In one of the industry’s most comprehensive analyses, Allianz Global Corporate & Specialty (AGCS)  has identified the top causes of loss for companies from more than 530,000 insurance claims in over 200 countries and territories that it has been involved with between 2017 and 2021. (Typically, a number of insurers provide coverage jointlym considering the huge values at stake in the corporate sector.) These claims have an approximate value of €88.7 billion, which means that the insurance companies involved have paid out – on average – over €48 million every day for five years to cover losses.

Top Causes of Loss

The analysis shows that almost 75% of financial losses arise from the top 10 causes of loss, while the top three causes account for close to half (45%) of the value. Despite improvements in risk management and fire prevention, fire/explosion (excluding wildfires) is the largest single identified cause of corporate insurance losses, accounting for 21% of the value of all claims. Fires have resulted in more than €18 billion of insurance claims over five years, according to the analysis. Even the average claim totals around €1.5 million.

Natural catastrophes

Natural catastrophes (15%) rank as the second top cause of loss globally by value of claims. Collectively, the top five causes (based on more than 20,000 claims around the world) are: hurricanes/tornados (29%); storm (19%); flood (14%); frost/ice/snow (9%); and earthquake/tsunami (6%). They account for 77% of the value of all disaster claims. Hurricanes and tornados are the most expensive cause of loss; two of the past five Atlantic hurricane seasons (2017 and 2021) now rank among the three most active and costliest on record, and there has recently been record-breaking tornado activity.

Insurers are also seeing new scenarios. During 2021, the Texas Big Freeze in the U.S. and flooding in Germany stood out because of unexpected claims. The Texas freeze in February caused huge disruption to infrastructure and manufacturing, with many companies forced into shutdowns by widespread power outages, resulting in property damage and in some large contingent business interruption (CBI) losses. This event alone is estimated to have caused economic losses up to $150 billion. 

Faulty workmanship/maintenance incidents are the third top cause of loss overall (accounting for 9% by value) and are also the second most frequent driver of claims (accounting for 7% by number, ranking only behind damaged goods, with 11%). Costly incidents can include collapse of building/structure or subsidence from faulty work, faulty manufacturing of products/components or incorrect design.

The other top 10 causes of loss are: aviation collision/crash (#4; 9%), machinery breakdown (#5; 5%), defective product (#6; 5%), shipping incidents (#7; 3%), damaged goods (#8; 3%),  negligence/bad advice (#9; 2%) and water damage (#10; 2%).  

Inflation’s Impact on Claims

Inflation is bringing pressure on claims costs from multiple angles. Property and construction insurance claims, in particular, are exposed to higher inflation, as rebuilds and repairs are linked to the cost of materials and labor, while shortages and longer delivery times inflate business interruption (BI) values. Other lines of insurance, such as directors and officers, professional indemnity and general liability, are also susceptible to inflationary pressures through rising legal defense costs and higher settlements. 

Replacement costs more, and replacement takes longer, and this means both the property damage and the business interruption loss are likely to be significantly higher. Updating insured values for all new contracts is therefore a pressing concern for insurers, brokers and insureds. The insurance market has already seen a number of claims where there has been a significant gap between the insured’s declared value and the actual replacement value. For example, in a claim for a commercial property destroyed in the 2021 Colorado wildfires, the rebuild value was almost twice the declared value, due to a combination of inflation, demand surge and underinsurance. 

See also: Taking Care of Small-Medium Business

Business Interruption Losses on the Rise

The claims analysis also highlights the growing relevance of BI as a consequence of losses in property insurance, and the fact that CBI claims have reached a new high over the past year. Costs associated with the impact of BI following the aftermath of a loss can significantly add to the final bill. The average BI property insurance claim now totals in excess of €3.8 million compared with €3.1 million five years ago. For large claims (>€5 million), the average property insurance claim that includes a BI component is more than double that of the average property damage claim.

The number of CBI claims has increased year-on-year for the past five years, exemplifying the growing interdependence and complexity of corporate supply chains. The automotive industry alone has seen several CBI events during this period, with the overall growth in CBI claims exacerbated in the last two years by a large loss in the semiconductor manufacturing sector and the Texas freeze. The claims from these two events more than tripled the number of CBI claims in the previous three years. 

The COVID-19 legacy and the Ukraine crisis 

The report also investigates the insurance impact of recent specific claims events such as the pandemic and the Ukraine crisis. Insured losses from COVID-19 are in excess of $40 billion, according to industry estimates, with the bulk of claims coming from event cancellation insurance and BI claims from companies affected by lockdowns. The pandemic has also had knock-on effects, such as stressed supply chains, heightened inflation and financial insolvencies.

Meanwhile, Russia’s invasion of Ukraine is likely to result in a significant, yet manageable, loss for the global insurance industry. Insurers’ exposure to the conflict are limited by war exclusions, which are standard in most property/casualty insurance contracts. Expected insured losses from the war in Ukraine are comparable to a mid-sized natural catastrophe, according to AGCS, but specialist markets such as aviation insurance could yet suffer disproportionately.

To read the full AGCS report, please visit Global Claims Review 2022.

