KEY TAKEAWAYS:

--If you look at Lemonade as a way of examining what insurtech approaches are working and which aren't, you see that everyone, including incumbents, must use data and technology for risk selection, pricing accuracy and automation. Most have already started.

--State Farm's vision abut a platform play and the smart home strategy represents an area that is frequently ignored and could be fertile territory.

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In the 2023 third quarter, Lemonade showed:

• Losses: $62 million loss this quarter (about 10% less than in the previous two quarters), and only $6 million of cash burned from operations (after the $97 million burned in the last two quarters)
• Top line: $213 million written in the quarter (17% more than the previous quarter and 22% more than in the '22 third quarter) and almost 78,000 customers added (highest increase since Q3 '21, without considering the Metromile acquisition)
• Sales and marketing: The top-line growth has been achieved by investing $24 million, which is 11% of the written premiums. In Q3 '22, marketing expenses were $33 million (37% of premiums).
• Loss ratio: 83% (the lowest since Q3 '21)
• Other expenses: 35% of written premiums (the best level since Q3 '21)

We are still talking, though, about a gross combined ratio of 129%.

After an eight-year journey that has burned more than $1 billion, with many seasoned insurance executives hired, these results are the bare minimum that we should be able to expect. But I'm actually more interested in observing their insurtech approach and understanding if there is anything they are doing that can be relevant for the insurer of the future. Moreover, is there anything they're now doing that incumbents have missed?

See also: Insurtech Startups Are Doing It Again!

Why am I more interested in the insurtech approach and tools, instead of the venture per se? Because I'm advising on innovation at insurance incumbents -- 10 of the top 25 global P&C insurers currently are members of the IoT Insurance Observatory -- and each day I'm discussing the future of our sector with them.

Let's look at the key insights from an article I just wrote with a State Farm executive:

• "State Farm envisions a future where virtually everything within the sector is interconnected based on the belief that a platform-based approach to insurance is the best way to capitalize on the availability of data and create a seamless customer experience."
• "State Farm is looking to reinvent the insurance industry once again, by leaning into a model that doesn’t just price, protect and recover. State Farm is proactively seeking ways to integrate experiences and predict and prevent loss."
• "Connected cars, connected homes and connected self are at the heart of this vision for the future. State Farm is committed to progressing in these spaces as it looks toward the next hundred years of industry leadership."
• "State Farm is keen on the smart home and what it means for the carrier’s business. [...] In this scenario, the execution of a thoughtful smart home strategy may not be a nice-to-have goal. Rather, it may be essential to remain competitive."
• "Smart home technology has the potential to forge novel homeownership experiences and strengthen customer relations. This constitutes a relevant motivation for embracing IoT in the realm of home insurance."
• "Central to the State Farm vision for smart homes is the aspiration to transition from recovery to the ability to help predict, intercept and prevent losses, relying upon products like ADT and Ting. [...] State Farm harbors the ambition of preventing 20% of losses related to fire, water and theft (which account for approximately two-thirds of all homeowner insurance losses)."
• "Insurers with the ambition to remain relevant must possess the capability to master connected platforms, specifically those related to IoT."

See also: Lemonade's 'Synthetic Agent' Nonsense

Haven't you started yet your smart home insurance journey? What are you waiting for? 

Now, let's observe Lemonade's journey and its insurtech approaches.

At the outset, Lemonade was all about charity giveback, behavioral economics... and storytelling. None of these has made any dent in their insured risks and has yet to disrupt any segment of the insurance market.

I remember a discussion at a roundtable at the 2018 Annual North America Re/Insurance Conference where I challenged this storytelling, asking if Lemonade really believed that fewer people would submit a claim because there was this charity giveback mechanism.

However, this nonsense has progressively faded in their storytelling and even in the premiums (last year, less than two cents for each dollar of premiums went to charity).

Here is what I said in the first edition of this newsletter: "the insurance professionals - who have fallen in love with their disruptive storytelling over the past six years - should feel a little betrayed."

But let's talk about the current storytelling. There is an interesting interview by @Neil_X10 that covers the key areas they're betting on. (You can enjoy the full two-hour interview here.)

Basically, the issues are risk selection and pricing accuracy. I think everyone in the insurance sector agrees.

Less agreeable is the comment from Lemonade's CEO about being able to "predict risks in ways that incumbents cannot for structural reasons." Well, U.K. personal line carriers (incumbents!) have mastered for years targeted advertising to drive risk selection, and Progressive (incumbent!) has built its journey on superior segmentation and pricing accuracy in the U.S.

The ability to attract and retain good risks doesn't yet seem like an actual Lemonade capability... it's more of an ambition.

I think everyone in the insurance sector agrees even on the need to improve efficiency, applying automation in customer support and claims. It would be difficult to find an incumbent that is not working on applying AI to these processes.

Looking at the current level of expenses (other than marketing and sales), Lemonade doesn't seem efficient (yet), and it has not improved over the past three years even if the size of their business in 2023 increased more than three-fold compared with 2020.

See also: AI and the Future of Independent Agents

Efficiency seems more like an ambition for Lemonade, not a reality.

The current Lemonade's insurtech approach makes much more sense than back in the day, even if they seem far from delivering it.

Using data and technology for risk selection, pricing accuracy and automation is a must for the insurer of the future. But there is consensus around this, and a large part of the incumbents all around the world have already started investing in it. 

State Farm's vision about the platform play and the smart home strategy represents an area that is frequently ignored (or denied after some first rough and unsuccessful attempts), and it is a fundamental area for any personal line insurance carrier in the future.

IoT is a necessary capability, not a nice to have!

KEY TAKEAWAY:

--What's needed is a radical rethink of what is possible. How do we use the home's existing shutoff valve, thereby eliminating the need for the redundant shutoff valve in cut-the-pipe solutions? How do we detect water flow from outside the pipe, thereby eliminating the need for cutting the pipe to insert a flow meter?

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There are a wide variety of home water leak mitigation solutions available today, and yet none of these products is widely deployed, and home water leak losses continue to increase. The reason?  Except in certain special cases, insurers are not seeing a compelling return on investment. 

The return on investment for a water leak mitigation system is primarily determined by two factors: the total cost of the solution (i.e., device cost plus installation and monitoring cost) and its overall effectiveness in reducing claim payouts (i.e., percentage reduction in claim indemnity).  

Total cost for a specific water leak mitigation product is relatively easy to determine. Effectiveness is much less clear. However, water leak mitigation products differ dramatically in effectiveness based on a single functional difference: Does the product automatically shut off the water in the event of a leak, or does it only warn the homeowner of a possible leak? 

Everyone knows at least one home water leak horror story (in many cases, the stories are personal!). A backed-up toilet, a burst washing machine hose, a busted water heater – the list is seemingly endless. However, if you stop and think about these stories, virtually all of them share a trait: The occupants were either asleep or out of the house when the leak occurred. 

For this reason, insurers have found that water leak loss mitigation solutions that automatically shut off the water are far more effective in reducing claims than systems that only warn homeowners of a possible leak. (It can be many hours or even days before homeowners who are away or asleep act on, or even become aware of, a leak warning). Limited published reports from insurers suggest that the effectiveness of products with automatic shutoff capability are 60% to 80% effective in reducing claim payouts, while products that only warn are 15% to 35% effective.

