As the insurance industry navigates the complexities of a rapidly changing market, a significant debate has emerged. Will traditional insurers — with their established practices and deep-rooted presence — continue to lead, or will digital-first insurers seize the future, driven by innovation and customer-centric approaches? This question has become increasingly pertinent as patron expectations evolve and technology reshapes the risk management landscape.

The Evolution of the Insurance Industry

The insurance industry has seen considerable changes over time, primarily influenced by evolving risks, technological advancements, and regulatory frameworks. Initially, insurance was a basic system designed to protect against specific risks, such as fire or maritime losses. Policies were often tailored to each client, and the underwriting process relied heavily on personal relationships and qualitative assessments. As economies expanded and risks became more complex, the sector saw the emergence of standardized policies and actuarial science, which introduced statistical methods to more accurately price risk.

In recent years, digital technology has enabled the industry to innovate and adapt to a rapidly changing world. Integrating big data and analytics has revolutionized underwriting, claims processing, and customer engagement, allowing insurers to assess risks with unprecedented precision.

Moreover, the rise of insurtech — technology-driven companies focused on insurance innovation — has accelerated the adoption of new models such as peer-to-peer insurance, usage-based policies and parametric insurance. These advances are enhancing efficiency and personalization and expanding access to insurance in underserved markets, fundamentally reshaping the risk management and protection landscape.

Key Characteristics of Traditional Insurers

Traditional insurers have built a reputation for reliability and trustworthiness, often supported by strong regulatory frameworks. Below are some of the key characteristics:

• Risk pooling: They operate by pooling the risks of many individuals or entities. This means the premiums collected from policyholders are used to pay for the claims of those who suffer covered losses. By spreading risk across a large number of policyholders, traditional insurers can offer protection at a relatively predictable and stable cost.
• Underwriting: Traditional insurers evaluate factors such as health, occupation, lifestyle, and property details to determine the premium rates and terms of the insurance policy.
• Policy standardization: They often provide insurance policies where the terms, coverage, and exclusions are essentially the same across many customers, with little room for customization. This standardization streamlines the process of selling and managing policies.
• Regulation and compliance: Traditional insurers are heavily regulated to maintain sufficient reserves to pay claims, operate fairly, and protect policyholder interests. They must comply with a range of legal and financial standards set by regulatory bodies.
• Claims processing: They verify the validity of claims, assessing damages and determining appropriate compensation. This is usually a manual process and can be time-consuming.
• Distribution channels: Traditional insurers typically sell their products through a network of agents, brokers, and direct sales teams. These intermediaries educate customers, assess their needs, and find suitable insurance products.
• Investment and financial management: They manage large pools of premium income, which they invest in various assets to generate returns. This helps ensure they have the funds necessary to pay claims and other obligations.

Key Characteristics of Digital-First Insurers

Digital-first insurers — also known as insurtech companies — have distinct characteristics that set them apart from traditional insurers:

• Technology integration: Digital-first insurers leverage advanced technologies such as artificial intelligence (AI), machine learning, and big data analytics to streamline operations. This integration enables more accurate risk assessment, personalized policy offerings, and efficient claims processing.
• Customer-centric approach: They focus heavily on user experience, offering easy-to-use digital platforms for purchasing policies, managing accounts, and filing claims. This often includes mobile apps and online portals that provide 24/7 access to insurance services.
• Customization and flexibility: These insurers often provide highly customizable policies tailored to each client's specific needs. They offer innovative products like pay-per-mile car insurance, on-demand coverage, and microinsurance, which allow customers to adjust their coverage based on real-time needs.
• Cyber insurance: Cyber insurance is a rapidly growing sector providing coverage against digital threats such as data breaches and cyberattacks, resulting in over $4 billion in losses in 2020 alone. It’s particularly relevant in the digital-first space, where protecting sensitive information is crucial.
• Automated processes: Digital-first insurers rely on automation for many aspects of their operations, from underwriting and policy insurance to claims and adjudication. This reduces administrative costs and speeds service delivery.
• Data-driven decision-making: They use extensive data analytics to inform decision-making across all business areas. This includes using customer data to predict risk, optimize pricing, and improve customer engagement strategies.
• Direct-to-consumer sales: Many digital-first insurers bypass traditional intermediaries such as brokers and agents, selling directly to consumers online. This model allows for lower costs and more competitive pricing.
• Focus on innovation: Constant innovation is a hallmark of digital-first insurers. They’re often at the forefront of developing new insurance products and services, using emerging technologies such as blockchain, telematics, and the Internet of Things (IoT) to create more efficient and responsive insurance solutions.

See also: How Everybody Wins in a Digitized Insurance Market

Customer Experience and Expectations Are Priority

Customer experience and expectations have become critical determinants of success. Traditional insurers — long established, with extensive infrastructures — have historically focused on reliability and comprehensive coverage. However, they often fail to deliver the seamless, personalized experiences modern customers expect.

The traditional model’s reliance on face-to-face interactions, paper documentation, and slower response times can seem like a hassle to a digitally savvy clientele accustomed to the instant gratification of the online world. As customers increasingly value convenience, transparency, and quick service, traditional insurers are under pressure to innovate and adapt their offerings to meet these evolving expectations.

