From Analysis Paralysis to AI Triumph: A Guide to Picking the Right Vendor

By: Frank Huang | September 4, 2023

Frank Huang, FCAS, MAAA is Managing Director and P&C Actuarial Practice Leader at Davies, formerly Merlinos & Associates. Frank has over 20 years of actuarial experience supporting insurers, self-insureds, private equity, agencies, and governmental entities in various risk and insurance issues. Frank resides in Atlanta, GA, and can be reached at [email protected].

In my early 20s, I’d often find myself standing for minutes in my nearby Publix trying to figure out which item to buy.

Did I want the $2 name brand product, or the $1.50 Publix generic product? Did I want the less tasty Gala apples at $1/lb or the tastier Honeycrisp apples at $2/lb? I would stand paralyzed by the decision.

Thankfully, at some point, stomach pain kicks in and forces you to make a decision.

But in real life, there are many people who are staring blankly, maybe even petrified and anxious, in the aisle of predictive models trying to figure out how to decide between different companies. If you can withhold judgment at the horrible intro you just read, I’ll do my best to present to you things you should consider to help move you from trepidation to triumph.

First, two caveats.

The first is that this is not comprehensive. Writing a thorough treatise on this would take too long and the editor already thinks I have wasted 150 words of my 900 word limit. Second caveat is that this article is focused on analytics firms providing underwriting, pricing, loss control, or claims-level solutions that are commonly marketed as AI.

So, how does one select an AI vendor in claims, loss control, underwriting, or pricing?

Consider the Build vs Buy Decision

There are a lot of considerations going into this decision, but it’s worth checking this point off before you start heading to the analytics store.

Building something in-house or even with outside support could be a better option if you’re looking for a more customized solution, have in-house technical expertise and resources, and/or need a quicker turnaround.

On the other hand, I have definitely seen companies start off with great intentions and then end up with more money spent and less of a product than if they had just outsourced the work from the get-go.

Going with an external vendor can mean avoiding diverting too much attention and resource from other parts of the business, having immediate access to specialized expertise, proven technology, and on-going support.

Have the Right People Leading the RFP

A Request for Proposal (RFP) process or something akin to it is absolutely crucial to ensuring a methodical approach to evaluating the potential vendors. Internal stakeholders with previous experience are the most ideal, and it’s important to also incorporate other stakeholders if not into the actual process then at least to get feedback at the outset.

Experience is key but a characteristic not to be overlooked is independence. Whomever you have leading the process, make sure that that person or group of people have the best interests of the company at heart, with no selfish motivations apparent that might impair their judgment.

Look Under the Hood

It’s important that you, or the people you trust, understand the model design and how it compares against competition. I’ve seen models promoted as being robust and cutting edge, but once you get through an NDA and delve into the model details the model is shockingly dated and not well suited for anyone’s needs.

It’s also good to give it a test drive. How does the model perform on your own data? Having real-life examples can help you get comfortable with important details like the potential range of ROI and what a model “error” or incorrect prediction might mean financially and operationally.

Differentiate Between Salespeople and Post-Sale Support

As you go through the RFP process, some firms will connect you with smooth-talking salespeople and flashy decks persuading you that your hard-earned budget will generate an immense return.

However, after you sign the contract, you quickly realize and regret that the immediate attention you received from that salesperson is now replaced with inattentive and rigid interactions with the people actually doing the work.

As you go through the RFP process, make sure you differentiate those two groups, and talk to the actual people behind the scenes.

A subpoint to this is understanding how important of a client you are for the company. Are you a smaller or larger client for them? Will they be willing to work with you on changes in the model because you’re a valued client, or will they brush you off because you’re booked as a win on last month’s sales quota?

Push for Performance-Based Contract Terms

It’s great when companies say they want to share in your success and ensure there will be little downside to spending your budget with them, but what if they were able to codify those assertions in a contract?

Having a contract designed such that you pay little when there’s little to no results, and you pay more when you’re swimming in ROI is a true partnership.

Of course, the devil is in the details. You have to not only define “success” but be able to objectively quantify and monitor it over time.

While there are many other considerations at play and each situation is different depending on the buyer’s history, sophistication, needs, goals, etc., the above points hopefully will help reduce some anxiety when looking at the different options in the predictive modeling aisle. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

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