The insurance industry is undergoing significant transformations affecting how businesses obtain coverage and manage risks. As outlined in the book The 10 Laws of Insurance Attraction, these changes are reshaping the way insurance companies underwrite policies, price premiums, and structure coverage. Understanding these shifts is crucial for businesses seeking to navigate the evolving insurance landscape effectively.
When I interned at a large insurance company’s underwriting school as a college intern, I learned one thing from my mentor: You can insure any risk provided you structure (control) the insurance program’s coverages and price the premium appropriately so the insurance company makes money. Think like a casino: if you restrict the potential payout and control the odds (rates), the house always wins.
The Rise of Data Analytics in Underwriting
One of the most significant changes in the insurance industry is the increased use of data analytics in the underwriting process. Insurance companies now have access to vast amounts of data and sophisticated tools to analyze it, allowing them to assess risks with unprecedented precision. Face it: computer processing power and the amount of data being stored continue to grow, and insurance companies are rapidly learning how to use these better.
Expanded Data Points
Traditionally, underwriters relied on a limited set of data points, such as your loss history, industry classification, basic information about your business, and maybe a single inspection by their loss control. There was a day when you could show the insurance company loss control person your safety manual, and you would receive a discount. Today, insurance companies consider hundreds of internal and external factors to determine if you have an effective safety program. There are now hundreds of data points they look at, including:
- Financial stability and credit scores
- Management practices and company culture
- Employee hiring and training procedures
- Operational efficiency and quality control measures
- Facility maintenance and safety protocols
- Environmental factors and regional risks
- Contractual risk transfer controls
- Third-party data sites
You probably would not have imagined that aerial Google photos of your facility or FMCSA SAFER scores of your fleet would impact your premium when you have never had a claim, but these data sites do. This expanded scope allows insurers to create a more comprehensive risk profile for each business they evaluate.
Predictive Modeling
Although having no prior claims helps with your insurance premiums, insurers are increasingly using predictive modeling to forecast future claims and losses. They will analyze your data points to see if you share similar traits with businesses that experienced large or catastrophic claims. These models incorporate historical data, industry trends, and company-specific information to estimate the likelihood and potential cost of future incidents. This approach enables more accurate pricing and helps insurers identify high-risk accounts that may require additional scrutiny or risk management interventions. In other words, even with no prior claims, if there is something they do not like in your data, they may significantly increase your premiums or even choose not to insure your business.
Changes in Pricing Strategies
The evolution of underwriting practices has led to significant changes in how insurance companies price their policies.
Micro-Segmentation
Instead of broad industry classifications, insurers now use micro-segmentation to group businesses with similar risk profiles. This allows for more tailored pricing that reflects the specific risks of each segment, rather than applying generalized rates across entire industries.
Dynamic Pricing
Some insurers are moving towards dynamic pricing models that adjust premiums in real-time based on changing risk factors. This could include factors such as weather conditions, economic indicators, or even data from Internet of Things (IoT) devices monitoring a company’s operations.
Experience and Schedule Rating
While experience rating (based on past claims) remains important, insurers are placing greater emphasis on schedule rating. This approach considers a company’s risk management practices, safety programs, and other proactive measures when determining premiums. Businesses that can clearly demonstrate strong risk control may receive significant credits, even if they have a less-than-ideal claims history.
Coverage Restrictions and Customization
The evolving insurance landscape has also brought changes to policy structures and coverage options.
Increased Specialization
As risks become more complex, insurers are developing more specialized policies tailored to specific industries or types of exposures. This trend allows for more comprehensive coverage of unique risks but may also lead to gaps if businesses don’t carefully review their policies.
Higher Deductibles and Self-Insured Retentions
To manage their own risk exposure, insurers are often requiring higher deductibles or self-insured retentions, particularly for businesses in high-risk industries or those with poor loss histories. This shift places more financial responsibility on the insured but can also lead to lower premiums.
Coverage Sublimits and Exclusions
Insurers are increasingly using sublimits and exclusions to manage their exposure to certain types of risks. For example, many policies now have specific sublimits for cyber liability or exclude coverage for certain types of pollution risks. Businesses need to be aware of these limitations and consider additional coverage where necessary.
Loss-Limited or Quota-Share Policies
Due to the growing number of catastrophic claims, insurers are capping how much they will pay out for a claim or series of claims within a specified period. Loss-limited insurance policies cap the amount an insurer will pay out for a claim or series of claims within a specified period.
Quota share insurance is a type of reinsurance arrangement where the primary insurer and reinsurers agree to share a fixed percentage of premiums and losses. By implementing these, insurers can better manage their risk exposure.
Both types of policies are commonly used in commercial insurance, particularly for high-risk industries or businesses with significant potential for large claims. Loss-limited programs also require careful consideration of the devastating potential financial impact if losses exceed the specified limits.
The Impact of Reinsurance
Reinsurance plays a crucial role in shaping the primary insurance market, and changes in the reinsurance sector are having significant effects on coverage availability and pricing.
Capacity Constraints
Reinsurers are becoming more selective about the risks they’re willing to take on, particularly in industries prone to large losses. This can lead to capacity constraints in the primary insurance market, making it difficult for some businesses to obtain the coverage limits they need.
Risk Appetite Shifts
Changes in reinsurers’ risk appetites can quickly ripple through to the primary market. For example, if reinsurers become wary of certain types of catastrophic risks, primary insurers may restrict coverage or increase prices for businesses exposed to those risks.
The Role of Technology in Risk Assessment
Advancements in technology are providing insurers with new tools to assess and price risks.
Telematics and IoT Devices
In industries like transportation and manufacturing, telematics and IoT devices are providing insurers with real-time data on operations, safety practices, and potential risks. This information can be used to adjust premiums, provide risk management advice, and even prevent losses before they occur.
Artificial Intelligence and Machine Learning
AI and machine learning algorithms are being employed to analyze vast datasets and identify patterns that human underwriters might miss. These technologies can help insurers detect fraud, predict claim outcomes, and identify emerging risks.
The Growing Importance of Risk Management
As the insurance landscape evolves, the importance of proactive risk management for businesses cannot be overstated.
Emphasis on Loss Prevention
Insurers are placing greater emphasis on loss prevention strategies, often offering premium credits or other incentives for businesses that implement robust risk management programs. This includes safety training, regular facility inspections, and the use of advanced safety technologies.
Partnerships with Insureds
Some insurers are moving towards a more collaborative approach, working closely with insureds to identify and mitigate risks. This may involve regular risk assessments, tailored risk management advice, and even co-investment in loss prevention measures.
Conclusion: Adapting to the New Insurance Landscape
The evolving insurance landscape presents both challenges and opportunities for businesses. To navigate these changes successfully, companies should:
- Invest in comprehensive risk management programs
- Leverage data and technology to better understand and control their risks
- Work closely with knowledgeable insurance professionals who understand the changing market
- Be prepared to consider alternative risk financing options, such as captives or higher deductibles
- Regularly review and update their insurance programs to ensure they align with current market conditions and business needs
By understanding and adapting to these changes, businesses can position themselves to obtain the most favorable terms and pricing in an increasingly complex insurance market. The key is to view insurance not just as a necessary expense but as an integral part of a comprehensive risk management strategy that supports long-term business success.