Faced with an aging workforce, operators in the specialty, target/managing general agent (MGA) and wholesaler spheres face an ongoing battle to attract and retain technical underwriting and actuarial talent to meet the demand for niche insurance solutions.
Making matters more pressing is that not just any talent will do.
“Only the best and brightest can tackle complex risks. To have a true specialty focus, you need deep talent and expertise,” said Pat Donnelly, president and deputy CEO of JLT Specialty USA.
“The competition to attract and retain specialist talent is real and a challenge throughout the industry,” said Donnelly, who noted that specialty lines continue to grow as a percentage of all insurance premiums when compared to standard lines.
Earlier this year, a survey by London Market Group (LMG) and Deloitte of the London insurance market — a renowned hub for MGA expertise — identified skill gaps in operations, wordings, underwriting and claims that respondents felt could threaten performance in the long term.
Technology is also contributing to the issue, according to LMG. Indeed, the technical talent pool is being stretched both by competition from outside the insurance sector and the increasing movement of talent within it.
“The days when a majority of workers could expect to spend a career moving up the ladder at one company are over,” LMG and Deloitte stated in the report.
“Young people anticipate working for many employers and demand an enriching experience at every stage of their working life, leading to expectations for rapid career progression, as well as a compelling and flexible workplace.”
Bernie Heinze, executive director of the American Association of Managing General Agents, is seeing the same pattern emerging in the U.S.
“The concept of loyalty to one’s employer has gone out of vogue — if you want loyalty, you’re better off getting a dog,” he said.
“We live in an ADHD world. The current mind-set is to maximize one’s talents to the greatest of one’s capabilities. If talent see an opportunity to do so they take advantage, and are more likely to move project to project, or title to title, than to stay in one place.”
Consolidation, as well as fundamental changes in strategy — with many underwriting and brokerage firms choosing to leverage scale and efficiency over expertise and specialization — have also increased movement between companies.
“These strategies and initiatives might be advisable, even necessary, in certain circumstances. But they have without question had an impact on talent dislocation in recent years,” Donnelly said.
MGAs and wholesalers face competition for talent not just from competing outfits and new entrants in the specialty space, but also the standard insurance markets, which are increasingly seeking to establish specialty arms to boost their ailing profit margins and increase product diversity.
“[Standard markets] that recognize that clients don’t think in terms of insurance products, but rather in terms of risk and loss scenarios — and adapt their approach and offerings accordingly — will be more relevant to clients. This, in turn, will make them more attractive to good talent,” he said.
“We’re beginning to see fierce competition for actuaries, data science roles, [and] information technology in addition to competition for specialty underwriting, claims and brokerage talent.”
“Only the best and brightest can tackle complex risks. To have a true specialty focus, you need deep talent and expertise.” — Pat Donnelly, president and deputy CEO, JLT Specialty USA
However, with many mainstream insurers cutting staff following expense reviews, it’s not all one-way traffic, noted Peter Staddon, managing director of the UK’s Managing General Agents Association.
“The nature of many MGA businesses is to develop a more efficient and cost-effective way of providing niche insurance products compared to mainstream insurers. This can be very attractive to underwriters looking to take more control of their business.”
According to Staddon, the cost of technical talent will likely rise, though he believes this will correct itself over time as sectors such as cyber and emerging technology expand, increasing supply.
Yet with retaining talent “vital” to success, “providing equity, additional employee benefits, skills development opportunities and support with professional education all have a role to play” in helping firms keep hold of valued technical staff, he said.
“Ensuring employees are appropriately recognized for what they bring to the party, and that they are able to engage within the management process or growth of that business, is important in the MGA business,” Staddon said.
Donnelly added that creating a desirable workplace “culture,” offering staff performance rewards, career path clarity and flexible working arrangements can all help firms retain valued talent.