Small and medium-sized businesses (SMBs) have been grappling with an array of economic and cultural forces over the past two years that threatened their viability. Stretched thin by the global pandemic, the Great Resignation and spiking inflation, SMBs have no doubt relegated other important concerns to a lower priority, including cybersecurity and cyber insurance. However, an attack on a small business is often catastrophic, leading to a tarnished reputation, customer dissatisfaction and, even worse, closures. In a National Cybersecurity Alliance study, 25% of small businesses that experienced a data breach filed for bankruptcy, and 10% went out of business. 

A recent survey reports that only 50% of small business owners are fully prepared for a cyberattack. Many SMBs do not view cyber insurance as urgent, because of the cost and the effort required to conduct due diligence on providers. Cyber insurance is a crucial safety net to have in place, but companies must also improve risk management protocols.

Risk management is a neglected piece of the cybersecurity puzzle  

An excellent place to begin is with employee training, especially because 85% of breaches involve the human element. Forty percent of people simply do not see themselves as responsible for looking after their workplace’s sensitive information. Remote workforces have added a level of challenge for companies to control risk factors, such as home network connections. 

Addressing the human factor in risk management

Robust education and awareness programs are essential because a personal cyberattack on one employee creates an enormous burden to the entire company. Training courses should include recognizing privacy risks, preventing phishing attacks and detecting an attack. Multi-factor authentication (MFA) has emerged as a great, inexpensive way for SMBs to combat potential account takeovers or bad password hygiene. If MFA is not in use, then password blacklisting -- a list of words disallowed as user passwords due to their commonplace use -- becomes a must. In addition, like large enterprises, SMBs can take an extra step of protection by imposing a password protection cadence where employees are expected to change their username and passwords regularly.

SMBs need to also remain vigilant when it comes to their vendors. The often-overlooked process of scrutinizing insurance requirements in vendor contracts, confirming where the onus lies in handling a cyberattack and understanding the full spectrum of liability, is necessary.

See also: Tips for SMBs Buying Cyber Insurance

Cyber insurance considerations 

Once these risk management logistics are in good standing, adding a layer of protection by seeking cyber insurance is a must. To execute proper due diligence, SMBs need to fully understand what cyber exposure is, what cyber insurance can do and what it covers. (If an SMB stores any sensitive client data whatsoever on computers and network technology, they have the potential for cyber exposure. Cyber insurance generally covers a business' liability for a data breach involving sensitive customer information. Not all cyber insurance policies cover the same things; most provide breach response services and damage mitigation and ensure the obligatory investigation and notification procedures are implemented. Some insurers may offer an enhanced plan that also helps protect against lawsuits and regulatory actions.)

Before applying for cyber insurance, SMBs should have a sense of the depth of internal information carriers will require. Carriers want to get comfortable with the risk before they're willing to offer decent insurance coverage. There aren't many insurers willing to offer a minimum limit of cyber insurance without extensive supplemental applications. The process may require time, but SMB leaders should not be discouraged, as cyber liability insurance ensures the organization has a concrete response plan.

The proper guardrails in place to succeed 

SMBs have made strides in recent years in recognizing the existential threats that data breaches present, but they must be even more vigilant as remote work models and the digital transformation continues to sweep through virtually all industries. While they have fewer resources than enterprises, SMBs should adopt the same level of caution against cyber criminals through a combination of cyber liability insurance and comprehensive cyber risk management practices.

Faced with increasing competition, insurance providers are adding new products and offering better deals to take a slice of the $200 billion in revenue opportunity. Yet, providing an experience that meets the needs of today’s customers can prove challenging, especially when it comes to seamlessly authenticating customers. 

Insurers, like many modern-day service providers, can store sensitive customer account information and even have access to customer banking/payment information, making it essential that they deliver the appropriate account protection and customer experience. To do so, insurers need to know who is accessing accounts from the beginning of the interaction, on mobile, via web and over the phone. However, contact center phone exchanges are increasingly a challenge for insurers, especially as fraudsters leverage new tactics to gain access to customer accounts. 

Fraudsters are better at accessing accounts than genuine customers

Contact center customer interactions usually start with a series of questions that begin the authentication process by asking the user to verify their name, phone number, account number and other knowledge-based authenticators (KBAs), for example. But with data breaches making this information readily available and social engineering attacks tricking users into handing over their information to fraudsters, it’s harder than ever to tell if a caller is genuine. 

Asking questions during the authentication process is no longer a secure method because the answers may no longer be private and can allow fraud to infiltrate the business. In fact, according to a case study covered in Pindrop’s recent Voice Intelligence and Security Report, fraudsters passed KBAs 92% of the time, while genuine customers only passed KBAs 46% of the time. This harsh truth of fraudsters knowing customer information more than actual customers, coupled with information from the same report that call center agents from insurance companies failed to verify customers’ identities as much as 12% of the time, allows fraud to slip through the cracks. 

The report found that a sample of insurers have an average fraud call rate of 1 in 7,390. Although insurers typically see lower fraud rates than a bank, the payoff is often higher in the life insurance space. Additionally, property/casualty companies sampled regularly saw fraud during the automated claim process, with fake credentials being used by fraudsters. 

See also: How to Balance CX and Fraud Detection

Changing the locks 

Insurers have a lot to lose, and, without the proper authentication protocols, disaster may await the company and its customers’ financial information.

