Perhaps it’s a symptom of buzzword fatigue that everyone in the insurance industry seems to use the word “insurtech” without agreeing on – or maybe even really thinking about – what it means.
Some use it as a noun, suggesting a type of company – typically a startup – that applies cutting-edge technology to insurance-related challenges. Others use it as an adjective to describe the technologies and applications themselves. Still others seem to take the position of U.S. Supreme Court Justice Potter Stewart, writing on a very different topic: “I know it when I see it.”
Whatever it is, insurtech is a rapidly growing feature of the insurance landscape, and many traditional insurers and venture capitalists are investing in it.
Modernizing the value chain
Insurtech emerged around 2010 as an offshoot of a similar movement in banking, known as “fintech.” With providers of just about every other product and service embracing “Amazonation,” consumers have come to expect absolutely seamless service – wherever and whenever. Like those industries, insurers need to satisfy their customers while growing profitably and managing operational costs.
But insurtech doesn’t just mean offering products more quickly online. It means transforming the offerings and the customer experience.
Insurtech most consistently refers to the use of apps, wearables, big data, machine learning, and other technologies to automate and improve processes across the insurance value chain – from marketing and policy origination through underwriting, services, and claims.
Some applications focus on reducing friction in transactions; the time required to fill out an application and receive a quote is a classic example. Others seek to streamline and enhance back-end functions, such as risk assessment, pricing, loss control, and settling claims.
Claims: Ripe for insurtech
The claims process is particularly well suited for transformation. Insurers typically hire adjusters to determine the extent of their liability for a loss, damage, or injury and come up with a settlement. This can be time consuming, expensive, error prone, and, in some cases, dangerous.
Today, new approaches aid the claims process.
For example, drivers can submit photos to their insurers via app immediately after an accident. Some insurers also use machine learning and publicly available datasets to detect and flag potentially fraudulent claims.
As technology helps improve underwriting, policy administration and claims, new products are being developed and traditional ones can be handled differently.
One emerging approach – enabled by the intersection of telecommunications and big data known as “telematics” – is usage-based insurance (UBI), priced according to drivers’ own voluntarily provided behavioral data. A more recent stage in UBI’s evolution is pay-as-you-drive insurance, with monthly billing that varies based on mileage driven.
A similar trend involves using data from smart-home technology, such as water-monitoring systems that can anticipate and prevent leaks that might otherwise lead to claims. Advances in telematics and the Internet of Things are increasing the quantity and range of the data insurers will have at their disposal.
Insurtech offers tremendous opportunities for innovation, but – as one of the most heavily regulated and publicly scrutinized industries – it faces obstacles. Many technologists driving the movement come from outside insurance. Few have navigated the legal, regulatory, and cultural minefields surrounding personal privacy and security.
Unlike many other industries, in which maximizing speed and satisfaction has become the prime directive, insurers are required by law to protect customers from privacy breaches and bias. Perusing social media for insights to help optimize user experience or using machine learning to anticipate and address changes in users’ buying behavior may be acceptable if you’re selling cars or cosmetics – but for insurers, their clients, and regulators it raises a host of red flags that have to be addressed.
By Loretta Worters, Vice President – Media Relations
The credit crisis of 2007-2008 was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared. “Everyone was impacted, not just those working in banks. Because the price of debt, the ability to get financing changed, a lot of things happened. So, everyone is impacted by credit every day, whether they know it or not,” said Tamika Tyson, senior manager, credit with Noble Energy, in this video interview.
Tyson, who is also a non-resident scholar with the Insurance Information Institute, said what she is most concerned about is debt repayments that are coming due. “If a global recession happens, as economists are predicting, and it happens in conjunction within an election, it can be difficult for companies to refinance any mature debentures they have coming in 2020,” she said. “Leadership needs to be thinking about the risks in their company. Not just the credit risks, but all risks related to their business.”
What leads to credit risk and how can companies protect themselves?
