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.”
Helping Investment Advisers Hurdle New “Customer First” Government Regulation
This spring, the Department of Labor (DOL) rolled out a set of rule changes likely to raise issues for advisers managing their customers’ retirement investment accounts. In an already challenging compliance environment, the new regulation will push financial advisory firms to adapt their business models to adhere to a higher standard while staying profitable.
The new proposal mandates a fiduciary standard that requires advisers to place a client’s best interests before their own when recommending investments, rather than adhering to a more lenient suitability standard. In addition to increasing compliance costs, this standard also ups the liability risk for advisers.
The rule changes will also disrupt the traditional broker-dealer model by pressuring firms to do away with commissions and move instead to fee-based compensation. Fee-based models remove the incentive to recommend high-cost investments to clients when less expensive, comparable options exist.
“Broker-dealers currently follow a sales distribution model, and the concern driving this shift in compensation structure is that IRAs have been suffering because of the commission factor,” said Richard Haran, who oversees the Financial Institutions book of business for Liberty International Underwriters. “Overall, the fiduciary standard is more difficult to comply with than a suitability standard, and the fee-based model could make it harder to do so in an economical way. Broker dealers may have to change the way they do business.”
As a consequence of the new DOL regulation, the Securities and Exchange Commission (SEC) will be forced to respond with its own fiduciary standard which will tighten up their regulations to even the playing field and create consistency for customers seeking investment management.
Because the SEC relies on securities law while the DOL takes guidance from ERISA, there will undoubtedly be nuances between the two new standards, creating compliance confusion for both Registered Investment Advisors (RIAs)and broker-dealers.
To ensure they adhere to the new structure, “we could see more broker-dealers become RIAs or get dually registered, since advisers already follow a fee-based compensation model,” Haran said. “The result is that there will be likely more RIAs after the regulation passes.”
But RIAs have their own set of challenges awaiting them. The SEC announced it would beef up oversight of investment advisors with more frequent examinations, which historically were few and far between.
“Examiners will focus on individual investments deemed very risky,” said Melanie Rivera, Financial Institutions Underwriter for LIU. “They’ll also be looking more closely at cyber security, as RIAs control private customer information like Social Security numbers and account numbers.”
Demand for Cover
In the face of regulatory uncertainty and increased scrutiny from the SEC, investment managers will need to be sure they have coverage to safeguard them from any oversight or failure to comply exactly with the new standards.
In collaboration with claims experts, underwriters, legal counsel and outside brokers, Liberty International Underwriters revamped older forms for investment adviser professional liability and condensed them into a single form that addresses emerging compliance needs.
The new form for investment management solutions pulls together seven coverages:
- Investment Adviser E&O, including a cyber sub-limit
- Investment Advisers D&O
- Mutual Funds D&O and E&O
- Hedge Fund D&O and E&O
- Employment Practices Liability
- Fiduciary Liability
- Service Providers D&O
“A comprehensive solution, like the revamped form provides, will help advisers navigate the new regulatory environment,” Rivera said. “It’s a one-stop shop, allowing clients to bind coverage more efficiently and provide peace of mind.”
Ahead of the Curve
The new form demonstrates how LIU’s best-in class expertise lends itself to the collaborative and innovative approach necessary to anticipate trends and address emerging needs in the marketplace.
“Seeing the pending regulation, we worked internally to assess what the effect would be on our adviser clients, and how we could respond to make the transition as easy as possible,” Haran said. “We believe the new form will not only meet the increased demand for coverage, but actually creates a better product with the introduction of cyber sublimits, which are built into the investment adviser E&O policy.”
The combined form also considers another potential need: cost of correction coverage. Complying with a fiduciary standard could increase the need for this type of cover, which is not currently offered on a consistent basis. LIU’s form will offer cost of correction coverage on a sublimited basis by endorsement.
“We’ve tried to cross product lines and not stay siloed,” Haran said. “Our clients are facing new risks, in a new regulatory environment, and they need a tailored approach. LIU’s history of collaboration and innovation demonstrates that we can provide unique solutions to meet their needs.”
For more information about Liberty International Underwriters’ products for investment managers, visit www.LIU-USA.com.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.