In recent years, the combination of heightened customer demands for a more seamless user experience, combined with the rise of purpose-built insurtechs, has forced insurers to accelerate their innovation cycles. Data-driven processes such as marketing, underwriting and portfolio monitoring, to name a few, require a deeper understanding of the customer, based on requests for as few data points as possible. Insurers are also seeking opportunities to customize user journeys to enhance satisfaction with onboarding and claims processing.

In response to these challenges, insurers are developing world-class innovation teams, expanding their data science and technology capabilities and partnering with purpose-built MGAs to “test the waters” in a more limited scope. While some insurers are pursuing a combination of these strategies, almost all of them are putting an emphasis on improving data usage, particularly in the context of external data.

In the last decade, the market for external data has grown tremendously, with large bureaus such as Experian, Equifax and CoreLogic offering more data products than ever and hundreds of new data vendors emerging on the scene. Insurers were already consuming vast amounts of external data to run decision-making functions on risk, but now they are inundated with thousands more products to choose from across many more data types.

Consider the following examples. Aerial imagery data can provide more accurate property details than tax assessor data, while also automating certain claims around roof damage. Footfall data can be used to verify the hours a business is open and whether the property is regularly hosting large events or gatherings outside of normal business hours, suggesting the presence of additional risks. And digital intent data can provide clues about customer satisfaction, helping insurers reduce churn through preventative methods.

As insurers innovate across the new data landscape, they are faced with a series of challenges. First, not all data vendors are equal, and careful attention must be paid to data quality, collection methodologies and usage restrictions. Second, onboarding each data vendor for testing can take months to even a year depending on whether customer data must be enriched for an accurate data test. Third, with so much new data, enterprises need tools to help them “sift through the noise.”

In this context, an External Data Platform (EDP) is a valuable tool to accelerate data discovery processes. EDPs provide rapid access (via API or Data Share) to a curated collection of external data products from hundreds of different upstream providers, data dictionaries and due diligence certifications focused on usage restrictions and collection methodologies. When it comes to testing, EDPs also structure data in ways to feed into automated machine learning platforms that can test thousands of attributes and hundreds of model variations to identify the most predictive attributes across a sea of data sources.

See also: How Analytics Can Disrupt Work Comp

EDPs are also helpful in the context of solution deployment as they can provide access to production-grade data via APIs or full files delivered to in-house data lakes. Moreover, they provide the ability to procure external data from multiple vendors simultaneously via a single API. Thus, it can be said that these platforms provide access to hundreds of sources, via a single API and a single contract. 

For insurers seeking to accelerate their analytical innovation cycles and move ideas “out of the lab,” data discovery tools such as EDPs are vital. Insurers are in a competitive arms race with insurtechs and other carriers as they seek to leverage the best technologies, data and people to maintain and grow their businesses. Those that fail to innovate will almost certainly lose market share, and pushing the bounds of analytical innovation will be the primary mechanism for innovation in the coming years.

2022 and 2023 are lining up to be historically expensive years for commercial P&C insurance. The headwinds of inflation, labor instability and anticipated economic downturn have CFOs concerned about not only rising insurance premiums but also the rapidly growing opportunity cost of capital that is tied up in insurance collateral obligations. These factors can present a competitive advantage to companies with strong balance sheets. In response, top-performing brokerages need to introduce solutions for insurance-related collateral to help clients manage their balance sheet and to increase corporate financial liquidity and flexibility. 

A rapidly evolving P&C environment for corporate clients

In recent years, large companies have migrated away from guaranteed cost insurance programs to loss-sensitive and captive insurance programs due to their ability to lower premium costs and increase company cash flow. The primary focus of management continues to be on premium costs, but this addresses only half of the expense issue. The market has overlooked the very real cost of foregone economic value caused by insurance collateral requirements. 

The leading solution used by companies to collateralize their insurance requirements, letters of credit, suffers from a major drawback. These letters of credit are treated as drawn capital with respect to their corporate credit facilities, thereby reducing the amount available to the company to run and grow their business. The amount of collateral companies are required to maintain via these letters of credit is often higher than the realized, or paid, claims.

To make the problem worse, recent years have seen marked premium increases due to more stringent underwriting and higher claims costs, which have forced carriers to push for higher collateral requirements in deductible programs. Workers’ compensation coverage, commercial auto and general liability insurance programs have become more expensive in terms of both premium prices and the opportunity costs associated with inaccessible, collateralized balance sheet capital.

