Every year, about 3,000 people in the U.S. are killed in crashes attributed to a distracted driver. Yet, despite numerous public service announcements aired on television and radio or published online and in print, these fatal crashes have hit a record. As an insurer, you may be asking, “What can I do to curb this behavior?”

Every April, the National Safety Council sponsors Distracted Driving Awareness Month. This month is an ideal time to communicate with your customers about not only the dangers of distracted driving but how violations can affect their insurance premiums and how they can benefit from safe driving habits.

Here are three actions LexisNexis has put together that you can take today to better manage risk from distracted driving. If these trends across the automotive, telematics and road infrastructure are addressed, we can reduce risky driving. 

The first step is educating your policyholders. When you think about a distracted driver, you probably picture someone on his or her phone. Myriad behaviors, however, such as eating and drinking, talking to a passenger, applying makeup or even changing the radio station all qualify as distracted driving. Your customers, especially young drivers, may not even realize their habits behind the wheel constitute distracted driving. Few drivers are aware that texting while driving at 55mph is the equivalent of traveling the length of a football field with your eyes closed.

• According to AAA, new teen drivers (ages 16-17) are three times as likely as more experienced adult drivers to be involved in a deadly crash. Distraction plays a role in about 60% of teen crashes.
• Distracted driving is on the rise. More than 40,000 people died in traffic crashes in 2020 — the largest projected number of fatalities since 2007 — with many of these attributed to distracted driving.
• Accidents involving distracted drivers injured an estimated 400,000 people in 2018, with one in five people who died being bystanders.

Some of your customers may also be unaware of state laws governing use of mobile phones while behind the wheel. Your messaging should include applicable laws and penalties. It’s also a good idea to include how a distracted violation can affect a driver's insurance premiums. 

See also: AI and Its Impact on Automotive Claims

A second step for insurers involves using violation data. Distracted driving, unlike other major violations, is difficult to ticket or prosecute by law enforcement because there is no sure way to test for distracted driving after a crash occurs, but you can take advantage of the predictive nature of driving violations data. Distracted drivers often fail to maintain their speed, driving faster or slower than other drivers or the speed limit.

As the chart below shows, distracted driving violations over the past year also seem to track with miles driven as reported in the new 2022 LexisNexis Auto Trends Report. By keeping an eye on these violation trends, you can better anticipate future risks and adjust your rating plans to factor those projections into underwriting decisions. 

The third step is implementing a telematics program. If you haven’t implemented a telematics, or usage-based insurance (UBI), program, now is a great time to explore your options. Telematics data provides better insights about driving risk and offer more personalized pricing based on actual driving behaviors. Among the top 50 insurers we spoke to in a 2021 survey, 96% believe they need to invest in telematics data now or run the risk of being left behind the competition within three to four years. 

Telematics allow you to recognize your customers' safe driving behavior through premium discounts and other rewards. As featured in the 2022 Auto Insurance Trends Report, a recent survey of U.S. consumers shows that 71% of respondents said they’re interested in sharing their vehicle and driving data with their insurance company, with a predictable interest in potential discounts. However, only 22% of consumers are currently using telematics data to enable reductions on their insurance premiums through UBI enrollment. Appealing to your customers’ interest to save money on insurance can be a game-changer and creates a huge opportunity for carriers.

I hope that headline got your attention. The fact that the industry has been able to perpetuate itself for so long throughout the world, considering the sheer amount of obstacles thrown at it, is impressive. 

Some believe the first written insurance policy dates back to ancient Babylonia and is contained within the Code of Hammurabi, which specified that a debtor did not have to pay back loans in the event of a personal catastrophe like death, disability or flooding. This concept was perpetuated over time, with guilds collecting dues from masters and apprentices to cover robbery or damage. It evolved with our more familiar understanding of the famous coffeehouse in London owned by Edward Lloyd. These events led to the continued evolution of insurance and its eventual growth into the mainstream with products we are familiar with today like auto, home and business. 

While this system has laid the groundwork for our modern insurance ecosystem, there are some exciting opportunities in our near future that will modernize, democratize and grow the industry even more over the next 100 years. I will dive into three I believe will help this evolution. Think about which you believe will be the most earth-shattering. 

Embedded Insurance Solutions 

This concept is growing.

Why is this important? Embedded insurance solutions simplify the purchasing process and integrate it into one fluid motion for the customer rather than disintermediated experiences. 

There are a few main reasons embedded insurance makes sense: 

• Information — Typically, the purchase of major items like automobiles, homes or businesses requires a significant exchange of information, enough to quantify and price the risk at the same time and streamline insurance buying for the customer. 
• Integration — I have yet to find an individual on Earth who was genuinely excited to purchase an insurance policy. As much as we admire the work we do in the industry, we have to admit it’s just not as fun as buying a new home or car. Integrate the coverage so the purchase experience is end-to-end, meaning you are excited to get this new car, and, guess what, it is protected in one out-the-door price. 

Cutting-edge companies are building this experience now--e.g., Tesla and Rivian integrating insurance into the car itself or CoverGenius developing a simple plug-in for any non-insurance company.

Smart Contracts Powered by Blockchain 

This concept is on its way. 

Why is this important? Smart contracts have the ability to unlock the burden of standardized contracts and democratize the power of the customer in ways never seen before. 

