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The future of reinsurance (RI) markets is being reshaped by new technology, alternative capital and reinsurers bundling value-added services with reinsurance. These forces are leading to new trends, in a backdrop of changing RI buying patterns, emerging risks and the realities of ever changing regulation. Placement processes have evolved at a slow pace while acquisition […]
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This concluding part extends the narrative from insurtech orchestrators (Part-1) and pioneers like Discovery’s Vitality (Part-2) to emerging ecosystem impacts, based on examples of Manulife and John Hancock, its US subsidiary. Customer-focused health ecosystems are being designed to seamlessly deliver the right care in the right setting at the right time. Globally, they are […]
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In Part-1, ecosystem characteristics and successes in digital health were discussed. In Part-2, the focus turns to Discovery’s Vitality health ecosystem. In September ’18, John Hancock declared that it would discontinue traditional life insurance and instead offer only its Vitality branded interactive health policies. This announcement was newsworthy at the time, as behavior-based programs such […]
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It’s really a tour de force, the 146 page Blueprint One recently released by leadership at Lloyd’s, a detailed road map for the staff and approximate ninety syndicate players that comprise the firm, its reinsurers, customers, associated MGAs, vendors, brokers and agents. Plans, flow charts and implementation strategy that are planned for the next two years, with all the new moving parts in synch by close of 2022. Oh, and did I mention the £35 billion in annual premiums that the organization generates through its stakeholders? Bold plans for a three-hundred-year tenure organization. And there is the unmentioned tension- an entrenched business model planning to evolve into an agile, cutting edge tech leader.
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Lloyd’s is the industry standard bearer for specialty risk management, AKA ‘the stuff an underwriter can’t thumb to in his/her U/W manual’. Its technique and mystique have evolved during the more than three centuries since a few gents sat in front of some pints and pondered financial hedges against loss of shipping cargos. Why then, does the firm think that several months of research, interviews, participant interviews, technology vendor schemes, and resulting blueprint from Lime St are the best answers to changing the course of the culture and operations of a complex global insurer?
Consider this voice from the street (location to remain unmentioned):
“Sadly, it seems that Lloyds underwriters have developed a degree of contempt for the XXXX market, over the last year I’ve seen the worst performance from certain Lloyds underwriters I’ve ever experienced in the last 20 years or so. In particular, not having renewal terms ready in time when renewal submissions have gone in well on time. It’s definitely a hard market from where I’m standing, and it isn’t particularly civilised either!”
Well, hard markets currently abound for many reasons across the globe, and anecdotal responses are a little unfair. But the basis of the speaker’s concerns may not be- Lloyd’s is a huge, multi-variate, multi-cultural, global organization that cannot be changed under dictate, singular plan, or silo-driven flow chart. Underwriters remain subject to the performance matrix of the day, and grand plans from on high take a rear seat when quotas aren’t met, or loss ratios are trending north. Additionally, the firm remains entangled in aftereffects of sexual harassment accusations, mitigating the perceived impact of an over-arching office culture of suits and club decorum (although well past the days of PFLs), and recent years’ declining profitability. Can Blueprint One be communicated, integrated and adapted uniformly in the face of these challenges? And can the evolution avoid the strong effects of the “Quarterlies?”
Culture and process changes aren’t new with the advent of Insurtech, innovation, globalization or change of leadership. Much of what the blueprint discusses has its foundation in technology and transparency across the organization’s depth and breadth. At its core we are talking insurance, so the topic may be busy, but it’s not rocket science. Identify risk, understand risk, price risk, hedge risk, service occurrences that confirm risk (claims), and pay less than is taken in. The firm is smart, therefore, to look to leverage technology for easy inclusion of participants across many regions and many forms of access, easier aggregation of business, more effective application of information, collection of data, and so on.
Consider the Blueprint’s ‘what it is’:
That’s on page 7 of the 146 page blueprint; it is an ambitious, wide scale road map.
It’s clear the more complex a plan is the greater the chance of incomplete implementation; the more incomplete or disuniformity of implementation the greater the chance of not achieving success. The firm has its plan, its foundation for success, if the plan can be implemented.