Troubling skies ahead: Balance sheets under threat

Looking ahead, collateral requirements are set to rise significantly in loss-sensitive programs, driven by multiple factors.  Expected wage inflation is helping to boost overall renewal premiums collected for workers’ compensation insurance, according to Travelers. With respect to claims experience, that same report says workers with less than a year’s time on the job filed 35% of all workers’ compensation claims, a troubling statistic considering employers are in the midst of an historic hiring spree.  

According to the American Trucking Associations, there is a driver shortage of more than 80,000 positions. Amid the shortage, many organizations have lowered driver applicant standards, a practice that comes with risks, as these new employees are more likely to be involved in a vehicular accident. The projected outcome of these factors is an increase in claims and a resulting acceleration in collateral requirements within deductible programs.  

The increasing possibility of a recession in the wake of global central bank tightening will further contribute to a liquidity crunch and strained balance sheets. The combination of stricter lending requirements and fluctuating cash flows will have CFOs intensely focused on balance sheet and liquidity management. While less competitive companies will need this liquidity plan to manage financial performance fluctuations, stronger companies will seek to increase and deploy accessible capital toward business investment and M&A.  

See also: Catastrophe Bonds: Crucial Liquidity

Skilled brokers required to navigate clients through the storm

In this turbulent environment, a focus on price negotiations with clients’ carriers is not enough. Brokers will need to fully navigate clients through this tempest by providing liquidity solutions that enable growth, reduce cost and provide competitive advantage. The burden of collateral obligations associated with insurance programs can be remedied through Insurance Collateral Funding - a solution that enables companies to not only fund their insurance collateral requirements but to transfer them off their balance sheets to free significant amounts of capital to deploy toward business operations and investment.  

Insurance Collateral Funding replaces any form of collateral including existing letters of credit, trust accounts and surety bonds, and can be treated as off-balance sheet financing.

Here are four actions brokers can take today with their clients using a solution like Insurance Collateral Funding:

• Provide liquidity. Have a liquidity plan in place for your clients that will release trapped insurance-related capital if your clients have the need during uneven business cycles. 
• Enable growth. Know which clients are positioned to out-invest their competitors in a recessionary backdrop. Firm acquisitions will be less expensive, and the acquiring firm will benefit from additional liquidity to capitalize on these opportunities.
• Create client choice. By moving an insured’s insurance collateral off the balance sheet, you are giving your corporate client choices when it comes to program design and how they work with their carrier.
• Open the loss-sensitive door. For those firms still in guaranteed cost programs, brokers can move them to loss-sensitive programs without the historical friction involved in so doing.

Brokers are in a position to advise their clients on how to unlock the full potential of their balance sheets. The most capable brokerages will be rewarded for operating as skilled navigators through the choppy waters ahead.

Earlier this year, Duck Creek Technologies conducted a global survey of 2,000 consumers to learn more about where strategic opportunities may lie for carriers in 2022. 

While there were a number of findings that presented carriers and brokers in a positive light, it was clear that a large majority of consumers – when asked about their perception of insurance – were indifferent.

Indifferent is not negative. Indifferent can mean there is a chance for great opportunity. 

Insurance… on demand.

Following the survey, 48% of respondents said they would find add-on products appealing, and 58% said that they would find insurance on demand appealing. These points are interesting and, along with a number of other findings from the survey, highlight how consumer attitudes toward insurance are changing rapidly. Are insurance policies supposed to be "set it and forget it"? Maybe not. 

The on-demand finding is a result of consumer movement toward “what you want, when you want it” models. Of course, insurance is a lot more complex a scenario than your television, razor or coffee subscription. However, there is a large market opportunity for those organizations that can meet consumers where they are. 

Examples of on demand insurance are being seen in auto – accelerated by changes to driving behavior around the pandemic – and travel, along with home and renters spaces, too. It is bubbling under the surface, and the carriers that most quickly and painlessly integrate the right data or IoT solutions into products and processes will win this migration.

On demand insurance (like usage-based insurance) cannot be achieved without data and information, and accuracy and transparency are paramount. Cars have telematics. Travel has records. This all must be documented, verified and then applied to a policy with the same swiftness a consumer would demand when updating any number of their other subscriptions. 

One last thought on this topic: We also found through the survey that nearly one in two respondents would prefer to make any changes to their policy online or through an app. All of this combined really demonstrates that attitudes from consumer experiences in banking, retail, entertainment and so on have already infiltrated the world of insurance.

To engage, or not to engage. 