The main microeconomic factors that lead to credit risk include limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, direct lending, massive licensing of banks, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank.
Doing a comprehensive risk assessment is a great idea for everyone within an organization, noted Tyson. “Once an assessment is made as to how much risk they are exposed to, then they can develop a strategy to help protect the company. If there’s more risk in the system than a company is willing to take, then they should consider obtaining credit risk insurance,” she said.
What is Credit Risk Insurance?
Credit risk insurance is a tool to support lending and portfolio management. It protects a company against the failure of its customers to pay trade credit debts owed to them. These debts can arise following a customer becoming insolvent or failing to pay within the agreed terms and conditions.
What can impact credit risk?
The factors that affect credit risk range from borrower-specific criteria, such as debt ratios, to market-wide considerations such as economic growth. Political upheaval in a country can have an impact, too.
For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs or barriers, investment, wage levels, labor laws, environmental regulations and development priorities, can affect the business conditions and profitability.
“At the end of the day, political risks have the ability to impact credit risks. Credit risks rarely impact political risks,” she said. “We have a lot of different views right now on the political spectrum so until we know how that’s going to work out, it’s going to create risk in the system, and we’ll see how different companies react to that,” Tyson said.
“We all talk about biases. Everyone thinks they’re better off and it’s always someone else that has the issue. It’s the same when looking at a risk assessment or reviewing someone’s financials; everyone thinks they’re doing fine, but then they discount what’s going on with other people. That’s why it is imperative companies self-evaluate as they evaluate those they transact business with.”
“Know your portfolio, know your customers and understand your risk tolerance,” said Tyson. “Know, too, there are a lot of tools available to help you mitigate against those risks.”
Human trafficking is a crime with enormous individual and societal impacts, and it relies on legitimate businesses to sustain it. Motels, for example – and, arguably, insurers.
“Hotels and motels are routinely used for sex trafficking,” reports the Polaris Project, a nonprofit that aims to “eradicate modern slavery.” Two recent lawsuits involving insurers of motels used by traffickers highlight the complexity of determining who bears legal costs associated with such activities.
Duty to defend
Both cases revolve around “duty to defend” — an insurer’s obligation to provide a legal defense for claims made under a liability policy. Before proceeding, let me say: I’m not a lawyer. Everything that follows is based on published reporting, and no one should act on anything I write without first consulting an attorney.
In the first case, a woman sued motel operators for letting her be trafficked at their motels when she was a minor. The Insurance and Reinsurance Disputes Blog says, “The allegations of physical harm, threats, being held at gun point, and failure to intervene were wrapped up into claims ranging from negligence per se to intentional infliction of emotional harm.”
One of the motels sought defense from its insurer, Nautilus Insurance Co. Nautilus argued it was not obligated to defend based on a policy exclusion for claims arising out of assault or battery. The court agreed, and an appellate court affirmed.
In other words, the motel owners were on the hook for their own legal costs.
In the second case, a court found the insurer – Peerless Indemnity Insurance Co. – must defend its client in a suit brought by a woman claiming she was imprisoned by a man grooming her for prostitution while the owners turned a blind eye. A lower court had dismissed the case, finding insufficient evidence the motel was engaged in trafficking. An appeals court overturned that decision.
“The relevant question,” the judge said, is whether the victim’s injuries constitute personal injury. This is because the definition of personal injury under the policy included injuries arising from false imprisonment.
Because her injuries, at least in part, arose from false imprisonment, the judge said, “the answer to that question is ‘Yes’.”
So, the court said, Peerless must pay to defend the motel.
The differences between these rulings seem to have more to do with nuances in policy language than trafficking facts.
In the Nautilus case, the appeals court found the exclusion – stating Nautilus “will have no duty to defend or indemnify any insured in any action or proceeding alleging damages arising out of any assault or battery” – unambiguous. It declared: “Nautilus had no duty to defend and indemnify” because the claims “arose from facts alleging negligent failure to prevent an assault or battery.”