On the other hand, digital-first insurers are rapidly gaining ground by prioritizing customer experience at every touch point. These brands use technology to streamline processes, offering intuitive mobile apps, AI-driven customer support and chatbots, and personalized policy options. The ability to customize coverage, receive instant quotes, and file claims efficiently online resonates strongly with today’s customers.

Digital-first insurers also excel in providing transparency and simplicity, making insurance more accessible to those who may have found traditional processes confusing or intimidating. Their focus on user experience — often manifested through mobile apps and responsive customer service — builds strong consumer relationships and loyalty.

As the insurance industry faces a critical juncture, the model that will dominate will likely be the one that most efficiently aligns with customer expectations. Digital-first insurers currently have the advantage, as their approach meets and often anticipates customer needs, positioning them as leaders in this new era.

See also: The Need for 'Digital Fluency' in Insurance

Integrating the Two

The insurance sector's future may not be a clear-cut victory for either model. Integrating traditional and digital-first insurance can be a strategic move. Traditional insurers bring a wealth of experience, extensive customer bases, and robust regulatory frameworks to the table, which are valuable assets in a highly regulated sector. By adopting digital tools and methods, these insurers can enhance their existing infrastructure, improve operational efficiency, and exceed customer expectations.

For instance, integrating digital underwriting processes and automated claims handling can streamline operations and provide a more personalized customer experience. This hybrid approach allows traditional insurers to leverage their strengths while modernizing their offerings.

Conversely, digital-first insurers can benefit from integrating aspects of the traditional model, such as building deeper customer relationships and offering more comprehensive policy options. They can also enhance their credibility and trustworthiness, which is crucial in an industry where customers seek security and reliability.

A combined approach can enable digital-first enterprises to expand their reach and scale more effectively. Thus, the future of the insurance sector may not necessarily be a zero-sum game between traditional and digital-first models. Instead, it could see the emergence of hybrid insurers that blend the best elements of both worlds, offering a comprehensive, technologically advanced and customer-centric experience. This integration could provide the optimal path forward, meeting diverse customer needs and adapting to a rapidly changing market.

A Collaborative Future

As the industry evolves, it becomes clear that the future of insurance may lie in collaboration rather than competition. By embracing a hybrid model, insurers can take advantage of both approaches, ensuring they remain relevant and responsive in a rapidly changing environment. The key will be to focus on what matters most — delivering value, building trust, and meeting changing customer needs.

Ultimately, the model that will dominate the future of insurance isn't about being purely traditional or entirely digital. It's about being adaptable, innovative, and customer-focused. Insurers that integrate these elements successfully will be best positioned to lead the sector forward.

What have we learned in seven years?

One of my favorite quotes comes from Mark Twain, who once said, “When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much he had learned in seven years.” 

I used the quote at my father's funeral in recognition of his patience during my troublesome teenage years. This came back to me when I reviewed the first half of 2024. One of the features of my year to date is how well I’ve been getting on with the insurance industry – better than at any other time this millennium, and I was wondering why.

For context, I should say that for the last 25 years of my career I have been involved in the digitalization of the insurance industry. Originally, I was a platform builder, and more recently a partner of InsTech – a “community for the curious,” which sits in the nexus between insurance and technology innovation. It champions solutions, whether from startups or big tech, that can make insurance better. So, I’ve always been on the outside selling in, relatively free to express my views, and I have done that with a degree of candor that has occasionally involved rocking the establishment boat -- usually by complaining about lack of technology investment, foresight, and leadership.

But I find myself doing that less and less. I don’t seem to be upsetting people so much, either – although there are exceptions! Am I softening at the end of my career? I wouldn’t be the only one to get more conservative and traditional as I aged. Or has the progress that the industry has made in recent years brought it closer to my more reformist agenda? I think it’s a bit of both, and here’s why:

• Disruption is dead. As I and many others have observed, the whole insurtech scene has stopped being about disruption and is now about partnership and collaboration. That’s a big and very helpful shift in aligning interests. 
• There’s less silly stuff going on, too. Gone are the days when the airwaves were full of talk of blockchain, crypto, and peer-to-peer (remember that?). They’re now consigned to the fringe, where they are finding their part to play.
• Gone, too, is the brief era of crazy valuations fueled by cheap money and generalist investors funding ideas that were either misguided or too far ahead of their time. There’s less money, and it’s seeking out well-managed businesses that are profitable (or have a clear path to profitability) and proven propositions. Sanity reins. 
• There’s more realism about the role of IoT in underwriting. Data from devices has a role, but in insurance — whether life or non-life — dynamic pricing based on real-time data on the state of the asset or the life being insured, isn’t going mainstream any time soon. 
• And then there’s generative AI. Counter-intuitively, the hype around GenAI has increased interest and investment in the use of AI for analyzing and modeling data. In days of yore, the industry would have batted GenAI away as yet more Silicon Valley nonsense. Instead, it has provided a second wind for AI adoption (not just GenAI) and stimulated much-needed investment in the underlying data infrastructure required to run enterprise grade AI solutions that are scalable, secure, and fit for regulated industry.

See also: Where Insurtech Went Wrong

A well-served industry

These are the ways in which the innovators have changed. To return to Mark Twain, this is what we “teenagers” have learned and how the dynamics have changed. 