It may be surprising, but 70% of respondents expressed feeling that their insurance company treats them as an individual. Go, insurance! And, to quote Duck Creek CEO Michael Jackowski, “For an industry that is often painted black, I hope this is heartening for carriers and brokers.” Data statistics like this prove that the move to digital or web-based engagement and insurance’s efforts to modernize in the digital age has not significantly dented how customers feel about the way they are treated (despite previous fears that it may have). 

There are plenty of opportunities that on demand insurance can provide, but, from an engagement perspective, these opportunities are even greater than one might think. In the past, hearing from your carrier meant one of two things: renewal time or claim time. Admittedly, this has not been cause for too much excitement. 

According to the survey, 32% of respondents, on average, never heard from their insurance provider on an annual basis when there was no claim against a policy. That is nearly one in every three people having zero engagement with their carrier outside of a claim. Are there other potential touchpoints with policyholders that carriers are missing out on? Most definitely.

And even from the claims side, we are still not getting it quite right. The majority of time a claim is filed, consumers need real support. It can be an emotional and financially frustrating time, and, often, the hardest part is the waiting game or the uncertainty of a claim status and resolution. In fact, 95% of respondents said they would like to hear more about the status of a claim.

The takeaway is that consumers need to see and hear more from carriers and brokers – whether it is a communication with critical information about a claim or to uncover potential opportunities to conduct further business. Carriers and brokers cannot have the answers if they do not ask the questions. Are there opportunities to bundle coverages? Can goods be added to an ongoing policy? Is the policyholder potentially dissatisfied prior to renewal time, and there is still adequate time to make a difference?

See also: How Carrier Tech Drives Agency Change

Buying preferences are a mixed bag. 

To put a bow on the consumer experience bundle, the survey highlighted that insurance buying preferences are all over the place. Insurance lines vary so dramatically – in complexity, to coverage, to price, to times to fulfill claims and everything in between. Rather than a one-size-fits-all approach, insureds want more personalized purchasing options. 

Here’s that mixed bag: One in four consumers made their purchase through brokers or third parties, 73% on average bought directly from a carrier, and 40% preferred to interact through a website. Many carriers are already recognizing these behavioral shifts and are maintaining multiple channels to engage consumers. But, this requires truly understanding your customer and knowing the persona of the buyer in question. 

Carriers are turning to technology and solution providers to see how they can access the latest and greatest customer engagement tools. Think digital customer service, for example, where carriers can leverage real-time chat, cobrowsing, screen sharing, voice and video to find a middle ground with their consumers. Using AI-powered chatbots helps eliminate communication efficiencies, and e-signature helps ensure that the policy is signed, regardless of where it’s purchased. These personal touches create powerful interactions (at the times they are needed and desired most) by technology. 

Where are we?

From research, to inquiry, to sale, to purchase and to service, great customer engagement opportunities await. Carriers that meet people, products or processes where they are will find success.

Carriers have proven they are resilient over the past couple of years. Now, they are also proving they are innovative. Three areas that carriers might want to consider looking into when undergoing this process: accelerating speed to market, maximizing operational efficiency and growing distribution channels.

All three of these areas will enable carriers to expand their reach, meet current demand and optimize resources to ensure the desired customer experience is achieved. 

Keep an eye out for this space. It is ripe for disruption – and carriers know it

Smartphones have done so much for usage-based insurance (UBI), providing the technology to help move away from expensive aftermarket hardware through software leveraging smartphone sensors. One of the clear benefits has been lowering the startup costs of a carrier’s UBI program. Nonetheless, more innovation is needed for UBI to become more broadly adopted. As much progress as the industry has seen in recent years, I don’t think we can categorize UBI participation as mainstream when only 22% of people reported participating in such a program, according to internal research we plan to publish in the coming weeks.

Not just any innovation is needed, though. I think an improved product-market fit is critical, particularly in the interface with the end-user, the insurance customer.

Among the survey respondents, 67% said they are aware that connected vehicles could capture and transmit driving behavior data that can be used for potential insurance discounts. Moreover, 71% of respondents who had not used their vehicle and driving behavior data to get those potential deductions said they are interested in doing so. 

The auto insurance industry has considered – and positioned – telematics as an opportunity to further engage with their customers. In fact, most of the telematics solutions available today, such as smartphone apps, offer plenty of touchpoints.

However, I think most consumers may view car insurance as one of those products you check in on once or twice a year, if that. As a result, it’s understandable that consumers may not be accustomed to interacting with their insurance carrier’s smartphone app.

