KEY TAKEAWAY:

--Surety bonds can broaden an agency's offerings, provide a steady revenue stream by deepening relationships with customers and keep rivals from gaining a foothold with the agency's clients.

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Surety bonds play a crucial role within the insurance industry, providing protection for taxpayers and governmental entities, opportunities for clients to engage in contracted or permitted work and profitable business for both carriers and agencies. Despite the significance and profitability of surety, however, there remains a misconception among some insurance professionals that providing surety services is neither a competitive advantage nor necessary for their business. This line of thought can be very costly.

With the global surety market projected to reach more than $25 billion by 2027, insurance professionals must consider integrating surety bonds into their client services to not only stay relevant in a rapidly changing industry but also expand their range of services to create additional revenue streams and appeal to a broader audience in need of surety bonds.

Surety services offer dual advantages that can enhance insurance business operations and create opportunities for growth for both an agency and its clients. Mostly required by separate entities within the government, construction or real estate sectors, surety bonds guarantee that a party will fulfill contractual or licensing obligations. Understanding the benefits of surety bonds will enable insurance professionals to understand their value and leverage surety to the benefit of all parties. 

Let us first look at how surety bonds can provide a profitable stream of business to carriers and agents:

Surety bonds can significantly enhance an agency's product offerings. By integrating surety services into their product offerings, agencies can differentiate themselves from competitors and attract new clientele. The nature of surety bonds is to provide protection for third parties who want to enter into a business relationship with companies. The bond protects those parties by providing a safeguard against potential default and financial risks they might suffer. This extension of services can help agencies attract new business by providing services with which other agencies may stumble.

Agencies can boost their revenue streams with surety. Surety bond premiums offer agencies a consistent and reliable income to improve their bottom line. By forging long-term relationships with clients with significant surety needs, such as construction businesses, real estate firms and mortgage brokers, not to mention the surety companies themselves, agencies will receive repeat business and referrals from loyal customers.

Agencies can become the go-to surety provider for business owners within their market, which often leads to more opportunities. When you help a client with something as potentially complex as a bond, they will come back for other lines! 

See also: Blockchain’s Future in Surety Industry

Surety bonds can mitigate competitive risks to the agency itself. Surety is an excellent way for agencies to provide value-added services to their existing clients, especially because it is an area that can be overlooked. Think that little $100 premium isn’t an opening to a client’s overall insurance program? If you neglect it, that may be all a competitor needs to get in the door and put your client’s business at risk. With the addition of surety services, insurance professionals have the opportunity to strengthen their reputation as a trusted and reliable insurance provider while further entrenching their relationship with clients. 

Additionally, surety bonds can be valuable to a client, offering benefits such as:

• Establishing trust and credibility among important stakeholders. By obtaining a surety bond, business owners demonstrate financial stability and reliability, assuring business partners and investors that they have the capacity to fulfill their contractual obligations. This trust-building element is invaluable in establishing long-term relationships and attracting additional business opportunities for the client.
• Increasing business opportunities with contractors and other parties that may require surety bonds for specific projects. Clients who possess surety bonds are better-positioned to seize such opportunities. This coverage allows clients to meet the necessary requirements, giving them a competitive edge in their respective markets. As a result, clients can bid on larger projects and attract more significant business ventures. 
• Removing compliance liability with entities that require licensing or permits for business activities. With a quality agency and surety on board to allow for fast procurement of bonds, clients can be sure that they are in compliance with governmental entities that statutorily require a bond for the activity in question. Moreover, the client will always be ready for the next opportunity, knowing that the bond is just a request away!

Surety bonds offer plentiful advantages for both insurance agencies and their clients. By incorporating surety services into their product rosters, insurance agencies can expand their business, increase revenue streams and safeguard their clients’ insurance programs. On the other hand, surety bonds help clients establish their credibility as business owners, create opportunities for expansion and protect their business from possible compliance risks.  

KEY TAKEAWAY:

--Here is a checklist for building resilience into operations to keep goods and staff safe.

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Supply chains in North America faced a spike of 13% in the volume of cargo theft between 2021 and 2022, with an increase in value of 16%, a trend that has continued in 2023. While electronic goods remain highly vulnerable, thieves are increasingly targeting household items and food and beverage, indicating that inflationary pressures are driving changes in criminal activity.

With a stolen commodity value of $107 million in 2022 – a significant increase on the $68 million reported in 2020 – cargo theft is clearly a risk that calls for heightened vigilance. As a global marine insurer, Allianz Commercial has seen an uptick in cargo theft incidents in recent years and particularly in transportation and logistics. In North America, the number of theft claims has increased for the past six years in a row in this area, with a 20% increase year-on-year in 2022 (169 claims). The total for 2023 is likely to surpass 2022.

Risk Management and Mitigation

It is essential for any company at risk of cargo theft to identify, manage and mitigate security threats using internal processes and external advice such as partnering with their insurer to implement risk mitigation practices. Here is a checklist for building resilience into operations to keep goods and staff safe.

Run a tight warehouse

A well-run warehouse and transportation operation is the first step toward tackling security hazards. This should include stringent security processes and procedures, security and loss prevention training and awareness programs and robust hiring practices for employees as well as third-party partners. Reduce the chance of a fraudulent pick-up by controlling access to key information and keeping drop-off locations as confidential as possible. Carry out internal and external security audits to determine where the strengths and vulnerabilities lie in your security practices.

See also: Emerging Risks for Shipping Industry

Secure facilities

Cargo warehouses and storage facilities should be equipped with the appropriate security measures, such as access control systems, surveillance cameras and monitor surveillance systems, including perimeter security, alarms and sensors. Ensure the exterior and surrounding areas are well-lit. Work together with other companies, industry experts, trade associations, law enforcement agencies and security professionals to stay abreast of best practices and emerging trends in cargo theft deterrence.

Technology

Surveillance technology can be effective in preventing cargo theft or identifying criminals if a cargo gets stolen. Some devices include front-side and rear-facing cameras on trucks, tracking devices (GPS or radio frequency identification (RFID), and high-security seals and locks, including landing gear locks, kingpin locks, air-cuff locks and truck immobilizers.