There are a few main reasons smart contracts make sense: 

• Blockchain — Allowing the secure hosting of contracts/data/evaluators in a digitally trusted format opens up a new level of creativity. 
• Flexibility — The customer has never experienced any level of flexibility with insurance, as contracts are formulated as a time-bound basket of coverages. The policies are built for everyone, therefore no one. 
• Inhibition — Insurance has evolved as a series of packaged products. They are stuffed with a multitude of coverages and pages of contractual language. Because customers rarely have a real connection and understanding of what they purchase, they do not open up about what really worries them. In turn, companies barrage them with messages about why they need more insurance or cheaper alternatives. This is a turn-off and makes insurance look like a nagging mom rather than a creative way of transferring the risk of life. 

Smart contracts can combine blockchain technology with the ability to customize protection that excites customers to readily assess their risk and look for solutions. This could be one of the largest shifts in the industry, ever. We talk about putting the customer first; this technology has the ability to actually do it. 

Imagine a day when a forward-thinking platform with the power of Google-like simplicity can capture customers' coverage needs into data nodes. These feeds allow for the quick assessment of these coverage needs and allow companies to bid on these electronically, using smart contracts (quote/bind) all in one. Companies can then perpetuate these relationships by using data to feed real-time recommendations such as “October to December has a higher-than-average risk of wildfires in your area; you can buy up coverage for ALE.” The contract can be adjusted with the type of flexibility that creates high trust among your customers for understanding their unique needs. 

Think this is too far out there? Check out what Chainlink Labs is doing in the insurance space for parametric coverages. If you don’t have someone working on how blockchain and smart contracts will help you reshape your business, you may find yourself behind someday.

See also: Reinsurers Face New Challenges

Parametric Solutions 

This concept is here now. 

Why is it important? There are many situations that happen on a daily basis where risk is more of an inconvenience than a life-alternating ordeal, like your home being wiped out by a tornado. 

There are a few main reasons parametric solutions make sense: 

• Unique risk — These solutions have the ability to dig deeper and provide solutions to life’s daily challenges where we know there is an appetite for customers to accept a risk transfer for peace of mind. Possibly, booking a flight for five family members for vacation is stressful, knowing there is a chance the whole thing could be ruined with a quick auto-generated email. Sorry to inform you….. 
• Quick payouts — The main concepts behind these solutions are (1) simple underwriting (2) data-powered (3) and triggered claims payouts. For example, we know that when a frost hits orange crops there will be some issues. The temperature data is easily gathered, and a shortened claims process payout allows the farmer to make a quick pivot using these funds to recover what is possible during that growing season. 
• Creativity — Major lines of insurance are burdened by slow progress. Parametric solutions can be creative and quick to market and complement existing insurance coverages. 

This is a great opportunity for companies to partner and help foster emerging insurtech companies. Not as competition but rather as a choice for the customer to fill gaps and provide simple solutions. Check a few examples out there now: Jumpstart for earthquakes, Blink for travel or African Risk Capacity for climate change. 

There is still space for newcomers. 

Now, you must guess which of the three is the earth-shattering one....

The answer is: Smart contracts powered by blockchain. They will permanently disrupt the market. Mark my word. The other two will merely have a huge impact.

The question is…will your business invest the people and resources necessary to build and grow for your future, or will you miss out on a trillion-dollar opportunity to not only grow the business but provide your customers with products and services that wow them? 

It is not too late to become a partner in discussing and uncovering your true potential.

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Insurance Thought Leadership  Note from the editor:  We've had great feedback on some recent webinars we've hosted, as part of our efforts to help the ITL community drive innovation in risk management and insurance. I encourage you to check out our array of webinars. And please let us know here if we can ever help you get the word out about how you're reshaping our crucially important industry. How You, Too, Could Afford to Buy Twitter Paul Carroll, Editor-in-Chief of ITL If you look at the wealth that Elon Musk has built through Tesla and that is financing his whimsical bid for Twitter, his fortune is a bet on the future. Tesla has only about 1% of the global car market. Its profits for the past three years have totaled about $5.5 billion -- much of that dependent on government subsidies for purchases of electric vehicles. Yet Tesla commands a market value north of $1 trillion and provides the bulk of Musk's $260 billion personal net worth because the market sees enormous potential for electric vehicles, in general, and Tesla, in particular. Can we get the market to sprinkle some of that fairy dust based on potential on us, too? In a word, yes.  Insurers surely won't generate the shovelfuls that Musk has managed to heap on Tesla, but insurers can create much better narratives for investors if they start playing offense, and not just defense, on the issue that has carried Tesla and Musk to such heights: how the world can get to net-zero on emissions of greenhouse gases.  continue reading > Podcast Alert Join Denise Garth for a new podcast featuring Deloitte's Abhishek Bakre, Senior Manager of Strategy and Santosh Kutty, Principal, to discuss changing customer demographics, absence management, and bundling with disability and leave products. Listen Now SIX THINGS Can Insurers Use AI to Retain Staff? by Tom Warden Technology can tip the scales back in favor of a healthy workforce, driving growth and innovation as well as preserving institutional knowledge. Read More Specialization: Agents' Vast Growth Opportunity by Joel Zwicker There is a huge range of opportunities that are still untapped, just waiting for creative, research-driven, passionate agents to capitalize on. Read More The Future of Work  Wednesday, May 4th at 1:00 pm EDT Sponsored by JobsOhio  As employees start to return to work after two years of mostly working remotely, smart employers are rethinking just about all aspects of how work is done to get the best of both the home and office worlds.  Register Today New Conclusions for P&C Insurers by Denise Garth The customers want to drive. Are insurers prepared to thrive once we’ve handed them the keys? Read More Reinsurers Face New Challenges by Steven Kaye Emerging risks affecting the reinsurance business present opportunities for analytics and predictive modeling. Read More Excess & Surplus Lines Market Hardens Further by Brian Brown  Travis Grulkowski  Zach Ballweg At this point, we believe that the hard U.S. E&S market will not end any time soon; however, some companies will struggle with prior year reserving issues. Read More Ukraine Invasion's Potential Impacts by Anton Lavrenko The invasion poses a complex threat to the operations of financial services companies and has enormous consequences for the financial markets in the short term.  Read More Winning the War for Talent  Thursday, April, 28th at 1 pm EDT Sponsored by PwC This webinar tackles a key issue -- maybe the key issue -- facing the insurance industry: How can we attract, train and retain the talent that we need and that the industry's mission merits. Watch Now  MORE FROM ITL April Focus: Automation and RPA Sometimes, innovation takes time.   Some 30 years ago, I wrote an article for the front page of the second section of the Wall Street Journal that declared a revolution in forms. We were far enough along in the personal computer revolution that software companies were coming out with products that would let users fill out forms on-screen, speeding the process and eliminating the errors that occurred as someone had to interpret people's handwriting. Even more magical, the spread of local area networks meant that information could flow straight from my screen into a corporate database, with no never to ever print the form and have someone re-enter the data. .  Everything I wrote was correct, and forms did take a major step forward, but, here we are three decades later, still drowning in forms. And the insurance industry is Exhibit A.  Read More The New Competitive Landscape Sponsored by PwC Insurers increasingly go to market not as individual companies but as part of ecosystems -- a radical change in thinking. In this high-octane webinar -- featuring Marie Carr, partner at PwC; Andrew Robinson, CEO at Skyward Specialty Insurance Group; and Andy Cohen, COO at Snapsheet; along with moderator Paul Carroll, editor-in-chief at Insurance Thought Leadership -- we discuss where ecosystems are making a difference now, where they will in the near future and where their impact is likely overstated.  Watch Now    Partner with ITL to create expert thought leadership content. Custom Content Promoted Content Display Advertising Custom Webinars Monthly Topic Sponsorships ITL Partner Packages and more Learn more and get the 2022 Media Kit

