Raising the Experience Bar
Commercial insurance has recently faced several major challenges. Economic distress has made it difficult to profit off of investments, thereby necessitating profitable underwriting to drive returns. In addition to soft rates, exposure bases (i.e., U.S. GDP) are flat, if not effectively down, and interest rates are at historic lows.
As a result of these and other pressures, the overall commercial lines market has shrunk since 2007 — from $241 billion in 2007 to $222 billion in 2012 — and has been recovering very slowly over the last five years. Difficult economic conditions and saturation of a highly fragmented market has increased competition, leading commercial carriers to improve their value proposition by offering a better customer experience for both the end insured and producers.
Commercial carriers have every incentive to invest in improving the customer experience.
In contrast with personal lines (e.g., private passenger auto insurance, for which most carriers struggle to promote a superior customer experience and divert consumers’ attention from price), ease of doing business and other value-added services — even as basic as advice — greatly influence placement.
From the lower end of small commercial to the largest commercial accounts, producer experience and, by extension, the experience of the insured has increasingly become a critical factor in a carrier’s ability to acquire and retain clients. An underwriter’s product expertise and local market knowledge often takes precedence over price.
In the meantime, shifts in customer expectations, access to information and diversifying needs are creating networks of increasingly self-directed, self-organizing and self-aware groups. This has broad implications for the design, manufacture, marketing, pricing and servicing of commercial insurance.
Small and medium enterprises increasingly interact and transact through a variety of channels. PwC’s recent Future of Insurance research shows that 49 percent of SMEs now use the Internet to supplement or replace agents and brokers in their search for commercial insurance.
As a result, investments in technology, customer data and analytics across the spectrum of carriers — from small to large commercial — are raising service expectations. Based on their business and operating models, carriers need to judiciously select and prioritize on which business and technical capabilities they should focus.
For instance, a niche market positioning that targets only a very narrow customer segment may require specific capabilities that are relevant to only that segment, such as specialized risk control services for medical facilities.
The distribution model also should greatly influence the types of customer experience-related capabilities in which to invest. For example, middle market carriers with numerous local offices will have to expend more effort, such as on guidelines and training, to promote a consistent customer experience.
Also, different sources of distribution will value different kinds of experience. While national brokers tend to be more transactional in nature and favor speed of processing and decision-making, small regional producers typically value coverage advice and are not as concerned about ease of doing business.
Regardless of a carrier’s business model, technology has been a consistent source of differentiation and an enabler of a superior customer experience, driving efficiencies throughout every stage of the sales funnel and customer life cycle.
New Customer Acquisition
The ability to collect and analyze customer data is the foundation of superior marketing capabilities. Better understanding of buyer behavior, demand for specific products or coverage, and pricing trends help carriers identify the most profitable market segments and growth opportunities.
Agents and brokers are increasingly leveraging new technologies such as social media to increase brand presence, generate leads and engage customers online. Underwriters at leading commercial carriers and MGUs likewise should promote their expertise in a given industry segment and/or line of business through “likes,” posts, retweets, blogs and articles on social media platforms.
Multiple social media outlets can help brand and disseminate thought leadership to engage both current and prospective producers.
Another key component of superior customer experience and producer productivity is ensuring that producers clearly understand a carrier’s risk appetite so they do not spend time on submissions that are likely to be rejected. This is an issue for many commercial carriers that struggle to effectively communicate their underwriting appetite, both internally and externally.
In fact, independent technology companies have emerged to address this problem by offering a new category of services to agents and brokers. For instance, there is now a search engine that gives agents and brokers a sense of insurance companies’ risk appetites, thereby allowing them to quickly find the right insurer for a particular risk.
This results in an improved quote ratio from carriers and provides more options to the prospective insured. It also saves time for everybody concerned.
The process of shopping and purchasing commercial insurance is still relatively complex. Future of Insurance research noted that nearly all non-insured small business owners cited the complexity of the process as one key reason for not getting coverage.
Ease of doing business is a key part of a superior customer experience and falls on the strategic agenda of most commercial line carriers, which are:
• Investing in streamlining and automating the underwriting process;
• Actively finding ways to simplify the data collection process by eliminating non-critical questions from their applications;
• Avoiding redundant information capture (i.e., re-keying); and
• Pre-populating submissions through third-party data services.
Beyond the initial step of capturing customer and coverage information, workflow management solutions enable better up-front triage and orchestration of account clearing, rating and quoting activities.
In an increasingly large number of small commercial segments, complete systematization of product rules and automation of underwriting decisions enable straight through processing — a commercial carriers’ ultimate goal as they strive to reduce quote turnaround times.
Some commercial carriers may choose to implement tiered service models to facilitate a superior customer experience for their most valuable producers.
Customer Relationship Management
Once a deal closes, carriers continue to look for ways to improve the producer and policyholder experience. Some carriers increasingly handle several policy administration transactions (e.g., endorsements, bill payments) on behalf of producers.
Policy administration service provision is increasingly taking place online. Even for large, multinational accounts, carriers have rolled out and continue to invest in self-service platforms that allow brokers and customers to focus on risk management, loss control and other value-added activities instead of premium payment tracking, loss reconciliation and other administrative activities.
Many carriers also have started to effectively utilize mobile computing (e.g., smartphones, tablets) to empower agents, claim adjusters, risk inspectors and customers by providing them on-demand access to both existing and new information and services.
In addition, data analytics are playing an increasingly important role, and can enable innovative value-added services, some of which may be disruptive enough to be successfully monetized and re-position a carrier’s business and/or operating model.
For instance, sensor technology has already started to transform the crop insurance business by reducing the need for traditional insurance coverage (i.e., insuring farmers against the loss of a crop or reduced yield from a crop), thereby enabling carriers to focus instead on preventive loss control services.
Sensors embedded in a field can measure the level of moisture in real time, which can then help determine the necessary level of irrigation and drive optimal watering. Several manufacturers have equipped their machinery to communicate with sensors and help farmers determine when a field is ready for harvesting.
Sensor technology also can provide real-time feedback on large scale disasters. Photos facilitate estimating damage, and mapping tools allow carriers to dynamically and automatically assign adjusters, contact customers and estimate Cat losses.
Sensor data provides carriers with real-time information on what has been damaged — Has the boiler broken? Is the basement flooded? Is there smoke damage? Is there mildew, rot or termites? Likewise, sensors can trigger customer alerts when there is minor — not just major — damage.
This presents the opportunity to stave off greater subsequent damage, as well as create pre-populated claims forms and even fulfill a claim before a customer knows the extent of damage.
Innovation has raised the bar for the customer experience and service expectations in the commercial lines sector. Commercial carriers must continue to invest in technology and find ways to harness customer data to remain competitive in the short-term.
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
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.