Transit security measures

Educate your drivers in how to recognize potential threats or suspicious activities and empower them to take preventive action. Maintain frequent communication between the driver and the dispatcher and encourage drivers to report security concerns immediately. Route plans should consider hot spots and hot times and minimize wait time. Aim to keep cargos moving, avoid leaving loaded trailers unattended, park them in secured locations wherever possible and use geofencing tracker apps, which create a virtual perimeter of a location, alerting you when the device enters or leaves the area.

KEY TAKEAWAY:

--SMEs are vitally important to the U.S. economy but are, for now, low-hanging fruit for hackers for a host of reasons.

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Small and medium-sized enterprises (SMEs) are extremely attractive targets for cybercriminals. Heavy reliance on external vendors exposes SMEs to risks, as many lack the necessary expertise and resources to thoroughly assess the security posture of their vendors. If a vendor has weak security practices or fails to adequately protect their systems, cybercriminals can exploit weaknesses in the vendor's software, networks or supply chain to gain unauthorized access to the small business's data or systems. 

Additionally, smaller organizations often have fewer resources and weaker cybersecurity measures than their larger counterparts, making them low-hanging fruit for bad actors. Against this backdrop, Cowbell recently commissioned an independent research firm to survey SME leaders across North America to gauge their level of preparedness for a cyberattack. 

The survey explored measures SMEs are taking to avoid cyberattacks, and their recovery plans should they fall victim to an attack. The Cowbell Cyber Round-Up: Q2 2023 survey revealed that only around half (55%) of SME leaders feel highly confident they are prepared for a cyberattack. Fifty percent of SMEs have already experienced a significant cyber incident in the past 12 months. 

How can SMEs better prepare for the increasing threat of cyberattacks? They must shore up their cyber defenses to avoid incidents that could cause irreversible financial and reputational damage. Here is a sampling of key survey findings and actionable tips to help SMEs enhance security and mitigate potential risks effectively.

Cyberattack Preparedness and Aftermath

Survey respondents revealed a staggering lack of understanding about the cost of a cyberattack. 

• 90 percent of SME leaders who experienced a serious incident said the cyberattack cost them more than anticipated. 
• 81 percent of cyberattack victims suffered a drop in revenue due to the incident. 

Cyberattack methods like malware, phishing and ransomware are becoming more common, making a comprehensive cybersecurity strategy mission-critical. SMEs with a cybersecurity strategy were nearly two times more likely to recover quickly from a cyberattack than those without a cybersecurity strategy. 

See also: How to Fight Rise in Cyber Criminals

Protect Your Business With Cyber Insurance 

Thirty-three million U.S. organizations are defined as “small businesses” based on data from the U.S. Chamber of Commerce. The segment is critically important to the health of the U.S. economy, and equipping them with the right resources and tools to prevent and fight threats is key. Survey respondents cited having a cyber insurance policy as critical to a sound cybersecurity strategy. 

• 72 percent of SMEs without cyber insurance said a major cyberattack could destroy their business. 
• 91 percent of respondents with cyber insurance policies said their insurance provider helped them avoid potential incidents.
• Comprehensive, flexible cyber insurance coverage protects SMEs when it comes to business interruption, data recovery and legal liabilities stemming from a cyberattack. Cyber insurance isn’t a nice-to-have – it’s a must-have to fight against today’s threats and bad actors.  

Lower Your Risk of Cyberattacks

Cyber incidents against SMEs threaten socio-economic stability, as SMEs create jobs and account for a large percentage of U.S. economic activity. SMEs don’t have to be vulnerable targets for cyberattacks. Basic cybersecurity hygiene is extremely effective against the threats affecting SMEs.

By defining a cyber risk management strategy, purchasing cyber insurance and adopting cybersecurity best practices, SMEs can shore up their cyber defenses to prevent and mitigate threats. Cyber insurance, in particular, can help SMEs lessen the severity of and even prevent cyber incidents. Cyber insurance providers help narrow the protection gap with clearly defined risk and augmented underwriting.

KEY TAKEAWAY:

--Insurtech funding has slumped. But market players are still finding opportunity for operational and financial leverage in insurtechs that work to enable the experience of buying and selling insurance, rather than disrupt it.

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Insurtech investment has fallen from its highs in 2021. CB Insights says global insurtech funding in 2022 actually dropped below $1 billion for the first time since 2018. Boston Consulting Group reported that funding in the fourth quarter of 2022 was the lowest in 20 quarters.

With the drop in investment, insurtech is at an inflection point. Will it rebound, continue on a flat path or decline further?

To answer that question, think about the purposes that insurtech is serving. To me, insurtech is most relevant when it focuses on creating efficiencies and enabling better customer and distributor experiences. After all, hasn’t insurtech always been about creating efficiencies and enabling improvements?

I broadly categorize insurtech in two swaths: the disruptor model and the enabler model.

Disrupter insurtechs typically must cover the length of the insurance value chain, and they aim to replace it. They usually aspire to hold a balance sheet, underwrite insurance policies and manage capital. 

Enabler insurtechs try to make the experience of buying and selling insurance better. They focus on improving discrete steps in the value chain for greater efficiency. 

One way to tell an enabler from a disrupter opportunity is whether it will bring in new capital or create new insurance capacity. 

There are hundreds of examples of enabler model approaches, and many have met with success. One early enabler focus was third-party data services. These took an application, verified information on the form, consolidated it and reported it. As another example, in auto insurance, third-party data services sought to read and verify information, check the driver’s data and give the carrier an underwriting score.

Financial reporting has been a rich area for the enabler model — for example, Power BI (business intelligence) as a reporting tool. Robotic process automation, data science capabilities and machine learning tools are other good examples. 

Disruptors also have delivered products and services, sometimes with novel approaches. Many have yet to demonstrate profitability or haven’t achieved their goal of disrupting. 

