POINT: Commercial Insurance Is a Commodity
Complex risk is ripe for commoditization, and that's good for risk managers.
By Cyril Tuohy, managing editor of Risk & Insurance®
With all the advances in technology around insurance placement, underwriting and claims, for the bulk of buyers, insurance has become a commodity with an increasing focus on price. That is a welcome trend as it benefits the marketplace as a whole.
Most commercial risks are not as complex as they seem, not with all the data risk managers have at their fingertips.
Thousands of small businesses and hundreds of midsize companies benefit most when risks are run through standard algorithms. Many of the risks faced by global Fortune 500 companies can be commoditized to a large extent.
Commoditization means less differentiation, which makes it easier for buyers to compare one insurance program with another based on price.
With the Council of Insurance Agents & Brokers' initiative to streamline and computerize insurance application and placement, there is a national system in place that could lend itself to both the streamlining of the process and greater price competition. All the major brokers have developed technical systems for the most effective placement of insurance, and allow bidding on the best placement in regard to both price and terms and conditions.
Think of how competitive pricing for auto insurance has become in personal lines, or how cheaply we can trade stocks today compared with 20 years ago.
In the late 1990s, I bought an odd lot of Sunbeam stock worth $2,000, minus the $55 commission. Sunbeam subsequently went bankrupt. It was the first and last stock I ever bought. Were I to buy stock today, my prowess would likely have cost me another $2,000, but at least I'd only be charged $7.
As these insurance systems collect more data on hurricane modeling or global warming, for example, the industry will be able to offer greater coverage for a wider range of risks, at a better price. Commoditization is fundamentally democratic. It does the greatest good for the greatest number, and it plays an important role in making insurance markets efficient, competitive and open.
In personal lines, we've all benefitted from the speed with which we can get quotes. Why can't corporate risk managers?
Efficiency, competition and openness are ingredients that have been in short supply in the commercial insurance industry. The time has come to inject a heavy dose of each into the industry. We all stand to benefit.
February 19, 2013
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