The Peerless case involved two policies – a general liability and an umbrella – both of which contained exclusions for “‘personal and advertising injury’ arising out of a criminal act committed by or at the direction of the insured.”
The “personal” in “personal and advertising injury” includes false imprisonment.
To a non-lawyer like me, this seems as unambiguous as the Nautilus case: the Peerless policies excluded personal injury “arising out of one or more” of a variety of offenses, including false imprisonment.
The U.S. District Court for the District of Massachusetts disagrees. Its analysis goes into semantic tall grass, parsing phrases like “arising out of” and “but for” and is peppered with case law citations like:
“Ambiguities are to be construed against the insurer and in favor of the insured” and
“The insurer bears the burden of demonstrating that an exclusion exists that precludes coverage.”
It would exceed the bounds of my non-existent legal training – and the length of a blog post – to critique the court’s analysis. I recommend reading the decision.
But it doesn’t take a lawyer to see insurers have a stake in reviewing and possibly tightening their policy language to avoid having to fund defenses of criminals and businesses that enable them.
Trafficking is a $32 billion-a-year (and growing) industry, according to the Polaris Project. With that kind of money involved, cases like these won’t just go away.
Private workers compensation insurers were slightly less profitable in 2019 than their 2018 record, according to a preliminary analysis by the National Council of Compensation Insurance (NCCI). NCCI estimates the combined ratio – a measure of insurer profitability – for 2019 will be about 87 percent, the second-lowest in recent history after last year’s record-low 83.2 percent.
These results, reflecting the segment’s sixth consecutive year of underwriting profitability, are part of NCCI’s State of the Line Report—a comprehensive account of workers’ compensation financial results.
Workers’ compensation net premiums written (NPW) fell 3.9 percent in 2019, to $41.6 billion from $43.3 billion in 2018, the report says. Before 2018, cession of premiums to offshore reinsurers stalled NPW growth. But the Base Erosion Anti-Abuse Tax (BEAT) component of the Tax Cuts and Jobs Act of 2017 – which limits multinational corporations’ ability to shift profits from the United States by making tax-deductible payments to affiliates in low-tax countries – spurred NPW growth to almost 9 percent in 2018.
While the BEAT’s residual effect and the strong economy may place upward pressure on 2019 net premiums written, recent decreases in rates and loss costs are likely to more than offset these factors.
Changes in rates/loss costs impact premium growth and reflect several factors that impact system costs, such as changes in the economy, cost containment initiatives, and reforms. NCCI expects premium in 2019 to fall 10 percent, on average, as a result of rate/loss cost filings made in jurisdictions for which NCCI provides ratemaking services.
The State of the Line Report was presented at NCCI’s Annual Issues Symposium (AIS) in May.
The U.S. Federal Emergency Management Agency (FEMA) is being pressed to adopt innovative methods to increase insurance penetration for floods and other natural disasters. In a draft report, FEMA’s National Advisory Council suggests that in order to increase financial preparedness for householders and local governments, novel financial models must be considered. The report notably mentions parametric triggers as a way to grow the insurance markets and protect against future disasters. Blockchain is also recommended as a means to create a land and property registry stored off-site in a secure platform.
What are parametric triggers, and how can they help?
Parametric insurance is a type of insurance that agrees—before the triggering event—to make a certain payment, instead of compensating for the pure loss. Parametric insurance pays out immediately when a certain threshold, such as water depth or wind speed, is reached; thus, expediting funding and reducing overall administrative costs.
What does the future hold for this new model?
“When added to the ubiquitous nature of smartphones and other levels of connectivity, the opportunity for expanding parametric insurance protection to individual households may merely be a matter of connecting the dots, for which FEMA is uniquely placed to lead this effort,” the Council’s report states.
Indeed, the Council believes that FEMA should “look towards a new model of insurance” in an age when natural disasters increasingly threaten both public and private interests.