For all the negative connotations associated with the disruptive impact of technology, it’s hard to deny the positive outcomes as it’s transformed industries from travel and transportation to healthcare. Better-quality services. Lower costs. Improved efficiencies. Enhanced customer experiences and better satisfaction.

And so it goes for the insurance industry, including agents and agencies. Ready or not, technology is fast reshaping every facet of the business. For brokerages that intend to participate in fast-emerging opportunities, the future is now. It’s time to carpe diem. 

Where high tech and high touch meet

Some of the most disruptive emerging technologies – like artificial intelligence and machine learning, and robotic process automation – are viewed with trepidation. Who hasn’t gotten frustrated by a chatbot “conversation” where the virtual assistant just didn’t understand the nuances? 

But forward-thinking insurance agencies are increasingly using such advanced solutions to free them to provide the sort of high-touch human interactions that solidify client relationships and grow the business. 

A World Economic Forum report predicts that the amount of work done by machines will jump to more than 50% by 2025. Brokers can take advantage of that trend by investing in technologies that make their processes more efficient. 

This streamlining involves the kind of repetitive, manual work that is typically embedded in brokers’ processes and poses a big drain on their capacity to do sometimes basic yet significant functions. But the technology also extends to advisory services that are better-informed and much more valued, thanks to the insights provided by advanced analytic capabilities. 

Top brokers’ advantage: an armory of advanced tech tools

Increasingly, leading insurance brokers understand the transformative power of high-tech tools that not only dramatically lower their costs but result in work product that is far more accurate and responsive to client needs – and expectations. These tools are having significant impact on three mission-critical service areas:

• Policy management and maintenance. This tends to be an unsung yet critical internal agency function. Until recent technological advances, it involved manual data management processes and was cumbersome, costly and time-consuming. Digitization, combined with AI and machine learning, has transformed the processes – ensuring the fast delivery of error-free policies that are contract-compliant.
• Risk placement. Clients want competitive prices and comprehensive coverage. Their brokers want to be able to share their clients’ risk success stories with the carriers likely to be most responsive to their pressure points. Automated agency management systems streamline the process of identifying and collecting their information – and efficiently gathering quotes and placing the coverage with the right insurer for the clients’ needs.
• Risk advisory services. This is the heart of the value proposition of the best insurance brokers. The big differentiator? How well they leverage data to gain insights and help their clients manage existing and emerging risks. Advanced capabilities – AI, machine learning and natural language processing – facilitate advanced analytic capabilities. Brokers that can leverage the technology are poised to anticipate client needs and advance the kind of personalized, consultative relationships that drive business success.  

See also: ITL FOCUS: Agents & Brokers

New expectations in a fast-changing marketplace

Make no mistake. None of these advances is merely “nice to have.” They are must-haves for any brokerage that hopes to have an advantage in an increasingly competitive and fast-changing marketplace. Because technology is not just causing shifts in market segments, it’s also changing the nature of their competition. Face it: Clients expect their brokers to deploy the tools that will give them an advantage, too. 

Consider how technology is reshaping their markets.