Some disrupters have discovered that the insurance business is a really hard business. As Boston Consulting Group says: “Their loss ratios are significantly higher than the industry average.” That’s not to say disrupters won’t reach positive cash flow and earnings and offer a strong alternative to the status quo. Time will tell.

Some venture capital (VC) investors expect a low success rate but a very high payoff, so they’ve funded disrupter models across several industries. Once an investment within that multi-industry strategy pays off, the investor may back away from investments that haven’t yet “hit it” (such as in insurance). That explains some of the cycle we’re seeing in insurtech funding.

See also: The Key to Transformation? It’s Not Technology

Yet investors are still enamored of disrupting the insurance business because of the sheer number of markets and their business volumes. Even with the current down cycle in funding, I expect VC investors to continue to be drawn to attractive insurance targets.

Right now, for example, the pet insurance market is a popular destination for investors. Globally, the consumer market is set to balloon from $9.5 billion in 2023 to $40 billion in 2033, a 17% compound annual growth rate, according to Future Market Insights. Segments within the property insurance market also are significant in size and scope, as are personal auto and commercial auto, among others.

Segments like these represent multibillion-dollar market opportunities. The companies that figure out effective approaches to these segments could reap significant payoffs. 

However, I expect that over time enablers have delivered more value than disruptors. Because of enablers' relatively strong performance, users and investors have pivoted to them. Carrier-backed VC funds once active on the disruptor side have sought enabler opportunities. The rationale: Carriers can realize returns by investing in capabilities that benefit their own operations. 

Enabler insurtechs play an increasing role in the managing general agent/program administrator segment, including here at National Programs. One example, called “Submission Grader,” uses artificial intelligence to screen data and schedules on a property insurance application. The insurtech tool looks at that data vis a vis underwriting guidelines and gives an initial indication about whether the risk is acceptable. 

If the application passes muster, the AI tool assigns a grade for the application using risk, carrier, producer and other variables that indicate underwriting success. The tool then sends an email back to the producer thanking them for the submission, noting the indication and inviting any follow-up that might be needed.

This type of enabler tool gives the producer fast feedback and wins back time for underwriters. The carrier or managing general agency sees their staff freed up.

In the past, an underwriter would’ve needed to receive the submission, open up and check the documents and read the property schedule. They might have reached the last row of the schedule only to realize that a property listed there doesn’t qualify. Instead of the underwriter having to slog through that process, insurtech screens the application using artificial intelligence.

With enabler approaches like this, market players can gain leverage by attacking a need —creating a solution and testing, improving and implementing it. 

Enabler insurtech might seem less appealing because the needs it can solve do not span the insurance value chain. The potential payoff doesn’t seem as large. But pursuing the enabler model can provide operational and financial leverage. If a firm can pile enabler improvements on top of one another, it’s like interest accruing on top of interest. Ten 1% improvements are as good as one 10% improvement.

Top articles surrounding our September FOCUS on Resilience and Sustainability. Plus: an insightful interview with Oliver Wyman's Alex Wittenberg

FROM THE EDITOR  "No insurance, no finance. No finance, no project. No project, no transition." Alex Wittenberg, a partner at Oliver Wyman, says that phrase governs the transition from fossil fuels to a clean energy economy. By now, everyone acknowledges that the transition is under way, but it has to begin with insurance. And the insurance piece of the puzzle can be so very complicated. Think about an offshore wind farm. The turbines have to be erected under difficult conditions. The mast may stick 260 meters out of the water. Each blade can be 100 meters long, so the rotor can be 220 meters long. Wind turbines are huge, powerful, complex machines, and it's hard for insurers to find the technical expertise to fully understand them -- there are few enough experts, and the field is new enough that the experts want to be on the front lines, innovating. Adding to the complications: Installations are tailored to their environment, so even if you can figure out all the technical issues on one project, you can't just apply that learning across the board. There is, of course, limited historical data, given how innovative these projects are... and the technical issues are just the start. You also have to figure out what the supply chain looks like -- and might look like when a repair is needed. Will, say, a replacement blade be available when you need it? How quickly will you be able to ship this 110-meter-long, high-performance blade to where it's needed? Will a ship and repair crew be ready to make the repairs, and how long will it take them to get to the site? Understanding those issues may be even more important than having a good estimate on the likelihood of damage and costs of the repair, because the utility operating the wind farm will still have to deliver the electricity it's contracted to provide, and a lengthy delay could lead to enormous expenses. The good news, Alex says, is that insurers are starting to figure out new structures that can accommodate the needs of utilities. They'll look very different from traditional insurance structures -- involving a mix of captives, traditional insurance but with significant sub-limits for natural catastrophe perils, more risk retention by the utilities and perhaps CAT bonds. These structures will take some getting used to. Public utility commissions, for instance, are accustomed to seeing a hefty amount of insurance attached to a power project, and they'll have to work their way through these new approaches. But, Alex says, "Over time, both individual carriers and the overall market are going to better understand the underlying drivers of profitability and provide a much more stable, albeit potentially smaller, source of capacity. I think they are already getting there." Cheers, Paul For this month's  FOCUS on resilience and sustainability, we turned once again to Alex Wittenberg, a partner at Oliver Wyman, with whom we spoke a year ago. He says insurers are making real progress on understanding how to underwrite the transition away from fossil fuels and to renewable energy, but there's an awful lot of complexity that goes into that assessment. Read the Full Interview "Over time, both individual carriers and the overall market are going to better understand the underlying drivers of profitability and provide a much more stable, albeit potentially smaller, source of capacity. I think they are already getting there." — Alex Wittenberg Read the Full Interview READ MORE How to Prepare for Extreme Weather Developing a well-defined preparedness plan is crucial to mitigate damage from hurricanes and other extreme weather events. Read More The End of Globalization? The Journey to Sustainable Aviation Airlines are experimenting with a host of sustainable fuels, electric aircraft, hybrid electric/fuel planes and new operating techniques. Read More How Digital Twins Help on Climate Digital twins help insurers leverage high-quality data to counter unpredictable weather conditions caused by climate change. Read More Bringing Innovation From Australia to U.S. Severe environmental threats, together with Australia’s regulatory landscape, have catalyzed insurers to adopt new technology quickly. Read More AI, Aerial Imagery Can Help Spot Flood Risks Any company that still relies solely on governmental property records instead of using AI-derived property databases is significantly increasing its risks. Read More The Race Against Natural Disasters Because of technological advancements, we’ve never been better prepared to understand what could happen tomorrow. Read More FEATURED THOUGHT LEADERS Yuval Mey Rez Paul Carroll Mabé Villar Vega Tom Fadden Greg Oslan Amrit Santhirasenan   View all ITL FOCUS topics