But it’s not the whole story. The other big influence is that there’s currently a real alignment between what the insurance industry wants and what is being provided. The industry is now well-served by some top-notch solutions spawned in the insurtech era, thoroughly tested in the heat of battle and built and supplied by companies that understand the industry and what it needs.

The focus for the insurance industry is to get more efficient, select and price risk better, get more from its talent, and provide a better service to its customers. The exact same dynamic applies to underwriters and claims handlers. To achieve its goals, the industry needs to get smarter with data (both ingesting and analyzing it) and give underwriters/claims handlers the toolsets they need to optimize how they use that data. Then there’s the legacy drag, as most insurers are trying to do that with considerable continuing dependence on an aging legacy stack.

Hence the excitement about the latest data ingestion tools, triaging inbound submissions/claims, underwriter/claims workbenches, algorithmic/augmented risk selection, more dynamic pricing engines, data ecosystems, automation capabilities, and so on. This is where the insurance industry has changed the most. Solutions have been around for a while in various stages of maturity, but insurers now accept that they all have a big role to play. And after a few years of great underwriting results, funds are available to invest, in return for the long-term benefits of adoption.

Some issues persist

Before you think I’ve gone completely soft, I have still got a few beefs. While sentiment toward technology investment has never been more positive, the pace of change is still far too slow – it is no longer glacial, but in some respects the climate is changing faster. Nothing illustrates this better than the continued reliance on spreadsheets and PDFs for moving data around with all the inefficiencies and inaccuracies that they entail. I think I will have retired before these stop being the industry’s default data migration tools. 

And then there’s the worrying proliferation of that old insurance habit of what I call “herding”.  This refers to the reluctance to pursue change unless it’s clear that most of your peers are inclined to do so too. This usually involves a breakaway pack that kicks things off, and then everyone else follows in their wake with a business case based on FOMO. The corollary is that it is all too rare to find an insurer seeking competitive advantage through being different, let alone much better. All too often, boards sign off on strategies designed to keep companies from falling behind, rather than getting ahead.

Observations from the front line

Reverting to the more positive me, let’s finish with some real evidence for these observations. InsTech had a busy June running some big events in which some of the biggest companies in insurance participated. Working with them, we were also able to get a record number of grandees to contribute their insights. And it gets better. Not only are we engaging (for the first time really) with real industry influencers, but even contrary old me is aligned with the insights they provided! Let me take a couple of extracts from my interview with Andy Marcell, the global CEO of Aon Reinsurance Solutions, in early June.

Insurance companies are crippled by their data architecture and by the platforms they have. And if they can’t change their platforms fast enough, they can’t use the insight that technology can give them …so we’re going to invest US $1 billion over the next three years in improving that [the Aon Business Services Platform]

See also: Insurtech Is NOT Dead

 Later on, when asked to comment on the motives for such a vast investment, Andy said:

To differentiate and solve client problems, you need to give them solutions and advice linked together with technology, with software, that enables them to make real-time decisions … linking underwriting decisions and claim outcomes to capital. And if you don’t do that, and you don’t make it real with advice, then ultimately, you’re going to be disintermediated, because all you’re doing is providing a transaction. If that’s all you’re doing, then somebody really smart is going to figure out how to transfer risk more effectively than we are. So, you have to stay ahead of the game. The rule of thumb is to anticipate what your clients need, understand their issues, and bring them solutions so they can continue to operate their business and you’ll be relevant as the market changes around you.

Those are the sort of observations we’re used to seeing from the big consulting houses, tech and data service vendors and the ragged cohort of technology adoption protagonists like me. All have a vested interest in change in one form or another. It’s much less common to see commentary of this nature from the leadership of big brokers which are themselves among the main gatekeepers to better data. That’s a big bold statement to make in public and a real sign of the times. 

An insurer’s Mark Twain

For some observations from the other end of the spectrum (startup world), here’s an extract from last month’s podcast with Charlie Blackburn from Azur Technology and Graham Elliot from the newly launched Crux Underwriting. The latter is setting up a new technology-enabled insurance business nine years after the last one. I asked him if there was any difference this time around.

When we set up the last business, I really felt like we were a bit of a petting zoo. We had a lot of people come in to look at us and stroke the little furry animals and wash their hands and go away and think, well, that’s great, and I can go back to my normal day job now. And what I see now in the market is much more of an acceptance that things have got to change, that you can’t win in the 21st century on legacy technology, and a growing realzsation that it’s an unstoppable trend, and that’s great.

So, there we have it. Mark Twain was nearly right, but the insurance version would be like this ,“When I was a furry insurtech animal of 14, the insurance industry was so ignorant they could barely bear to be around me. But when I got to be 21, I was astonished at how much we had both learned in seven years.”

You might think that Gen Z are a bunch of whining weenies: Their unrealistic expectation around work-life balance, fantasies about speedy career progression, and complaints about stress, workload, and lack of diversity in the workplace all put this generation in the firing line of derision from their elders. 

Who do they think they are? The bootstrapping Boomers and cunning Xers never grappled with such entitlement. Right?

