The Caveats of Qualitative Benchmarking
Risk managers find themselves continuously challenged by senior management to develop meaningful and relevant benchmarking data to determine how well their insurance-related cost of risk compares to that of their peers.
The key words here are “meaningful” and “relevant”. Risk managers are well aware of the inherent difficulties of securing such data from their peers.
Compiling a lot of insurance industry- related data doesn’t assure that we will get an apples to apples comparison. Regardless of the data source, whether it be peer-related or insurance industry-related, risk managers must be focused on aligning the data to their respective company and its operations.
…a risk manager must be cognizant of the key considerations in any benchmarking exercise to arrive at a “meaningful and relevant ” conclusion before presenting that conclusion to senior management.
I have outlined below some of the key questions which need to be considered to get the right alignment.
• What drives your insurance costs, retained losses or commercial premiums?
• Regardless of whether your company operates regionally or nationally – for as we know workers’ compensation, general liabilities and auto liability laws and regulations vary by state – comparisons should be broken down regionally versus nationally. Comparing performance in the Northeast to the Midwest is probably not relevant.
• Is your workforce comprised of union and/or non-union employees? Costs for workers’ compensation may vary considerably and comparisons should be union to union and non-union to non-union.
• In regards to retained losses, is your actuarial forecast of ultimate losses conservative? Do you reserve at or above the midpoint of the actuarial forecast? Does your forecast include a risk margin?
• Are safety, loss control and claims management initiatives receiving credit for impacting ultimate retained losses?
• Are retained losses under your supervision as opposed to outside of your purview?
• Is your company actively engaged in mergers and acquisitions?
• What is the primary focus of your business?
• Does your company actively utilize a captive insurance company?
While the above considerations can be applied to benchmarking both commercial premiums and retained losses, it’s essential to understand that risk managers in most instances will have much less control over commercial premiums.
Such premiums are often driven by less predictable and unforeseen global events such as natural disasters and class-action lawsuits, to cite a few. As such, a risk manager must be prudent to not assume too much credit for premium decreases in a “soft” market so as not to assume inappropriate blame in a “hard” market.
On the other hand, a risk manager generally has greater control over retained losses such as workers’ compensation, general liability and auto liability.
From an actuarial perspective, such losses lend themselves to more predictability. A risk manager, through a variety of aggressive loss control, safety and claims management programs and practices may be able to positively influence and mitigate such costs.
As indicated at the outset, a risk manager must be cognizant of the key considerations in any benchmarking exercise to arrive at a “meaningful and relevant ” conclusion before presenting that conclusion to senior management.
Given the uncertainty and limitations on the kinds of peer group data a risk manager would need to perform a truly “apples to apples” comparison, the most “relevant and meaningful” data may be that which a risk manager already possesses: His own.
An Uncertain Future
In recent years, trends in liability claims have been relatively low, with weak economic growth helping to maintain a benign claims environment. The result has been higher profitability for insurers in liability.
However, in our current risk environment, there are waves of new and emerging issues constantly sweeping into the market with unknown risk and liability profiles.
Technological advances, predictive modeling and government regulations have shifted the market and caused new issues and risks to emerge that can affect liability claims going forward that impact customers, brokers and insurers alike.
These new issues vary across industries — from emerging technologies like e-cigarettes, wearable devices, robotics, 3-D printing and driverless cars to the long-lasting effects of sports injuries and the regulatory ramifications of diminishing tort reform — and cast the primary and excess general liability market on a turbulent path.
New risks will increase the demand for liability insurance; however, with little understanding of the related liability claims, the increased demand will be challenging for insurers to effectively manage these risks.
Given the multitude of issues, I have some predictions on which way the market will turn.
Next year will be the start of a “micro-casualty” period, marked by a state of extreme market conditions.
I’ll use the analogy of the economic cycle to illustrate this state of extremes I believe the industry will face. If all the people around you have jobs, then we are in expansion; if your neighbor is out of work, then we are in recession; and if you are out of work, then we are in a depression.
That analogy depicts the casualty market as we head into 2015. Some customers will feel the effects of a soft market and enjoy rate declines in their programs, akin to economic expansion. Others will feel the chill of a recession with difficulty finding adequate limits at any price. How can that be?
A variety of changes will shape the future of liability insurance. The perception of the market will depend on the emergence of predictive modeling of losses; this new and needed predictive modeling needs to be combined with the expertise of a specialist.
Data modeling alone can lead to inaccurate outcomes. The specialist experts will understand emerging trends and predict future loss trends — where no data exists. Thus, we are left with a paradoxical micro-casualty period in which some customers enjoy favorable market conditions while others struggle to find solutions.
On a macro level, it is clear that the insurance market is growing and changing, with the emergence of new market cycles and the end of some traditional ones.
This transition itself means a bumpy ride for those in the liability market as they navigate the market cycle transitions. Ultimately, it will be the specialists in the market who capture the opportunities emerging in the casualty marketplace. They will provide the expertise and innovations to help guide customers and brokers through the micro-casualty period.
Read all of Robert Rheel’s Risk Insider articles.
2015 General Liability Renewal Outlook
There was a time, not too long ago, when prices for general liability (GL) insurance would fluctuate significantly.
