Navigating Innovation: The Intricacies of Insuring Emerging Exposures

Emerging risks are always in mind for underwriters, but reinventing the wheel is rarely necessary to give brokers and insureds the new types of security they seek.

By: Gregory DL Morris | February 18, 2024

Between emerging risks and written coverage is a lot of science and more than a little art. There are always new exposures that owners would like to insure. Most carriers say development is just as much a push from their underwriting and claims groups as a pull from brokers and insureds.

Innovation is more than just a what; it’s a how.

“New and improved” gets a bad rap, but incremental enhancements to existing policies are often the fastest and easiest ways to respond to evolving risks. And fast is important. “Speed to market” was a familiar phrase among development executives. Unspoken, but implied, was the importance of not letting great be the enemy of good.

Creating Coverage

The foundational pillars of developing new coverage, according to Michael Marks, VP of emerging markets and innovation at Nationwide, “are understanding the risks themselves, the partners and collaborators, and then the specific policy language itself. The risks and the coverage might seem obvious, but the collaboration is just as important.

“It is essential that their strategic objectives are aligned with ours,” he said.

Michael Marks, VP of emerging markets and innovation, Nationwide

It might seem axiomatic, but “we are trying to find what is insurable,” said Marks. “For example, we are very interested in parametric, especially for single perils. That can simplify the offering both for us and for the insured. They can buy just the protection that they need. We are always trying to break things apart and make them more accessible.”

An example of making things insurable would be a parametric trigger to protect against the effects of a hurricane in the Pacific disrupts that supply chain for a business that requires shipments of steel from an Asian port.

“We look for opportunities to enhance offerings for areas not previously covered,” said Marks. “In that case we could add a business-interruption insurance with a parametric trigger.” Another approach can be to carve out coverage for specific exposures for perils such as hurricanes or wildfire, he added.

“We work in both admitted and non-admitted,” said Marks, “we also conduct some consumer testing. All of it informs our development. Our brokers tell us what is and is not selling, and why. Our claims people tell us how we could revise our coverage.”

De-novo innovation starts with data analysis, Marks explained. “At the beginning we work with our partners to get new offerings into the market. About six months after the introduction we review the uptake rate and loss ratios.”

The refresh rate on data is “critical,” Marks stressed.

“We’ve found that a lot of data just sits until something big happens. So it’s important to refresh data often, especially in climate-related coverage when we look at CAT-prone regions. You could be looking at acres of concrete,” where there was recently woods or fields, he elaborated.

A notorious example of that was when Hurricane Harvey devastated the Gulf Coast, especially Houston, in 2017. Areas that had not previously suffered serious flooding were inundated because a new housing development, shopping area or office park just a few miles away changed the local drainage pattern.

Most of the specific developments in Marks’s group are under non-disclosure agreements with partners, but he did give an example of the kind of things they have cooking. “Artificial intelligence is being used in many areas for processing and analysis. That creates new risks that we need to get ahead of. The question becomes how to cover AI. Possibly through errors and omissions insurance.”

From a binding perspective, much of the focus in 2023 was around refinement of our existing appetite as opposed to coverage expansion, Marks explained.

“However, there were a few segments of the portfolio, namely product manufacturing and contractors, in which we broadened appetite and introduced additional ancillary coverages to help round out our offerings and attract greater market share.”

That included revamping the product-manufacturing program to expand the risk profile into several additional classes; introducing a remodeling program tailored to meet the needs of residential and commercial contractors performing non-structural, non-ground up work; and a miscellaneous-tools inland-marine bundle offering on the contractor classes, added via endorsement.

“These were developed by assessing competitor offerings and market demand in correlation to our business strategy as it relates to our focus classes,” said Marks. “Because our binding portfolio is non-admitted and not subject to filing, pricing was judgment-based and took into consideration scalability and market salability. Initial response from agency partners has been favorable; since launching our new remodeling program and product-manufacturing programs, we have more than doubled our written premium and polices-in-force counts.”

Innovation Drivers

Innovation comes from different areas, said Hela Trerotola, senior vice president in executive assurance growth and middle markets at Arch Insurance. “In management liability, it mostly comes from customer requests. We also identify areas of opportunity,” which can include areas of disruption – for example perils that have been excluded or losses that are not covered.

A big part of developing new types of coverage is taking feedback, positive and negative from brokers and clients, added Jamie Schibuk, executive vice president and head of cyber and PL open brokerage at Arch.

“We also try to work from claims to address gaps. We also make extensive use of technology. For example, in cyber coverage we use third-party data for identifying vulnerabilities. That helps us in underwriting and pricing, as well as in supporting risk management for insureds to help them enhance their cybersecurity.”

Sometimes innovation is what happens organically.

“Across the industry there are a lot of out-of-date forms,” said Trerotola. “Last year we started an initiative to update our forms. In some cases those updates incorporate 10 or 15 years of advancements consolidated into the base form. That simplifies and streamlines the process, and several of the enhancements are of material benefit to insureds. Brokers definitely had a lot of input.”

Schibuk noted that Arch also has customizable forms for brokers to adapt on their own. That collaboration with brokers “helps us to reposition our risk engineering, and also helps us in our approach to underwriting.”

Innovation in underwriting “is a meeting of the minds,” he stressed. “Everyone has their perspective — actuaries, claims people, risk managers, sales, brokers. It really does take a village to understand the opportunities and the possible downsides.”

Bringing Forth a Good Product

That all said, speed to market is essential, said Trerotola.

“It is important to have the right minds in the room, and we have to move the process along. We implemented a plan across the company in 2019 to help us push innovation through the organization and out to the market.”

In some lines the perils themselves drive innovation. The most obvious is climate change that is radically altering natural catastrophe exposures. Another is cyber, said Schibuk, explaining that cyber coverage today is very different from coverage several years ago.

“When cyber coverage started to be offered, it was mostly about data breaches and privacy,” said Schibuk. But business that did not have customers’ personal information or credit-card numbers did not feel they were at risk. Now cyber coverage is about operations, business interruption, even ransomware. That has vastly expanded the type of coverage and the client base.”

The lesson, Schibuk concluded, “is that new coverage comes from meaningful underwriting. Offerings have to be relevant to the landscape. You can’t just put exclusions on things.” &

Gregory DL Morris is an independent business journalist currently based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected].

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.