The draft report also includes many suggestions to improve disaster preparedness, such as better building codes and code compliance, better preparedness for Indian tribes and rural communities, building resilient infrastructure and increasing funding for mitigation.
To close the insurance gap the report recommends:
Educating the public about the benefits of flood renter’s insurance and hidden hazards in real estate, rental properties and communities.
Stress testing state insurance guaranty funds to determine if they can withstand large-scale disasters and insurer insolvencies.
Creating more offerings for state and local governments to reduce rates of self-insurance of infrastructure.
Cyberattacks on hospitals can lead to increased death rates among heart patients, recent research suggests. This research emerges as attacks on health facilities are reported to have increased 60 percent in 2019.
Researchers at Vanderbilt University‘s Owen Graduate School of Management drilled down into Department of Health and Human Services records on data breaches from more than 3,000 Medicare-certified hospitals. They found that, for facilities that experienced a breach, the time for suspected heart attack patients to receive an electrocardiogram (ECG) increased by more than two minutes.
When seconds count
The study focused on the impact of remediation efforts on health care outcomes following a data breach. It found that common remediation approaches, such as additional verification layers during system sign-on, can “delay the access to patient data and may lead to inefficiencies or delays in care.”
“Especially in the case of a patient with chest pain,” the report says, “any delay in registering the patient and accessing the patient’s record will lead to delay in ordering and executing an ECG.”
The researchers found that “a data breach was associated with a 2.7-minute increase in time to ECG three years after the breach.”
A bit over two minutes may not seem like much – but during a coronary or a stroke it can be the difference between life and death.
Vanderbilt’s research was based on data collected before ransomware attacks against health care facilities became common. The authors caution that such attacks – in which systems or data are held hostage until a ransom can be paid – “are considered more disruptive to hospital operations than the breaches considered in this study.”
The medical sector is the seventh-most targeted industry, according to a report by internet security firm Malwarebytes, based on data gathered between October 2018 and September 2019. But Malwarebytes warns that attacks on this sector are on the rise.
“Threat detections have increased for this vertical,” the report says, “from about 14,000 healthcare-facing endpoint detections in Q2 2019 to more than 20,000 in Q3, a growth rate of 45 percent.”
Comparing all of 2018 against the first three quarters of 2019, Malwarebytes said it has observed a 60 percent increase in such attempted intrusions.
“If the trend continues,” Malwarebytes reports, “we expect to see even higher gains in a full year-over-year analysis.”
For those still tiptoeing around whether the property insurance market is yet officially “hard,” two speakers at Advisen’s Property Insights Conference last week unabashedly used the “H-word,” and none of the 300-plus insurance and risk-management professionals attending seemed to disagree.
Gary Marchitello, head of property broking for Willis Towers Watson, was first to say it in an on-stage conversation with Michael Andler, executive vice president/U.S. property practice leader at Lockton Cos.
Andler concurred: “If it walks like a hard market and talks like a hard market, it’s a hard market.”
Some presenters during the daylong event quibbled over when pricing went from merely “hardening” to “hard”. Some said the hard market is eight quarters old, while others said it began as recently as the second quarter of 2019 – but no one piped up to deny it’s here.
Hard, soft, and why it matters
In a hard market, demand for coverage is strong, supply weak. Insurers impose strict underwriting standards and issue fewer policies. Consequently, buyers pay higher premiums. During soft markets, customers can negotiate lower prices as insurers compete for business. When the market hardens again, prices rise as insurers adjust rates at renewal.
Marchitello, with four decades’ experience, said this hard market is different: “With prices rising, you’d expect new entrants to the market. That is absolutely not happening.”
“It’s going to get worse before it gets better,” he added. “Two years of combined ratios above 100 have forced underwriters to drive profitability” rather than pursue market share, as many did during the soft market.
We brought it on ourselves
In a room packed with insurers, brokers, and buyers, one might expect some finger pointing for the dramatic price increases. I heard little to none.
“We as underwriters allowed it to happen,” said Erik Nikodem, senior vice president at Everest Insurance.