Prices would decrease as new markets offered additional capacity and wanted to gain a foothold by winning business with attractive rates. Conversely, prices could be driven higher by decreases in capacity — caused by either significant losses or departing markets.
This “insurance cycle” was driven mostly by market forces of supply and demand instead of the underlying cost of the risk. The result was unstable markets — challenging buyers, brokers and carriers.
However, as risk managers and their brokers work on 2015 renewals, they’ll undoubtedly recognize that prices are relatively stable. In fact, prices have been stable for the last several years in spite of many events and developments that might have caused fluctuations in the past.
Mark Moitoso discusses general liability pricing and the flattening of the insurance cycle.
Flattening the GL insurance cycle
Any discussion of today’s stable GL market has to start with data and analytics.
These powerful new capabilities offer deeper insight into trends and uncover new information about risks. As a result, buyers, brokers and insurers are increasingly mining data, monitoring trends and building in-house analytical staff.
“The increased focus on analytics is what’s kept pricing fairly stable in the casualty world,” said Mark Moitoso, executive vice president and general manager, National Accounts Casualty at Liberty Mutual Insurance.
With the increased use of analytics, all parties have a better understanding of trends and cost drivers. It’s made buyers, brokers and carriers much more sophisticated and helped pricing reflect actual risk and costs, rather than market cycle.
The stability of the GL market also reflects many new sources of capital that have entered the market over the past few years. In fact, today, there are roughly three times as many insurers competing for a GL risk than three years ago.
Unlike past fluctuations in capacity, this appears to be a fundamental shift in the competitive landscape.
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them, through risk control, claims management and a strategic risk management program.”
— David Perez, executive vice president and general manager, Commercial Insurance Specialty, Liberty Mutual
Dynamic risks lurking
The proliferation of new insurance companies has not been matched by an influx of new underwriting talent.
The result is the potential dilution of existing talent, creating an opportunity for insurers and brokers with talent and expertise to add even greater value to buyers by helping them understand the new and continuing risks impacting GL.
And today’s business environment presents many of these risks:
- Mass torts and class-action lawsuits: Understanding complex cases, exhausting subrogation opportunities, and wrangling with multiple plaintiffs to settle a case requires significant expertise and skill.
- Medical cost inflation: A 2014 PricewaterhouseCoopers report predicts a medical cost inflation rate of 6.8 percent. That’s had an immediate impact in increasing loss costs per commercial auto claim and it will eventually extend to longer-tail casualty businesses like GL.
- Legal costs: Hourly rates as well as award and settlement costs are all increasing.
- Industry and geographic factors: A few examples include the energy sector struggling with growing auto losses and construction companies working in New York state contending with the antiquated New York Labor Law
David Perez outlines the risks general liability buyers and brokers currently face.
Managing GL costs in a flat market
While the flattening of the GL insurance cycle removes a key source of expense volatility for risk managers, emerging risks present many challenges.
With the stable market creating general price parity among insurers, it’s more important than ever to select underwriting partners based on their expertise, experience and claims handling record – in short, their ability to help better manage the total cost of GL.
And the key word is indeed “partners.”
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them — through risk control, claims management and a strategic risk management program,” said David Perez, executive vice president and general manager, Commercial Insurance Specialty at Liberty Mutual.
While analytics and data are key drivers to the underwriting process, the complete picture of a company’s risk profile is never fully painted by numbers alone. This perspective is not universally understood and is a key differentiator between an experienced underwriter and a simple analyst.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks — things that aren’t necessarily captured in the analytical environment,” said Moitoso.
Mark Moitoso suggests looking at GL spend like one would look at total cost of risk.
Several other factors are critical in choosing an insurance partner that can help manage the total cost of your GL program:
Clear, concise contracts: The policy contract language often determines the outcome of a GL case. Investing time up-front to strategically address risk transfer through contractual language can control GL claim costs.
“A lot of the efficacy we find in claims is driven by the clear intent that’s delivered by the policy,” said Perez.
Legal cost management: Two other key drivers of GL claim outcomes are settlement and trial. The best GL programs include sophisticated legal management approaches that aggressively contain legal costs while also maximizing success factors.
“Buyers and brokers must understand the value an insurer can provide in managing legal outcomes and spending,” noted Perez. “Explore if and how the insurer evaluates potential providers in light of the specific jurisdiction and injury; reviews legal bills; and offers data-driven tools that help negotiations by tracking the range of settlements for similar cases.”
David Perez on managing legal costs.
Specialized claims approach: Resolving claims quickly and fairly is best accomplished by knowledgeable professionals. Working with an insurer whose claims organization is comprised of professionals with deep expertise in specific industries or risk categories is vital.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks, things that aren’t necessarily captured in the analytical environment.”
— Mark Moitoso, executive vice president and general manager, National Accounts Casualty, Liberty Mutual
“When a claim comes in the door, we assess the situation and determine whether it can be handled as a general claim, or whether it’s a complex case,” said Moitoso. “If it’s a complex case, we make sure it goes to the right professional who understands the industry segment and territory. Having that depth and ability to access so many points of expertise and institutional knowledge is a big differentiator for us.”
While the GL insurance market cycle appears to be flattening, basic risk management continues to be essential in managing total GL costs. Close partnership between buyer, broker and insurer is critical to identifying all the GL risks faced by a company and developing a strategic risk management program to effectively mitigate and manage them.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.