To help insurers protect their customers’ accounts and only allow verified callers access, they can leverage new technology tools, such as voice authentication, which analyzes callers’ voice characteristics. Unlike traditional questions that are easily answered due to data breaches and other means, voice characteristics are hard to replicate. Even if an audio deep fake is created, voice authentication tools can still detect a synthetic voice, helping thwart fraud attempts at the source. 

Not only can voice authentication help reduce fraud, but it can also reduce average call handling times in contact centers and increase operational efficiency by creating a frictionless authentication process. 

Customer information is more readily available than ever before, and insurers need to be at the forefront of protecting their business and customers from fraud. If they let fraud infiltrate their contact center, they risk more than losing money; they risk losing their customers’ trust and loyalty to the brand.

While the "heat apocalypse" that is baking much of Europe may seem like just more of the same extreme weather we've been experiencing globally for years now, it seems to me that we've now reached a new level of disruption, with significant implications for insurers. 

Like prior heat waves, this is one is exacerbating wildfires, destroying homes and other buildings, causing mass evacuations and generally upending millions of lives. The "heat apocalypse," as it's being labeled in France, is causing stress that is killing people -- hundreds just in Spain last week -- and overloading hospitals. But, as awful as all that is, insurers have been adjusting, and the public has become inured. 

The new news here, it seems to me, is all the downstream disruption -- the business closings, the cancellation of flights and trains, etc. that will produce a flurry of claims for insurers and that will only get worse as global warming continues. 

Although most of the climate change debate seems to focus on just how much temperatures will rise by 2035 or 2050 and just how destructive that increase will be, major effects have begun happening here and now -- and insurers are on the hook. 

In England, temperatures of 104 degrees Fahrenheit are expected this week. That may not sound unbearable to Floridians, Texans or those of us who live in California's Central Valley, but the average daytime high in London in July is 70F. When I lived in Brussels, where the climate is very similar to London's, we once went straight from a rainy spring to a rainy fall, with only one clear, reasonably hot day in between -- and that was a Thursday, so I was in the office and missed summer that year. 

English homes are built to retain heat, not cold air. Fewer than 5% of English homes have air-conditioning. The transportation infrastructure is tuned for a mild climate, too, so the heat is hitting hard.

Luton Airport, near London, had to close for repairs because the runways were melting. The Royal Air Force closed two airports for the same reason. Municipalities spread sand on roads because the asphalt was getting sticky and endangering drivers. Rail transit shut down because of fears that the metal rails would buckle -- electrified commuter trains had additional problems because stress on the grid meant that their power lines were unreliable. 

With millions of people unable to get around, businesses closed across the British Isles.

All the other problems associated with extreme weather are, of course, still happening, too. Temperatures in Spain and Portugal hit 117F last week, and there are wildfires in those countries, as well as France, doing massive damage to property and forcing evacuations. 

"In rural areas," the Washington Post reports, "heat waves are expected to have an increasingly serious impact on agricultural production. This year, French farmers faced a mix of frost, a record-hot May accompanied by a spring drought, and intense hailstorms that brought heavy rain, followed by more drought this summer.

“'The drought in much of Europe is critical,' the European Commission’s research branch concluded in a report released Monday, which warned that 'a staggering portion of Europe' — about half of European Union and British territory — is now at risk of drought."

Drought, wildfires, tornadoes, hurricanes, derechos and other forms of extreme weather will continue to generate the vast majority of claims for insurers, but the lesson for me from the "heat apocalypse" in Europe is that lots of claims for travel and business disruption and perhaps for auto accidents are already hitting insurers, too. 

So, even if you don't think of yourself as being in the business of insuring against extreme weather, you may be. 

And the exposure will only grow as climate change worsens. Look at the images below. The top image is from two years ago. It was a hypothetical example of a weather forecast from 2050 that would show how extreme the temperatures could get in England. (For those of us not conversant in Celsius, 40C is 104F.) The bottom image is an actual forecast from the past week. They're eerily similar.

Now think how hot 2050 could actually be. Or 2025, for that matter. 

Cheers, 

Paul

The insurance industry has experienced record-breaking fraud attempts since the pandemic’s onset, significantly outpacing other sectors during the same period. Consequently, insurance carriers have reached a pivot point when it comes to fraud detection and prevention.

According to IDology’s Eighth Annual Fraud Report, 75% of insurance companies report increases in fraud attempts, nearly 10 percentage points higher than the next sector. The repercussions have been swift and severe. The Coalition Against Insurance Fraud’s most recent assessment found that insurance fraud costs people $80 billion annually, increasing annual premiums for the average family by up to $700. 

Several factors contributed to this increase, including enhanced phishing attacks, mass work-from-home deployments, decentralized fraud teams and nation-state attacks. While insurance fraud is a crime, the perpetrators are intelligent and well-organized. They know how to exploit the industry’s vulnerabilities for financial gain, and they capitalized on this unique moment to commit fraud at an alarming rate. 

At the same time, broad industry trends, including customer desire for self-service onboarding, extensive personal identifiable information (PII) exposure from data breaches and authentication infrastructure gaps, made it easier for threat actors to commit insurance fraud.  

In response, insurance carriers must enhance fraud detection and prevention measures, ensuring they can protect platforms and customers from constantly shifting fraud trends. Let’s look at three ways every company can strike a balance between fraud prevention and customer experience. 