• Small business. These clients typically have fairly routine risks, making them easier to serve with digital insurance solutions. Insurtech firms have made substantial inroads in this segment with a variety of coverage options. With automated direct marketing to this group, insurers are cutting brokers out of the distribution pipeline. Touchless claims are another efficiency affecting small business commercial markets. Increasingly, it’s the high end of this market where opportunities lie, but, without tech-driven operational efficiencies, brokers will struggle to compete cost-effectively.
• The middle market. Surveys have shown that middle-market organizations have had significant concern over their viability during the economic changes since 2020. One found that economic uncertainty had pushed three-fourths of respondents to reassess their insurance needs. There is fertile ground for brokers who can use digitization to better understand and respond to this segment’s risks and use automated quotation and risk selection capabilities to better manage their costs. They will strengthen their foothold in this market.
• Large accounts. Larger accounts have bigger and more complex risks that require more of their brokers – and are accompanied by high customer expectations that they will be up to the challenge. It’s technology that will enable brokers to deliver at every level. Start with the efficiencies and prospective savings that automated quotation and renewal pose. But digitized processes also can reveal areas where coverage could be improved or new products might be valued – better serving clients while adding to the agency’s revenue opportunities. Another opportunity with this market lies in claims automation, especially the prospect of the AI-driven touchless claim that improves the efficiency and accuracy of claims management.

How effectively brokers harness the transformative power of technology will be a critical factor deciding winners and losers in the marketplace in the days ahead. Those who are still testing the waters are well-advised to jump in with enthusiasm lest they get overtaken by nimbler players.

See also: Technology Cannot Replace Brokers

When we think about the risks posed by climate change, we often think about the long term. In the gloomiest of scenarios, life expectancies plummet due to widespread crop failures and pestilence, while rising tides and geopolitical instability displace countless others.

It's easy to forget that we already live with the consequences of unchecked climate change today. One example is the recent wildfires that raged across California, a state that is also afflicted by drought and that produces over half of the nation's fruits and vegetables. The bushfires that ravaged Australia in 2019 enveloped an area estimated between 24.3 million and 33.8 million hectares, resulting in economic costs of A$103 billion and 445 deaths. One billion native animals perished, either from the blazes themselves or the subsequent loss of habitat.

Climate change will harm every segment of the economy. This makes the insurance sector acutely vulnerable and at the same time presents a huge opportunity. According to a Deloitte study, most U.S. state insurance regulators believe all insurers will face heightened risks -- physical, liability and transitional -- over the medium and long term. Half of those surveyed believe climate change will have a high or extremely high impact on coverage availability and underwriting assumptions. For those that get it right (the product, the pricing and the reinsurance), there's a market ready to buy. For those that get it wrong, there could be significant losses 

For the industry to survive, it must change radically. Insurers have already faced a strong imperative to embrace digital transformation. Climate change merely emphasizes this. Faced with more (and more extensive) claims, insurers will embrace artificial intelligence and data analytics, allowing them to understand the changing face of risk and operate at a larger scale.

The Challenge of Climate Change

Over the past two decades, a new discipline of climate science has emerged. Dubbed "extreme event attribution," it untangles the links between human activity and the proliferation of devastating weather events. In one meta-analysis published by CarbonBrief in 2021, researchers found that climate change exacerbated 70% of events from a sample of 405.

Complicating matters, a growing body of evidence suggests that climate change makes it harder to predict extreme weather events, reducing the window of opportunity for policyholders and insurers to mitigate risk. Last year, Stanford University researchers discovered that the window for accurately forecasting the weather shrinks by several hours for every degree the planet warms. This phenomenon primarily affects the mid-latitudes -- the area of the Earth located between the Tropic of Cancer and the Tropic of Capricorn.

For insurers, these trends represent cause for concern. Payouts will only increase in the years to come. As noted by the world's largest reinsurer, Munich Re, 2021 proved to be the second-most-costly year on record for the industry, with insured losses from natural disasters totaling $120 billion. This figure only trails 2017, when an unprecedented number of hurricanes resulted in insured losses of $146 billion.

On a logistical level, climate change will force insurers to become scalable, allowing them to meet the needs of policyholders. Hurricane Sandy, which devastated the U.S. East Coast in 2012, resulted in 1.1 million claims from homeowners alone. Automotive claims totaled 250,000, and business claims totaled 200,000.

How AI Will Help

The insurance industry was already gravitating toward the widespread usage of artificial intelligence. As noted by McKinsey, an estimated half of all claims made in 2030 will involve AI in some meaningful sense. Its use will be centered on the predictable elements of the insurance business, which instinctively lend themselves to automation.

A policyholder may make a claim by talking to a chatbot in the future. Payouts will be determined by sophisticated computer vision algorithms that can quantify the level of damage to a building or vehicle and estimate a dollar figure to settle the claim. Determining risk won't be a one-time event but a process that repeats throughout the life of a policy.

These innovations were already necessary due to rising costs in the insurance business and the growing urgency to find efficiencies. Insurers will be able to reapply these technologies to address the genuine problems of climate change.

Some of the early products on the market show great promise. One startup, Tractable, offers a product that automates the process of assessing property damage, reducing the need for human claims specialists. Take flood insurance. Some providers take advantage of connected devices that can issue real-time flood warnings to policyholders.

Insurance has traditionally been a data-hungry industry, but climate change has accelerated this. Providers increasingly rely on more data sources and sophisticated AI-driven models to determine the risk of freak weather events when underwriting a policy.

See also: An Early Taste of Climate Change Disrupting Insurance

The Future

There is cause for optimism. The COP26 conference held last year in Glasgow produced a meaningful global consensus about limiting the most disastrous consequences of climate change. The resulting agreement, known as the Glasgow Climate Pact, saw 140 countries agree to reach net-zero emissions, albeit to different deadlines. It also included binding commitments to phase down the use of unabated coal.