For this month's ITL FOCUS on resilience and sustainability, we turned once again to Alex Wittenberg, a partner at Oliver Wyman, with whom we spoke a year ago. He says insurers are making real progress on understanding how to underwrite the transition away from fossil fuels and to renewable energy, but there's an awful lot of complexity that goes into that assessment. While insurers have generally maintained their commitment to facilitating a clean-energy future, they have reoriented their approach. They recognize that even the most aggressive scenarios for a net-zero future envision heavy use of oil and gas in 2050, so insurers are taking more of a long-term view. They are also taking more of a portfolio view, looking at the whole mix of clients and their energy sources and at the mix of geographies where clients operate, rather than just viewing them as a series of individual companies.  And that's just the start of the adaptations insurers are making. Alex goes into detail below.

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ITL:

We had an illuminating conversation a year ago about, among other things, the opportunities for insurers that will arise as the world shifts toward renewable energy sources but also about the difficulties of underwriting extraordinarily complex projects such as offshore wind. What are some of the big changes that have occurred since then?

Alex Wittenberg:

It’s a fairly significant development that major property/casualty insurers have departed from the NZIA [Net-Zero Insurance Alliance, whose members commit to decarbonizing their underwriting portfolios]. Last year, at this time, we were talking about how the NZIA was basically adding members every other week. Then, earlier this year, they started losing individual members, including the largest property/casualty insurers and reinsurers, such as Munich Re, Swiss Re, SCOR, Zurich and Allianz. Eventually, they lost all the founders, including the chair of the group, AXA XL.

There's a lot of speculation that the departures were driven by aggressive political tactics in the U.S. on behalf of approximately 23 state attorneys general, based on anti-competition allegations. That is not an insignificant reason, but the reality was that, as members got closer to following through on implementation, many also began to realize that perhaps they were on a pathway that wasn't aligned with their – or their insureds' – long-term view of an orderly energy transition. And for a lot of the insurers, there were practical considerations: “Are we ready to do this? Do we have the resources? Can we get the right information?”

If anything, NZIA implementation may have inadvertently created an energy transition with less financial underpinning.

If you consider the IEA [International Energy Agency] and its three different core scenarios for the energy future to 2050, whichever one you happen to believe, they all acknowledge that we are on a long journey.

To be clear, I don't think any insurers are stepping back from their individual corporate commitments. I think they're being more thoughtful about putting their commitments on a timeline that reflects the commercial reality of both the transition and of their insurance or reinsurance company.

ITL:

What does that look like? What should somebody be doing in 2024/2025 to support the longer-term energy transition?

Alex Wittenberg:

Well, there are a few things that we advocate. Increasingly, insurers are getting better at looking at their whole portfolio, as a collection of assets and not just as individual client names. If the insurer writes some oil and gas companies, utilities, pipelines, renewables – those are actually a collection of underlying assets with specific carbon attributes. Taking a portfolio view allows the insurer to consider how insuring specific organizations impacts their asset mix and to create the optimal mix of traditional and renewable sources that meets their transition pathway.

Also, insurers need to take a long-term view of their portfolio. It is more important for carriers to be going in the right direction with the right clients than it is to attempt a short-term overhaul of their book of business by applying rigid restrictions. There will be stops and starts driven by a variety of external factors that will make this a bumpy road, and each carrier will need to chart its own path to having the portfolio of clients and assets it wants in the long term.

ITL:

There’s been a backlash against ESG [environmental, social and governance efforts], especially in the U.S., not as much in Europe. I wonder whether insurance companies can go out and say they're trying to promote the energy transition and so forth, or whether they're having to back off on some of their pronouncements on the topic.

Alex Wittenberg:

I would separate supporting the energy transition from anything that's politically charged, on either the right or the left. I don't think there's a lot that's politically charged about saying you're supporting the long-term energy transition. I think many are recognizing that we're going to have a mix of fuels. Even in the most aggressive of the IEA scenarios, there will still be carbon-based fuels in the mix in 2050. So, I don't think anyone's denying that the transition is occurring, and that the transition needs to be supported. More importantly, insurers have a huge role to play in the transition.

Leaving politics aside, there's a lot of discussion about how we are going to finance the transition, but what’s often ignored is that not much gets financed that isn't insured. And the scale of this transition is significant.

It used to be that a power plant would get built in your state, and it would be insured, and the regulators didn't really think about the insurance. Now, due to the scale, exposure and complexity – such as found in offshore wind – insurance capacity is becoming increasingly scarce. It is increasingly clear that facilities of this nature are not going to be insured in the same way it would have been 10 years ago or even when the project was conceived. The insurance industry has a critical role to play in mobilizing the capital to underpin these projects so that they actually get done.

I know it sounds kind of trite, but the expression we use is, “No insurance, no finance. No finance, no project. No project, no transition.” In my 30 years of doing this, insurance isn't usually considered the linchpin of anything, but in this case it will be a key element for the energy transition to move forward at the scale required.

ITL:

I know we talked about some of this last year, but can you walk me through offshore wind? How would that work? I assume onshore wind is sort of quantifiable. We've done it. But walk me through the complexity of an offshore project.

Alex Wittenberg:

None of this has gotten particularly better since we talked last year. Large losses are occurring across a variety of renewable and traditional energy sources, and the projects are getting significantly larger and are being situated in more challenging locations.

Utility-scale renewables projects in solar, wind and storage are unique projects and are leveraging constantly evolving technology. Underwriters do not have the benefit of decades of historical exposure and loss data to evaluate future performance and price risk with precision, and understanding the engineering complexity has been a constant challenge.