Tackling Dynamic Risks
Heinze believes that the insurance industry has historically done a poor job of selling itself as a career path, but that the specialty space has a unique opportunity to appeal to new talent by offering the opportunity to “fashion interesting, dynamic, bespoke insurance products,” compared to the relatively vanilla standard markets.
“This may be difficult to hear, but the insurance industry is tremendously exciting,” he said.
“When we talk to students, we say the E&S of excess and surplus also stands for ‘exciting and sexy’.”
The opportunity to tackle risks, from cyber fraud to power grid outages due to emissions of gamma rays from the sun, is what gets young professionals excited, Heinze said.
“They can have a hand in creating insurance solutions that will fundamentally transform the way in which the old, antiquated insurance model has existed. The promises of the insurance and technological abilities of the future are untold.”
With millennials set to account for around three-quarters of the workforce by 2025, Staddon is optimistic that there is a strong pipeline of technologically savvy talent waiting.
“We are seeing many young people come into the insurance industry from an array of educational and social backgrounds,” he said.
The U.S. has seen an uptick in educational programs in a bid to tackle the talent shortage. The AAMGA has, for example, developed a 40-hour program that allows risk management undergraduates to add an underwriting certificate to their degrees, equipping them with basic underwriting knowledge and reducing the learning curve upon entering the workplace.
But if it is to truly solve the problem, the insurance sector must look beyond its borders. According to Donnelly, JLT has employed 200 people in the last two years from 30 firms, half of which are outside the insurance industry.
“The good news is that we work in a vibrant, challenging, complex industry that is attractive to a large pool of potential employees. The bad news is that competition for that talent will only intensify — both within and outside the industry.” &
Betting on the Weather
Apart from an attendee dying, rain is perhaps the worst thing that can happen to a festival,” said Christian Phillips, contingency underwriter at Beazley. “An angry few hours from Mother Nature can cost hundreds of thousands of dollars, dampening profits even for sold-out festivals and negatively affecting on-the-ground consumer spending.”
Yet according the insurance industry, many event and hospitality companies continue to find themselves inadequately covered against losses that could arise from adverse weather, or are unaware of the insurance coverage options available to them.
“A protection gap exists on weather coverage for events companies,” said Tanguy Touffut, global head of parametric solutions at AXA, who believes those buying coverage are in the minority.
“However, increasing weather anomalies as a consequence of climate change, as well as the emergence of innovative insurance solutions such as parametric insurance, are fueling increased demand for such covers from events companies.”
Typically, event organizers must choose between event cancellation coverage — a broad policy that compensates the insured if their event is cancelled for a multitude of reasons beyond their control — or a parametric weather policy that pays an agreed sum if a certain weather trigger is hit, for example, half an inch of rain over four hours.
While the weather policy won’t cover against the wide range of perils the cancellation policy would (such as fire, terrorism or road blockages), it does cover against the lost income from attendees leaving a weather-affected event early. But that kind of loss wouldn’t be covered under a cancellation policy because the event must be cancelled to trigger a payout.
“This presents companies with a tough choice. They usually don’t have the budget for both policies, and weather can be a little more expensive as it is a stated value policy.
“If the client picks the wrong coverage and loses money, they will be upset,” said Marlene Benoit, promotions and events leader for broker Lockton.
Beazley has gone some way to bridge the gap with a new product that is a hybrid of both types of coverage. As well as offering broad cancellation cover, the product also establishes a weather trigger on which it will pay a fixed sum to compensate for lost revenue.
Benoit said she believed other insurers may soon introduce similar products.
“When the industry comes up with something unique in the marketplace, others will follow, particularly when it is well-received and there is demand.”
Weather observation techniques and data gathering has improved markedly in recent decades, and insurers now have a data bank of at least 30 years of high-quality data as a base for their underwriting.
“Additionally, the capacity to process these data has improved tremendously, which gives us very sophisticated indexes that better reflect the clients’ risk,” said Touffut.
However, gaps in coverage remain.