Separate from government intervention, electric and hybrid cars are becoming increasingly common and affordable. Renewables account for a more significant percentage of energy production and look set to replace fossil fuels in the medium to long term completely.

But it remains to be seen how much advances will mitigate the worst effects of climate change. We have a bright, green future ahead of us, but the road to get there is bumpy, and we can expect more extreme weather events in the years to come. For the insurance industry to survive this transitory period, it must evolve.

If you look at the wealth that Elon Musk has built through Tesla and that is financing his whimsical bid for Twitter, his fortune is a bet on the future. Tesla has only about 1% of the global car market. Its profits for the past three years have totaled about $5.5 billion -- much of that dependent on government subsidies for purchases of electric vehicles. Yet Tesla commands a market value north of $1 trillion and provides the bulk of Musk's $260 billion personal net worth because the market sees enormous potential for electric vehicles, in general, and Tesla, in particular.

Can we get the market to sprinkle some of that fairy dust based on potential on us, too? In a word, yes. 

Insurers surely won't generate the shovelfuls that Musk has managed to heap on Tesla, but insurers can create much better narratives for investors if they start playing offense, and not just defense, on the issue that has carried Tesla and Musk to such heights: how the world can get to net-zero on emissions of greenhouse gases (GHGs). 

A recent article from McKinsey frames the opportunity like so:

"Nearly 90% of emissions are now targeted for reduction under net-zero commitments, and financial institutions responsible for more than $130 trillion of capital have declared that they will manage these assets in ways intended to hold warming below 1.5°C. This wholesale shift toward institutions and projects that emit minimal GHGs may create the largest reallocation of capital in history.

"At present, about 65% of annual capital spending goes into high-emissions assets. But in a scenario where the world reaches net zero in 2050, McKinsey analysis suggests that this pattern would reverse; 70% of capital outlays through 2050 would be spent instead on low-emissions assets. And as organizations adjust their operating budgets, they would pay trillions of dollars for renewable energy, circular materials and other low-emissions inputs during this time frame."

The CEO of a successful software company once told me that his strategy was to find a parade and jump in front of it, waving a baton -- and McKinsey is describing quite a parade.

The consulting firm identified 11 net-zero "value pools" that could generate a total of more than $12 trillion of annual revenue by the end of this decade, including: transportation ($2.3 trillion to $2.7 trillion per year), buildings ($1.3 trillion to $1.8 trillion) and power generation ($1 trillion to $1.5 trillion).

McKinsey also says: "Certain markets for green products and services are also proving to be more lucrative than markets for conventional offerings, as green premiums start to kick in. The most profitable opportunities have emerged in fast-growing niches such as recycled plastics, meat substitutes, sustainable construction materials and chemicals, where margins can be 15% to 150% higher than usual as demand for traditional products softens. In the plastics market, for example, consumer-packaged-goods players are changing their sourcing practices to reach sustainability targets."

McKinsey warns: "The flip side of increased spending on low-emissions assets is the stranding of today’s emissions-intensive assets. McKinsey analysis suggests that some $2.1 trillion of assets in the global electric-power sector alone could be stranded by 2050."

Now, insurance companies aren't going to start making electric vehicles, low-carbon cement or plant-based "meat" or doing many of the other things that McKinsey says can make companies leaders in the march toward net-zero. But insurers can still do a lot. 

For one, insurers can start figuring out how to best insure those companies that are making electric vehicles, low-carbon cement, plant-based "meat" and so on. Innovation can't happen unless someone figures out how to deal with the risks, and the insurers that figure out how to do so will ride the wave just as surely as those making the new types of products. 

Those insurers with big investment portfolios can start to lean into the trends that McKinsey describes in such compelling detail. 

Insurers can also start to lay out more of a vision for a net-zero future, as a way both to draw investors and to attract talent. Some are starting to talk about related issues such as rising sea levels, increased hurricane activity and a surge in wildfires, but, while that sort of talk might feel innovative, it still reflects the traditional defensive posture that most businesses are taking. There is an opportunity to go on offense, describing, perhaps, how insurers are working with car companies to lower the high cost of repairs for electric vehicles, are quantifying the risks for low-carbon cement (which will behave differently than traditional cement in some uses) and so on.

There is a great story to be told about all the opportunity being created by the push to net-zero and about the role insurance can (must) play, but nobody is really telling it. Whoever gets this right still won't be able to spend $44 billion on a whim, as Musk is planning to do. But they should still see massive success as they help lead the way into a world of opportunity.

There's quite a parade out there that's just waiting for someone to jump in front of it with a baton. 

Cheers,

Paul

Reinsurers face multiple headwinds forcing them to come up with creative solutions. Most reinsurers already are investing in business intelligence (BI), data analytics and sophisticated, specialized components (e.g., modeling tools). At the same time, the technology solutions in place at reinsurance companies often lag other areas of the insurance industry. 

The COVID-19 Pandemic and Emerging Risk

COVID-19’s impact on reinsurers has depended in part on their exposure to particular lines of business (e.g., event cancellation). Even so, claims have been lower than anticipated, and reserves and solvency do not present issues. Life reinsurance saw more of an impact from the pandemic than property/casualty did but was still manageable. The overall loss development of the pandemic presents a potential opportunity for modelers. 

At the same time, predicting and managing emerging hazards (e.g., nanotechnology, pandemics, terrorism, cyberattacks, GMOs, e-cigarettes, driverless cars) are creating analytics and modeling challenges for reinsurers. One leading emerging hazard that reinsurers face is climate change and the related increase in natural catastrophes. 