The scale of these projects is also difficult to understand. You're talking about something that is huge. In offshore wind, if you consider the GE Haliade-X wind turbine, the mast height can be up to 260 meters (the Eiffel Tower is 300 meters), and an individual blade is 100 meters long, making a 220-meter rotor. A single turbine can generate up to 14MW of power. And a single wind farm may have upwards of 200 of these turbines. (Note that the largest approved U.S. offshore wind project is Ocean 1, with 98 turbines planned; Dogger Bank in the U.K. has 270).

Complicating the obvious potential are offshore losses, which can be costly and difficult to resolve. While there is a clear physical damage component to losses, business interruption costs can be more significant and less predictable, often exacerbated by a lack of available vessels to make repairs. The supply chain implications for replacement parts, such as turbines, transformers or cables, and potential obsolescence issues, also impact loss quantums and are dependent on backlog at the manufacturers of critical equipment. And the longer the interruption, the more cost the insurers incur, as the operator continues to have an obligation to provide power.

ITL:

If I'm trying to find financing for offshore wind, to stick with that example, and I have to get the insurance, how do I work through this with an insurance company?

Alex Wittenberg:

The public utilities commission (PUC) in a jurisdiction usually has authority over new projects, and they're used to seeing insurance included, usually a fairly significant amount. Due to the reasons we've discussed, the companies deploying these projects are going to have to resort to different risk finance structures. They're going to involve larger retentions, likely through increased participation from corporate captives; they’re likely to involve a smaller commercial insurance market participation excess of a much larger retention and with significant sub-limits for natural catastrophe perils. And they may involve catastrophe bonds (CAT) bonds or parametric products if the projects are CAT-exposed.

The problem is that your typical PUC is not populated with insurance experts who are going to fully understand these types of complex structures. They are going to want to see traditional insurance with reasonable retentions, because from their standpoint that is how you best insulate the rate base.

But that's not realistic.

There's a huge educational component, because the ways that a project may have to resort to transferring risk aren't necessarily bad, they're just different. A project will effectively transfer the risk or diffuse the risk into different pools of capital via an insurance company or a series of insurance companies. That educational piece is something that isn't easy to do but needs to be done.

ITL:

It sounds like a massive project for the insurers, too, to get smart about these complex projects.

Alex Wittenberg:

Many insurers we work with on the energy transition will readily admit that they need more technical advice and technical support. But there is a definite scarcity of quality resources, so they can’t all acquire the resources that they need. A lot of the strong technical people, especially in renewables and alternative fuels, are not going to be working for an insurance company; rather, they will be on the front lines of renewables and fuel development.

There is a larger pool of engineers who join insurance carriers after a long career elsewhere. In the nuclear space, perhaps they come out of the U.S. Navy, and they join an insurer as an engineer in one of the nuclear pools. But in renewables, it's not quite the same. There's not a backlog of folks who have been doing this for decades and are looking for a transition.

The second issue is converting technical knowledge into underwriting advice. It's one thing to say, "Well, we understand failure rates, and we understand the failure rates under different meteorological circumstances.” But now you need to turn that knowledge into a price. So insurers need to get a lot better about understanding and pricing the risks, and they need to do it without running egregious loss ratios as they learn. And those that have experienced losses or underpriced the risks often curtail their appetite or retreat altogether. It's a challenge.

Are there ways out of these challenges? Absolutely. Over time, the markets are likely to settle out, and probably in a different place than they are today. I think some of the carriers are going to say, "OK, we're going to write this, but we're not going to write it the way that we used to write everything else in our energy portfolio. We’re going to want to define our appetite for certain technologies, we're going to want to increase deductibles and we're going to sublimit specific perils and be more precise about geographic concentration."

Over time, both individual carriers and the overall market are going to better understand the underlying drivers of profitability and provide a much more stable, albeit potentially smaller, source of capacity. I think they are already getting there.

Another complicating factor, beyond underwriting and technical concerns, is that the carrier management teams are still wrestling with reconciling the commercial reality of the long-term transition in their energy books and their public climate commitments. These internal contradictions are difficult to resolve in the short term and lead to insurer underwriting decisions that can seem inconsistent to both brokers and insureds.

ITL:

We had a conversation last year about many of these topics, and we are having one again this year. Let’s say we have one next year. Are we making progress?

Alex Wittenberg:

Most insurers, when they left the NZIA, recognized that they were going to have to take a lot more responsibility to support the energy transition and couldn’t just rely on third-party scoring of the names in their portfolio. They were going to really need to understand the underlying data and underlying assets in their portfolios and how they wanted to manage their portfolio and its transition over the long term.

Many companies are certainly undertaking the necessary work, and that’s progress. However, this isn't going to be something that can be easily fixed in a couple years. This isn’t just about setting guidelines for an internal referral network that will say "yes" or "no" to offering coverage; there needs to be a sincere effort to understand what is in the portfolio, the planned changes in the insured’s asset mixes and the targeting of new clients. Insurers are starting to understand the implications of their commitments and how to align those with the transition of the energy book. That's all positive.

The other real positive is the long-term approach. There are a lot of ways to look at the energy transition. Some insurers are more conservative and will stick with a portfolio that has more traditional energy within it and migrate over time. Some will want to move faster to new sources. The marketplace needs an assortment of carrier approaches to ensure an orderly transition, and while it will not be smooth it seems to be moving in the right direction.

Insurers are trying to solve problems, too. The industry is moving forward; the market is not sitting still. A lot of large insurers are making themselves available to support the energy transition by supporting traditional energy assets in portfolios, while insureds work to address real world challenges such as providing affordable, reliable baseload power.

ITL:

The New York Times had a piece recently saying that new, renewable energy sources are coming online faster than people thought, but I worry a lot about the grid. It just can’t do what we need it to do. It seems to me that we almost need to start over and declare that we're going to build an interstate highway system of the grid.