But one way or another, leaders need to come to grips with this precariously perceived generation. Already 22% of the workforce, they will represent one out of every three employees by 2030. They are here to stay, and even though they “grow up,” their core values will stick with them. Just have a look at what has happened before: Boomers (ages 60+) never lost their penchant for hard work, Generation X (ages 44-59) has kept their focus on pragmatism and efficiency, and Millennials (ages 28-43) continue to value purpose-based work.

See also: Gen Z and Millennials Make Bold Moves

The Perfect Workplace, According to Gen Z

Gen Z wants from their employers:

1. Work-Life Balance:
   • They prioritize flexibility and work-life balance, valuing opportunities for remote work and flexible schedules.
2. Career Growth:
   • They seek continuous learning and development opportunities. They appreciate clear career paths and chances for advancement.
3. Purpose and Impact:
   • They desire meaningful work that aligns with their values and contributes to societal and environmental causes.
4. Technology and Innovation:
   • They expect up-to-date technology and innovative tools that enable efficiency and creativity.
5. Diversity and Inclusion:
   • They value a diverse and inclusive workplace where different perspectives are respected and integrated.
6. Feedback and Recognition:
   • They prefer regular, constructive feedback and recognition for their contributions and achievements.

See also: Strategic Guide to Unlocking 'Gen Zalpha'

The Perfect Leader, According to Gen Z

Gen Z wants from leadership:

1. Transparency and Communication:
   • They appreciate leaders who communicate openly and transparently about company decisions, goals, and performance.
2. Authenticity and Empathy:
   • They respect leaders who are authentic, empathetic, and approachable, fostering a supportive and understanding environment.
3. Mentorship and Support:
   • They seek leaders who are willing to mentor, provide guidance, and invest in their professional development.
4. Empowerment and Autonomy:
   • They value leaders who trust them with responsibilities, empowering them to take initiative and make decisions.
5. Adaptability and Innovation:
   • They expect leaders to be adaptable and forward-thinking, embracing change and fostering a culture of innovation.

By understanding and addressing these preferences, organizations can better attract, engage and retain Gen Z talent.

Since the launch of OpenAI’s ChatGPT in November 2022, the concept of generative AI (Gen AI) has sparked a universal interest that spans beyond industries, geographical borders, and even generations.  

Everyone–from CEOs to your grandma—has inquired about the transformative technology, and now companies are learning how to harness it. In the ever-evolving and competitive landscape of the insurance industry, companies need to stay ahead by anticipating, navigating, and addressing growing customer expectations and emerging challenges to mitigate the risk of becoming obsolete. 

One of the challenges the insurance industry is facing is how to leverage emerging technologies to streamline processes and enhance customer experiences. 

Through my role at Clearcover, I have discovered that success with Gen AI comes from identifying the places in the customer journey where AI can supplement or enhance the experience. 

Though we’ve seen substantial operational efficiencies and high percentages of customer adoption, the journey to our recent launches taught us three important lessons that can help other product and innovation teams ensure that customers receive personalized, empathetic service via advanced Gen AI technology. 

See also: AI and a Vision for Safer Roads

1. AI can improve customer experiences: Gen AI products can allow for customers to receive around-the-clock support, addressing their queries well outside standard operating hours. One area we targeted at Clearcover was offering a 24/7 support system, developed in partnership with Ada, which ensures that our policyholders receive prompt assistance while having our human agents remain available for much more complex inquiries. Since the solution launched in April, more than 40% of our customer-facing chats no longer required human intervention. We estimate this could result in at least a 1% servicing cost ratio improvement at scale. 

2. Collaboration is crucial: Streamlining processes requires cross-functional collaborative efforts of all your teams, including in data science, product, compliance, claims, and customer service. Our teams identified a way to streamline our claims process even further by using large language models immediately following the submission of a claim (first notice of loss, or FNOL). Our AI extracts key details of the claimant’s account and asks relevant follow-up questions. This technology creates fewer hassles for the customer, who provides real-time data to the claims representatives up front, enabling fewer back-and-forth conversations and faster payouts. Since launching in March, we’ve collected 140% more information per claim while on average only asking the customer seven additional questions. 

3. It’s about enhancing, not replacing: Gen AI should augment and empower your human workforce. By leveraging these tools to streamline processes, you enable your employees to prioritize delivering personalized, empathetic experiences. In fact, according to a 2023 report by Hubspot, 78% of customer service professionals surveyed said they believe AI helps them spend more time on the more important parts of their roles. An example of this at Clearcover is our AI-powered Claims Assistant, which has revolutionized how our adjusters operate. By rapidly summarizing extensive claim files, providing insights, and drafting initial denial letters, the AI “assistant” empowers our human experts to focus on the nuances of each case. We launched this internal-facing tool in late January, and in a short time, it generated 740+ summaries and answered 540+ questions, saving around 730 hours. 

See also: We Need to Rethink the Future of Cars

The use of Gen AI in insurance is brimming with possibilities – from revolutionizing underwriting and risk assessment to detecting fraud more effectively. However, as our journey has highlighted, the key to unlocking this potential lies in striking the right balance between technological capabilities and preserving the elements customers value.

We're committed to staying agile, fostering cross-team collaboration, and maintaining a customer-centric approach that prioritizes both technological advancement and human empathy. As others in the industry join us in this pursuit, we are collectively working to redefine the insurance experience through the blend of Gen AI and human expertise.