Skipping forward to “Why we will succeed,” on page 11 , and I chime in with some observations that the principles suggest from other large org’s culture/ops changes:
Rather than ramble on I am going to shamelessly borrow some innovation/org change concepts from a Property Casualty 360 article penned by Ira Sopic, Global Project Director at Insurance Nexus that has an apt perspective- “Agility is the key to technology innovation for insurers.” But let’s build a contrast from Lloyd’s presentation.
Agile? Can a global, £35 billion insurance giant be agile? Do Lloyd’s customers demand innovation, or will they benefit materially from innovation? We can see what the author and Lee Ng, VP of Innovation at Travelers Insurance say.
Fundamentally, the article notes org agility means looking at how decisions are made across an org and making significant changes. That’s ambiguous until the addition of, “you can’t prove innovation before it happens.” Uncertainty of innovation’s results can be overdone with analysis. ‘Agile’ is the opposite of ‘waterfall’, an approach where plans and decisions are made at the top and cascaded down through the org as steps in a process are encountered. Rolling out comprehensive plans by their nature inhibit iteration- big plans have milestones, have successive designs, benchmarks and schedules. Agile has ideas, iterative maps, acceptance of failures. Lloyd’s has established a grand approach to the former method- I kid you not, here’s an exemplar flow chart of planned core technology:
Many participants influencing and accessing the tech core of the firm, and those magical skeleton keys to open the doors- APIs and interfaces.
Continuing, agile can be successfully piecemeal- protect the primary ROI factors of the biz, experiment with agile ways of working with collateral functions, build the innovative environment without whacking the quarterlies. The inherent problem with piecemeal approaches? They are hard to measure for success, and hard to program into project management software.
Another agile tack to take? “Done is better than perfect’. Resist the urge to over plan, over measure, and to set expectations that the first attempt is a go or no go for the entire org. A popular innovation concept applies- try, and fail fast. Then try again. There are many vendors who are experts in narrow parts of an org’s innovation path- it’s OK to rely on them. Investment in a POC or two is as good as implementation.
Perhaps another day will allow discussion of the plans for the six Solutions, particularly Claims and Risk Exchange (the nexus of provision of service and of customers’ expectations from the firm.) In spite of a skeptical take on the Blueprint I certainly want Lloyd’s to remain the bastion of risk management in a increasing risky world, but the concern is the firm is approaching this insurance elephant as a full take away meal, instead of as tapas.
In closing consider this- if there are five levels of Blueprint implementation and each effort has a 98% probability of success, after the five levels there is an aggregate probability of integration success of 90%. That’s not bad, unless the interplay of five operational areas serving clients is considered with 90% effectiveness at play- aggregate 59% average Blueprint compliance outcome.
Consider those little bites, Lloyd’s. The industry is pulling for you.
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There’s an odd contradiction in some of what the insurance industry does; the industry is built on predicting risk and strategizing risk sharing, yet in many ways it is victim of knowing its own concerns and reacting to and pricing the reaction, and not working to mitigating the effects of the outcomes. And in at least one case looking to backfill its model to fit corporate strategy and perhaps not customer choice.
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Backfilling or buyer’s remorse?
Allstate Insurance (US P&C carrier) recently announced its digital insurance brand, Esurance, will be discontinued as part of Allstate’s migration into being an omnichannel carrier where customers have options under one access point/model for agency based or digital insurance acquisition and service.
Looking back to 2011 with Esurance being a $1 billion acquisition by ALL wherein the company’s CEO announced, “Allstate is uniquely positioned to serve different customer segments with unique products and services,” said Thomas J. Wilson, Allstate’s president, chairman and chief executive officer. “This transaction provides immediate incremental growth in customer relationships and makes Allstate the only company serving all four major consumer segments based on their preferences for advice and choice.”
