From the Triple-I Daily: Our most popular content, November 29 to December 5

Here are the 5 most clicked on articles from this week’s Triple-I Daily newsletter.

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What’s Insurtech, Anyway?

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.

Insurtech doesn’t just mean offering products more quickly online. It means transforming the offerings and the customer experience.
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.

Drivers can submit photos to their insurers via app immediately after an accident. Some insurers use machine learning and publicly available data to detect fraud.

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.

Obstacles remain

 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.

Is a Global Recession Imminent? If So, Businesses Can Protect Themselves with Credit Risk Insurance

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.”

 

When Must Insurers Defend Motels
in Trafficking Cases?

Hotels and motels are routinely used for sex trafficking. Two recent lawsuits highlight the complexity of determining who bears legal costs associated with trafficking.

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.

Trafficking is a $32 billion-a-year industry. Insurers might want to review their policy language to avoid funding defenses of criminals and businesses that enable them.
Language matters

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.