#1 Verify Customer Identities Without Collecting Excessive Data 

After years of astonishing data breaches and personal information misuse by digital platforms, many consumers are rightly wary of handing over their information. As a result, two-thirds of Americans report they are extremely or very concerned about cybersecurity, data breaches and ransomware attacks. 

Similarly, 70% believe that businesses obtain their personal information without consent, and 90% want new federal laws that protect their data online. 

Of course, this puts insurance carriers in a difficult position. With threat actors opening unauthorized accounts and defrauding insurance providers, implementing identity verification and Know Your Customer (KYC) protocols is a natural solution. 

However, nearly half of Americans will abandon enrollment if the process is overly onerous or companies ask for too much information. Today’s consumers are vigorously guarding their Social Security and driver’s license numbers, dates of birth and home addresses, making it especially challenging to balance fraud deterrence and customer expectations. 

That’s why insurance carriers must develop the capacity to verify customer identities without collecting excessive data by analyzing readily available but less invasive data, such as IP addresses, phone numbers and email addresses. With the right solution in place, insurers can effectively analyze this information to verify identities and reduce fraud without impeding customer experience.

See also: How to Thrive Using Emerging Tech

#2 Implement Customized Identity Verification Protocols 

Today’s consumers are unapologetically self-sufficient and digital-first. For instance, nearly 70% of consumers would rather self-serve than speak with a customer service representative. 

To empower self-enrollment and self-service functionality without compromising identity verification protocols, insurance carriers must implement customized workflows that support customer preferences while continuing to thwart fraud attempts. This includes solutions that minimize data collection but also requires the industry to develop protocols for prequalification that streamline the application process while preventing unauthorized account openings or other fraud efforts. 

This can be achieved with a solution that optimizes identify verification workflows without encroaching on customers' desire to be self-sufficient. 

#3 Adapt to the Latest Trends 

Fraud trends changed significantly during the pandemic, introducing new risks while mitigating others. Threat actors took advantage of the peculiarities of pandemic life to enhance their fraud efforts, and their tactics will continue to change in the days ahead. 

The insurance sector can’t afford to remain stagnant in the face of evolving threat patterns. 

Notably, insurance carriers should pay close attention to fraud attempts targeting mobile technologies. While mobile apps and digital communications are prerequisites for doing business, they also introduce fraud prevention challenges, requiring insurance carriers to implement identity verification and fraud detection solutions across all device types and platforms.  

Deterring Fraud Is Part of the Customer Experience 

Insurance fraud increased significantly in recent years, representing a turning point for insurance carriers and their customers. 

Security and customer satisfaction are inextricably linked. Now is the perfect time to enhance the customer experience with identity verification solutions and processes that keep customers safe and criminals unsuccessful.

While COVID was life-changing for all of us, the pandemic catapulted customers and businesses alike into the digital world, revamping standards for how we engage to conduct business while also creating a universal demand for digitization for almost every aspect of our lives. Some industries were quick to adopt AI and technology into their business models, while the auto insurance industry was a little slower to adopt despite the fact that 79% of customers would trust automotive claims powered entirely by AI.

Those that did adopt early had remarkable success. In fact, 58% of insurers that are already using AI experienced improved business resilience. The customer demand for AI is strong today, and it is time for all insurers and body shops to start thinking differently about their claims and repair processes and how those processes can be revolutionized through implanting AI and VI – Visual Intelligence. 

Visual Intelligence (VI) is a form of computer vision (a field of AI) that uses image-processing technology and machine learning algorithms to derive insights from photos and videos. At Solera, we have introduced VI at different touchpoints to help the industry make faster and better decisions about a claim. For example, we use VI to pinpoint damage and itemize a line-item estimate within about three minutes by processing photos and vehicle repair data. In this article, I will refer to AI for the photo estimating process but want to note that all AI solutions are not equal, so a close evaluation of AI estimating capabilities is key to success in leveraging this technology to gain greater efficiencies with an elevated level of estimate accuracy and customer satisfaction. 

The current insurance claims processing model is often criticized as being too slow, disconnected and outdated. After experiencing damage or a collision, a customer must call their insurance company to file a claim with a member of the staff, who then sends the claim to the body shop within the insurance company’s network, leaving the administrative work primarily in the hands of the body shop: to contact the vehicle owner, schedule an initial inspection and complete the repair estimate before scheduling the repair. This is the same process that was in place 30 years ago when Direct Repair Programs (DRP) were just getting started.  While technology has improved dramatically, especially over recent years, the DRP process has not changed.  

Over the last two years, customers of all ages began to leverage digital in new and exciting ways to simplify life, from ordering food to having virtual doctor appointments and ordering a wide variety of personal services. Some even used digital options to buy their next vehicle online for a home delivery. I often refer to the pandemic years as the tipping point for digital, as today customers really do “think digital first.” The question for auto insurers and body shops is, how do we leverage these customer digital first preferences to re-imagine the way insurers and body shops interact and assist customers in creating a more seamless claims and repair experience.  