To reduce their exposure to potential capital and earnings volatility, reinsurers should consider the increasing frequency and severity of perils such as floods, storms and wildfires in their pricing. Some reinsurers are already shifting investments away from industries that contribute significantly to CO2 emissions and toward green technologies.

Business Intelligence and Data Are Critical

Pressure from competitors means moving from Excel-based analysis to more sophisticated technologies. Reinsurers are demanding complete and accurate data from primary insurers, focusing on data cleansing, and continuing to use advanced analytical tools to find opportunities to create competitive advantage. 

Once some reinsurers begin investing in data analysis and predictive modeling, the others must follow; otherwise, the latter group will face adverse risk selection and lose market position. Larger reinsurers are investigating AI and machine learning. 

Reinsurers are also exploring new frontiers when it comes to third-party data sources. Some reinsurers are piloting new data aggregation startups that bring together data sources from social media and government records. Others are acting as data aggregators themselves by packaging and providing data and book of business analytics to small and midsized insurer clients.

See also: Excess & Surplus Lines Market Hardens Further

Core Modernization

Reinsurers are investing in core systems to centralize business, streamline workflows and gain better data access to deal with an increase in audits and regulations. Most reinsurers looking at core system replacement are prioritizing integration of core systems with BI and modeling tools, catastrophe modeling and mapping and using broker and third-party data to build risk insights. 

Reinsurers also continue to monitor and engage with emerging technologies, paying most attention to technologies with impact on data and process improvements. Some are exploring robotic process automation to automate routine processes and data movement, freeing resources for value-added work while improving cycle time and consistency. Most of the blockchain consortiums in the insurance industry revolve around reinsurance, though there has yet to be significant impact on how the industry works.

Final Thoughts

Emerging risks affecting the reinsurance business present opportunities for analytics and predictive modeling. Reinsurers should continue to leverage data from primary insurers and other sources to derive insights for primary insurer clients and to optimize their portfolios. 

AI and machine learning have a role to play alongside traditional analytics in optimizing analytics models, placement of business and loss mitigation or prevention on behalf of primary insurers. Reinsurers should also migrate from Excel spreadsheets and workbooks to centralize and improve access to data, achieving a better user experience and easier regulatory compliance. 

To learn more about the latest activity in the reinsurance industry, please read Aite-Novarica Group’s latest report on the topic, Business and Technology Trends, 2022: Reinsurance.

Given my Irish roots, I took pleasure in the 1995 publication of a book called "How the Irish Saved Civilization." It described how Irish monks provided the bridge for Europe between the fall of Rome and the rise of medieval states by preserving and copying the great works of Western thinking during the Dark Ages. 

That book popped to mind when I recently read a fascinating piece in Wired about how monks today have moved beyond making cheese, beer and other products to support their ascetic communities and are now taking on gig work that wouldn't have been foreign to their predecessors all the way back in the sixth century in Ireland. The trend suggests just how far the gig economy can stretch, if we think about the issues creatively enough. 

The article in Wired describes how communities of monks and nuns are gravitating toward electronic piecework, largely through a group called the Electronic Scriptorium. Like their predecessors in the Dark Ages, they are curating knowledge, for instance by putting libraries' card catalogs into the formats that they must be in to for the collection to be accessible online.

The article says: "Several monastic communities are working together to catalog approximately 2 million photographs in the archives of The New York Daily News; they will soon begin on those of Time magazine. Benedictine monks near Abiquiú, New Mexico, have worked to catalog public and school libraries, and at the Incarnation Priory in Berkeley, California, monks have edited computer files for Readmore, a New York subscription information company. In Lufkin, Texas, cloistered Dominican nuns have digitized records of the National Institute for Occupational Safety and Health. In the past four years, monks and nuns have transferred a dizzying array of information from paper to cyberspace: the medical archives of Johns Hopkins University Medical Center, the files of major law firms, the records of government agencies, the recipe collections of Gourmet and Bon Appétit magazines, and the catalogs from the Yale University undergraduate library as well as more than 100 smaller ones."

What a wonderful fit the work has turned out to be. The piecemeal nature of the tasks fits well with the days in monasteries and convents, which are organized around prayer, study and contemplation. The monks and nuns are educated, careful and patient. While outsourcing firms in the Philippines, India and elsewhere can do the same sort of work the monks and nuns do, the fact that employees there typically aren't working in their first language can be an impediment given the exacting nature of cataloging.

The article says: "In doing a library catalog, the worker has to know that 'Shakespear' isn't correct.... The worker must be able to catch it when the Bibliofile program truncates the first A of a title, mistaking it for coding. When logging in a recipe from Gourmet, he or she should recognize that a recipe calling for '2 cups baking powder' would make a loaf the size of an apartment."

The monks and nuns don't need much income to support their ascetic lifestyles, so they afford to earn just $12 to $14 an hour. The work does require some investment in technology -- but not a lot. A group of monks mentioned in the article makes do with a few computers that use the Intel 386 chip, which was state of the art, oh, 35 years ago. 

While we all talked about "remote work" during the pandemic, which meant we could be on our computers in front of the TV in our gym shorts and T-shirts, the monks and nuns can be truly remote. The group in Abiquiú, New Mexico, for instance, lives 13 miles from the nearest paved road. They operate on solar power and have just one cellphone for emergencies -- no one is getting distracted by notifications as the monks sit there, cataloging, in their long robes and cowls. 