See also: Key Learnings From Winter Storms

The chart below models how total cost and effectiveness affect the rate of return to an insurer for investment in a water leak mitigation product. (The model assumptions are based on reported U.S. industry-wide averages.)

A key observation from this model is that the rate of return for an investment in water leak mitigation product declines exponentially as total cost increases. However, while low total cost is obviously critical, lowest possible cost alone doesn’t yield positive returns; a $100 total cost product with 30% effectiveness generates negative returns.  

The above model is simplistic and omits many details. Nevertheless, it’s easy to see why existing water leak mitigation products don’t make economic sense for the broad home insurance market. Products that warn only are less expensive ($100-$300 total cost), but given their limited effectiveness, they are unlikely to generate a reasonable return (the return for a $200 total cost, 40% effective device is negative).

Products with an automatic shutoff generally require cutting the main water pipe. For this reason, these products, while more effective, are much more expensive ($1,000-$2,500). Even with very optimistic assumptions (80% effectiveness, $600 total cost) the return for a cut-the-pipe automatic shutoff is negative.

One strategy that does work is to deploy cut-the-pipe automatic shutoffs in very-high-value homes that have a much higher average loss per claim. Chubb reports that their average water leak loss per claim is $50,000. With this average loss per claim, the model shows that a cut-the-pipe automatic shutoff with a $1,000 total cost and 70% effectiveness generates a three-year IRR of 19% – reasonable cost and effectiveness assumptions yield an attractive return for high-value homes.

See also: How to Minimize Fraud in Disaster Claims

Clearly, what is needed for mass market deployment of water leak mitigation devices is a breakthrough technology that combines the effectiveness of current cut-the-pipe automatic shutoffs with the low total cost of systems that warn only. The model shows a $250 total cost, 70% effective automatic shutoff installed in an average home (i.e. average loss/claim = $12,500) generates a three-year IRR of 10% -- about the same as a $1,200, 70% effective cut-the-pipe solution in homes with an average loss/claim of $50,000. 

We need to reduce the cost of cut-the-pipe automatic shutoff functionality by at least a factor of five. How do we get there? We will not get there by reducing costs for cut-the-pipe solutions. The devices themselves are not susceptible to cost reduction because all components in contact with water must be strictly controlled so there is no possibility of contaminating home drinking water. Furthermore, the installation cost for cut-the-pipe solutions is increasing, not decreasing, because the hourly cost for plumbers is going up. 

"Think Different" was Steve Job's approach to solving problems like these. What's needed is a radical rethink of what is possible. How do we use the home's existing shutoff valve, thereby eliminating the need for the redundant shutoff valve in cut-the-pipe solutions? How do we detect water flow from outside the pipe, thereby eliminating the need for cutting the pipe to insert a flow meter? One key insight is that the core loss mitigation functionality of cut-the-pipe solutions is to make sure that water doesn’t flow continuously for too long; measuring gallons-per-minute is irrelevant to loss mitigation. 

Smart home and home security companies are constantly developing innovative new home IoT products. Why haven’t these companies recognized the need for innovation to address home water leak mitigation?

These companies develop products to sell to homeowners. Homeowners are motivated to buy today’s home IoT products for safety and convenience. Water leak mitigation products enhance neither safety nor convenience. Smart home and home security companies have learned from bitter experience that there is very little homeowner demand for water leak mitigation products.

Insurers have been waiting for the silver bullet to magically appear. They must recognize that the water damage innovation drought will end only if they take actions and adopt policies that promote investment in the development of innovative new products that generate positive returns for both the product developers and the insurers.

"Everything you've told me is very interesting, Mr Robert. But apart from that, what are your values?"

This was the question asked by the AXA recruitment manager after letting me spout off for 20 minutes. The year was 1991, and I was 27 years old, three of which had been professional.

"What kind of question is that? He hasn't said a word the whole interview, so is he just leading me gently toward the exit, or what"

Go for introspection, then: I talk to him about ambition as an individual driving force, about the need for it to converge with a collective goal and therefore about loyalty to the team. And that's when the recruiter comes to life, gives me a boost and challenges me. After 30 minutes of this game, the interview comes to an end.

"We'll keep you posted," he said.

On my way back to the waiting room, I picked up a leaflet about AXA's values. It talked about ambition, team spirit, loyalty and realism.

I thought, "In the end, I didn't do so badly."

A few weeks later, I received a job offer from AXA and another from the No. 2 company in the French market. I remember my meeting with my potential future boss at the other company: He was negotiating my salary demands by telling me about the great rates at the company restaurant!

See also: The Broad Reality of Diversity

So it was AXA, then only the fourth-largest French insurer but with teams united by a common base:

• The tutelary figure: Claude Bébéar ("CB"), who -- with a civil engineering diploma in his pocket -- joined an obscure provincial mutual insurer in the late '50s and rose through the ranks to take over the reins some 15 years later.
• A founding myth: a seminar in the Ténéré desert in 1985, during which the directors of the mutual company decided to create the AXA Group.
• A crazy goal: in 15 years, to turn just another French insurer into a world leader.
• The grit of the challengers: at the beginning of the '90s, to accomplish in less than two years the merger of five insurance organizations with 16,000 employees, to redeploy them by distribution channel, to adopt a single brand whose name means absolutely nothing but can be pronounced in all the countries where the group will be established.
• A decentralized organization, designed for growth: only a few key functions are centralized -- equity, brand, executive management, financial reporting, IT and data infrastructure. The rest is in the hands of the business.
• The logo, in the form of the pin that we wear: It immediately identifies us when we turn up at industry professionals meetings. The "Axiens" (give or take a letter, are they aliens?) hunt in packs.

Why all this? To illustrate that a company's culture is not a collection of mantras to be displayed as posters. Or, to be more precise, while mantras and posters may have their place, they mean nothing if they are not supported by a common DNA.

It's this DNA that moves the lines, not the posters.

"Culture eats strategy for breakfast," Peter Drucker said. The success of a strategy depends on a strong and congruent culture.

It is largely because there was this bond between employees that AXA achieved its ambition.

G.Johnson, R.Whittington and K.Scholes have modeled the factors that make up a company's culture, in the service of its purpose (the "paradigm"). Their representation echoes AXA's DNA, as I have just outlined it:

This diagram implies that a culture takes time to build. So how can start-ups claim to be building a solid culture from scratch?

See also: Why Innovation Fails (and How You Can Succeed)

I'm reminded of my first few weeks with Paris-based insurtech ALAN. When we hadn't yet started work on designing our first insurance product, the two founders spent a morning in one-on-one talks. Then they came to see me to submit a first version of what they presented as ALAN's values. I laughed.

"Oh, yeah? You expect to make posters out of the value, like AXA does?!"

Of course not: "We want to offer our customers simple, transparent insurance. We think we'll only be able to do that if we're really simple and transparent in the way we work." Aligning corporate values and value proposition.

For ALAN, the idea is not to focus on the slogans of simplicity and transparency for their own sake, but to apply them to day-to-day operations: decision-making on company priorities, HR policy, communication, etc. 

And because ALAN is a start-up, there isn't a question of aligning existing procedures with simplicity and transparency, but of designing a simple and transparent way of working by design. As a result, atypical practices such as the absence of hierarchy, public pay scales, decision-making without meetings, etc. were deployed very early on. 