Appears that ALL figures customers in 2020 expect only one access point that will provide purchase options. Here’s the thing- Allstate had internal rules that inhibited customers from switching agents and/or internal brands, not external barriers; this change will reportedly alleviate the ALL system problem, and empower agents to better serve customers (per leadership and aligned with a previously announced commission decrease) as ALL migrates into being an insurance technology company. But what of the 1.5 million Esurance policyholders who consciously chose the Esurance model, and may balk at being tied in with the legacy brand? And, will marketing costs truly be saved if digital customers still need targeted messages? It’s certain that Allstate’s advertising partners will create a clever omnichannel ad campaign, but legacy brand is legacy brand, and buying culture is buying culture- can ALL be a cleverer digital carrier under the parent name than was Esurance? Additionally, will rolling the Esurance policies into the parent change how staff handle claims? Perhaps, but the effects of several years of underwriting losses for the Esurance PIF will not disappear simply because those claim customers are now called Allstate customers. Would it have been a more direct action to fix the Esurance claim handling issues? And what does this move in combination with centralizing customer service away from agents suggest for the agency model?
Maybe a good idea earlier in the finance value chain?
Swiss Re announced this week the placement of US $225 million in parametrically triggered cat bonding for Bayview Asset Management’s MSR Opportunity Fund, covering mortgage default risk for Bayview’s loan portfolios in the states of California, Washington, Oregon, and South Carolina. Bayview does manage ‘credit sensitive’ loan portfolios and derivative funds that include packaged mortgage portfolios, so a parametric product is an immediate hedge in the case of an event that meets the USGS survey index associated with the bond. Seems a suitable move for the management company as it does not have direct ownership of properties but does have exposure to indirect loss if there are mortgage defaults for its funds mix of loans. Makes one think- loan originators would be doing the market a service if along with property insurance requirements for loans in the respective states there would be either an EQ insurance requirement, or even a parametric option for mortgagors in the event of a trigger occurrence. Hedging ‘up the food chain’ is good for the portfolio manager but does not help address the potential cause of default. Swiss Re also has the unique opportunity to market the parametric default risk products to primary mortgagees. It’s a changing risk mitigation world.
Problem hiding in plain sight
First California, now Australia in the news due to property owners encountering challenges with property underinsurance and unexpected increases in property repair costs. These concerns are not new and become front burner issues each time a significant regional disaster occurs, always attracting the attention of those who sit at the head of the political insurance table, the insurance commissioners. California’s commissioner enacted a moratorium on policy cancellations in brushfire areas (1 million property owners involved), and Australia’s Treasurer Josh Frydenberg recently asked Aus property insurance carriers for detailed information to help the government and population better understand where insurance recovery efforts stand. Not Dutch boys with fingers in the dike, but certainly ex post actions for circumstances that pre-existed the respective regions’ disasters.
At least in California the primary drivers of the problem are property owner valuation knowledge (or lack of it), ineffective underwriting valuation tools, policy premium and market share competition driving carrier lack of enthusiasm for change, and unpredictability of post-disaster rebuilding costs. Also- misconception on the part of the public- few policies (close to zero) include wording of restoring to pre-loss condition, or replacement with like kind and quality. The reality of the underinsurance problem is that there is now a de facto rise in insureds’ ‘deductibles’ after a disaster due to inadequate coverage limits. The ‘deductible’ effect is mitigated by insureds employing personal property settlement proceeds in the dwelling rebuild costs, but all in all it’s a relative fools’ game. The worst effect is the extreme hardening of the property insurance market to the point where dwelling insurance becomes unavailable and/or unaffordable. The easy fix is better upfront estimation of rebuild costs, but even with that there is then a problem for carriers- the marginal premium increase suggested under current methods in moving from a $500K limit to a $750K limit is far less than a comparable change from $250K to $500K, so is there an overarching lack of motivation to raise coverage limits? An unexpected related potential effect for carriers- earlier triggering of reinsurance treaties due to the weight of maximum losses and lessening of rei appetites for renewals under existing agreements. Without question structural changes (no pun intended) are needed in property policy valuations and underwriting for areas where the frequency of regional disasters is high.
*Contrarian viewpoints of an industry observer, not to be confused with that of mainstream press, and presented in the light of knowing that there are many forward-thinking players in the industry who will work to lessening the effects noted above.