Alex Wittenberg:

A big challenge is that many new renewable generation facilities aren’t near an interconnection point with the existing grid. Also, the public doesn’t necessarily want utility scale generation nearby. New transmission and distribution and other grid infrastructure must be considered a priority if the energy transition is to occur at scale.

Unfortunately, insurers don’t usually want to insure operating, above-ground transmission and distribution lines. Construction of the grid would be fine from an insurer's perspective. It’s when you turn it on and make it susceptible to a variety of perils that it becomes less attractive.

ITL:

That makes sense. I found this fascinating. Anything I didn't touch on that you want to talk about from a personal or an Oliver Wyman perspective?

Alex Wittenberg:

There's one thing that I think insureds could do better and could think about more strategically. Energy is a global industry, right? Everyone generates power, needs power, transportation fuels, etc. But in the U.S., an individual utility tends to be organized by state, or maybe in their region of the country. The same occurs in Canada.

The insurance industry is different, it is a very globally fluid capital market. And although insurers are based in certain places and get regulated by individual states or countries, the capital tends to flow to where it can generate the best returns. That means the insureds need to think about the implications of their strategies on their ability to attract insurance capital in a globally competitive marketplace.

It's also important that the insurer looks at their energy portfolio across all of their geographies, so they can make equitable decisions on where to accelerate the move to renewables as an offset to a slower pace in another part of the world.

I’ll add that I'm still very positive directionally, actually more positive than I was last year. Last year felt a little dire, as though the insurance industry was basically going to abandon the ship, and there were not going to be sufficient options to address the projects that are required to accelerate the transition. While working with a number of the large commercial insurers and energy specialist markets, we have found that they are committed to thinking strategically about solving for the energy transition challenges, even if it means charting a new path.

ITL:

This was great. Thank you for your time, Alex.

We often hear insurance professionals say, “I know I need to begin to automate my business and operations, but where do I start? With a policy admin system? If so, which one? Or should I focus on automating underwriting and rating capabilities?”

In this webinar with the National Association of Mutual Insurance Companies (NAMIC), Murray Izenwasser, Senior Vice President of Digital Strategy for OZ Digital Consulting, elaborates on the essentials of an effective automation strategy — and why it matters in insurance.

Tune in to get insights as he delves into the automation maturity model and roadmap and how this helps insurers prioritize automation projects, aligning with their existing automation landscape.

 

 

SPEAKER

Murray Izenwasser Senior Vice President, Digital Strategy OZ Digital Consulting

 

 

 

 

 

 

 

Contact us if you would like to learn more about how the right automation strategy can drive digital transformation.

 

By Venkat Malladi, Co-founder and CTO, Vymo Technologies

Before we leap into the future, let’s go back to the basics. The seven parts of a sales lifecycle are prospecting, making contact, lead qualification, lead nurturing, proposal, discussions and negotiations, and lastly conversion. Sellers go through this journey with every lead and we all know how rocky and challenging the actual cycle is.

CRMs were introduced to accelerate the sales lifecycle and help the seller. And help sellers with a centralized data repository, better lead management, streamlined processes, structured activity and task management, reporting and to an extent analytics. Although the CRM is ubiquitous to a sales hierarchy today -- we know that it is largely disliked by sellers and hardly used.

The quest now is to increase CRM adoption among sellers. Making the tool intuitive and easy to use, mobile-first and a single interface vis-a-vis the multitude of systems sellers need to access are top of mind challenges that sales teams are looking to solve to make this happen.

Here is where cloud-based sales engagement tools and platforms are raising adoption numbers. These tools provide an app-based, unified experience, remove the need to toggle between systems, retrieve data from CRMs and give it to sales teams as nugget-based insights, and capture activities easily allowing them to close their daily targets faster,  and  improving their daily productivity. 

So far. So good.

Can sales performance be boosted further? What can sellers look forward to in the coming decade? Tools that can navigate a seller from prospecting to conversion via a least resistance path with intelligent interventions? Playbooks that can pinpoint sellers to best actions that steer towards conversion? Technology that can understand a lead status and tell the salesperson exactly what to do based on another seller’s recent experience?

The need for such intuitive technology coupled with Generative AI is just the turning point sales teams need towards the future.

Here are four ways AI tools can help sales transform the way they work in the coming decade.

1. Sharp Solution Building - It is almost like you can read the customer’s mind! Beyond relying on historical data that an organization has, generative AI can help analyze real-time customer conversations and enrich existing customer information. Such thriving data thanks to AI and ML can help sales teams design products and solutions that are bespoke and personalized. Not only this, with such deep customer insights, AI opens up the potential of cross-sell and upsell opportunities helping sales teams do a lot more with the data on hand.
2. Heightened efficiency of day to day working - Imagine a Donna Paulson (of Suits) to help your sellers through the day! With effective use of AI, tools can track activities, help with daily planning, take notes and remind sellers on their meetings, a quick update before a meeting, the best solution to pitch based on customer profile and explain the next best steps.
3. Transformative Training and Onboarding - Sales training is a high priority across industries. For example, in the Insurance industry, attrition is a significant problem. 89% of agents quit within the first three years of joining. And coupled with this is the retirement of baby boomers - seasoned agents who have a wealth of knowledge. So the insurance agency is looking hard at two things:
   1. How do I train new recruits faster so they start selling as soon as possible?
   2. How do I retain the rich knowledge that a tenured agent has, to pass on to the new recruits, younger workforce?

   AI can prove to be quite a lever here. It is possible to analyze seller behavior and performance across thousands of salespeople to understand best behavior and practices. This becomes a rich source of learning and can be built into effective training programs for sales, empowering them to get on the ground faster. And intervene with tailored lessons as they need support on the ground. Likewise, AI can encapsulate best behaviors of senior sellers and guide the newer teams to mirror this behavior.

4. Better Sales Leadership: Rich, real-time information on sales team performance, and customer profiles can help leaders get both wider and deeper visibility into engagement and gaps. It is almost like gazing into a crystal ball. But this is no magic - it is technology. Such clarity can help leaders rework on strategy, intervene and coach as appropriate and ensure that both seller and customer engagement is optimum.