While agencies need data insights to gain visibility into how their business is performing, accessing that data hasn’t always been easy. Staff had to sift through inconsequential data and try to interpret insights that had no meaning to their role. Ultimately, the time and effort spent sorting data often outweighed the advantages gained from the insights.

But there’s good news: Data visualization tools have evolved to allow users to see only what data is relevant to their role. Employees with access to data visualization tools can easily find answers to common questions without running and preparing multiple disparate reports, saving them time and allowing answers to be shared more quickly. Team members in nearly every agency role can benefit from insights ranging from employee productivity to cross-selling opportunities to revenue breakdowns.

Let’s take a deeper look at how data insights can enhance daily work from the perspective of each agency role.

View From the Top

Let’s start at the top with owners and principals. Keeping an agency running smoothly requires a bird's-eye view of the business. Data visualization tools make data regarding growth, profitability, and retention from across the business easily accessible in a single location, helping owners better track the health of their agency. This information can be further broken down to understand how individual branches and departments are performing.

To fully understand the health of the agency, it’s important to have a firm grasp on its sales pipeline and financial performance. Digging into sales and opportunity highlights such as customer revenue breakdowns, won/lost opportunities, and performance across producers, departments, and branches can provide valuable insights that guide future decisions and help course-correct any emerging issues.

Data insights can even help owners understand their agency’s carrier relationships. Owners can quickly answer key questions about their carriers, including who their preferred carriers are based on premium, which carriers are writing new/renewal/rewrites, and what a carrier’s hit rate is for their agency.

Managing With Data Insights

There are many different types of managers within an agency, all of whom can benefit from data insights. Let’s start with department managers, who can gain a line of sight into the workload and business managed by their team across clients, policies, and lines of business. Customer retention and expiring policy information provide valuable insight into the health of the team’s book of business and help ensure the agency’s goals are on track. Department managers can understand the productivity and capacity of their team by looking at work effort and overdue activities. They can even balance workloads across employees by reviewing book and retention rankings of individual employees and correcting any lopsidedness.

Next are sales managers. Much like owners and principals, sales managers can dig into sales pipeline data, such as recent wins and near-term opportunities, to understand how their team is performing. Sales managers may wish to dig deeper than an owner, looking at things like customer mix and retention breakdowns, and growth areas across business lines and policies. Data insights also allow the sales manager to understand revenue growth, profitability, and progress across their team, as well as revenue breakdowns such as average and trending revenue by customer.

An Account of the Accounting Department

Speaking of revenue, let’s move on to the accounting department. Accountants with access to data insights can easily manage cash flow, control data quality that affects accounting workflows, and understand financial performance. It becomes easier for the team to maintain appropriate cash positions when they have visibility into cash flow in and out of the agency with near-real-time transaction information like incoming client payments, outgoing carrier payments, and expenses. They can even ensure the accuracy of accounting entries and avoid posting incorrect financials with insights across general ledger entries, commissions, account balances, and transactions.

With all of this information, the accounting department can easily understand and report to leadership the health and performance of the business, including revenue breakdowns by carriers and producers, profits and losses, expense trends, and more.

Data Insights for Client-Facing Roles

Without clients, there is no agency. It only makes sense that an agency would provide their client-facing team members with data insights that can enhance their performance. Account managers and service reps, for example, can use data insights to easily understand where to focus their time each day. Having an in-depth view of coming and overdue activities in the agency management system can help prioritize each day’s tasks. This is particularly helpful when it comes to renewals. Being able to easily view expiring policies enables the team to focus on the most urgent renewal tasks.

Insights into revenue composition and key activities across an agency’s book of business allow its producers to keep a pulse on customer relationships and stay focused on tasks that drive sales. Visibility into the agency’s largest customers and highest-value industries based on revenue, including how those rankings trend over time, can help producers determine where their best opportunities lie. This information, combined with the ability to monitor coming and new business activities across all opportunities, allows producers to understand the health of their pipeline and get an accurate look at how the team is progressing toward its goals.

Informing the Information Technology Team

Last but definitely not least is the IT team. These team members play an important role in keeping everyone else’s systems up and running, so it is crucial that IT administrators have as many tools at their disposal as possible. Data visualization tools allow the IT team to gain insight into user logins to quickly determine who may be having problems logging into their software, how often users log in, and when logins occur.

With the constant threat of security breaches and cyber events, IT teams are under more pressure than ever to keep their agencies safe. Visualization tools help monitor software logins, security changes, and data integrity more efficiently to meet organizational compliance standards, audit security permissions, and spot trends in data quality throughout the agency.

Data Insights Are for Everyone

Giving all roles at an agency access to data visualization tools will allow them to double-click into what’s happening with their business, teams, and workflows. This enhanced visibility will enable the team to grow revenue, improve efficiency, and improve the customer experience.

It's been more than two and a half years since my article “Emerging Risks With Long Tails” appeared in Insurance Thought Leadership. It was written in December 2021 to heighten the risk management and insurance communities’ attention on and preparedness for the lawsuits and claims that will emerge from climate and forever chemical risks. A second look, specifically at forever chemicals known as PFAS, which includes chemicals such as PFOS and PFOA, is timely.

