Overall, the commercial insurance industry weathered the pandemic remarkably well (so far). There is still uncertainty over when the pandemic will end and claim litigation. The COVID related business interruption claims are still playing out in the legal system; however, it appears most insurers will not be paying damages unless there is a significant reversal in the trend of judgements in their favor.
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The trends with the biggest impact are inflation and cyber. Prior to 2021, there was already concern over social inflation and the nuclear verdicts. Inflation is now becoming entrenched and impacting wages and prices in 2022 and likely beyond. Insurers and their agents have not had to deal with inflation in decades, now they have the risk of offering a premium that becomes inadequate after a year of inflation. Inflation will require more attention from agents and brokers because property owners might quickly become underinsured as building material and labor costs escalate.
Cyber has rapidly transformed from data privacy concerns to widespread, very expensive ransomware attacks. International hackers have demonstrated the ability to infiltrate systems, successfully demand exorbitant sums of money, and face little threat of criminal prosecution. In addition, they may receive support and protection from their government. At this point is it an unfair fight in their advantage.
Growing up in Florida and living there for 30 years, you witnessed firsthand the devastating effects of Hurricane Andrew on communities and the economy. In your opinion, what are the top three things that every commercial insurance organization should be doing today to prepare for the intensifying impacts of climate change?
Commercial insurers can support property owners who are fortifying existing structures to withstand wind and flood damage. It can be through premium discounts or through claims settlement. An interesting pilot program is underway in North Carolina. The North Carolina Insurance Underwriting Association provides money to offset some of the replacement costs for qualified roofs meeting the Insurance Institute for Business & Home Safety (IBHS) “Fortified Home” standard.
Commercial insurance organizations should continue to work with state legislators to encourage stronger building codes and limit development in hazard prone regions. Insurers are the experts as they create and use the models to predict the impact of climate change on their policyholders in high hazard areas. They can also support research on effective fortification and climate change.
Not to be too pessimistic, but it is probably too late for portions of Florida and coastal counties in Louisiana and the Carolinas. Governments can’t build enough seawalls or continuously rebuild beaches and dunes, so what happens to coastal properties that eventually will need to be elevated or abandoned? Commercial insurers need to prepare for these types of coverage questions and work with regulators and legislators to develop a plan for coastal residents.
Commercial insurance carriers and brokers collect mountains of data, but they still struggle to gain the insights needed to accurately assess and price complex risks. If you had to give the industry a report card, how well do insurers manage risk today?
In my opinion they have earned a “B”, and I’m not sure that I want them to earn an “A” just yet. State regulators and lawmakers need time to catch up and fully understand the potential benefits and risks of where we are going.
Historically insurance has relied on a large number of similar exposure units pooling their risk, so what happens when insurers are able to predict risk too accurately and underwrite accordingly? Will we see a segmentation that creates groups that are unable to afford insurance coverage? Where will they receive coverage? Will it disproportionately affect low-income populations and inadvertently use proxies that effectively redline communities.
The pandemic disrupted the entire insurance value chain including producers and traditional distribution channels. In your view, how have insurance companies responded to the ongoing challenges of COVID-19 and a hardening market?
The entire insurance value chain responded remarkably well. The ability to shift to a remote work environment so quickly with little advance warning is a tremendous success story. The ability of producers to immediately adapt to a remote model surprised most people. The retail agents did not have the infrastructure, resources, or tech support of the larger insurers, and they were still able to remain operational and help customers during a critical time of need. The entire insurance value chain has been forced to improve their online services and policyholders will expect that to continue.
Insurance company leadership and employees learned that remote work can be done efficiently, with lower expenses and improve quality of life. Some employers will eventually try to force their employees back to the office to improve collaboration and supervision. Other employers will stay with the remote environment and reduce their physical presence. It will be very interesting to see which model works and which employees prefer.
The industry faces a recruitment challenge with millennials and Gen Z choosing professions they believe to be more progressive, challenging and fun. What can insurers do to entice new talent?
I think about this every day. To no one’s surprise, very few students start their first year at college planning to major in risk management and insurance. The first challenge is to get their attention and share examples of career opportunities. As a professor I need to make the material relevant and interesting, which is actually easier than it sounds. We have a great story to tell; the challenge is getting their attention and getting them to listen.
Insurance is a relationship business with the opportunity to help people in crisis. If you do your job well, you will help others in their greatest time of need and improve their lives. I’ve heard insurance professionals referred to as the “second responders” and use the term in class. The first responders will put out the fire, rescue the victim, and stop the bleeding. Insurance professionals then step in to help them rebuild and financially recover.
Once the young person has decided to pursue an insurance career, it is then up to the employer to offer attractive compensation, proper training, and investment in their professional development. Work-life balance has always been prized, but now employees have the ability to work remotely and can actually enjoy real flexibility.
Take out your crystal ball: What do you think the commercial insurance industry will look like in 10 years?
It will largely depend on what America looks like in 10 years. It seems likely that political risk, social unrest, and climate change will create significant challenges going forward.
On the positive side, advances in technology provide a real opportunity to improve the customer experience, reduce losses, and improve quality of life. One example is autonomous driving and crash avoidance technology. At some point the benefits will substantially outweigh their costs and additional repair expenses. Fewer accidents benefit everyone, and insurance companies will have a prominent role in encouraging adoption of this technology.
Underwriting will look much different in 10 years. Given additional sources of data and improved models, there will likely be fewer people underwriting traditional small commercial accounts. As other types of risks increase, we will need new types of underwriters in areas like cyber, private flood, or things we have not even thought about yet.
David Marlett, PhD, CPCU is a Professor in the Department of Finance, Banking and Insurance at Appalachian State University and the Managing Director of the Brantley Risk & Insurance Center. He holds the IIANC Distinguished Professorship and serves as the faculty advisor for Gamma Iota Sigma. David also serves on the Board of Directors for the InVEST program and recently chaired the Loman Advisory Committee for the CPCU Society.
After completing an eight-year term as Department Chair in 2014, he took a sabbatical in Christchurch, New Zealand where he studied the recovery from the Canterbury earthquakes. David has taught courses in Risk Management and Insurance for the last twenty years. Prior to entering the doctoral program at Florida State University David worked as a commercial lines underwriter for USF&G in Tampa.
David and his wife have three grown children and have cared for six foster children over the last several years. He is an advocate for foster care and worked with state legislators to enact the Foster Care Family Act in 2015.