Houston, for example, sustained damage to over 600 of their 2400 locations when Hurricane Harvey hit, with two locations being a total loss. After an adjuster met with the client in the days following the storm, AIG saw no reason to wait for a formal report of damages and issued a $15 million advance within two weeks of Harvey making landfall.

Experience is vital as well. AIG has been through Hurricane Andrew in 1991, the tragedy of 9/11, and the catastrophic hurricane seasons of 2004 and 2005, among others. Through the influx of alternative capital and the challenges of prolonged soft market, AIG and Lexington have been constants.

“It’s one thing to offer capacity and to knowingly write catastrophe risk, it’s another thing to be able to respond when catastrophe happens,” Stratts said.

Emerging Stronger

Being prepared to respond and come back stronger takes continual self-improvement and a dedication to getting the details right.

Post-event, Lexington conducts a comprehensive review of its loss response to determine what went well and what didn’t.

“We call it ‘loss lessons learned.’ It’s a multi-disciplinary approach where we examine a loss through six lenses: underwriting, risk engineering, analytics, claims, operational response and communications,” Stratts said. This exhaustive process pulls in people across the organization to gain a holistic view of the loss to reflect the way clients experience it.

“Those functions might be separate within any given company, but a client sees it all at once — the property damage that may reveal engineering flaws, the claims process, the impact on the insurance contract, etc.,” Stratts said. “Getting a holistic view of our response helps us to create and fine tune comprehensive solutions. We plan to conduct such a review for our losses following the catastrophes in late 2017.”

Through its experience, risk expertise and claims commitment, Lexington is positioned to not just transfer clients’ risk, but to truly partner with companies to build resiliency no matter what lies ahead.

To learn more, visit http://www.lexingtoninsurance.com/home.

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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.