“We allow the insured to choose a threshold amount of rain at the front end of the policy. However, we can’t cover every eventuality,” said Phillips.
“If they insure against half an inch of rain but it rains 0.49 inches and people still leave their event, there will be a gap in cover.”
“Due to budgeting, companies may choose a threshold that is too high, and when they have a weather claim, it doesn’t hit the trigger mark, so they end up paying for a policy that doesn’t pay out,” said Benoit.
Indeed, while improved climate data makes weather parametrics relatively reliable, attendee spending behavior is harder to predict.
“We try to bring our knowledge of what we’ve seen in the past to give guidance, but it is still subjective,” admitted Phillips.
If more than one-third of an inch of rain falls, some attendees will normally leave an event, Phillips said, particularly if the rain falls persistently over several hours rather than in a short, sharp downpour. Clients typically stand to lose around 20 percent of their projected revenues from weather-related departures, though this figure could vary depending on the nature of the crowd, he added.
Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering.
Insureds can improve their chances of securing appropriate coverage by delving deep into their own revenue histories. “We ask the client for historical cancellation and revenue data over the longest period possible,” said Touffut.
Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering. However, James Ingham, head of renewables at risk analytics specialist Sciemus, said that in an age when “data is king,” it may be hard to get data providers to collaborate.
“It can be done, but you would need a large provider like Google Public, for example, to host data covering multiple events across multiple demographics and geographies over a number of years in order to give event organizers full confidence in the inferences. You would also need a secure neutral environment to encourage Big Data providers from other areas such as credit card providers to also collaborate,” he said.
Touffut added that as the quality and amount of data and Big Data processing methods continue to improve, “indexes will become more precise and the models used to design parametric insurance products will even more accurately reflect the clients’ risk.”
“Furthermore, as parametric insurance fixes most of the ‘pain points’ of traditional insurance, both from the claims view and from the purchasing view, we expect this type of insurance to greatly propagate and eventually cannibalize some forms of traditional insurance,” he said.
But as Phillips pointed out, it is often only after an events company suffers a damaging loss that they will consider seeking cover. “Someone may have run an event for 30 years and never had a problem, but weather is changing. Companies can’t afford to rest on past weather patterns.” &
Corporations Get Creative With Cells
Cell captives have become extremely popular self-insurance tools for companies of various sizes across all sectors, with cell legislation enacted in more than half of U.S. states and cell formations now outstripping stand-alone captive formations in many onshore and offshore captive domiciles.
Protected cell companies (PCCs, also known as a segregated accounts companies or segregated portfolio companies) consist of a core company that writes and administers ring-fenced insurance policies in underlying cells, whose policies and accounts are segregated from other cells in the PCC.
The recent development of incorporated cell company (ICC) legislation in a handful of jurisdictions enhances PCC features by granting each cell distinct legal status.
As well as being quick to set up, cells require significantly less capitalization than stand-alone captives, while shared costs among the participants and core lead to economies of scale. It is little surprise that since the first PCC was formed in Guernsey in 1997, they have proliferated and broadened.
“Risks written through cells are becoming more sophisticated, expanding beyond traditional medical malpractice, workers’ compensation and property insurance,” said Paul Scrivener, a partner in the Cayman Islands’ law firm Solomon Harris.
Cells are being touted, for example, as a potential solution to cyber risk, one of the insurance industry’s great challenges.
Cells for Every Risk
“If you have a structure with different risk profiles within different cells, it may make sense to put cyber risk in a separate cell rather than co-mingle it with traditional lines of insurance as it is very different and unique,” said Scrivener.
“Some have suggested using a cyber cell because you are looking at low frequency, high severity situations,” added Tom Jones, partner with McDermott, Will and Emery. Questions remain, however, over how best to address coverage terms, exclusions and payout limits, he said.
Cells are also growing in popularity in the health care space, particularly for medical malpractice risks.