In the end, these practices harmonize behavior before shaping the start-up's culture, which is probably the opposite of what would happen in an established company.

Operating methods also need to be adapted as the company grows and new issues emerge. The challenge is to flesh out the framework of practices by forging their alignment with values. This is how ALAN is now presenting a set of leadership principles, inspired by other fast-growing companies (such as Amazon). What distinguishes these leadership principles from values is that they are more operational than incantatory.

One of the keys to developing a strong culture therefore lies in the adoption of consistent behavior within teams, much more than in posters displayed in meeting rooms. 

The question then is how to spread these behaviors throughout the company? This is where the practices of ALAN and AXA can come together.

ALAN breaks down  its leadership principles into behavioral traits, which are m easured during the recruitment and individual assessment processes. Clearly, an applicant who does not demonstrate strong alignment (or an employee who deviates from the norm) does not have much of a future at ALAN. 

What remains to be managed is the risk of producing an army of clones from recruiting profiles that are too similar. For me, this is a general issue for start-ups, which goes beyond the introduction of behavioral criteria into HR policy.

AXA deployed an original process in the '90s, consisting of training its managers in Model Netics, which illustrate 150 management situations. This approach provides managers with common responses, even though they do not necessarily have an academic background in management literature. It is also a common language, in the primary sense of the term, marking those who use it with the stamp of those in the know. Example: "So, how are you going to get your team on board with this project? It's simple, I've got my recipe: 50% Attitude-stair-steps and 50% Planning-path." 

In this case, the focus is on practices rather than behavior, so there is a good fit with the diversity of profiles that make up a mature organization. The question of sustainability may arise (once you've trained the management, what do you do?); in fact, AXA has gradually abandoned this tool.

Which goes to show that you can have a strong culture in a young organization: Culture emerges from shared behaviors that form the backbone that allows the organization to grow.

Which goes to show that, for a mature organization, culture is the bedrock of individual commitment in the service of collective ambition. Otherwise, there's always the "mantras and posters" option!

KEY TAKEAWAY:

--ignoring value-added services can lead to customer churn, reduced profits, a bad reputation, loss of market share, missed upselling opportunities and increased susceptibility to market disruptions. 

--Insurers must also do three things: 1) Use AI and predictive analytics to personalize communications, ensuring each interaction resonates with the client's individual needs and emotions. 2) Employ digital platforms for informative and engaging communication about policies and benefits. 3) Analyze client interactions and feedback through technology and use these insights to tailor future targeted direct mail and digital campaigns.

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Now more than ever, insurance companies are finding it challenging to retain clients. With such a competitive market, many companies find that traditional practices are not cutting it. Although remaining competitive is vital, insurance companies need to strike a balance between competitive pricing and delivering exceptional value-added services to ensure long-term customer retention.

The Limitations of Competitive Pricing

Focusing only on having competitive pricing has proven to be insufficient. As more insurance companies offer increasingly similar products, we see more individuals focus on price rather than client loyalty. Clients want more than just low rates for their insurance. They want personalized service that is convenient to use. They desire a positive customer experience.

By providing valuable extras, such as excellent customer service and user-friendly digital tools, insurers will be better positioned to differentiate themselves. Additionally, companies can seize cross-selling opportunities and focus on building strong customer relationships to enhance retention.

Ultimately, customer loyalty in the insurance industry is not just about price; it is about meeting client expectations while building trust and adapting to the evolving market dynamics.

See also: The 'I Told You So'​ Moment

The Long-Term Impact of Ignoring Value-Added Services

Consumers, feeling the economic pinch, are looking for more value. They are moving away from insurers that stick to traditional offerings and toward those that offer more than just basic coverage.

Ignoring value-added services has severe consequences. First, there's customer churn. Better services and additional benefits from competitors easily attract clients. 

By cutting prices to stay competitive, companies are losing profits. This limits the ability to invest in technology and customer support, which are key to attracting new clients.

Then there's the issue of a tarnished reputation. Negative customer experiences stemming from the lack of value-added services deter potential clients. It's a cycle: Poor services lead to a bad reputation, which in turn drives customers away.

Loss of market share follows. Insurers failing to innovate are losing market share to competitors that understand changing customer expectations. Missed opportunities to cross-sell or upsell are also problems. Without additional services, the chance to offer extra products or coverage to existing clients is lost, affecting revenue growth and competitiveness.

Increased vulnerability to market disruptions is another concern. The insurance industry is changing rapidly with technological advancements. Those slow in adopting new technologies like telematics are missing out. Insurance telematics, for instance, promotes good driving behaviors and attracts safer clients, reducing claim incidents.

Ultimately, ignoring value-added services is risky. The long-term impact includes customer churn, reduced profits, a bad reputation, loss of market share, missed upselling opportunities and increased susceptibility to market disruptions. 

Value-added services lead to satisfied customers, and satisfied customers lead to long-term success.

See also: How Cedents Can Win Reinsurance Race

3 Strategies to Successfully Balance Price and Value-Added Services Through Technology

Integrating new technologies is necessary to deliver exceptional value-added services, improve customer retention and stay competitive. The following strategies are the best places to start:

1. Prioritize personalization and emotional engagement.

Use AI and predictive analytics to personalize communications, ensuring each interaction resonates with the client's individual needs and emotions. This includes timing messages strategically during key moments like policy renewals or claims processing. Additionally, incorporating data-driven personalization in direct mail campaigns can increase engagement and conversion rates, making these communications more effective.

2. Offer engaging client communication.

Employ digital platforms for informative and engaging communication about policies and benefits. This approach should focus on making insurance details clear and personalized, enhancing client understanding and satisfaction. Insurance providers can also leverage industry-specific technology solutions to create communications that resonate emotionally with clients. This approach can make clients feel more connected and valued and likely to remain loyal.

3. Review data-driven client insights.

Analyze client interactions and feedback through technology. Use these insights to tailor future targeted direct mail and digital campaigns. That tailoring can lead to increased engagement, conversion rates and overall client satisfaction.

Insurance companies need to go above and beyond implementing competitive pricing strategies to succeed. They must embrace technology and innovatively provide personalized services to meet clients' evolving expectations and secure a lasting competitive edge.

The 2023 North Atlantic hurricane season got off to an unusually early start, with an unnamed subtropical storm off the north-eastern coast of the U.S. in January – well before the hurricane season’s official start date of June 1.

By Nov. 23, the 2023 season had witnessed 20 named storms, six more than the average pre-season forecasts expected. 2023 had the fourth-highest total of named storms in a year since 1950, according to the National Oceanic and Atmospheric Administration (NOAA). Of these, seven intensified into hurricanes, with three escalating to major hurricane status: Lee (Category 5), Franklin (Category 4) and Idalia (a Category 4 hurricane that was Category 3 upon landfall).

A season of “fish storms”? 

Only eight storms have made landfall so far in 2023, and only tropical storms Harold and Ophelia and Hurricane Idalia made landfall in the U.S. This has led to most storms being referred to as “fish storms” – storms that pose virtually no risk to land but can be a threat to boats and ships and produce dangerous currents along the coast.