#innovatefromthecustomerbackwards #newinsurancebalance
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There are suggestions of hardening markets for US property insurance participants, and there is no better example of this than what is occurring in California. Non-renewals in wildfire prone areas, premium increases, reductions in coverage and the seeming ultimate reaction- regulatory prohibition of policy non-renewals.
How did the state get to this point, and is there a lesson to be gained for any area that is exposed to regional maximum losses? Is the hardening multi-trillion dollar California homeowners market a bellwether for others?
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Hard Market — in the insurance industry, the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases. Can be caused by a number of factors, including falling investment returns for insurers, increases in frequency or severity of losses, and regulatory intervention deemed to be against the interests of insurers.[1]
An on point definition of a hard market for the California property insurance market prompted in great part by successive years of severe wildfires throughout the state, a circumstance that recently culminated in the state’s insurance commissioner to enact temporary regulations that prohibit non-renewal of homeowners’ policies for one million insured properties located within wildfire-prone areas. The commissioner’s action came as a result of insurance premiums in affected areas rising to seemingly unaffordable levels, in carriers refusing to underwrite properties, and in delayed recovery in wildfire areas due to limited availability of hazard insurance.
[1] https://www.irmi.com/term/insurance-definitions/hard-market
How did a bad fire situation get worse? Two years of homeowners’ lines’ loss ratios averaging in the 190 range, or $1.90 being paid out for every dollar of earned premium. Who expects carriers to absorb that extent of loss without an according rise in premiums? Let’s take a look at how the state got there (we’ll set aside the climate risk and fire damage negligence/liability discussion), and how things aren’t as simple as one might think.
Loss History
The state’s homeowners’ carriers were essentially the same in 2017-2018 as they were in the ten years preceding the heavy wildfire years. Why does that matter? Consider this chart of data for HO line earned premium, losses, and loss ratios for the ten years prior:[2]
[2] http://www.insurance.ca.gov/01-consumers/120-company/04-mrktshare/2018/upload/MktShrSummary2018wa_RevisedAug1519.pdf
$37.4 billion surplus of earned premiums over losses incurred during that ten-year span. That is not bad.
If one looks at the 2017 and 2018 results, the numbers flip:
Earned premiums– $15.6 billion
Losses incurred– $29 billion, or a $13.4 billion deficit. That gets companies’ attention.
A significant compounding concern for carriers for the 2017-18 period is that the losses were compressed into repetitive geographic areas, reflect concentration of maximum losses within same, and the factors behind the peril have not materially changed. So even though there was a $37 billion surplus noted for the ten years prior, carriers (being forward looking for revenues) reacted not only to raise premiums, but to restrict available coverage and restrict the scope of coverage, classic hard market characteristics.
Premiums and pricing
If the discussion continues to market factors regarding historic pricing, more evidence of the roots of a hard market come to the surface. Average homeowners’ policy premiums for the state relative to median property values are significantly skewed in comparison with other states with higher population and exposure to concentrated risk:[3]
[3] data from https://www.policygenius.com/homeowners-insurance/how-much-does-homeowners-insurance-cost/#average-homeowners-insurance-cost-by-state
So the case builds for how a hard market builds- premium levels that seemingly fail to consider the potential effects of regional peril occurrences. California having premium values one quarter of those in Florida? There is also significant evidence that- on average- properties have been under-insured for value in that post-disaster rebuilding costs are exceeding coverage limits. The market (through pricing history) inadvertently set its own table for hardening. And it’s not just carriers- homeowners and financing institutions are partners in the issue.
Coverage
Homeowners do have options when persons have are unable to obtain voluntary insurance due to circumstances beyond their control- the state’s default insurer, the FAIR (Fair Access to Insurance Requirements) plan. The state’s FAIR plan provides limited coverage for primary perils but its use requires property owners to have separate wrap around policies in order to have cover that reasonably matches the benefits of voluntary cover. The FAIR plan is a syndicate pool supported by the state’s property insurance carriers, so think of it as analogous to auto/motor risk pool insurance.
