Tag Archives: Fitch Ratings

Harvey Hammers Home NFIP Issue

The economic devastation and human suffering that Hurricane Harvey inflicted on vast numbers of people will sorely test the National Flood Insurance Program (NFIP) as it comes up for renewal, with the NFIP lapsing if Congress and the president fail to act by the end of the month. Some in the federal government, state regulators, industry experts and this economist favor solutions encouraging private sector participation in flood insurance markets. Near-term, the most likely and wisest course seems to be a short extension allowing the Federal Emergency Management Agency (FEMA) and NFIP to focus on settling claims while politicians and policy experts develop longer-term solutions.

With the U.S. Government Accountability Office (GAO) reporting the NFIP was $24.6 billion in debt before Hurricane Harvey, many in government and elsewhere feel significant reforms are needed. Other knocks against the NFIP as currently constituted include its reliance on allegedly inaccurate and out-of-date flood insurance rate maps (FIRMS), its failure to charge actuarially appropriate premiums and policy limits too low to provide adequate insurance protection. Some also contend that the NFIP encourages excessive risk taking and poor land use by providing subsidized insurance coverage for properties that repeatedly get flooded out, effectively divorcing those who choose to reside in flood prone locations from the consequences of their decisions.

Uncertainty about the exact extent of the devastation caused by Harvey will persist for some time, as the huge number of properties damaged by the storm, difficult conditions and continuing lack of access to some of the hardest-hit areas all add to the time necessary to assess losses. Further complicating efforts to understand the magnitude of the losses caused by Harvey, published reports often fail to clearly distinguish between economic losses, insured losses covered by private carriers and insured losses covered by the NFIP. Nonetheless, it appears Hurricane Harvey may exhaust the NFIP’s financial capacity, causing the program to go still deeper in debt.

See also: Harvey: First Big Test for Insurtech  

The NFIP purchased private reinsurance covering 26% of its losses between $4 billion and $8 billion, but Fitch Ratings believes losses from Hurricane Harvey could consume the NFIP’s $1.04 billion in reinsurance protection.

As Congress and the president ponder the way forward, the options available to them include several that would facilitate development of private markets for flood insurance akin to the private markets for homeowners insurance. Key elements of such solutions include measures clarifying mortgage lenders’ ability to use flood coverage underwritten by private carriers to satisfy insurance requirements imposed by Fannie Mae and Freddie Mac.

The development of private markets for flood insurance will also require that the NFIP adopt actuarially sound pricing. Simply put, private carriers that must cover their costs and earn an adequate rate of return on capital would be at a tremendous disadvantage competing against taxpayer-subsidized coverage from the NFIP. And it would certainly help if carriers currently participating in the NFIP’s WYO Program were allowed to also offer alternative coverage. Currently, the WYO Program includes a non-compete clause that precludes carriers from offering alternative standalone flood insurance.

The constituencies supporting increased private sector involvement in flood insurance markets include the National Association of Insurance Commissioners, the Property Casualty Insurers Association of America, the National Association of Mutual Insurance Companies and the American Insurance Association, which have all come out in favor of the Flood Insurance Market Parity and Modernization Act passed unanimously by the House in 2016.

Thinking more broadly, there may be no need for the federal government to participate directly in the flood insurance business. Mechanisms akin to state FAIR and Beach Plans could serve as insurers of last resort for property owners unable to obtain coverage from private carriers. Or, we could transition from the NFIP as it exists today to a new NFIP modeled on the Terrorism Risk and Insurance Program (TRIP) introduced after the terrorists destroyed the World Trade Center on Sept. 11, 2001. Under that program, insurers must offer terrorism coverage, with policyholders then free to accept or decline. If insured losses from a terrorist attack exceed specified triggers, the federal government provides reinsurance protection, and insurers subsequently reimburse the federal government.

Thinking still more broadly, there may be no need for the federal government to participate in the flood insurance business at all. With trillions of dollars flowing through global capital markets, catastrophe bonds and other insurance-linked securities could enable insurers and reinsurers to obtain all of the capacity necessary to cover flood risk without any federal reinsurance backstop.

See also: Time to Mandate Flood Insurance?  

An ideal solution would enable one policy to provide coverage for both wind losses and flood losses. As long as those losses are covered by separate policies, policyholders and insurers will remain burdened with having to distinguish wind losses from flood losses— a frequently contentious and often expensive undertaking that adds to the time necessary to settle claims.

In any case, private sector insurers and reinsurers now have access to data and sophisticated flood models that enable them to price and underwrite flood risk intelligently. And developments such as the new commercial flood insurance program recently introduced by ISO and Verisk Analytics set the stage for greater participation in flood insurance markets by ever greater numbers of insurers, as will the corresponding personal property flood insurance program they plan to roll out later this year. With state regulators and insurers aligned, it seems all that’s necessary to unleash the power of private markets is action on the part of Congress and the president. Why not send them a postcard?

7 Imperatives for Moving Into the Cloud

For property and casualty insurance carriers, growth is hard-fought in an environment of compressed margins, regulatory scrutiny, increased competition and customer expectations for anywhere/anytime service. Add unsteady economic conditions, low interest rates that decrease investment income and catastrophic losses from significant events such as Hurricane Sandy into the mix, and insurers are finding that their tried-and-true business methodologies that worked well pre-2008 are in desperate need of a facelift. Growth is especially challenging for insurance carriers with inflexible legacy technology systems, as well as small and mid-size carriers that lack the resources to make the product and operational changes they need to remain relevant and profitable.

