Global Forces Demand More Agility from Insurers

The property/casualty insurance industry is in the midst of historic times. In fact, it is fair to say that a fundamental transformation of the business is occurring. The basic insurance equation of matching risk to price is not changing. However, the past decade has seen more volatility, new risk factors, and novel business models that disrupt the traditional dimensions of that basic equation. The commercial lines sector deserves special focus as the transformation underway is substantial along many fronts.

First, it is worth exploring the global forces that are changing the game for insurance – presenting both challenges and opportunities. Then, we will examine the implications for rating, pricing, and underwriting.

Global Forces

The world is becoming more complex and more dangerous, resulting in increased exposure to traditional risks and the emergence of new risks. Several factors are contributing to this environment:

Geopolitical conflicts: Wars in Ukraine and the Middle East have far-reaching implications for economies across the globe. When tariff and trade volatility are added in, businesses must deal with the effects on supply chains, shipping, energy costs, and many more factors that significantly impact their business models and risks.

Increased catastrophes: The world has seen an unprecedented run of catastrophes, with six straight years of over $100B in CAT losses. Major weather events, combined with inflation and the shifts of population and property to high-exposure geographies contribute to these losses.

Volatile inflation and financial markets: Interest rates have gone from an extended period of low rates (near zero) to a sharp run-up in rates that has dramatically changed investment patterns and returns, with important implications for governments, businesses, and consumers.

New business models: The growth of telematics and the Internet of Things has created new opportunities and approaches for insuring vehicles, property, and people. In addition, the emergence of parametric insurance, embedded insurance, and on-demand models has resulted in new ways to insure risk. The potential for leveraging these new approaches for commercial lines is massive. Connecting fleet telematics to insurance programs, harnessing data from IoT devices in commercial properties, and using parametric insurance as a new risk transfer mechanism are a few examples.

Tech and AI advances: The rapid and accelerating advancements in tech and AI are reshaping businesses, whole industries, and the daily lives of individuals around the globe. Nearly every industry is facing new risks while also grappling with workforce changes as a result of automation. For example, workers compensation insurers that calculate premiums based on the number of employees may see declining premiums as business shed workers due to AI productivity gains. It will be the insurance industry’s challenge to not only navigate these shifts but also to find effective ways to address the AI-related threats facing every business.

Implications for Rating, Pricing, and Underwriting

These global forces and others are changing how the P&C insurance industry serves customers in addressing their risks. In the past, more predictable loss history patterns and known risk factors resulted in a relatively stable environment for rating and pricing. Underwriting guidelines and appetite were comparatively static with quarterly, semi-annual, or annual updates. The data elements used by insurers to evaluate and price risk slowly evolved over time. Whether for admitted risks requiring filing and approval by regulators or for non-admitted/E&S risks, insurers tended to use a consistent set of factors and data points to fuel rating engines. Coverage and policy packages also had a degree of stability for most lines. All of that has now changed – and in some cases has changed considerably.

This has evolved the way insurers must approach rating, pricing, and underwriting in a variety of ways.

1. Agility and speed: Carriers must now be much more responsive and dynamic in how they evaluate, rate, and price risk. They need an ability to change appetites and rules quickly as market conditions change. The US market has experienced a high level of activity in market withdrawals, plus the scaling up or down of exposures over the past few years.

2. Data expansion and insights: The data sources that relate to risks have expanded dramatically, including real-time data sources due to telematics and the IoT/connected world devices. New providers of risk data, peril scores, and models offer the potential for deeper insights into risk selection and more precise price-matching for risks.

3. Precision and personalization: Precision is the winning formula, including the move from larger “pools” of risk to more individualized and customized analysis. Personalization and customization provide a competitive advantage as customers experience a better understanding of their unique risks and how to address them from an indemnity standpoint. In addition, more precision drives higher profitability.

4. Expansion of the excess and surplus market: The E&S market has expanded dramatically, with MGAs leading the way in creating programs and coverages for complex commercial risks. This trend is expected to continue as the industry continues to move to more specialization and address the risks of increasingly discrete business segments,

Ultimately, the disciplines and systems of rating and pricing must evolve toward more AI-based analysis and more real-time updates to react to market forces and evolving company strategies. As market solutions advance to those greater technological capabilities, the most competitive insurers will be the ones that invest in the tech infrastructure and talent to thrive in this new environment.

Read our eBook, “The Next Challenge in Commercial Insurance Pricing,” to explore the technology, processes, and operating model that enable commercial insurers to move from strategy to execution.