Hurricane Franklin was the first major hurricane of the 2023 Atlantic hurricane season. It made landfall as a tropical storm on the southern coast of the Dominican Republic and triggered heavy rainfall and destructive winds. After passing the Dominican Republic, it intensified into a Category 4 hurricane on the high seas.

In late August, Hurricane Idalia made landfall in Florida’s Big Bend region (where the narrow Florida Panhandle merges into the wider Florida peninsula) as a Category 3 storm, becoming the first major hurricane to make landfall in that area since record-keeping began in 1842. 

At peak season in early September, the massive and expansive Category 1 Hurricane Lee threatened to hit the eastern coast of the U.S. and Canada. A long-lived storm, Lee underwent a remarkable transformation, intensifying from a Category 1 to a Category 5 storm in just 24 hours. However, it quickly weakened and became an extratropical storm before making landfall in Nova Scotia as a Category 1 storm, then moving out into the far northern Atlantic.

Lee’s extratropical phase brought rain and gale-force winds to parts of the U.K. and Ireland. Meanwhile, swells generated by the storm triggered dangerous surf and rip currents along the entire Atlantic coast of the U.S. Aon estimates economic losses due to Hurricane Lee to be around $50 million.

See also: Key Learnings From Winter Storms

How did the 2023 season compare with the forecasts?

Contrary to pre-season predictions of a near-average season, the 2023 Atlantic hurricane season turned out to be above average, with Hurricane Idalia making it to the list of costliest Atlantic hurricanes in recorded history.

El Niño, a natural climate pattern associated with warmer-than-average sea surface temperatures (SSTs) in the central and eastern tropical Pacific Ocean, typically casts a dampening effect on Atlantic hurricane activity. This is because El Niño can increase wind shear, a disruptive force that can hinder hurricane formation and intensification. However, the 2023 Atlantic hurricane season has defied this El Niño-induced suppression, producing an unusually high number of named storms. This can be attributed to exceptionally warm SST anomalies recorded in the north Atlantic Ocean. These record-breaking SSTs were caused by a combination of short-term anomalous circulation in the atmosphere and longer-term changes in the ocean.

The complex interplay of these contrasting climate signals made it difficult for forecasters to accurately predict the activity of the 2023 hurricane season. Forecasting institutions were faced with the challenge of balancing the typically hurricane-suppressing effects of El Niño with the potent hurricane-fueling conditions created by the warm Atlantic waters.

Midway through the season, forecasting bodies such as the NOAA and National Hurricane Center revised their predictions, indicating that the season would be more active than previously anticipated.

Comparison of the 2023 North Atlantic hurricane season storms to the pre-season forecast averages, mid-season averages of AccuWeather, Colorado State University (CSU), Tropical Storm Risk (TSR), National Oceanic and Atmospheric Administration (NOAA) and North Carolina State University (NCSU) and 2022 season actuals.
Source data: National Hurricane Center. Graphics by Allianz Commercial

Deep dive: Hurricane Idalia

On Aug. 30, Hurricane Idalia made landfall along the Florida coast, unleashing its fury on the Big Bend region. The system briefly attained a Category 4 status on its approach to Florida, but its intensity waned to maximum sustained wind speeds of 201km/h (125 mph) before it made a destructive landfall as a Category 3 hurricane near Keaton Beach, Florida. Despite a gradual weakening after landfall, Idalia’s initial intensity and rapid forward speed propelled it across northern Florida and into southern Georgia within a mere nine hours, maintaining hurricane strength throughout its path.

Idalia unleashed catastrophic storm surges with inundation levels in coastal areas ranging from 2 to 3.7 meters (7 to 12 feet). These surges were among the highest recorded since the 1993 Storm of the Century, leaving a trail of destruction along the coast.

Heavy rainfall also accompanied Idalia, leading to flash flooding in some areas. The storm’s impact extended beyond Florida, with heavy rainfall and strong winds affecting Georgia. As Idalia weakened further, it continued into southern South Carolina, where it still posed a significant threat as a tropical storm.

Moody’s RMS estimates insured losses from Hurricane Idalia to range between $3 billion and $5 billion, with a best estimate of $3.5 billion. Additionally, Moody’s RMS anticipates the National Flood Insurance Program (NFIP) could incur losses of around $500million. It expects the U.S. private market insured losses to be driven by wind, while storm surge and flood could contribute to around 40% of total private market losses and around 30% of the total event losses (including NFIP). Moody's RMS estimates most private market insured losses (around 70%) and NFIP losses (around 90% to 95%) from Idalia to be in Florida.

Even though losses from Idalia surpassed the billion-dollar mark, two factors may have helped mitigate its impact. First, the landfall area has a significantly lower population and exposure density compared with much of Florida. Second, Idalia had a relatively small wind field, which helped reduce the spatial extent of wind-induced damages. However, some of this mitigation was counteracted by the greater vulnerability of the properties in the region, which were mostly built during the 1980s and 1990s, before modern building codes were implemented. 

See also: Glimmers of Good News on Climate (Finally)

Where are we now?

The Atlantic hurricane season has officially ended (on Nov. 30), having had notable impacts on several regions. The impact of Hurricane Idalia, particularly its storm surge and floods (both pluvial and fluvial), underscores the urgent need to accurately model and incorporate secondary perils into probabilistic catastrophe models. The increasing relevance of these perils due to climate change necessitates further research and development in secondary peril modeling to fully assess and mitigate disaster risks. While advancements in these models have been significant, adequately capturing the complexity and potential impact of secondary perils remains a challenge. 

The information within this article is based on the preliminary operational data and tropical cyclone reports available on various sources as of Nov. 23, 2023. Tropical cyclone reports for several storms have yet to be released and may adjust storm parameters based on reanalysis.

KEY TAKEAWAYS:

--Parametric insurance allows for a greater web of protection beyond asset owners -- perhaps a government-funded index for, say, the urban poor who depend on a certain crop for their sustenance.

--With payouts based on specific wind speeds or rainfall amounts, property owners can quickly recover from damages, alleviating the long wait times and uncertainties associated with traditional claims processes.

--For businesses, particularly those dependent on complex supply chains, parametric coverage offers a way to mitigate the financial impact of unpredictable climatic events by making it possible for a company to receive a payout if a key region is hit by a natural disaster.

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Consider this: In the fall of 2022, a drought blanketed southwestern China, bringing many industries to a standstill. The drought led to a severe reduction in the country’s hydropower, which, in turn, spurred factory blackouts that curtailed electronics production. The contraction of the electronics market led to a slowing in automobile production and other electronic goods, which caused prices to soar worldwide. Moreover, the drought caused the water levels of parts of China's great Yangtze River to fall so low they hampered water transportation. According to the New York Times, the problem with water transportation caused: 

"Companies… to scramble to secure trucks to move their goods to Chinese ports, while China’s food importers hunted for more trucks and trains to carry their cargo into the country’s interior. The heat and drought have wilted many of the vegetables in southwestern China, causing prices to nearly double, and have made it hard for the surviving pigs and poultry to put on weight, driving up meat prices."

This year, a drought caused a similar throttling of hydropower production in Taiwan that reduced semiconductor production. This was the third year in a row that a record-shattering drought gripped the world’s main supplier of semiconductors; and it was the third consecutive year that the Taiwanese government subsidized rice farmers in the southern part of the country for not planting crops because of limited water resources.        