Some say they appreciate that the work gives them at least a bit of a connection to the outside world. One monk said he "maintains his sense of humor by keeping a running list of his favorite goofy titles. His favorite so far is Lewis Grizzard's 'Don't Bend Over in the Garden, Granny, You Know Them Taters Got Eyes.'"

I'm not saying that the monks and nuns represent a breakthrough in the gig economy -- though the Electronic Scriptorium might be worth a call for some organizations, because I could imagine some insurance work being a good fit -- but I do think the story shows just how remote work can be and what sorts of talent we can find if we look hard enough and fit seamlessly into a group's lifestyle. 

I also just thought the story was a lovely one and wanted to share -- while reminding you that the Irish saved civilization.

Cheers,

Paul

One of the more persistent consequences of the COVID crisis has been the so-called Great Resignation, a development that has been unfolding over most of the past two years. We’ve seen a steady flow of employees leave the workforce, many doing so after taking stock of their lives amid a rapidly changing world. The insurance industry has by no means been immune. Companies in our industry rely heavily on the institutional knowledge of experienced employees, so, as the pandemic has served as a catalyst for early retirements, these organizations have been especially hard hit.

Employees are an organization’s most valuable assets. It sounds clichéd, but it’s undoubtedly true, especially in an industry where knowledge is a key factor in determining success or failure. People are the soul of any organization; they bring reason and purpose to the daily activities of the business. But employees are also a company’s single most important repository of critical institutional knowledge. Every successful business is built on repeatable systems and processes, but it’s their workforce of committed employees who operate those systems, who monitor and adjust their performance and who ensure that they are delivering the intended results.

Veteran employees, especially, have valuable institutional knowledge, having spent years working with the company’s systems and processes as they evolved. These are the people who are best-equipped to understand the nuances of the organization’s data. When procedures change — for example, when a company has changed the way a particular field within its customer database is used — veteran employees are the ones who can point out the subtle but meaningful distinction years later, helping others in the organization to interpret historical data in the context of today’s datasets. When employees walk out the door for good, that kind of institutional knowledge goes with them.

Unfortunately for insurers, these veterans eventually reach retirement age or move on to other things. It’s not all happening at once, but, for companies that understand where this is all leading, it pays to get ahead of the problem with some mitigating strategies. In this respect, the Great Resignation just might be the wake-up call that many insurers needed.

How might employers in the insurance industry respond? They can hire more people, but that inevitably calls for an intense focus on training and upskilling those new employees. It does little to compensate for the institutional knowledge that may be slowly slipping away. To some degree, of course, hiring and training new people is unavoidable. Nevertheless, these efforts divert resources that could be better applied toward innovation and growth.

In fact, there are better ways to approach this problem than by brute force. Perhaps counterintuitively, technology can tip the scales back in favor of a healthy workforce, driving growth and innovation as well as preserving institutional knowledge. With the right technology, insurers can make for a gentler learning curve, capturing the key factors that drive success and offering new employees a much faster path to productivity.

See also: The Real Disruption From Robotics, AI

Technology has a well-deserved reputation for disruption, but disruption doesn’t always unfold in the ways that people expect it to. Popular wisdom, for example, dictates that artificial intelligence (AI) will replace vast portions of our workforce, resulting in a net loss of jobs as technology supplants human beings. In fact, we’re on a trajectory to do quite the opposite, as AI serves to supercharge human capabilities at virtually every step along the value chain.

The enormous gap between AI myth and AI reality has been fueled by Hollywood portrayals that depict autonomous machines that appear to exercise free will. In fact, AI is firmly grounded in human thinking and human processes. Machine learning algorithms are not created in a vacuum; they’re developed through careful and deliberate processes designed to support and augment the human side of the business. By sheer necessity, we must understand what people need, how they work and how the technology can support them in making more effective decisions. Systems that operate without human oversight are destined to fail; effective AI systems are built to serve that operational model.

AI supercharges human productivity by taking on the rote work that most people simply prefer not to do. It elevates the human role in the process by monitoring, digesting and analyzing vast amounts of information.

In the wake of the Great Resignation, insurers have an opportunity to steer their ships in one of two very different directions. Those that take the default path, simply replacing outgoing employees with new workers, will find themselves increasingly outpaced by the innovators. Those that embrace technology — and that understand how it dovetails with the human element — will find the room they need to adapt and grow through constant innovation.

As first published in Digital Insurance.

The domestic U.S. excess and surplus lines insurance market has experienced rapid growth in direct written premium (“DWP”) in recent years, and our preliminary survey of 2021 annual statement data for a selected cohort of carriers suggests this growth accelerated in 2021, putting the E&S market on pace to write over $60 billion of direct premium in 2021, an increase of nearly 30% over 2020. 

Significant rate activity started toward the end of 2019, and the E&S cohort’s published underwriting results have since improved, with many writers reporting favorable results. Within its largest line of business, Other Liability – Occurrence, the E&S cohort’s booked direct and assumed (D&A) ultimate loss and loss adjustment expense (LAE) ratio for coverage year 2021 is 64%, up slightly from the coverage year 2020 ratio of 63%, but down approximately five to 10 percentage points from the ratios booked between coverage years 2017 and 2019.

However, deterioration in the E&S cohort’s underwriting results across coverage years 2019 and prior, in total, across all lines of business, has resulted in adverse reserve development in calendar year 2021. Though the magnitude of this deterioration is relatively small, it is the first such observation since 2004. Social inflation may account for some of this unexpected development.

All things considered; the results of our survey suggest the E&S market has experienced further hardening in 2021.