So, is the industry pushing a product that consumers do not want to use? I don’t believe so. I think the low level of telematics adoption for UBI is more likely a case of mismatching a product with a service industry.

Finding That Product-Market Fit

The research shows consumers value the benefits of UBI, but, until recently, the only way they could access those benefits was through having their telematics data captured by smartphone apps or aftermarket devices. Insurance carriers had no choice, and they made a huge effort to encourage consumers to participate in UBI programs. But the game has changed. Now, there are connected cars and the telematics exchange, more advanced technology that can receive telematics data generated by connected cars, analyze it and normalize it to have that data available for a variety of use cases.

An exchange solution provides the elusive product-market fit for UBI. Having the ability to participate in a telematics program, like UBI, by simply turning the vehicle key is likely the simplest approach. In addition, with an exchange platform, the telematics data is ready and accessible at the point of need without a monitoring period. 

This is a technology leap with huge potential to push a wider adoption of telematics and UBI products, because the solution provides the desired benefits without requiring aftermarket devices or smartphone apps: The data flows more seamlessly from the source to the exchange, where it is analyzed, normalized and used to build telematics-based solutions that can integrate into insurers’ workflows. 

See also: What Happens When Insurance Truly Goes Digital?

Higher Buy-In With Connected Cars

When I speak to insurance carriers about the prospect and value behind a telematics exchange along with the availability of telematics data, they are usually surprised. In the U.S., our estimates, based on internal analysis, show 16% of passenger vehicles circulating in 2020 were connected. Of the people driving those vehicles, our estimates suggest 60% have agreed to share the data generated by their cars for insurance purposes. That means potentially 40.6 million connected cars on the road in the U.S., with over 24 million drivers participating in UBI-type solutions. As we can see, telematics adoption by connected car drivers is much higher than smartphone app users.

When discussing higher executions of a telematics exchange, you can pull from a resource that has data collected from over 9 million vehicles and 250 billion-plus driving miles. This equates to tens of millions of years of vehicle logging and a massive opportunity for carriers. When data is sourced from different sources and normalized, it can suit a variety of telematics use cases. One such output would be a solution that could offer behavioral scores and attributes that can be integrated into workflows and used at several points of an auto insurance policy lifecycle, including point of quote and renewals, running alongside other data insights. 

The higher rates of telematics adoption when it is offered to connected car drivers, in comparison with consumers using aftermarket devices and smartphone apps, is very encouraging. Interest in UBI solutions is also growing, partly because of the COVID-19 pandemic lockdown. The auto insurance industry will still need to innovate and offer flexible solutions, which are becoming more of the norm, instead of a competitive advantage. 

New products

Within this perspective, the simplicity of a telematics exchange can help insurance carriers take advantage of new telematics solutions with confidence in the product-market fit. Insurance carriers can know of any potential risk they are embracing when they offer an auto insurance policy at point of quote, not just at renewal. The consumers who are taking advantage of the option to share their telematics data related to driving behavior and vehicle performance may use their telematics data by simply turning on the ignition. The more seamless flow of data can help allow faster access to potential benefits and may contribute to a more transparent relationship between insurance carriers and their customers. And this is just the beginning.

It’s an encouraging time in the industry, to say the least. Powered by advanced analytics, telematics exchanges are making it possible to deliver innovative products with better-quality data aggregation and analysis, more informed insights, real-time scores and much more.

The number of companies that are at risk of insolvency globally is on the rise. reversing a trend seen earlier in the year that briefly indicated insolvencies were actually going down.

The systematic increase of insolvencies will have a widespread impact on the global economy. When firms of all kinds are unable to pay off their debts, the general distribution of cash and cash equivalents will always be at risk. Furthermore, while this current rise is expected to be temporary—and in many cases, simply represents an adjustment to the “post” pandemic economy—insurers and other major financial players must account for the likelihood that increased levels of insolvency will directly affect the general availability of cash, the functionality of global supply chains, global GDP growth and various other factors.

The Irreversible Link Between Insolvencies and Inflation

As one might expect, the recent rise in inflation—which has occurred in nearly every country around the world—is inextricably linked with many companies’ risks of insolvency. This risk has been especially prevalent among companies that are heavily reliant on international shipping and also among those that are notably energy dependent. In the U.S., inflation figures have hovered near 9% year over year, and similar (if not higher) figures have been produced throughout Europe and other nations.