As we draw a curtain on 2023 – which featured the hottest summer on record – the world confronts an unprecedented challenge arising from climate change's domino effect. Beyond environmental degradation, drastically changing climate patterns affect everything from human and animal well-being to the connected global economy and its supporting supply chains. 

See also: Property Underwriting for Extreme Weather

The Health Emergency of Climate Change

Climate change, often perceived primarily as an environmental issue, has emerged as a dire public health emergency. The World Health Organization, in its report "Climate Change," paints a grim picture: By 2030, climate change is expected to cause 250,000 additional deaths annually due to diseases like undernutrition, malaria, diarrhea and heat stress. These figures only scratch the surface of a deeper crisis where the very determinants of health – clean air, water and food systems – are under siege. The report states:  

"WHO data indicates 2 billion people lack safe drinking water and 600 million suffer from foodborne illnesses annually, with children under five bearing 30% of foodborne fatalities. Climate stressors heighten waterborne and foodborne disease risks. In 2020, 770 million faced hunger, predominantly in Africa and Asia. Climate change affects food availability, quality and diversity, exacerbating food and nutrition crises."

The Disproportionate Burden on Vulnerable Populations

The outsized impact of climate change on low-income populations will continue to spur migratory crises that strain sociopolitical systems worldwide. The International Federation of Red Cross and Red Crescent Societies issued a report, “The Cost of Doing Nothing: The Humanitarian Cost of Climate Change and How it Can Be Avoided,” that states, “By 2050, 200 million people every year could need international humanitarian aid as a result of a cruel combination of climate-related disasters and the socioeconomic impact of climate change.”

The report also says:

"Today, resources are already insufficient to provide fundamental support to everyone who needs assistance after climate-related disasters. Depending on the amount of support provided and the source of cost estimates, meeting current needs costs international funders $3.5 billion to $12 billion annually. By 2030, this funding requirement could balloon to $20 billion annually."

If we truly want to roll back income inequality, we must prioritize climate change mitigation, because the cost of doing nothing is exorbitant indeed. 

A Crisis in American Homeownership

The world’s most economically vulnerable citizens are not the only ones threatened by climate dangers. A recent article in The New York Review of Books, "The Crash to Come," notes that insurers such as State Farm are withdrawing from regions like California due to the growing risk of climate-related disasters. This retreat is not just a crisis for homeowners but a signal of a deeper economic instability. The U.S. housing market, valued at $47 trillion, faces a climate risk bubble that could burst, causing widespread economic fallout.

Once enablers of dreams, insurance firms are now arbiters of harsh realities. Their withdrawal marks the beginning of a seismic shift in the financial landscape whose ripple effects from this will likely be felt across the nation.

See also: The Evolving Threat of Wildland Fire

Effects on the Business Community

On the business front, the next few years are expected to see substantial growth in industries directly affected by agricultural production fluctuations. Ethanol and biodiesel plants, flower processors and canning operations are just a few examples of businesses facing significant risks due to climate change.  Local processors, transporters and warehouses depend heavily on the consistent production of local crops, which can be undermined by an unexpected frost or a severe spike in temperature. A shortfall in crop production can lead to significant business disruptions across supply chains and reduced revenues.

Indeed, one significant yet underappreciated issue is the shift in cropping patterns. Traditional crops like soybeans, once limited to warmer climates, are now being grown in colder regions. However, these new areas often lack sufficient federal crop subsidies, creating a financial gap for farmers venturing into these new agricultural frontiers. 

Parametric Insurance for Today’s Risk Landscape

Each challenge to people, property and businesses, underscores the need for adaptable and responsive risk mitigation solutions that keep pace with the changing climate and its assorted impacts. Parametric insurance offers swift and accurate payouts based on objective data sources, which make it a versatile and responsive tool for businesses and financial institutions looking to manage their climate risks preemptively.

Moreover, parametric insurance allows for a greater web of protection beyond asset owners. Thus, one could imagine creating a government-funded index for, say, the urban poor who depend on a certain crop for their sustenance. Although they are not asset holders, parametric insurance can take into account the indirect effects of bottlenecks further up the supply chain. 

Likewise, in the real estate sector and urban planning, parametric insurance can be a game-changer. Advances in remote sensor technology and climate modeling mean it is, possible to create more robust predictive models that show prospective clients a comprehensive view of the risks they face. And in places such as Florida, where it can be tough to acquire traditional insurance for roofs due to the threat of hurricanes, parametric insurance can be used to fill the protection gap. With payouts based on specific wind speeds or rainfall amounts, property owners can quickly recover from damages, alleviating the long wait times and uncertainties associated with traditional claims processes.

The same is true for businesses, particularly those dependent on complex supply chains. Parametric coverage offers a way to mitigate the financial impact of unpredictable climatic events by making it possible for a company to receive a payout if a key region is hit by a natural disaster, which can cushion the blow from supply chain disruptions.

In essence, parametric insurance provides a proactive risk management tool that complements traditional insurance models. It enables businesses and communities to respond more effectively to the challenges posed by climate change, safeguarding assets and ensuring continuity in the face of environmental uncertainties. If we want to be serious about fostering resilience and adaptability in an era marked by escalating climate risks, it behooves us to make parametric insurance an essential component in our risk management toolkit.

KEY TAKEAWAY:

--From the insurer’s perspective, AI technology can be used to quickly score claims and provide a detailed explanation of a claim’s severity from its initial report. AI can assign that claim to an adjuster with the appropriate level of experience. It can also triage the case to professionals who have worked with these types of claimants and patients before.

--For risk managers, AI provides a secondary, 24-hour set of eyes on claims constantly looking for patterns enabling managers to put resources and ancillary services to work where they can make the most difference. In many cases, these AI tools inform you if, when and how you need to prepare for litigation. Additionally, you can use AI for reserving to help predict the cost of certain claims and determine how that cost affects employer deductibles and deductible programs. These AI risk management capabilities help risk managers curb costs, reduce liability and shorten the claim duration on the employer side.

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Workers' compensation claims pose challenges for all involved, especially risk managers who handle multiple claims simultaneously, set expectations and serve as the crucial point of contact among all parties. While they juggle the legal details, state-specific regulations and other data-driven aspects of the workers’ comp lifecycle, it becomes increasingly challenging for risk managers to effectively manage the people side of the equation. This can lead to claimants feeling underserved and underappreciated and more likely to sue the organization. 

Fortunately, emerging technologies such as artificial intelligence (AI) are beginning to address this risk management challenge, making it possible to optimize claim processing and triage at scale and in real time. AI can improve claims management while alleviating some of the burdens faced by risk managers. However, it’s essential to recognize that AI is not the sole solution. The key lies in integrating people-focused strategies with AI advancements.

By leveraging AI to streamline certain processes, risk managers can free up valuable time and resources. This newfound bandwidth allows them to prioritize an important aspect of their role: developing a comprehensive return-to-work program. This program, when combined with thoughtful consideration of the injured worker's needs and the requirements of employers, ensures both efficiency and empathy in managing workers' compensation claims.