The following sections detail the results of our preliminary survey:

E&S Market Growth

As illustrated in Chart 1 below, the 2021 E&S market has likely experienced its largest annual increase in DWP since 2003:

Chart 1: E&S Market Change in DWP by Calendar Year

The 2021 annual growth rate of 29% displayed in Chart 1 is based on surveyed results for the E&S cohort and is therefore shaded blue to denote its approximation for the larger E&S market. The actual 2021 growth rate for the E&S market will not be known until all 2021 annual statement data has been reported and compiled. Nevertheless, we believe the 29% growth rate derived for the E&S cohort is a fair representation, considering it made up 81% of the E&S market in 2020.

The 2021 estimated annual growth rate is the fourth-largest growth rate observed over the last 33 years, trailing only the post 9/11 hard market growth rates in 2001 (35%), 2002 (79%), and 2003 (30%).

If the estimated 2021 annual growth rate is realized, the total DWP for the E&S market would exceed $60 billion as illustrated in Chart 2 below:

Chart 2: E&S Market DWP by Calendar Year

Note: Calendar year data for 2007 and prior was taken from Best's Special Report, U.S. Surplus Lines, dated Sept, 23, 2013. Calendar year data for 2008 and subsequent was provided by S&P Global Market Intelligence.

See also: Choose Your Companies Carefully

One-Year Reserve Development

Chart 3 below displays a long-term view of the ratio of one-year reserve development for the E&S cohort across all lines of business; where the ratio is calculated as the one-year change in net ultimate loss and defense and cost containment expense (as measured by Annual Statement, Schedule P – Part 2) divided by net earned premium (as measured by Annual Statement, Schedule P – Part 1):

Chart 3: E&S Cohort Ratio of One-Year Reserve Development by Calendar Year

As displayed in Chart 3, the E&S cohort has experienced an extended period of reserve releases beginning in calendar year 2005 and extending through 2020, with the magnitude of the reserve releases generally trending smaller in recent years. The results from our preliminary survey suggest calendar year 2021 marks the first year of adverse one-year reserve development for the E&S cohort since 2004. Though 2021 reflects a relatively small amount of adverse reserve development (i.e., 0.4% of 2021 net earned premium), this result follows an extended period of reserve releases, not to mention its signal as a potential inflection point in the reserve cycle.

Chart 4 bifurcates the ratio of one-year reserve development for calendar year 2021 into its component coverage years:

Chart 4: E&S Cohort Calendar Year 2021 Ratio of One-Year Reserve Development – Coverage Year Contribution

As displayed in Chart 4, coverage years 2019 and prior have generally experienced adverse reserve development in 2021, whereas coverage year 2020 has experienced favorable reserve development. 

The favorable experience in coverage year 2020 nearly offset the adverse development observed elsewhere, as illustrated in Table 1 below:

Table 1: E&S Cohort Calendar Year 2021 Ratio of One-Year Reserve Development – Coverage Year Contribution

Though the favorable reserve development observed in coverage year 2020 is likely attributed to a number of factors, we suspect the main driver stems from reduced exposure to loss during the height of the COVID-19 pandemic (i.e., shutdowns and related initiatives may have resulted in reduced insured “activity” relative to premium charged, even after COVID-19 related premium refunds) as well as rate increases that began late in 2019 that may have not been fully recognized in the reserve setting process as of Dec. 31, 2020.

Other Liability — Occurrence Experience

The largest line of business for the E&S cohort (as measured by DWP) has historically been Other Liability - Occurrence. Chart 5 below displays the E&S cohort’s sequential development of booked D&A ultimate loss and LAE ratios for this line of business over the last five coverage years (as measured by Annual Statement, Schedule P – Part 1):

Chart 5: E&S Cohort Booked D&A Ultimate Loss and LAE Ratios – Other Liability Occurrence

As displayed in Chart 5, coverage years 2017, 2018 and 2019 have developed adversely in calendar year 2021, whereas coverage year 2020 has developed favorably. These observations generally align with the trends in one-year reserve development discussed in the previous section.

Specifically, the booked ultimate loss and LAE ratio for coverage year 2017 has increased 7.6% from the initial booked ratio at 12 months of development (as of Dec. 31, 2017). Likewise, coverage years 2018 and 2019 have increased 4.5% and 3.9% from their respective initial booked ratios at 12 months of development. It is likely that a portion of these increases stem from increased severity trends. 

The year-end 2021 booked ultimate loss and LAE ratios for coverage years 2020 and 2021 are significantly lower than the corresponding ratios for the preceding coverage years. This may not be a surprising result considering the widespread double-digit rate increases experienced within the E&S market over the last 18 to 24 months.

Despite the recent rate increases, the coverage year 2021 booked ultimate loss and LAE ratio as of Dec. 31, 2021 is marginally higher than the corresponding booked ratio for coverage year 2020. Based on this observation alone, one may initially suspect coverage year 2021 has a good chance to develop favorably over the next several years, working to offset any adverse development stemming from the prior coverage years. However, we caution the reader against that conclusion, considering the unique nature of coverage year 2020, where exposure to loss was likely reduced on account of shutdowns and related initiatives.

See also: How to Use Social Media Data in Underwriting

Concluding Remarks

At this point, we believe that the hard E&S market will not end any time soon; however, some companies will struggle with prior year reserving issues.

All data referenced in this article was provided by S&P Global Market Intelligence, unless otherwise noted.

For further information, please reach out to the authors. 

To request a copy of our full E&S study based on complete 2021 Annual Statement data (or to request prior such studies), please contact zachary.ballweg@milliman.com. We anticipate the 2021 study will be ready for release in mid-May.