There is a strong correlation between the recent rise in insolvencies and the recent rise in inflation. When the costs associated with performing certain functions increase—including the acquisition of raw materials, manufacturing of these materials, shipping of finished products, labor and many others—and the revenues yielded in producing these goods are not proportionately compensated, insolvency issues are likely to emerge.

This problem is particularly exacerbated by the simple fact that many firms that have large amounts of debt to service are locked into inflexible contracts. As inflation rises and the costs associated with performing any sort of institutional function directly increase, firms around the world are finding it harder to maintain their economic status quo.

The Proliferation of Global and US-Centric Economic Issues

Recent economic reports indicate that the rise in insolvencies will directly affect the economic well-being of the U.S., the U.K. and most other countries around the world.

Perhaps one of the most startling figures is the projection that the U.S. economy (as measured by GDP) is expected to retract by 1.4% compared with where it was a year ago—a figure that is especially startling considering that the population has increased by nearly 1% over the past year. This means that, necessarily, American GDP per capita is on the decline.

But the rise in insolvencies, along with highly correlated issues such as inflation, is not limited to the U.S. In fact, in response to these and other economic challenges, Atradius recently adjusted its future global GDP growth forecast from 3.2% to 2.4%. While a portion of this adjustment can be attributed to increased global development (making it more difficult for many countries, particularly China, to keep growing at their previous rates), the very existence of an adjustment is still problematic.

See also: Choose Your Companies Carefully

The Good News—There Is Still Hope for Avoiding an International Recession

The most recent batch of economic data might, on the surface, make it difficult to be optimistic about the world’s economic future. After all, the sudden and widespread increase in insolvencies indicates that the simple practice of servicing debts will be much harder to accomplish.

But, even in light of this recent information, there still is some good news: The probability of a near-term global recession is somewhat low. The global economy will continue to grow—especially in the developing parts of the world—and, as the world is able to recover from the COVID-19 pandemic, this growth will accelerate. The odds of a recession in the U.S. in the next six to 12 months are moderate and rising, while, in Europe, a recession is almost a given. 

Of course, there are still quite a few trends and variables that economists will need to account for. The general lubrication of global supply chains, the existence of international conflicts (including the Russian-Ukrainian war) and the general cost of energy will all, to some extent, affect the near future of the global economy. Nevertheless, there are at least a few reasons to remain optimistic and forecast a better tomorrow.

Why compete with top-notch insurtechs when you can collaborate with them instead? After all, policyholder needs are evolving fast—and so are the opportunities to leverage an endless stream of innovations by forming an insurtech ecosystem.   

Think about it this way. In 2021, insurtechs in the property and casualty space attracted a record $9.4 billion in capital investment. During the first quarter of 2022, they also clocked the highest participation in early-stage capital investment ever recorded. And it's easy to see why. Their advances in applied AI, mobility, data analytics and other technologies are rapidly transforming the industry. 

For incumbents, that change can represent a threat—or a massive opportunity. According to Accenture, the revenue gap between innovation leaders and laggards in the P&C sector could top 37% by the end of next year. As much as $200 billion in revenue will be driven by new risks, products and services between now and 2025. 

As it turns out, a go-it-alone approach to grabbing the biggest piece of the action isn't a sound strategy for either insurtechs or incumbents. Here's why collaboration is quickly becoming the name of the game.  

Ecosystems: Endless Opportunity—for All

Take an array of different innovations that dozens or more insurtechs bring to the table. Add what only insurers can offer: regulatory expertise, historical and experiential data and the reliability and support that are foundational to the entire customer life cycle. Mix into new combinations to create whole new value propositions. Reap and repeat continuously. 

That's the idea behind an insurtech ecosystem. More than a set of alliances, and further-reaching than even the most robust partnership program, ecosystems offer a powerful way for insurers to rapidly deploy amazing new insurtech capabilities without interruption. But that’s only if it's done right. To be successful, here are five questions every insurer should ask before building an ecosystem of their own.  

Okay, So What Exactly Is an Ecosystem?  

An ecosystem is a defined network of pre-validated solutions from an array of world-class providers that can be rapidly used on their own, or in combination, to deliver differentiated offerings that provide a competitive advantage. 

Maybe it's the embedded travel insurance offered by Norwegian Cruise Line or the Apple warranty on your iPhone 14. Perhaps it's the usage-based insurance (UBI) that rewards you for driving that snazzy new Tesla so very safely. Or it could be the smart-home sensors that monitor for water leaks to help you avoid costly claims. Maybe it's all of the above. 