It is clearly time to rethink how auto claims and repairs are processed and ask how the industry can leverage digital tools to improve this process to better service customers and automate many of the manual tasks, which will increase efficiencies and lower operating costs. AI is now an integral part of the customer journey across all industries, and consumers are actively seeking out claims and repair providers that put automation first. 70% of consumers would switch insurers for a faster digital claims experience, while 65% of consumers would choose a repairer using AI to minimize the risk of error in the claims process. In addition to meeting customer demand, AI implementation is also a significant benefit to insurer and body shops as it creates more efficient workflows and requires less employee assistance.

See also: 5 Trends Changing Auto Insurance

From the moment a vehicle sustains damages, the digital journey can begin, with the customer reporting the claim digitally via a customer friendly app or link instead of having to call into an insurance call center where at times hold times can seem long. This can also reduce handoffs in the claims process, simplifying the workflow and reducing the risk of miscommunications. While filing the claim digitally, the customer can also take photos of the vehicle damages and upload them directly through a user-friendly photo app or link to create an AI powered estimate for the body shop that already includes competitively sourced auto parts and AI-generated repair times. Just think, this could allow the body shop to simply review the AI estimate for approval, click a button for parts ordering and call or text the customer with repair date options. The change dramatically reduces the front office admin work while streamlining the process for the customer. 

For insurance call centers, leveraging more self-service digital options for customers who prefer digital would reduce the stress on the call center and provide the photos needed to advance the auto repair quickly, freeing staff to handle the more complex losses. Data capabilities available today can quickly auto-populate claims forms with data, speeding up the processing time and improving accuracy to create a better experience for customers, while AI technology can produce an intelligent estimate of the damages, including the needed parts through the photos provided by the customer. Additionally, transforming the insurer and shop relationship can open greater repair capacity. Not only can insurers work with DRP shops, but with today’s technology customers will have more freedom of choice in selecting a non-DRP body shop as insurers can electronically pre-approve shops outside the DRP that accept the AI repair estimate and have the equipment and skills necessary to complete quality repairs. 

AI leveraging the deep learning of Visual Intelligence is already at work across the industry, and insurers that have chosen to move forward in their digital journeys have already met strong success. 55% of customers surveyed said they have taken digital pictures of their vehicle damages and submitted them to the insurer to speed the claims process, and 100% of insurers were planning to invest in AI insurtech software in the next 12 months. Body shops have also leaned into AI to deliver on digital objectives, and 52% experienced improved profitability after adopting more technological process. With demand for AI on all sides, the insurance industry’s digital journey is already beginning, and it’s clear that the future of claims is an AI-powered touchless or low-touch experience.

While highly automated digital auto claims and repair process will take a lot of thought and planning along with the expertise of a top software provider, the impact will be off the chart with high customer satisfaction, lower body shop administration cost and increased repair capacity, which will lower repair cycle times. The benefits to adopting digital with a well-planned process are truly off the chart, and this is the future for the auto insurance and repair industry. The big question is: Is our auto insurance and repair industry ready to leap into the future and adopt the full benefits of an AI-powered digital claims process?

With their massive ad budgets, personal lines insurers can beat their names into our heads -- yes, yes, Flo, I get it. But what are agencies supposed to do? How can they put themselves in front of the right customer at the right time with the right product, in a way that piques the interest of that customer?

I asked Joel Zwicker, industry evangelist at Agency Revolution, which helps agencies with their marketing. Although I'm sure he'd be more than happy to help you spend a massive budget, he had two much simpler and less expensive ideas about how to market more effectively. 

For one, Zwicker says in our interview that agencies don't focus enough on renewal customers. He says there is so much cachet associated with bringing in new customers, that agents don't spend enough time on the massive numbers of leads that they have for additional business with existing customers. He says many agents worry they'll bother those customers by asking for more business but dismisses that worry out of hand and offers an easy way to broach the topic: Ask customers to assign you a Net Promoter Score -- then follow up with the fans.

For another, Zwicker says agencies need to focus more on niches so they can develop and demonstrate the sort of deep expertise that will draw clients. He says agencies often understand the need for a niche but don't go deep enough. For instance, he says, "Some people focus on contractors, but that’s a broad area. Specifically, do you do roofing contractors? Okay, let’s go deeper. Just commercial asphalt, or are we talking about hot tar?"

He says niches don't all need to focus on the product, either. For example, he cites agencies that provide a particular type of experience -- perhaps giving wealthier customers the sort of private-client experience that they get from their financial advisers, or arranging for all touchpoints with the customer to be digital.

Zwicker's approach to marketing won't get you all the attention that Flo does, but you won't have to spend billions of dollars, either. And you won't annoy me the way she does.

Cheers,

Paul

P.S. Here are the six articles I'd like to highlight for agents and brokers:

Agents Must Practice and Prepare

New business opportunities are difficult to come by. So why don't producers properly prepare and practice for those oh-so-valuable prospect meetings?

Inflation and the Auto Insurance Outlook

Auto insurers should expect higher claims costs in the second half and longer wait times for damaged vehicles to be repaired and returned to their owners.

Why Agents and CPAs Must Collaborate

Insurers and accountants have similar concerns on behalf of clients, so the more agents and CPAs collaborate, the better. 

Go All-in With Data Tracking

Agencies are highly motivated to use technology to track data on existing clients, to retain them. We need this same commitment in the pre-sale process for new clients.