Challenges Faced by Employers and Risk Managers

In my career, I’ve developed multiple perspectives on workers’ compensation by working as a claims adjuster, supervisor and risk manager. I was lucky to have supportive supervisors and mentors along the way who guided me from the most simplistic claims in the very beginning of my career to tackling the very complex as the years went on. I later shifted to the role of risk manager, which presented me with many new challenges:

• Limited File-Level Control: Risk managers often have little to no control over claimant files and how they are adjusted, yet they are the stand-between and the main communicator for both the adjuster and the company.
• Regulatory Compliance Requirements: Maintaining strict adherence to rules and regulations is essential to avoid unnecessary claims. If companies have frequent or large claims, their workers’ compensation insurance premiums can increase.
• Stakeholder Management: Risk managers must constantly keep up with, listen to and deal with the demands of all important stakeholders, including finance, operations, legal counsel, state workers’ comp boards, employee advocates and unions.
• Data Challenges: Handling a large volume of claims can be daunting. A risk manager might request a file review of around 200 files and give the adjuster 30 days to prepare for that task. However, as the process unfolds, these files may change significantly, for better or worse. It’s difficult to manage a large number of claims without accurate, real-time data.

See also: Why to Self-Fund Workers' Comp

While working through these challenges, I found myself in a tug of war with the multiple demands of my stakeholders, third-party administrator (TPA) and injured workers. Although the job was demanding, it was important to make room for the personal touch, which can make a significant difference when working with injured workers.

The Risk Manager’s Role in Return to Work and Employee Experience

It’s stressful to be an injured worker, especially if your job is changed or limited during your claim. While risk managers can't totally eliminate that stress and uncertainty, there are certain steps they can take and tools they can use to clarify return-to-work expectations, keep claimants engaged and feeling part of the team and build a healthier workers’ comp culture.

For improved return-to-work results, fewer legal issues and a happier workforce, risk managers should follow these three key steps:

1. Ensure accessible care is available to all claimants. Provide direct care options when your state allows it, but if that’s not possible, diligently provide claimants with as much care information as possible. Advocate for more doctors and clinics in your workers’ residential areas so they have accessible care options.
2. Develop a triage or advocacy program. Implement programs or employee applications that set clear expectations for claimants and show empathy for their situation in the earliest days of their claim. Armed from the beginning with more information about their particular situation and how it affects their employment, claimants are more likely to feel cared for and remain with the company.
3. Circle back post-claim. After claims are processed and employees return to work, follow up with them to get their feedback through surveys or apps that provide informal touch points. The focus of this survey is limited to compensable claims.  A claim that was denied would not be eligible for the survey. If they are unhappy with the outcome of their case, you’ll be able to identify and address any issues quickly to avoid litigation. 

Leveraging AI Technology to Optimize Workers’ Comp Workflows

Most risk managers do not have much time or the tools they need. However, a number of new AI solutions and risk management platforms are filling the gap, enabling risk managers to maneuver the workers’ comp workflow more intelligently.

From the insurer’s perspective, AI technology can be used to support better claim identification, classification, predictive analysis and automated claim assignments. For example, several AI tools now support a first report of injury model, quickly scoring claims and providing a detailed explanation of a claim’s severity from its initial report. From there, AI can segment that claim and assign it to an adjuster with the appropriate level of experience. It can also triage the case to professionals who have worked with these types of claimants and patients before. Using AI gives the insurance company or TPA more data and real-time knowledge from the outset, enabling it to process claims more quickly, with more context and at greater scale.

For risk managers, AI provides a secondary, 24-hour set of eyes on claims constantly looking for patterns enabling managers to put resources and ancillary services to work where they can make the most difference. In many cases, these AI tools inform you if, when and how you need to prepare for litigation, indicating which cases have certain levels of risk or fit patterns from past legal cases. Additionally, you can use AI for reserving to help predict the cost of certain claims and determine how that cost affects employer deductibles and deductible programs. These AI risk management capabilities help risk managers curb costs, reduce liability and shorten the claim duration on the employer side.

See also: Impact of PTSD on Workers' Comp Costs

Balancing AI Advancements With a Personal Touch

As the insurance industry grows increasingly complex, the demands for better and more accurate claims management have increased. Traditionally, risk managers have not had the resources or time to support the insurer in their work, but with recent AI-powered claims management solutions and the detailed, real-time information they provide, risk managers can reduce the need for frequent file reviews while automating and streamlining data and compliance management responsibilities.

More importantly, AI allows risk managers to devote more time to the human aspect of workers’ compensation. By prioritizing employee care and experience, which is really the most important piece of the risk management puzzle, organizations can mitigate the likelihood of legal action and employee turnover. When employees feel genuinely supported and valued, they aren’t likely to sue their employers or leave the company.

KEY TAKEAWAY:

--The first wave focused heavily on upgrading customer experience by emphasizing digital channels, data analytics and user-friendly interfaces. But there remains ample room for further improving specialty lines, embedding insurance into transactions, closing protection gaps and streamlining workflows for agents and brokers.

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The insurance industry is a pillar of the global financial system, with over $10 trillion in premiums written annually. This vast market has been dominated by large, established players for decades. However, the emergence of insurtech startups over the past 10 years aimed to leverage technology to disrupt incumbents struggling to adapt.  

Many predicted these startups would rapidly overhaul old-line carriers. But the first wave of insurtech taught the valuable lesson that innovation builds on traditional fundamentals rather than replacing them outright. While they did not revolutionize insurance, early insurtechs made the case for incorporating advanced technologies into the future. While there has certainly been disruption in insurance in the past decade, there are still many hard problems to solve in the industry, and incumbents have proven to be more resilient than many initially thought.

The first wave focused heavily on upgrading customer experience by emphasizing digital channels, data analytics and user-friendly interfaces. But there remains ample room for further improving specialty lines, embedding insurance into transactions, closing protection gaps and streamlining workflows for agents and brokers.

Key Lessons From the Evolution of Insurtech

1. Incremental Advancements: The first wave of insurtech didn’t revolutionize the industry but made vital strides in better customer service, signaling a gradual transformation.
2. Digitalization Imperative: Insurtech v1.0 effectively conveyed the inevitability of digitization to key stakeholders, paving the way for venture-backed companies. However, exit metrics of some ventures might seem underwhelming.
3. Fundamental Importance: Revolutionizing insurance requires more than technology; startups must understand and align with fundamental insurance basics. It’s a bottom-line industry where loss ratio and risk capacity play pivotal roles.
4. Valuation Challenges: Valuing early insurtechs was complex. Generous valuations based on growth metrics faced scrutiny as underperformance in public markets raised questions about the accuracy of top-line metrics like EV/GWP/revenue. Understanding market specifics is crucial for accurate valuation.

As the hype cooled, insurtech valuations faced more scrutiny. Investors shifted from rewarding growth potential to analyzing defensible moats and sustainable unit economics. Unlike traditional software companies, insurtechs face inherent loss volatility and intense competition, resulting in lower gross margins challenging software-style premium multiples. Future valuations will require assessments beyond top-line growth to accurately gauge quality.

See also: Insurtech Startups Are Doing It Again!

Emerging Opportunities in Embedded Insurance

Embedded insurance seamlessly integrates coverage into a user journey for a non-insurance product. This concept has existed for years but is accelerating with mobile adoption and application programming interfaces (APIs). Research predicts the total addressable market will rise from $63 billion currently to nearly $500 billion by 2032, representing a 23% CAGR.