Whatever the case, the ecosystems involved in these and a growing number of other insurance offerings deliver value that far exceeds what is otherwise possible by each of the participants on their own. 

Why Are Ecosystems So Important to Future Insurance Models?  

Ecosystems are foundational to today's most innovative operating models, and tomorrow's. Usage-based, "pay as you drive" auto coverage, for instance, is predicated on ecosystems that can span telematics, mobile connectivity, automobile or smartphone manufacturers and more, all tied into insurers’ core systems. 

According to JD Power, UBI policies were purchased by 49% of consumers who were offered one in 2021. And Forrester says UBI could account for nearly 20% of all auto policies by the end of 2023. 

Meanwhile, InsTech London projects that the embedded insurance market will top $722 billion by 2030—six times its size today. In fact, McKinsey estimates that up to 35% of all personal lines premiums could be generated through ecosystems during that same period. For auto, it could reach 30%—or more, if Elon Musk has his way. 

Harnessing the power of an ecosystem approach requires a modern, cloud-connected insurance platform enabled by API-connected applications, embedded analytics and workflows that leverage the full value of external and core system data. Today's most robust platforms also offer expansive marketplaces of prebuilt, pre-vetted insurtech solutions that enable insurers to build ecosystems that fit their specific needs and launch new capabilities quickly and without interruption. 

How Do You Get Started Building One?

Start by aligning your ecosystem strategy with real business challenges. What pain points need to be solved? Understanding that insurance has one of the highest ratios of cost of labor to final price, a good place to start is by identifying areas where you can release trapped value within the existing delivery chain. In our experience, that typically means a focus on claims because it typically has the highest volume of manual processes.

But, as Bryan Falchuk, author of The Future of Insurance, recently put it, "You can't efficiency your way to success over the long term." While streamlining back-office processes is valuable, Falchuk says, customer-facing innovation is what sets you apart. Decide if your ecosystem strategy is to focus on optimizing internal processes, customer-centric innovation or (ideally) both.

What's the Best Way to Choose Partners?

Insurers need to be careful in selecting insurtech partners. This is not (just) about finding the next whiz-bang technology. It's about sourcing the technologies that fill in critical pieces of the puzzle needed to achieve your ecosystem strategy. 

According to Accenture, considerations include: 

• Skill: Select ecosystem partners that give you access to a wider range of capabilities such as personalization or digital engagement
• Scale: Bring on partners that have greater size and reach in the areas you need it, such as cybersecurity or data
• Scope: Source partners that extend your insurance offering into new areas or enable you to introduce whole new services  

What Are the Secrets to Success?    

An ecosystem isn't a library of static assets. It's a living, breathing community of collaborators that must be nurtured—and continuously refreshed. At Guidewire, for instance, we recently created an insurtech incubator to ensure that the value propositions enabled by the solutions within our ecosystem continue to be relevant to insurers. 

What's your go-to-market strategy? Develop a road map for getting there. In our experience, it's critical to include a regular cadence of ecosystem asset drips. We even created a pitch day competition set to launch later this year to provide an opportunity for our customers and partners to learn about the insurtechs in our program, and even vote on the best value propositions. (You can follow the fun here.) 

Coupled with the right platform, a robust ecosystem can help insurers meet ever-changing customer needs, protect and expand market share and achieve sustainable business growth—by collaborating with insurtechs instead of competing with them.

Social inflation has become somewhat of a buzzword in insurance circles in recent years, especially over the past year. The phenomenon is responsible for driving up risk and the cost of claims across a range of lines, ultimately affecting insurer profitability. 

But for all it is talked about, very little is being done about it. Insurers know it is there – they can see it in their results – but, as an industry, we are struggling to define it, measure it and come up with a credible response.

This matters because the plaintiffs’ bar is doing quite the opposite: committing significant resources to understand and exploit litigation opportunities. The insurance industry is steadily losing a battle it hasn’t really begun to even engage in.

Before we get into what needs to be done, let’s take a quick look at what social inflation is and why it is a growing problem today.

At its core, social inflation is an industry-wide rise in claims costs over and above normal economic inflation. More specifically, it is added inflation caused by shifts in societal views toward litigation and plaintiff-friendly legal decisions. 

U.S. litigation has risen for seven consecutive years, topping 8.9% growth for the last year data was available, compared with an average of 3% for the previous two decades. And the level of compensation awarded has also increased, especially in large cases. The number of verdicts of $20 million-plus was 300% more than the annual average between 2001 and 2010. 