Agencies Turn to Networks for Growth

Networks of agencies understand how important it is to provide expert guidance and resources throughout the digital journey.

Digital Is the Assistant We Always Wanted

So why do many companies and advisers in our industry resist digital advances like customer self-service and apps?

“Do you know the only thing that gives me pleasure? It’s to see my dividends come in.” – John D. Rockefeller, 1908

It’s 2022, and inflation, geopolitical instability, rising interest rates and more are driving uncertainty to heights not reached since the late 1970s. Meanwhile, economic growth is falling and market volatility is at its highest since the onset of the pandemic. In the wake of this, many insurance companies have begun to reevaluate their equity investments. Is it time for them to follow John D. Rockefeller’s example and focus on dividend-paying equities?

When compared with an index equity strategy such as the S&P 500 Index commonly found in many insurance company portfolios, a dividend-paying equity strategy may offer insurers lower volatility, income opportunities and potential tax advantages. It may also prove to be a more effective equity strategy during a period of rising interest rates when viewed from a duration perspective.

A History of Lower Downside Risk

Historically, insurance companies have been reluctant to invest in equities, preferring fixed income securities’ typically higher yields and lower volatility. More recently, the need for portfolio growth led companies to take on equity exposure, often via passive index funds. Insurers became more willing to accept the higher volatility and lower income of equities in return for their potential capital appreciation. Unfortunately, insurers also accepted that they would only be able to convert the value of their equities into cash by selling shares, triggering a taxable event.

The Great Financial Crisis (GFC) of 2008-2009 caused many insurance companies and asset managers to again adjust their approach to equity investing. During the GFC, insurance companies experienced the downside of passive investing: When the market falls, passive investments bear the full brunt of the downturn. Lost to many in the chaos of the time was that dividend-paying stocks did not drop nearly as much as the broader market (as Figure 1 illustrates, the decline of dividend-paying stocks was only about 80% of the broader equity market between September 2007 and February 2009).

In fact, dividend-paying stocks have outperformed in other downturns, as well, notably after the tech bubble burst in 2001 (see Figure 2). After the GFC caused interest rates to drop and equity yields to rise, insurance companies began to look for an equity investment solution that combined higher yields with lower volatility. Many turned to dividend-paying stocks.

See also: Private Equity Drives Agency Change

Benefits of Dividend-Paying Stocks for Insurers 

Dividend-paying stocks can offer insurers several potential benefits, mainly steady income streams, lower volatility and some tax advantages.

Income Stream

Income-producing investments are very important for insurance companies and typically make up most of their assets. Companies often use this income to pay operating costs or increase earnings. Many dividend-paying stocks offer a consistent income stream paid on a quarterly basis. In fact, many dividend payers (unlike most fixed income securities) offer growing payouts by annually raising their dividend, while also offering the potential for capital appreciation if the equity market rises.

Lower Volatility

Equities tend to be riskier than bonds because the equity of a company represents a subordinate claim on the cash flows of a company relative to its bonds. As such, equity markets tend to loathe uncertainty because it calls into question the present value of these future cash flows. Within the cross-section of equities, though, dividend-paying stocks tend to have lower volatility. Because these stocks typically provide a cash payout each quarter, the level of return uncertainty associated with them is lower than for companies whose expected equity return is based solely on price appreciation.

Tax Advantages

Companies that receive dividends from their equity investments can take advantage of a tax rule that the average investor cannot. Known as the Dividends Received Deduction (DRD), this rule allows companies to deduct from their taxable income a portion (between 50% and 65%) of the dividends they receive from other companies. This rule applies to all dividends received except for those paid by real estate investment trusts (REITs) or other companies that are tax-exempt according to the Internal Revenue Code.

Tax-advantaged dividends tend to be a preferred source of funding from equities for these companies because the other source would be the sale of equity investments. Again, a good portion of dividends received can be deducted from taxable income, but equity sales will always generate either a capital gain (which is taxable) or a loss (which will reduce earnings).

Taken together, these three benefits provide a compelling argument for insurers to consider dividend-paying equities rather than an index fund representing the broader equity markets.

A “Shorter Duration” Equity

Insurers always face the risk of inflation, and that is especially true in 2022. Rising interest rates are also a reality now as the U.S. Federal Reserve has begun to aggressively raise rates and promises to continue this practice, with at least several more 50-basis-point increases expected in the near term, in an effort to tamp down inflation rates not seen since the late 1970s. Conning’s view is that most dividend-paying stocks will likely offer better protection in a rising rate environment than stocks that don’t pay a dividend.

Fixed-income investors are familiar with the concept of “duration,” which helps predict the behavior of bond prices as interest rates change. If we compare a 10-year bond that pays a coupon twice a year to a 10-year bond that pays no coupon until maturity (a “zero coupon” bond), we can see that the coupon-paying security will have a lower duration than the zero-coupon bond. As a result, the price of the coupon-paying bond will fall less than the zero-coupon bond as interest rates rise.

A similar case can be made that dividend-paying stocks are lower-duration instruments than non-dividend-paying stocks. In a general sense, any stock will have a higher time to maturity (essentially infinite) than any bond. As in many things, though, what matters is relative. With stocks, the analogy to the principal payment that is received when a bond matures is the price received upon the sale of the stocks. The intrinsic value of the stock is based upon the present value of the sale price and any payments received before the sale.