It is a great time to start exploring AI and ML in sales technology. As customer profiles evolve, sellers should up their game by understanding customers better than ever. AI provides the means.

KEY TAKEAWAY:

--When contemplating reinsurance, consider the following best practices: 

• Stay profitable by managing your risk profile.
• Keep an eye on the profitability of your reinsurers. 
• Build a stable of reinsurance contacts and get to know them personally.
• Don’t shop only on price. Think long term.
• If you’ve had a series of CAT losses, prepare discussion points and arguments against rate or retention changes--why those losses are blips rather than the beginning of trends. 
• Work your reinsurance program throughout the year, not just at renewal. 

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The unprecedented wildfire in Hawaii and the tragic devastation it has left in its wake is the latest catastrophe to wreak havoc and devastation within our communities, and by extension on the insurance industry. Insured losses related to the natural catastrophe that has killed more than 100 people to date and burned roughly 2,200 acres and 3,500 buildings is projected to be the second largest insured loss ever recorded in Hawaii. The insurance industry will respond as it also does -- quickly and efficiently and, in the process, return to insureds billions in loss payments to help them recover and rebuild. Unfortunately, CAT events like this, including hurricanes, wildfires and floods, are hitting our communities and the insurance industry hard. Combined with other economic factors, they are making reinsurance either impossible or difficult to secure.

So, what’s in store for reinsurance, and what does it mean for carriers looking to place risk? Taking a good look at what’s causing prices to rise and how capacity has been affected can help to shed some light on the issue. A deeper understanding of what’s causing this market tightening also uncovers steps carriers can take to ensure they remain attractive to reinsurers, keep costs down and sustain capacity. 

The Origins of Today’s Hard Market

Last year, Hurricane Ian crumpled Florida with $60 billion in insured losses. But it’s been years of costly CATs in the form of hurricanes, wildfires and floods that have contributed to challenges in today’s insurance marketplace. P&C carriers were paying out enormous losses and passing them off to the reinsurance marketplace. At the same time, economic influences such as inflation and rising interest rates are exacerbating the situation. As a result, carriers and reinsurers are taking a step back, with some exiting the market entirely. 

It’s not just the economic climate and recent onslaught of CATs that are driving insurers and reinsurers away, causing them to boost rates or rethink terms and conditions. For example, the retrocession market has become a virtual ghost town. Investors have largely left this market, which allows for yet another layer of risk transfer, and are seeking better returns on their investments from the fixed income and equities markets. While we are seeing some potential changes in this market, they should not yet be considered a trend.

As the economic climate has changed, so, too, have agency and policyholder attitudes toward insurance to value. While policyholders, and agents to some degree, were once complacent when it came to making sure properties were adequately insured to value, CATs and rising inflation are leading policyholders to request and insurers to demand an increase in the value of their property on their policies. Agents have also come to the realization that they could be found negligent under an errors and omissions exposure if they failed to bring their client’s attention to rising rebuilding costs. In the past, insurance companies were underpricing business and relying on reinsurers to share in the risk. That’s no longer the case. 

See also: How Cedents Can Win Reinsurance Race

The View From the Carrier

From our perspective at Pennsylvania Lumbermens Mutual Insurance (PLM), a carrier in the wood niche, the reinsurance market was fairly solid in the spring of 2022, but change was rumored to be on the horizon. Capacity issues were brewing, compounded by major losses. By late summer or early fall, reinsurers were signaling they were having problems in terms of profitability, and we knew the coming renewal season on the property side would be challenging.

In late 2022, we started to feel the impact. Quotes from many of our reinsurance partners were coming in unprofessionally late. We also saw changes to our terms and conditions coming in at the last minute. It was a very different and chaotic reinsurance marketplace. Prices surged dramatically, and reinsurance partners we had worked with in the past would no longer provide the retentions we historically had in place. They were no longer interested in assuming the same levels of risk. While we expected pricing and capacity to be a problem, we did not foresee the quotes coming in late or last-minute changes to terms and conditions. For us, this was problematic, as we send our renewal quotes out 30 to 45 days prior to expiration in many cases to comply with different state regulations. Because the reinsurers had delivered terms and conditions late, we did not have the information necessary to really understand the cost structure on our end before that 30 to 45 days. 

Fortunately, as a mutual insurer, PLM does not have to make short-term decisions. We do not have to report our quarterly results to Wall Street. We can take a longer-term perspective, and we know our niche. As a specialty insurer, we are good at what we do, and we can demonstrate that. While reinsurers might traditionally run away from a high-severity business like ours, for those looking to back front-line underwriters, we’re an attractive partner. 

Finding Value in a Year-Round Strategy

In a tumultuous market like this, it’s critical not to take your foot off the gas. We work on our reinsurance program throughout the year. We visit our existing reinsurers here in the U.S., and in England and Germany, sharing our results and talking about what is going on in the marketplace.

At the same time, we work to identify new reinsurers. We are always talking to reinsurers, trying to interest them in taking a “watch line,” where they would take maybe 1% of our property program or property CAT program just to get a feel for what it looks like and how we do things at PLM. 

Thinking ahead is critical for us. Those insurers that fail to plan ahead and come to their reinsurance renewal unprepared may see their rate is up 20% or more. They must make up for that increase with their own rate increase. Homeowners insurers, for example, have to seek approval from their state insurance department, and that can take time, in some cases a considerable amount of time. We have seen some resistance from certain states in the approval process. As a result, some of these states are seeing carriers constricting their willingness to write new business or ceasing to write new business entirely.

Smaller insurers that fail to plan ahead may have to take on reductions in retention ratios, and that can become difficult to handle. Small mutual and small stock companies rely on reinsurers, and they need to stay on top of their relationships or they could come up short. I’ve talked to others who have said there is no way they can be profitable as a company this year or next year because of the cost of their reinsurance. We at PLM do not feel that way; we are committed to finding a path to profitability without assuming inappropriate increases in risk.

See also: A Breakthrough in Wildfire Safety

Looking Ahead

While I might like to say the reinsurance market is turning a corner, we are only partially through the 2023 hurricane season, and no one can pretend to know if reinsurance pricing will remain high or even spike again. Smart insurers will be prepared. 