The impact of societal trends goes well beyond just high-profile, nuclear verdicts. Social inflation pushes up the cost of claims to such an extent that pricing now does not accurately reflect risk. If this persists, it could ultimately affect capacity and even availability across whole lines of business.  

There are two important drivers of social inflation today: The first is rooted in societal shifts that stem back to the 2008 financial crisis, which left a deep sense of anger and distrust toward large businesses. This has contributed to a tendency among juries and judges to sympathize with plaintiffs’ framing of issues. This is especially visible among the millennial generation who now occupy positions of influence in the legal system and sit on juries.

The second: Law firms and related third parties are deploying sophisticated tactics to monetize the societal trends for higher payouts. For example, some legal entities are investing in powerful data, analytics and technology to identify and exploit liability opportunities. They are also increasing marketing spending; funding liability activities for potential plaintiffs; conducting social media tracking; and adopting behavioral science to influence juries. 

Indeed, a whole sub-industry of consultants and lawyers has evolved to cultivate a claims culture and improve trial outcomes.

Where does this leave the insurance industry? We should be supportive of valid claims and work to resolve claims as efficiently as possible. But, to put it bluntly, we are playing catch-up on the issue of social inflation. As an industry, we are masters in understanding most claims trends, but, when it comes to broad, litigation-related trends, we rely on high-level data and guesswork. 

This imbalance between the insurance and legal entities must be addressed. We as an industry must become experts in social and legal trends, just as we are in other types of claims trends. 

See also: Growing Risks of Social Inflation

Societal shifts need to be respected and managed sensitively. But losing the analytics arms race against the legal system only serves to undermine a healthy functioning insurance market that is vital for society. 

The thoughtful application of the right data and analytics in the insurance industry can move us forward. 

First, we must recognize that social inflation is a human risk. Human behavior can be analyzed and even predicted in much the same way as traditional perils such as natural catastrophes. It requires a different set of tools and data, specifically non-traditional data. Unlike traditional data, it is not based on records but gathered from “live” activities such as internet activity, social media trends and smart technology. These data points provide clues about human behavior, which, with the support of advanced analytics, can be analyzed at scale to create a powerful predictive model. 

By analyzing claims and policy experience together with behavioral data and other non-traditional data, insurers can build a detailed understanding of the link between behavioral indicators and liability. In doing so, we can build predictive social inflation models that can measure levels of social inflation and price risk appropriately – and then take action where necessary. 

Liability insurance has a critical societal function. It exists to protect individuals and businesses from risks such as potentially crippling legal fees. It underpins an innovative and vibrant economy. To leave social inflation unchecked is hazardous not only for the insurance industry but also for the business community it serves and the wider economy. 

The industry and individual insurers should hasten to start paying more attention to this issue – and begin taking action to mitigate and counter the trend. That journey starts with intelligent application of non-traditional data and advanced risk models.

Economists get a bad rap. Economics is sometimes called "the dismal science." It is the subject of jokes such as, "If you laid all the economists in the world end to end, you still wouldn't reach a conclusion." President Truman once said he wanted a one-handed economist because all the economists he knew said, "On the one hand... but on the other hand...."

But in economically confusing times such as we're living in now, economists are our best hope for sorting out some pressing issues, including a key one for insurance: the trajectory of inflation and its likely effect on insurers' returns on investment portfolios, on economic growth in general, on growth in insurance premiums in particular, on costs for repairs, etc. So, I recently sat down with my favorite, "one-handed" economist, Michel Leonard, the head of the Data and Analytics Department at the Insurance Information Institute. 

The short version of his analysis is: The Fed is likely being too optimistic when it projects that annualized Inflation will drop to 4% in the U.S. by the end of the year, but inflation will head back toward the historic norm of 2% by the end of next year.

The longer answer follows. 

We started on an optimistic note, talking about growth in the U.S. economy, which clocked in at a whopping 6.5% on an annual basis in the first quarter. While that figure will clearly trend down toward the historic average of 1.5% to 2.5% and while Michel said a recession is even possible in the next few quarters, he said the insurance industry is positioned for significant growth in the next six months.

The industry's performance tends to mirror that of the overall economy, but some months behind, so its growth should stay strong even as the rest of the economy sees growth rates slow. 

The inflation picture is less rosy. We talked when the latest consumer price index published by the Labor Department showed an 8.5% annual increase for March. (The figure dropped slightly in April, to 8.3%.) And Michel said replacement costs for insurers have been rising some 16% annually, or almost twice as fast. He said price increases will slow for insurers by the end of the year, along with overall inflation, but will still far outpace most costs. He expects annual inflation for replacement costs will still be 12% to 14% at the end of the year.