Increasing the number of persons accessing the insurance of last resort is one thing, but considering a recent order by the state insurance commissioner to require FAIR to provide broadened coverage limits[4] (to $3 million) and broadened peril coverage (to mirror an ISO HO-3 policy form) seems (per FAIR leadership) to exceed the commissioner’s authority. Right or wrong, the change in the FAIR plan does not alleviate the issues with concentration of risk, actuarially supported rates, or the fundamental fact that risk factors need to be mitigated.
[4] https://www.insurancejournal.com/news/west/2019/11/14/548537.htm
What to do?
Property insurance is a keystone to any economy- borrowing, recovery, risk sharing, and risk management, etc. Absent a thriving insurance industry, a jurisdiction simply will flag in comparison with other areas. A hardening market is a wake-up call that the inherent cycle of insurance is at an attention point- carriers see challenges in the near future and are retracting access to insurance and placing a premium on price, even if company capital levels are currently higher than average. Soft markets certainly reflect the reverse, but who complains when underwriting is easier and rate taking is de-emphasized? The surpluses in premiums gained during 2007-2016 are long forgotten.
Ideally the market would:
With these efforts being in conjunction with all efforts being made to mitigate risk factors, encouraging behavior changes, and encouraging policies more in keeping with risk management- climate, economic, and functional.
Why this?
The state has other, potentially bigger concerns with risk- earthquakes. Wildfire risk has had terrible effects, multi-billion dollar effects, most often in more remote or less densely populated areas than urban Los Angeles, San Francisco, and Oakland, heavily populated and developed high-risk earthquake areas. EQ insurance penetration (approximately 11% of property owners) suggests uninsured losses will far eclipse wildfire losses if a significant quake occurs, and there is not enough resources (currently) for the state to back-fill an EQ disaster recovery. The entire country will be affected.
And what of the balance of the world’s economies? A recent Swiss Re Institute assessment of insurance protection globally denotes an estimated $222 billion natural disaster gap[5], a number that again would be overshadowed by temblor damage in developed regions. What of the wildfires in Australia, where the affected areas are more than six times greater than the 2018 California wildfires affected?
Hardening of insurance markets- that’s a challenge for insurance customers, but for markets like California’s homeowners’ lines it’s a precursor for what may be coming elsewhere.
[5] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/56236161
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It’s the end of 2019, an auspicious year for insurance and InsurTech, and it’s the end of the year with expectations in the business world for business results and (hopeful) bonuses. And of course there is the wondrous shadow of December holidays over all, with visions of sugarplums dancing in heads.
Not everyone celebrates a Christmas holiday, Chanukah, or Eid, but one cannot avoid the end of year holiday gifting and hopes.
In keeping with that spirit this final InsurTech column for 2019 wishes all well for the season and bright things for 2020.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
There are some friends and businesses for whom its hoped that Santa/Father Christmas/whoever finds holiday gifts. All deserving, all have been good this year.
Holidays – any holiday – are such a great opportunity to focus on bringing the family together. Lidia Bastianich
The holiday season is a perfect time to reflect on our blessings and seek out ways to make life better for those around us. Terri Marshall
Merry Merry and Happy New Year.
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No one can know all in an industry, and surely that thought applies to insurance and InsurTech. The Insurance Elephant knows the business is comprised of many parts that in aggregate lead to the insurance customer. It’s the end of 2019 and as such seems an apt time to list and appreciate the many persons who are resources for me, and surely can be resources for all. Please do review the list, gain an understanding of the unique contributions each in the list brings.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Here are my 2019 InsurTech/Industry respected resources, in no particular order, and certainly not an exclusive list:
There are so many more who I respect and follow, learn from every day. You know who you are.
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image The Geneva Association released an ambitious discussion of trust and its effect on insurance transactions, particularly in the perspective of well-known ‘protection gaps’ that are pervasive across many lines of insurance within mature economies. Is, as Jad Ariss, Association Managing Director notes in the publication’s foreword, a “lack of trust fundamentally impeding insurance demand,” […]
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image The insurance industry is in large part past the hysteria of disruption, innovation and entrants solving the issues of the insurance world, and is moving into the stage of implementation, collaboration and iteration. Startups that have gained traction are now broadening their markets, and in some cases, their offerings. And, the industry is recognizing […]
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