One of the best ways to prime for another challenging renewal season is to put yourself in the shoes of the reinsurer. They’ll want to see that your company is profitable and not only that you made a good return but that you protected your reinsurers at the same time. You’ll want to convince them that you are in this for the benefit of both companies. 

At a high level, when contemplating reinsurance, consider the following best practices: 

• Stay profitable by managing your risk profile.
• Keep an eye on the profitability of your reinsurers. 
• Build a stable of reinsurance contacts and get to know them personally.
• Don’t shop only on price. Think long term.
• If you’ve had a series of CAT losses, prepare discussion points and arguments against rate or retention changes--why those losses are blips rather than the beginning of trends. 
• Work your reinsurance program throughout the year, not just at renewal. 

Some industry experts I’ve spoken to feel that today’s reinsurance issues are a one-time blip. I don’t think that’s the case. Regardless, carriers need to think about how they will approach their reinsurance partners and what those reinsurers will want to see from them, as well as the types of rate increases and terms and conditions they are willing to accept. 

Reinsurance is a necessary component of what we do. Let’s understand how we can best work together to move our industry, as well as those we protect, forward.

KEY TAKEAWAYS:

--The standards, while they couldn't provide total protection, by any means, could greatly reduce policyholders' risks of cyber attacks.

--The standards need to be imposed on an industrywide basis because any insurer that imposed the standards on its own would risk losing business to less strict competitors.

--There would also need to be provisions for checking, in a scalable way, to make sure that insureds are following basic cyber hygiene.

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While all types of insurance present a host of variables only partially enumerable in actuarial calculations, cyber insurance presents many unique, abstract challenges. It is almost impossible to accurately predict the connectedness of systems: whether the attack frequency will rise or fall, which verticals will be most targeted by hackers and, without deep security audits, which specific organizations are adhering to rigorous cybersecurity practices.

For example, while the rates of serious global cyberattacks including ransomware have been increasing (overall) for many years, 2022 saw a decline in overall ransomware attacks. For some experts, this may have been predictable: War efforts will often divert hacker attention away from financially motivated attacks to those that support patriotic and militaristic motives (and a drop in the crypto market also reduced the profitability of attacks). But this threat reduction caught many by surprise. Regardless of reason, the result on the cyber insurance market was tangible: Reduced claim frequency and severity increased margins and lowered the perceived risk exposure in the short term, and higher margins and lower risk exposure (combined with new entrants to the market) started to softened terms and conditions once again. 

As some cyber insurers have vied for premium dollars, many of the recently introduced controls used to reduce underlying risk, including requiring minimum cybersecurity controls of their insureds, have fallen by the wayside. When we no longer have a means of controlling risk—such as requiring risk management controls—expanding capacity is no longer tethered to real-world data, making it far less attractive to carriers. This uncertainty has been underscored by the incoming data of 2023, which has shown that ransomware (as only one attack modality), is once again surging despite little else changing in the overall geopolitical environment, demonstrating yet again the importance of gaining risk visibility wherever possible.

What is needed, we argue, is a set of universal, standardized cybersecurity requirements for insured organizations, adopted across the cyber insurance market. By requiring insureds to meet basic, essential cybersecurity controls, we can, to some degree, mitigate the risks and make them more predictable.

Many cyber insurers would like to impose standards to reduce risk; but doing so on their own can hurt them while more risk-tolerant competitors are willing to waive limiting terms and conditions to attract insureds. This endless cycle, however, is contributing to a lower overall standard of cyber rigor in organizations and higher risk for the insurance industry. It is impractical to expect more than a few bold insurers to take a stand on this issue; thus, we believe that reinsurers are in a better position to leverage their influence toward this goal. This would be comparable to the type of collaborative action we saw in the industry when striving for a more unified war exclusion. By requiring insurers to require a universal set of minimum security standards, reinsurers could not only capture more certainty around loss performance and exposure, they could also level the playing field for cyber insurers, making minimum standards a norm vs. a competitive differentiator they wield to the detriment of risk predictability. The result would be improving enterprise cybersecurity stature and reducing risk for the insurance industry overall, setting the stage for further sustainable growth. 

For example, today, business interruption represents nearly 60% of cyber-related losses; the best way to reduce these losses is to ensure organizations are strategically securing their infrastructures as a condition of their cyber insurance policies. 

See also: Cybersecurity Trends in 2023

What Kinds of Cyber Standards Should Be Required?

As cybersecurity experts, we understand that no set of controls guarantees companies won’t be breached. However, there are basic hygiene controls that no organization should be without. We argue that the insurance industry should work together to not only define a minimum set of cybersecurity standards, but also bring in cybersecurity experts to determine how those controls should be deployed and checked in a scalable way to ensure they are effective. Some controls that should be considered include:

• Multi-factor authentication (MFA) deployed universally, wherever it is supported
• Endpoint detection and response (EDR) tools coupled with next-generation anti-virus software
• Segregated, redundant and immutable backups
• Patching and vulnerability management processes for critical updates
• Security awareness training for employees
• Privileged access management

Yet, it isn’t enough to merely require that organizations check the box on these items. It’s essential that details be clearly spelled out regarding how they are implemented. For example, backups are not effective if their security features are not properly configured, if they are included as a member of the active directory domain or if they are not immutable (if they can be deleted or moved outside of the very rigorous, two-key-turn and retention policies set by the company and system). We suggest that reinsurers create a panel of experts to consider which controls be mandated and the specific details of how these controls should be executed to ensure they are effective for both organizational health and for mitigating risk. 

Risk Is a Fact in Security and Insurance—But There’s More We Can Do

In cybersecurity, we live with the reality that breaches can happen even to the most cyber-dedicated organization. That doesn’t make their security efforts futile—without these safeguards, organizations would be open to virtually daily intrusions. While we must live with risk uncertainty in cyber insurance, setting universal, minimum cybersecurity standards for organizations would provide far greater risk reduction and visibility.