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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.

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Risk Management

The Profession: Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]