Early successes have come in extended warranties, travel insurance and auto coverage. Apple’s warranty cross-selling generates an estimated $8 billion annually, demonstrating embedded insurance’s revenue potential. These simpler products allow straightforward bundling into existing purchases.

As more buying shifts online, embedded products can flourish by gaining consumer trust. Companies managing this integration have the chance to meet their customers’ coverage needs. While still early days, embedded insurance shows promise to expand insurance accessibility.

Some fundamental questions to answer are:

• Value Chain Dynamics: Key questions include identifying the primary beneficiary in the value chain — whether it’s the distributor, incumbent or embedded participant.
• Regulatory Scrutiny: Regulators will examine how regulators will approach new insurance offerings, especially those delivered online or through mobile devices.
• Monopolistic Trends: There must be an exploration of potential monopolistic bargaining power within distributors and whether the market can accommodate multiple embedded products.

Strategies for Closing the Global Protection Gap 

Insurance coverage globally falls severely short of total insurable risk exposure, leaving a protection gap of $1.8 trillion, by some estimates. Shortfalls are most acute for catastrophe, mortality and healthcare perils.

Though not a complete solution, embedded insurance can help close gaps by meeting customers where they are. Travel insurance penetration expanding from 24% to 50% would generate over $70 billion more in annual premiums. Similar opportunities exist across insurance lines for creatively addressing unmet needs.

Modernizing Specialty Insurance 

Specialty insurance delivers targeted coverage for unique exogenous risks facing individuals and businesses. It makes up over one-third of all commercial premiums. The market’s size and complexity have insulated it from disruption.

But specialty lines often contain antiquated products, inefficient underwriting and fragmented distribution. These challenges create openings for innovation. Integrating lessons from prior insurtech waves with specialty’s nuances offers a road map.

Opportunities exist to leverage data and alternative sources to develop more tailored specialty products. Automating underwriting can also substantially trim processing timelines and costs. Agents and brokers will maintain import roles but face pressure to adopt technologies improving customer experience.  

Categories such as medical malpractice, long-term care, cyber and climate risk seem especially ripe for solutions boosting efficiency, expanding capacity and bridging information asymmetry.  

See also: The Next Wave of Insurtech

Streamlining Workflows for Agents and Brokers

Agents and brokers remain indispensable distribution partners in commercial and specialty insurance. They aim to provide consultative services while growing customer bases and maximizing retention. Many agencies still rely on manual processes that constrain expansion and boost expenses. Several insurtechs target this problem by offering workflow automation for faster quoting, expanded risk appetite and increased placement precision.

Targeting individual pain points in isolation has limitations, however. True transformation requires integrated platforms spanning customer-facing and back-office functions. This complete solution raises the technological bar across the entire value chain. Insurtech's next wave will see carriers, agents and startups collaborating to embed specialized coverages within transactions while also streamlining antiquated business practices. Leveraging expanded datasets and process automation can unlock growth opportunities too costly to pursue through traditional methods.  

Insurtech’s evolution has built on insurance fundamentals while intelligently incorporating technology. Succeeding will require pragmatism in solving problems all sector participants face in risk assessment, preference matching and delighting customers.

For more on this topic, here are two much more detailed looks at the history of insurtech and at the next wave: A timeline of the last 100+ years in Insurance in the U.S. (Part I) and The next wave of Insurtechs (Part II)

Business owners are often asked, “What keeps you up at night”? Depending on the business, their responses are numerous. In agriculture, weather is often the response. Farmers and agribusinesses worry about weather and the increasing frequency and severity of weather events that cause billions of dollars of crop damage and economic loss annually. Farmers alone have incurred on average just under $9 billion in annual loss recoveries over the last 10 years. 

While farmers and agribusinesses share a threat from drought, excessive moisture, windstorm and other weather events, their risk management strategies for managing weather risk are notably different. Why? Let’s start with a brief risk management 101 discussion.  

See also: Property Underwriting for Extreme Weather

When managing risk, we have three choices. We can avoid the risk, retain the risk or transfer the risk through insurance.  

1. Avoiding the risk is frequently not an option, as it is at the heart of why the farmer and agribusiness exist (i.e., farmers grow a crop, and agribusinesses sell a product or service to a farmer).  

2. Retaining the risk is a choice but requires a comprehensive understanding of the risk and consequences for each  agribusiness organization.  

3. Transferring risk, particularly when catastrophic exposure exists, is customary for commercial enterprises. Insurance, used as a risk transfer or for risk sharing, is a fundamental economic tool used by most businesses to secure capital and to protect against catastrophic economic loss, including weather that can devastate a business. 

Farmers and ranchers extensively leverage the federally subsidized Federal Crop Insurance Program to protect their production and revenues from loss due to weather events.

Agribusinesses, on the other hand, retain significant risk exposure for their own lost revenues caused when farmers and  ranchers don’t purchase their products and services due to weather-related crop loss. 

Farmers and agribusinesses share exposure to catastrophic weather events, but their risk management strategies are quite different. Moreover, agribusinesses face concentrated exposure for potential loss of their product and service revenues for corn and soybean crops in just five of the largest corn- and soybean-producing states. These five contiguous states represent roughly 60% of corn and 40% of soybean production. 

So how do agribusinesses manage weather risk? Agribusinesses can partially manage catastrophic weather exposure through  geographic diversification. Geographic spread of products and services can help to reduce the impact of a significant weather event. But is that enough?  

See also: Risk Management for Agriculture

Recent weather events, such as in 2019 when over 20 million acres of prevent plant occurred across portions of the Midwest, or 2020 when a “derecho” storm damaged crops along a 50-mile-wide path from South Dakota through Ohio, created  significant loss to agribusinesses from loss of input sales, replant guarantees and excessive usage of rental equipment. Because the derecho hit the Midwestern states, this single weather event created catastrophic loss to even large agribusinesses selling products and services to farmers and ranchers. Additionally, these types of events create significant risk to lenders’ revenues and balance sheets when they have exposure to operating and business loans to affected agribusinesses. 

So, while farmers and ranchers have crop insurance to manage their risk, what insurance alternatives exist for agribusinesses? Until recently, very few insurance options existed to protect agribusinesses’ revenue from weather-related losses on their farmer and rancher product and service sales. There are currently two types of insurance products to protect agribusiness revenues and balance sheet risk – parametric and basis risk insurance. 

Parametric insurance (or index-based insurance) provides coverage on a predetermined weather event vs indemnifying for  actual loss occurred by the insured. The para metric insurance policy insures a policyholder against the occurrence of a predefined event by paying a set amount to all insureds in the covered area, regardless of whether an actual l oss occurred  to an insured. The advantage of this type of insurance is the simplicity of the program and the generally lower cost. The  disadvantage is that some insureds who did not suffer any loss may be paid because the predetermined event occurred.  On the other hand, some insureds who suffered loss may not be paid, because the specific, predetermined event did not occur. This type of policy, under the Federal Crop Insurance Program, is known as an index policy. An example is the pasture, rangeland and forage insurance policy. 

The other type of insurance is “basis risk” insurance. Each field location is insured specifically. and the amount of  coverage, perils insured against and damage assessment occurs at the field level. This type of insurance matches specific risk exposure and loss payments to an insured’s specific location for actual loss incurred. This type of policy, under the Federal Crop Insurance Program, is known as an individual yield and revenue policy. Examples include the crop revenue coverage or revenue assurance policy. Basis risk insurance policies provide the best-alignment between risk exposure and coverage specific to the insured location and actual loss experience.  