Already, some very significant cases have gone to settlement. For example, in July, BASF paid about $4 million as part of a settlement, to be followed by another payment on March 1, 2025, of $312.5 million. The settlement will cover claims related to PFAS detected in drinking water. In its own media release, BASF states that it has a significant amount of insurance from a number of insurers, and it will seek recovery of its settlement from them. 

Another example involves 3M. This past April, a federal judge approved a settlement between 3M and public water suppliers valued at more than $10 billion. In fact, the final cost of the settlement could range between $10.5 billion and $12.5 billion, depending on additional identified contamination, with payouts through 2036. 

Also tied to drinking water contamination is the DuPont (and spinoffs Chemours and Corteva) settlement of $1.18 billion to resolve PFAS complaints by roughly 300 drinking water providers.

It is not just companies that produce and sell PFAS ingredients put into drinking water that have seen such activity. A host of other types of suits have arisen, including a 2024 class action in U.S. District Court of New Jersey against Johnson & Johnson (and its spinoff Kenvue) contending that its bandages contain PFAS ingredients, and lawsuits against McDonald's and Burger King in 2022 alleging PFAS is in their food packaging. The outcomes could show both the potential proliferation and determination of future suits.

One suit that did result in the defendant, Recreational Equipment Inc. (REI), defeating the proposed class action rested on a rather weak set of facts brought by the originating plaintiff. The plaintiff had alleged the company deceptively marketed its waterproof clothing as safe and sustainable even though such clothing allegedly contained PFAS. There is much discussion about other makers of waterproof and rain-protective apparel being sued over the presence of PFAS in their clothing.

This is a small sampling of PFAS litigation currently. The number and types of products that could be in scope for future litigation are boundless. It could be in clothing, food or drink containers, cooking pots, pans or utensils, furniture, building materials and so on. Additionally, the litigation might not only involve the makers of the chemicals themselves and the manufacturers that use these chemicals in their products, but also retailers of products with PFAS or owners of venues where the building materials or furnishings have PFAS in them.

For risk managers, this means that PFAS risk needs an in-depth review. Any possible association with PFAS should be identified, tested, quantified and mitigated. Mitigation can be both retrospective and prospective. Retrospective-oriented mitigation might involve removing some produced but unsold items from inventories, beneficial disclosures, comprehensive cataloging of all occurrence-based insurance policies or additions to captive reserves. Prospective-type mitigation might include elimination of PFAS in all parts of the value chain, special testing of materials where PFAS is not supposed to be present but there is a possibility it may be present and staff training about PFAS and company policy concerning it.

The amount of PFAS in and around all of us is significant and may be the cause of the rise in some of the illnesses we are afflicted with. The business community is seeing only the tip of the iceberg when it comes to litigation and consequent claims activity. ERM practitioners need to put serious focus on this issue and invest in sound mitigation strategies and actions.

As agency owners, we have been told that, from the moment we start our agencies, we should be thinking about our exit strategies. But if that's the case, then why do so many of us drag our feet when it comes to succession planning?

Usually, we say we are too busy to plan our retirement. We believe that if we spend too much time focusing on the future, we'll lose sight of what our agencies need today. But if you want to ensure your agency's long-term stability and avoid the painful sting of selling your biggest investment at below market value, then you need to start creating a strategic succession plan right now.

See also: 5 Key Mistakes in Long-Term Planning

Why a succession plan matters

We work in an industry built on a foundation of risk management. So, it's fascinating that many of us sometimes don't see the value of creating our own contingency plans. I know this firsthand. I'm "that guy" who waited to buy a life insurance policy until after the birth of my first child — and I've been in this industry for more than a decade.

In the same way a life insurance policy gives you confidence that your family will be cared for financially, a succession plan gives you peace of mind about your agency's future. It prepares you for the unexpected, such as a life-changing diagnosis or an abrupt change in your personal circumstances. It also provides an off-ramp when the day comes that you're no longer motivated to come into the office each day. Plus, it ensures the continuation of your life's work, allowing you to leave a legacy for future generations.

Adopt a future-focused mindset

The first step in creating a succession plan is to change your perspective. If you are an owner who believes you're irreplaceable, you're not thinking about your role correctly. Instead, you should aim to create an agency that's so efficient it can run without you. When you make this mindset shift, you free time to set the strategy and vision for your agency.

Next, start building your agency's bench strength. Identify a core group of employees capable of taking the reins should you leave tomorrow. Then, create well-documented processes and procedures — and socialize them agency-wide — so all employees can contribute to the agency's success.

Move beyond "dump and run" thinking

Sure, when it comes time to retire, you might find a large broker or a private equity company that will write a big check for your agency up front so you can walk away free and clear of any future responsibility associated with your agency. But while it's possible, it's not probable.

Most succession plans involve selling the agency to a family member, shifting ownership to an internal management team, or selling to another agency. In most cases, these deals will require long-term financing, whether through a Small Business Administration loan or other means, indicating that your successor will likely be using your agency's cash flow to pay you partly upfront, with a deferred amount paid over multiple years depending upon the specific terms of your deal.

You could also choose to sell a percentage of your agency — say, 80% — and roll the remaining 20% equity either into your agency or the larger organization of which you become a part. With this approach, you essentially become a minority investor in your former agency or the larger organization.

To account for these scenarios, consider the value of your investment two to three years after the deal closes. Make sure there's a clear path to how you'll be able to liquidate your equity when that time arrives.