Because dividend-paying equities typically pay a consistent income stream in the nearer term while non-payers do not, dividend-paying equities effectively have the lower duration of the two groups and should be affected less as rates rise.

The relative relationship between the two groups of stocks (dividend payers versus non-payers) in a rising rate setting tends to hold up well across the economic spectrum, with a couple of exceptions. Stocks that pay very high dividends and also have significant debt on their balance sheets can be hurt more by rising rates than other dividend payers. For example, REITs, telecoms and utilities tend to suffer more as rates rise than less levered industries that pay more modest dividends. This implies that focusing investments on the very highest yielding stocks might not be wise in this environment. A strong argument can be made for investing in a broadly diversified portfolio of dividend-paying stocks to soften some price volatility during rate increases while still providing a competitive income stream (see Figure 3).

Going Forward

History has demonstrated the potential benefits of equity investments for insurance companies. Passive strategies, though, have tended not to provide the income stream, lower volatility or tax advantages of a dividend-paying approach. In addition, many executives and investors have yet to experience a period of rising rates as sharp as is likely in 2022.

Income-producing equity portfolios may be a good fit for insurance companies but should be approached with caution. Not all income portfolios are created equal, and they can differ widely in terms of the consistency of income streams, volatility and tax advantages, not to mention sensitivity to interest-rate increases.

Many small and mid-size insurers may not have the capabilities or desire to manage equities internally and should consider an external manager to provide them the insights into these issues and to help them navigate through an environment that promises to be very volatile for the foreseeable future.

Risks of Dividend-Paying Stocks for Insurers

Equity prices will decline in bear markets. Potential changes in dividend tax rates could lessen demand for the asset class. A sharp increase in interest rates could affect prices of income-oriented equities.

In recent years, insurers have begun to adopt digital initiatives to improve the customer experience, use data and analytics in key processes, introduce digital products and services and reduce operating costs. Despite the advances in how insurance is offered to the public, many people still do not have insurance. Most uninsured are 19 to 34 years old; can artificial intelligence have an impact with them? 

AI can detect those who do not have sufficient insurance protection. From there, companies can produce policy recommendations that can better fill gaps based on individual needs. Whether it be in the areas of health, auto or home -- the recommendations that are offered are adapted as the life situations of the policyholders change. In essence, the industry can use AI and machine learning to offer to anticipate the customer’s needs as they progress through life events and their risk category changes. 

Another way AI can help is through hyper-personalizing messages to the client. The old line is that insurance isn't bought, it's sold. And carriers struggle to engage the younger generation with relevant messages. AI helps educate individuals about the risk they may face, with the context, messaging and approaches that are meaningful to them. 

What contributes to individuals being uninsured? 

Two of the biggest barriers to getting insurance, for the customer, are cost and accessibility, according to a study conducted by Oregon Health and Science University, Department of Family Medicine. This issue can be mitigated with AI technologies. Rather than wasting everyone's time by wading through insurance policies that are not relevant to a person, the insurer can immediately recommend a package that makes sense to their personal lifestyle and background. By making insurance more approachable for those in the 19-34 age range, insurance companies can begin to narrow the protection gap and keep their customers covered. 

AI technology has already been available to help insurers better anticipate customers' changing needs, including major life events such as having a child, buying a home or achieving a milestone birthday. Over time, a person’s risk category changes just as their needs and priorities do, or the impact of weather patterns change, and they may not be aware of how their insurance policy needs to be updated. If they are uninsured, they may not know where to begin when it comes to choosing the right policy for themselves and their families. The insurance industry owes it to consumers to help them better understand insurance, their risk change, their coverage–it needs to be simpler.

With evolving technology, insurers are getting better at assessing real-time risk category changes. Because the AI teaches itself over time, it can study the needs of those from the uninsured population and target the types of policies they may need. This results in a more accurate representation of this population. There is also a significantly reduced need for human intervention. 

See also: Life Insurance and Millennials

Updating policies once insured with AI 

Previously, a person would have bought an insurance policy, then forgotten about it, only to later realize, when they need it, that their risk category changed years ago. Now, AI helps insurers assess risk changes for that individual, advise clients and prevent loss before it’s too late. This process allows the customer to be at ease, knowing that their policy will be subject to updates as needed. 

AI optimization can also include circumstances such as natural disasters; unfortunately, too many are left realizing that they are no longer covered after a disaster has occurred, such as occurred following recent wildfires in the West.  

Conclusion

If insurers are to reach the uninsured between ages 19 and 34, it is of utmost importance for insurance companies to make sure that their customers receive the services that they need, through an optimized process for connecting with each other. 

I thought I'd try something different this week: a series of shorter items rather than a longer exquisition. That's partly because I found a whole series of items worth pointing out but also because I need to note the news that sparked my headline about how insurers are taking over the world:

The stadium where my beloved Pittsburgh Steelers play will, after 21 years, no longer be called Heinz Field, after the local corporate food icon, and will instead be named after Acrisure, an insurance brokerage based in Grand Rapids, Michigan, that bought the naming rights. 