While few weather risk insurance options were historically available for agribusinesses, innovative technologies, more granular data and specialized risk management solutions are now available. Agribusinesses, like their farmer and rancher customers, now have new insurance tools to help manage the frequency and severity of weather event risk and protect their revenue and balance sheet exposures. 

KEY TAKEAWAYS:

--Insurers must price risks more accurately, or they will lose their low-risk customers -- those with the highest lifetime value. That means moving beyond proxies such as age, credit history and gender and using actual driving behaviors. 

--Many insurers have avoided using telematics data because they don’t want a monitoring period that requires them to wait until they’ve collected sufficient driving data to price accurately, but monitoring periods are no longer required.

--While the insurance industry has made strides in using telematics for upfront discounts, insurers can also communicate with customers about their driving during the term of the policy and can improve renewal pricing to increase loyalty. 

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Holiday shopping is in full swing, and customers aren’t just tracking down gifts for family and friends. They’re also hunting for better rates on their car insurance. In fact, auto insurance shopping has hit record highs over the past three years as more drivers consider switching carriers in search of cheaper premium prices.

For drivers, the holidays and winter months mean snowy, icy roads, dangerous conditions and heightened risk while driving. For insurers, winter adds another slippery layer to their profitability challenges. As insurers increase premium prices to offset heightened losses, customers are reaching a point where they can’t afford their auto insurance.

It’s a perfect winter storm, and insurers that can’t find better ways to attract and retain customers will be left out in the cold. 

Improving retention starts with a better understanding of drivers' behavior and a better way to estimate the lifetime value of customers. There’s more available data than ever about how people drive, walk, bike and use other forms of transportation — and if insurers know how to use it, they can reverse customer defections and turn data into the gift that keeps on giving. 

See also: Auto Insurance in an Existential Crisis

Insurers need a better way to retain customers

In today’s highly competitive market, insurance companies can’t respond to inflation and other market pressures by simply raising premium rates across the board. That’s a surefire way for insurers to continue to lose even more customers in the new year – especially those high-lifetime-value customers (i.e., lower-risk customers) insurers need to keep on their books. 

Instead, insurers need to price customers more accurately and fairly to create predictable insurance outcomes, improved loss ratios and more profitable decisions for their bottom line. 

What’s stopping companies from achieving these goals? 

The answer comes down to the traditional approach to assessing and pricing customers. Many insurers have relied on proxies — such as age, credit history and gender — to evaluate customers and predict the likelihood and cost of accidents.  

Although these metrics provide upfront information to predict risk, proxies often fall short in delivering the pricing accuracy insurers hope to achieve. That’s because they fail to provide visibility and accurate predictions of actual driving behavior on the road. 

Insurers that rely too heavily on proxies often make incomplete assessments about drivers that can lead to underpricing of unsafe drivers and overpricing of safer ones. It doesn’t make sense to charge a safe 20-year-old driver more than a middle-aged driver who speeds and texts while driving.  

These decisions aren’t just unfair for drivers, they’re bad for business. It’s time for insurers to move beyond proxies and take a smarter, more strategic approach to customer pricing, renewals and retention. 

How insurers can gain more from telematics data

The best way to price customers and determine risks on the road is by evaluating a customer’s real driving habits. By focusing on actual driving behaviors, insurers can achieve better pricing accuracy and sophistication, driving improved customer retention and greater customer lifetime value. 

But until now, there’s been a significant gap when it comes to understanding and analyzing driving behavior. Today’s telematics data — sourced from smartphones, in-car devices and connected cars themselves, with user permission— helps fill this gap by offering enhanced visibility and precise insights into driving habits. This information is more reliable, relevant and comprehensive than ever before. 

As insurers work to gain and retain customers, they also need to extract more value from data; here are three ways they can do it:

1. Derive deeper, more meaningful insights

There’s more data collected on driving behavior than ever. The challenge is translating this information into meaningful, contextualized insights. Today’s telematics data doesn’t just capture how people get from point A to point B. It offers a depth and breadth of insights, such as when someone speeds or constantly slams on the brakes, when they switch routes and drive on unfamiliar roads and contextual information like the speed limit of roads traveled and weather conditions they’re driving in. 

Imagine how these insights can be applied to holiday travel. While we know the holidays bring higher levels of traffic and a higher number of crashes, data from Arity shows that drivers are more likely to speed home following Thanksgiving and Christmas days. Armed with this information, drivers could be encouraged to avoid traveling during these times or be extra attentive on the road. 

Likewise, auto insurers could encourage drivers to make safer holiday travel plans by providing feedback and coaching and rewarding them with reduced policy deductibles for safe driving behavior, especially around the holidays and during winter months. 

2. Access and analyze real-time information

Many insurers have avoided using telematics data because they don’t want a monitoring period that requires them to wait until they’ve collected sufficient driving data to price accurately. That’s no longer the case. Insurers today can access data at a faster pace to gain insights that are reliable, relevant and responsive to conditions on the road. 

This approach empowers insurers to price confidently and instantaneously. Insurers that take into account data about driving behaviors at the quote stage can eliminate the need for monitoring periods and pricing adjustments down the road. 

By leveraging real-time information and insights, insurers can accurately price customers based on their actual driving and respond to shifts in frequency and severity to offer fair, competitive rates. Safe drivers can be offered a discounted rate, while risky drivers can be encouraged to drive safely using a tangible reward like a future discount or a penalty such as a higher premium that reflects their higher risk.

The same data can be used to price existing policyholders at renewal. Instead of using the proverbial peanut butter approach of spreading higher premiums across the board, why not use actual driving behavior insights to determine which policyholders deserve higher rates and which don’t? With this sophisticated renewal approach, insurers are more likely to retain their best drivers. 

3. Strengthen telematics’ scale and sophistication 

There’s been a lack of telematics data available at the scale necessary to deliver tangible value to insurance companies. That’s starting to change. Advancements in data analytics are making telematics more accessible, more feasible and more useful in understanding and predicting driving behavior at an unprecedented scale. 

While the insurance industry has made strides in using telematics for upfront discounts, insurers need to scale usage across the entire value chain. With greater scale and sophistication of telematics data, insurers can forgo offering a generic participation discount and, instead, target customers with competitive rates, as well as improve renewal pricing for existing customers to increase loyalty. 

A large-scale telematics database can also help insurers market to and convert high-potential lifetime value customers. In addition, it can improve crash and claims processing — providing value and savings for longtime customers, new policyholders and prospective customers alike.

See also: Setting Record Straight on Auto Claims Severity

Pricing people based on how they drive, not who they are

Winter won’t last forever. Neither should the exodus of customers leaving their carriers. With better telematics data — and better ways to leverage it — insurers can move beyond traditional proxies and price people based on how they drive, rather than who they are, where they live or what their credit score is. 

This is now possible with telematics data available at scale, with no monitoring periods.

Insurers can’t control ice on the roads or snowy conditions. But they can navigate the challenges of winter driving by embracing telematics to improve customer pricing and retention and avoid leaving customers in the cold.