See also: The Long Game of Inflation – Dynamic Portfolio Strategies

Go beyond the valuation

Getting an accurate valuation is a critical step in succession planning, whether planning for internal (e.g., family or management) or external (strategic or private equity) perpetuation. It's also incredibly important to ensure that the company buying your business is a cultural match with your current agency. This is an area that too many owners overlook, often to the detriment of their agency's transition. If your successor and their organization don't match the values, principles, and work ethic of your current agency, conflicts will ensue, hurting business results. And if your exit deal is built on ensuring a certain level of financial success — or if you choose to stay on as an investor or adviser post-deal — you'll feel the effects directly.

Plan for a seamless transition

A strategic succession plan will help you avoid the potential pitfalls of agency transitions. Follow these five best practices when building your plan.

1. Set a timeline. Ask yourself today what an ideal retirement looks like. Then, map a path to get there based on your financial goals.
2. Find worthy successors. Determine whether you will look internally or externally for successors. If you choose to sell externally, start networking. Ask potential suitors about their operations and their culture, and seek professional references from your carrier partners.
3. Gather multiple perspectives. Ask recently retired agency principals and small business owners how they planned their exit strategies. Seek resources from agency alliances and other groups.
4. Partner with experts. Create a team of specialists who can help you execute the deal. Choose an attorney and a CPA who works on mergers and acquisitions regularly and enlist the help of investment bankers or brokers to help guide you through the transaction process.
5. Review your plan regularly. Do so at least once a year to make sure your plan still matches your goals. Also, review your plan any time you make a material change in your agency, such as bringing on a partner, acquiring another organization, or losing a major customer.

Start planning your exit today

Don't let the pressures of day-to-day agency business derail your future financial security. By crafting your agency's succession plan today, you'll give yourself plenty of time to adapt, adjust, and refine that plan and ensure a smooth transition into retirement (or your next career).

When I edited a magazine on digital innovation during the first internet boom, in the late 1990s and early 2000s, we had a motto: "Sometimes right, sometimes wrong, never in doubt."

In that spirit, I'm going to offer a judgment that goes against a lot of what I've seen in the press lately: I think the insurance industry will largely escape the crisis facing commercial real estate. 

I realize that life insurers have $900 billion invested in loans for commercial real estate, or 17% of their investable assets, so they're not going to escape unscathed from the tumult that will play out for years, perhaps even a decade. But there are growing signs -- at least to my eye -- that they'll be able to avoid big losses to their portfolios.

I'll explain. 

My argument is twofold.

First, there are signs that the market for commercial real estate is shifting from frozen-in-panic to rationality, and rational markets will work their way out of crises. Owners of office buildings seem to finally be facing up to how much the hybrid model will affect demand for their space and to whether they might, or might not, be able to convert their space to apartments or condos. Lenders are more comfortable making those calculations, too. 

This recent Wall Street Journal article begins: 

"Banks and other lenders are seizing control of distressed commercial properties at the highest rate in nearly a decade, a sign that the sector’s punishing downturn is entering its next phase and approaching a bottom."

The article continues:

"In previous downturns, comparable surges in foreclosure activity have signaled the approach of a market bottom. Once lenders seize a property, they are typically quick to sell it, a process that helps determine values of properties after long periods of sluggishness in the sales market."

Some of the results can be brutal. A Manhattan office building just sold at auction for 2.5% of the price it commanded in 2006. But at least people know where the market is.

Second, interest rates finally seem to be abating. Mortgage rates for homeowners hit a 15-month low last week, and the Fed is widely expected to finally start lowering interest rates next month. A key pressure point on commercial real estate is that $1 trillion of loans are coming due over the next two years. The current loans were negotiated during an era of roughly zero interest, so lots will be uneconomic in the current environment for interest rates. A long-awaited decline in interest rates will, however, diminish the pain.

Yes, a $900 billion position will be hard to unwind. Insurers will have to live in the uncertainty as rents for many buildings crater, as offices are revamped for today's workers' needs, as many are converted to living space, as interest rates decline, whether slowly or rapidly.

And, as I said up top, many think the reckoning for commercial real estate will be more acute than I do. Here are Harvard Business Review, Bloomberg and the Hill. 

But if the commercial real estate crisis turns out to be far less acute for insurers than many expected, you heard it here first. (If I'm wrong, feel free to forget that you ever read this.)

Cheers,

Paul 

For business owners, securing affordable property insurance has become increasingly challenging over the past five-plus years due to the rising valuations of their properties. Historically undervalued by as much as 30%, these properties have been reassessed by underwriters, who have encountered claims that exceed the properties’ declared value.

Most industries have also experienced a surge in both attritional losses and natural disasters that have surpassed the total declared or reported value for specific locations or exposures. Inflation and supply chain issues have also contributed to the strained insurance market, driving loss amounts far beyond what was anticipated or underwritten. 

So premiums have soared and coverage conditions have become stricter — even for properties with little to no CAT exposure and excellent loss histories. 

The good news is that valuations are stabilizing, primarily because most business owners have raised their property valuations in response to underwriters’ mandates, and inflation has slowed. Now, instead of 10% to 20% annual inflation in values, the starting point is a much less drastic 2% to 5%, with adjustments based on the specific exposure.