“Hospitals may set up cells for independent physicians or group faculty plans if they want to assist them with insurance but don’t want to co-mingle the loss reserves,” Jones said.
Scrivener recently converted a single parent health care captive to a cell structure so it could put its existing hospital program into one cell and create a second cell to insure the risks of the self-insured physicians within the hospital.
Ascension Insurance Services set up Cayman’s first portfolio insurance company, AARIS, in 2015 to offer workers’ compensation solutions to agribusinesses, but now intends to roll out flexible workers’ comp cells to other sectors including the trucking and automobile racing industries.
“We’re getting calls from all around the country,” said Paul Tamburri, Ascension’s West Coast risk management practice leader, adding that the next step could be to write employee benefits stop loss through AARIS.
Cells can offer a fast route into captive insurance for employee benefits programs, while many regulators have yet to find a comfort level with stand-alone employee benefits captives.
“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks,” said Karl Huish, president of captive services for Artex Risk Solutions, which runs a PCC-like employee benefits series business unit named Sentinel Indemnity in Delaware.
“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks.” – Karl Huish, president of captive services, Artex Risk Solutions
“The cells in Sentinel each have different employee benefit captive structures, including one that is for a group of credit unions who want to pool risk together for their health insurance,” he added.
According to Guernsey Finance, multinational corporations can use cells as fronting vehicles through which to gain access to the reinsurance market. A cell can be used to issue an insurance policy to the insured that is mirrored by a policy between the cell and a reinsurer, and while the cell retains no risk, the corporation benefits from access to cheaper wholesale reinsurance cover.
The ability for numerous small companies to group their insurance risks in a cell means the self-insurance business is no longer reserved for big corporations. Huish believes a group of insureds must have projected annual losses in the region of $5 million or above to justify forming a cell, while that figure would be closer to $3.5 million for individual cell owners.
Insured Turns Insurer
More than simply participating in their own risks and enjoying greater control and premium savings from self-insurance, an increasing number of companies see PCCs as an opportunity to generate cash flows while strengthening bonds with business counterparts. Indeed, any company comfortable with the self-insurance concept can set up its own PCC to offer insurance solutions to third-party clients, suppliers or partners.
Not only does the sponsor of the PCC get closer to the risk of companies that affect its own risk profile, but it can also add value to its service propositions by offering valued third parties a quick, cheap route into self-insurance.
“Setting up your own PCC is a way of locking in clients, strengthening relationships and generating revenues, while also offering profit sharing opportunities between the PCC owner and its clients,” said Clive James, consultant at Artex Risk Solutions.
While this may be a natural fit for financial services firms, the concept can be applied to any sector, and may be particularly useful for those that operate on a project-by-project basis.
Construction firms, for example, are setting up PCCs through which the underlying cells write segregated insurance coverage for distinct projects, partners or groups of subcontractors. Freight storage unit owners are already using cells to self-insure the fire, theft and flood insurance they provide to licensees of the units, and there are myriad opportunities for health care organizations to offer insurance across their networks via cells.
Companies that lack the insurance expertise to run a PCC themselves would outsource this responsibility to an insurance manager in the same way stand-alone captive administration is outsourced — at a similar cost.
As PCC sponsors must ultimately compete with guaranteed cost options in the commercial marketplace, Tamburri noted it is essential to educate potential clients that participation is both a long term commitment and also an opportunity to recoup underwriting profits they would otherwise lose if they stayed with commercial insurers.
“One hurdle is getting data from prospective clients,” said Tamburri. “It’s a lot of work for them to get together historical loss and exposure information. Smaller companies may wish to join the group but fear that they will do a lot of work only for the cell not to get off the ground.”
Such is the decision all companies must make when considering self-insurance, whether taking an individual cell or going a step further by forming a full PCC for third parties to join. What is clear is that cells give risk managers more options than ever before. And when insured becomes insurer, it is surely a sign of insurance industry evolution and innovation.