“We lost the script during the soft market,” said Michal Nardiello, senior vice president at CNA. “We pushed deals that weren’t sustainable in the long haul.”
And it wasn’t only underwriters accepting responsibility.
“I never turned down a lower rate” when the market was soft, said Lori Seidenberg, global director of real assets insurance for BlackRock. Not that she should have – but professional risk managers know a soft market isn’t going to last forever and need to plan accordingly.
Despite this admirable accountability, it’s important to remember larger forces have been at work. As CNA’s Nardiello put it: “There’s been a massive shift of wealth and people into areas prone to fire, tornados, hail, and flood” – perils that are themselves changing in frequency and intensity.
Also a factor is “social inflation” – rising litigation costs that drive up insurers’ claim payouts, loss ratios, and, ultimately, policyholder premiums. It’s been estimated that social inflation “could ultimately blow a $200 billion hole in global reserves.”
Carriers, customers, and brokers all acknowledged the need to do things differently. While much was said about using technology, data, and analytics to improve underwriting and reduce expenses, the dominant theme was communication. All parties recognized they must communicate early and often.
As Duncan Ellis, head of retail property, North America for AIG, put it: “Bad news doesn’t get better with time.”
“It’s important for brokers to get a handle on the data,” said Theresa Purcell, director of risk management for real estate giant Kushner. She also recommended that brokers “get creative. Suggest different structures. Educate us about other services” that might better suit individual customer needs.
Stephanie Hyde, executive director at P-E Risk, an insurance and risk management consultancy, echoed Purcell, adding that brokers need to “educate yourselves about all lines of coverage your clients need so you can understand what they’re going through.”
Maria Grace, vice president and chief underwriting officer for property and inland marine at Everest, urged brokers to “put us [underwriters] in front of your clients” to help them understand why prices are increasing and, where possible, offer more appropriate solutions.
A bill to reauthorize the Terrorism Risk Insurance Act (TRIA) of 2002 was passed on November 20 by the U.S. Senate Committee on Banking, Housing, and Urban Affairs. The unanimous decision was made only a day after the U.S. House of Representatives voted to renew the federally backed terrorism insurance coverage backstop program, which is set to expire in December 2020.
The bill includes a provision to study cyber terrorism and the availability and affordability of coverage, specifically for places of worship.
“The bill being considered today would not only avoid significant uncertainty in the marketplace, but it also preserves the taxpayer reforms included in the last reauthorization,” said Senate Banking Committee chairman Mike Crapo (R-Idaho) in a statement.
The 2015 reauthorization “required the private insurance industry to absorb and cover the losses for all but the largest acts of terror”, Sen. Crapo said. This included requiring total insurance industry insured losses for certified acts of terror to exceed $200 million before federal assistance would become available and increasing the industry’s aggregate retention amount to $37.5 billion.
The decision was met with resounding approval from insurance industry representatives and other stakeholders.
The next steps are for the Senate Banking Committee version to be approved by the full Senate, any differences between the two measures (which are said to be virtually identical) to be reconciled, and the final bill to be signed into law by President Trump.
Jimi Grande, senior vice president of government affairs at the National Association of Mutual Insurance Companies (NAMIC) said, “With passage of TRIA reauthorization legislation out of the House on Monday, today’s unanimous passage of an identical bill out of the Senate Banking Committee demonstrates that there is little daylight between the two chambers or between the two sides of the aisle. There is no reason Congress shouldn’t be able to get a bill to the president’s desk by the end of the year.”
To get an idea of what could happen without a government terrorism backstop we’ve been searching our database for news items that appeared in the aftermath of the terrorist attacks on September 11, 2001, before the federal program was in place. Below is an abstract citing a Wall Street Journal article about the impact on workers’ compensation. This line would be one of the most affected by a lack of a backstop because, unlike other insurance lines, workers’ compensation insurers have no choice but to include terrorism coverage in their policies.