See also: 7 Key Strategies to Safeguard Property

Staying on top of high property valuations

By managing property valuations, business owners can avoid unexpected premium increases while adequately safeguarding their essential assets. Here are five ways to do just that. Business owners should:

• Establish a clear valuation methodology to share with insurers.
• Conduct appraisals on a replacement cost basis, as this aligns with how insurance policies are typically valued.
• Include a detailed write-up of the valuation methodology in market submissions. This provides underwriters with an added layer of security and verification.
• Regularly review any insurance policies before they expire to ensure adequate coverage. Additionally, consider seeking deductible options to determine the impact on quoted  premium rates.
• Use a reputable insurance broker to assist with appraisals, purchasing insurance and filing claims if necessary.

Pivoting when coverage becomes cost-prohibitive

In cases where a reappraisal results in prohibitively expensive or unavailable coverage, a stair-step approach can be effective if insurer partners are agreeable. This involves gradually increasing property values by 5% to 10% annually over two to three years, rather than making a single large adjustment, such as a 30% increase in one year.

For property owners facing capacity or cost challenges, alternative risk options are available that come in various structures, tailored to different types of risks. These include captives, parametric insurance, structured solutions, integrated risk programs, and even self-insurance.

Captive insurance involves creating a self-funded insurance company, enabling entities to assume some or all of their own risks, sometimes in collaboration with similar risk-related entities. It may initially be more expensive than a traditional program, so it’s not a quick fix for high rates.

However, a well-managed captive can become profitable within a few years, reducing market uncertainties and offering long-term financial benefits. Premium savings can then be reinvested into the business to manage risk effectively.

These alternatives are worth considering when traditional insurance becomes too expensive, inefficient, or unavailable and should be considered when conducting your renewal strategy. Establishing an alternative insurance program is a complex process that requires careful planning.

It’s crucial for a business to assess its financial strength and ability to fund potential losses without traditional insurance. This involves understanding your risk tolerance and thoroughly evaluating all insurance alternatives well in advance of coverage expiration. Generally, all insurance plans should be reviewed at least 90 to 120 days before renewal, with even longer prep times for complex risks that may require inspections by insurers.

See also: Potential Solutions to Home Insurance Crisis

A plan for property management

Navigating higher property valuations and mitigating insurance premium increases requires a strategic approach from business owners. By staying on top of property valuations, establishing clear valuation methodologies, considering alternative risk options, and working closely with reputable insurance brokers, businesses can effectively manage their insurance needs.

COVID-19, the energy crisis, Russia’s war - to say that the aviation industry, and its insurers, have had to face significant challenges in recent years is an understatement. However, aviation has rebounded well, with several 2023 parameters showing “best ever" safety results. This year, the volume of global air passengers is expected to hit an all-time high (up 10% year-on-year), driven by Asia-Pacific and North America. 

While the general outlook for the industry is positive, there are still lots of challenges to tackle.

Global insurer Allianz Commercial just released a new risk report, Aviation Risk, Claims and Insurance Outlook. The report reveals that the aviation sector produces some of the highest-value and high-profile claims across the corporate insurance sector around the world. Analysis of more than 32,000 industry claims from 2019 - 2024 with a total value of $15 billion (€14 billion) shows that collision or crash incidents (63%) and faulty workmanship or defective products (22%) are accountable for 85% of the value. Other incidents, such as natural catastrophes (4%), machinery breakdown (3%) and fire (1%), account for a much smaller proportion of claims by value.

See also: 5 Ways Drones Are Changing Insurance Claims

Soaring repair costs and lack of mechanics are an increasing issue

There has been a significant increase in aircraft repair costs in recent years, driven by higher labor rates and the cost of aircraft parts, among other factors, such as inflation. The shift to next-generation aircraft continues to affect claims, especially when it comes to engine disassembly and repair costs.

Furthermore, a growing shortage of aircraft mechanics may affect future claims activity. It may take longer to complete repairs if vendors lack manpower or efficiency. More less-experienced mechanics on the line could mean they do not have the ability to repair a part, meaning it will need to be replaced with a new one, which typically is more costly.  An obvious concern is the shortfall ultimately could lead to an accident, despite the systems of checks and balances in place in the industry.

SAF and eVTOL aircraft take off, but compliance is the main lever to reach net-zero targets

Aviation contributes around 2% of global emissions and is focused on sustainability, pledging to reach net-zero by 2050. The lack of a silver bullet solution for decarbonization should not take away from the exciting developments underway. 

Sustainable aviation fuel (SAF) continues to attract a lot of attention, with mandatory targets starting to be implemented. Improvements on existing technology continue to advance apace, as do innovations. The market for eco-friendly electric vertical takeoff and landing (eVTOL) aircraft, which can transport passengers or cargo, is set to grow significantly – the first insurance coverages for operational uses are likely to be placed this year. 

One unheralded development that could force as much additional accountability as any technological advancement is the development and subsequent implications of the European Union’s Corporate Sustainability Reporting Directive (CSRD) and similar regulations worldwide. They require companies to disclose comprehensive information on their environmental, social and governance (ESG) performance and impact. 

To read the full report, please visit https://commercial.allianz.com/news-and-insights/reports/aviation-trends.html