I had held out hope that the stadium would some day be named Hines Field, after longtime Steeler wide receiver Hines Ward, who, in my not-so-humble opinion, needs to be in the Hall of Fame, but I defer to the power of the insurance industry. 

Now, on to some developments on: how drones are being used to inspect power lines; how electric vehicles are reaching a tipping point that could have major implications for auto insurers; the arrival of a new generation of "digital assistants"; why insurance customers may cut spending; and how embedded insurance is providing what Swiss Re calls a "second act to insurtech."

Autonomous Drones Inspecting Power Lines

An article in Wired describes how drones are being used to take a look at pylons in the U.K. electric grid to spot issues that could, among many other things, cause wildfires. Crucially, these drones are autonomous. They don't have to be maneuvered by an operator. And they can be controlled from anywhere -- the operator, who can handle a fleet of drones at the same time, doesn't need to be out in the field. The drones remove the need for workers to climb towers to conduct inspections (time-consuming and dangerous) and allow for photos to be taken much closer up than is possible with helicopters at a small fraction of the cost. 

While the article focuses on the U.K., it also describes early uses in Florida, Norway and Sweden.

As a resident of California, which seems to have become the wildfire capital of the world, I'm all for anything that will reduce that risk.

Electric Vehicles Have Reached a Tipping Point

An analysis by Bloomberg finds that electric cars in the U.S. has passed a tipping point: accounting for more than 5% of new car sales. "If the U.S. follows the trend established by 18 countries that came before it," the article says, "a quarter of new car sales could be electric by the end of 2025. That would be a year or two ahead of most major forecasts."

Such a swift switch would have wide repercussions. Car makers, already retooling to build more electric vehicles, would need to accelerate the changes in their factories, supply chains, work forces, sales forces and more. EVs need less maintenance than cars with internal combustion engines (many fewer moving parts), so those that service cars will see business diminish. 

Insurers will, as usual, have to adapt to the new realities of all those businesses and individuals they insure. They will also have to deal with the fact that EVs are more expensive to repair -- and will likely widen the difference with conventional cars because the massive batteries will be able to power many more (delicate and expensive) sensors and safety devices.

The change will also create uncertainty as the ground shifts in such a major industry. Who knows, all the new EVs flooding the market might even affect a certain individual who made most of his record-breaking fortune with an EV named after a Serbian-American inventor and who may or may not buy Twitter. 

New Generation of "Digital Assistants"

I've been a skeptic about digital assistants ever since tech types started geeking out about them three decades or more ago. No, I don't want my refrigerator ordering milk for me. I can buy milk all on my very own, thank you very much. Now, we're in business if, while I'm in a store, the refrigerator can tell me how much is left in the carton and that I not only have cilantro but that it hasn't melted into mush in my produce drawer. But the vision for "assistants" has really been about devices that would take control, so they missed on two counts: They didn't know enough to actually be able to take control of my whole refrigerator, let alone of more complicated parts of my life, and I didn't want to give up control even if they did know enough.

But a kinder, general, less obtrusive generation of digital assistants may be on its way. A Fortune newsletter quotes one of the AI developers as saying, “If you had another person on your team, what would you shamelessly ask them to do? That’s what we want this software to do.” 

In a demonstration that a developer has posted online, the article says, "software uses a basic SQL database to perform a variety of tasks. A user types 'can you grab the name and population for every country?' and the software goes ahead and pulls that data from the database and assembles it in a simple table. Then a user asks the software to 'make a bar plot of that,' and the software does so. But the plot is hard to read because it contains too many countries. So the user asks it to just 'to show the countries with the six highest populations,' and the software comes right back with a much easier-to-read chart. This time, though, the labels for the six countries are overlapping, which still isn’t great. So the user types, 'Good. But the x axis is still a bit hard to read, can you fix that?' And remarkably, the software does so—by writing the labels on an angle—even though the feedback from the user was not that specific. Later in the demo, the software grabs publicly available U.S. unemployment figures from the internet and charts those."

Don't add a digital assistant to your Christmas list just yet. I've been promised one repeatedly since the late 1980s. But these kinds of digital assistants should be available in some form in a few years -- and I'd actually use one.

Will Customers Cut Spending?

Just a quick data point here for those interested: A Guidewire survey found that:

"With most people (86%) concerned about the cost-of-living crisis, many are considering how to cut back. For almost half of insurance customers (48%), that will be insurance cover that they are not legally obliged to have. Policies likely to get the chop are cover for travel (18%), home contents (17%), and bicycles (16%)."

Embedded Insurance and a "Second Act to Insurtech"

Another pointer for those interested: A rich look at the prospects for embedded insurance, based on a conversation between Sebastien Bert, co-head of strategic partnerships for the Americas at Swiss Re, and Carrier Management.

If you've made it this far and have an opinion on this week's use of short items, whether good or ill, please let me know.

In the meantime, I'll be commiserating with my fellow Yinzers about the loss of an iconic name on the Steelers' stadium while assuring those I know that insurance brokerages are good people, too.

I do worry that Pittsburgh fans will have trouble pronouncing Acrisure while screaming at their TVs in the fourth quarter of a nail-biter, after perhaps one or two too many Iron City beers, but that should be the least of our worries this year, now that we have no idea if our quarterback will be any good. Don't get me started....

Cheers,

Paul