Some costs may never quite return to historic levels. Given that the pandemic has caused so many to reevaluate their work lives, Michel says many may not want to return to jobs in home construction or auto repair shops. 

"Those are tough jobs," Michel said. "People underestimate how hard it is to work those 12-hour shifts in the body shop." 

There's still loads of uncertainty out there, but I hope Michel's thoughts clarify the situation at least a bit. Assuming they do -- and he's typically right -- I promise to swear off economist jokes (for a while).

Cheers,

Paul

P.S. If you want to dig into his thoughts more deeply, here is a summary from the Triple-I about his latest report. 

Many date the beginnings of the insurance industry’s digital transformation to the emergence of cloud computing some 15 years ago. Others go back further, to the arrival of the commercial version of the internet in the mid-1990s. Some would trace the origins all the way back to the debut of personal desktop computers in the early 1980s or even to the introduction of digital calculators in the 1970s.

Whatever date is correct, it’s clear that digital transformation in insurance has been underway for a very long time. So, why haven’t we moved on? Why are we still focused on digital transformation?

In fact, it’s time we wind down the digital transformation phase and move to the next stage of digital strategy, which we call digital evolution, and then to the third stage: digital intelligence. The ill-defined transformation process is just one part of a digital strategy. To get the full benefits of digital technology, you need to understand and define all the steps that will get you there.

There’s a big bet being laid down in the insurance industry, and it seems like a sure thing: using real-time data and sophisticated analytics to better predict risk and tailor policies to specific customer profiles. It’s hard to argue against the logic that granular, up-to-the-minute risk data reveals better business insight and more actionable information than a single cell in a loss triangle spreadsheet.  

After all, insurers have access to terabytes of data to describe where insurance customers are, where they have been and all sorts of details on a user’s journey that may eventually inform what potentially lies ahead. So, of course, it seems logical that, as analytical capabilities make their biggest strides in decades, the industry should just leap forward and adopt this more algorithmic approach to actuarial science.

There’s just one problem: Most insurers are still spreadsheet-bound and, as a result, hard-pressed to make any progress outside of their spreadsheet environment.

Undoubtedly, more information in the form of data should ultimately lead to better decisions on the part of insurers—even within the confines of a basic spreadsheet. But, even if insurers can recall every detail of an individual customer journey now, the information has an inherently short shelf life. What’s more, it often lacks context to what specifically contributed any net changes during a period-over-period basis.

For example, used-vehicle prices have dramatically changed in the last several quarters. Immediately, it should be apparent that, if the value of the subject at risk increases, then perhaps the premiums for an indemnity contract might go up correspondingly. What gets in the way of progress is manifold---the aggregate costs are steadily increasing, but the prices of each used vehicle in the pool are different. 

Even worse, the capability to understand the subject at risk is traditionally poor. One cannot get an accurate vehicle replacement price with just make, model, year and sales price when new. Salient details, such as specific equipment and configuration, current condition, odometer reading and other features specific to sensors and capabilities, are not captured or available inside the data streams at most insurers.

See also: The New Mandate: 'Video or Vanish'

While pooled for the sake of abstraction, we are all individuals in unique living situations driving distinct vehicles in specific locations with different mobility needs, with discreet topologies, weather and traffic patterns, and surrounded by a variety of other real-world constructs like bridges, downtowns, farms and forests. Local market conditions for prices, labor, parts and services also will vary over time. 

All of these factors are nearly impossible to capture in a single cell of an Excel spreadsheet, the tool of choice for insurance professionals of a bygone era. Existing spreadsheet processes for pricing, rate making, claims estimation and reserving—and even capital modeling—all use historical data at aggregate levels that cannot respond fast enough to the changes that the industry is seeing in the price of used vehicles alone, no less all other factors of risk adjustment. 

In a world seemingly devoid of nuance, it’s easy to fall in line with one camp or another: Team Data vs. Team Spreadsheet. But the reality is that the best way forward is likely a hybrid. Yes, it is vital that companies get a better handle on their forecasting by using real customer data. But analytics can only get better when we admit they have limitations, and we seek to improve them in the quest of better processes and, ultimately, customer satisfaction.

This is a time for breakneck changes and overnight evolution for the insurance industry. For insurers looking to keep pace, they’ll have to honor the past, deal in the present and keep a keen eye on the future