Insurance carriers must navigate an environment that rewards nimbleness and flexibility, but to do so requires that insurers modernize their current systems and processes. Consider the example of bringing a new product to market. At most insurers, the process may take six months or more, with a price tag reaching seven figures. By the time the product is ready to launch, the dynamics in the market have shifted, or perhaps a new regulation has been legislated. The insurer has two equally unappealing choices: Launch the product as is and never realize a return on investment, or delay launch and retool the product, increasing the R&D price tag and losing potential revenue and market share.

There is a better way: Updating legacy systems with flexible and scalable Software as a Service (SaaS) computing capabilities allows P&C insurers to rapidly capitalize on opportunities and support growth. This article presents seven imperatives for the P&C insurance industry based on industry research and analysis, and outlines how a SaaS implementation can address each imperative.

IMPERATIVE 1: INCREASE SPEED-TO-MARKET 

In an Accenture survey of insurance industry professionals, more than seven of 10 (72%) respondents indicated that it takes their organization six months or more to launch a major product. In today’s constantly changing environment, six months is a long time indeed, and it’s likely that the market looks different than when product development began. However, insurers that are able to rapidly offer innovative products and services through multiple channels can take advantage of shifts in the market and exploit the slowness of competitors. Today, “slow and steady” doesn’t win the race.

Compared with legacy system-based product development, which requires coding, scripting and testing, a SaaS infrastructure by design incorporates more nimble and configurable software, significantly reducing development time and eliminating the cost of hiring a vendor or consultant to make coding changes. In addition, SaaS provides rapid provisioning of live and test environments to further increase speed-to-market. Lastly, SaaS requires minimal investment in hardware, software and personnel. Insurers can use a pre-configured infrastructure to reduce development costs by more than 80% over comparable legacy systems, according to Donald Harrell, senior vice president of marine, exploration and production for Liberty International Underwriters. This, in turn, reduces the risk for product launches.

IMPERATIVE 2: QUICKLY RESPOND TO MARKET AND COMPETITIVE CHANGES

Those insurers not able to turn on a dime may be in trouble because so many of their competitors are preparing to invest in technologies and processes that will help them design, underwrite and distribute products and services more quickly. More than 80% of insurance CEOs are planning to increase investment in technology, and more than 60% plan to develop their capacity for innovation. Innovation must continue after product launch, and SaaS allows insurers to retool products as market drivers dictate.

The ability to revamp an existing product is particularly attractive to small or mid-size insurers launching products to a relatively small target market. With SaaS, insurers are able to bring niche products to market that would otherwise not deliver enough ROI to justify the investment. Likewise, if a product is not profitable, an insurer can make changes and quickly reconfigure the product rather than being forced to offer an unprofitable or marginally profitable product because it’s too costly to make changes.

Insurers can also more effectively price products. SaaS is charged on a subscription or consumption basis, so costs are more closely aligned with the revenue being generated by the new product.

IMPERATIVE 3: REDUCE COSTS TO MAINTAIN PROFITABILITY

As the U.S. economy slowly improves, P&C profitability is starting to improve as well. However, there is little cause for celebration. Fitch Ratings warns insurers that the current pricing cycle may be running out of steam, forcing insurers to cut expense levels to maintain profitability. Now is the time for insurers to put in place cost-saving strategies. With a SaaS infrastructure, insurers can innovate and offer new products and services without incurring capital expenses.

Rather than implement an expensive technology infrastructure, SaaS allows insurers to leverage preconfigured infrastructure and reduce IT resource requirements, staffing and professional services fees. In fact, SaaS up-front costs are typically less than 20% of the development costs of legacy systems. SaaS pricing models have also matured, giving insurers access to a variety of bundled and unbundled pricing options.

IMPERATIVE 4: AUTOMATE AND STREAMLINE UNDERWRITING

A survey of insurance professionals by FirstBest Systems found that 82% of respondents believe that their insurer’s underwriters spend less than half of their time actually underwriting, with the majority of underwriter time spent on data collection and administrative tasks. Insurers understand that giving underwriters the automation tools they need to do their jobs effectively is key to improved underwriting, but many believe that the technology is problematic, with 81% citing lack of data integration as limiting underwriting productivity. In contrast to legacy underwriting systems, SaaS allows insurers to easily incorporate rules to automate the underwriting process and increase underwriting ratios and revenues.

SaaS also allows for streamlined data integration as opposed to off-the-shelf packages that often need extensive modification, thus eliminating a major stumbling block to optimal productivity for underwriters.

IMPERATIVE 5: SUPPORT NEW DELIVERY CHANNELS

Mobile technology continues to be top-of-mind for many carriers, with more than 60% planning to add new mobile capabilities for policyholders and agents. Notes Novarica partner Matthew Josefowicz, “As the use of smartphones and especially tablets displaces the use of desktops and laptops in more areas of personal and professional life, support for these platforms is becoming critical to insurers’ abilities to communicate electronically across the value chain.” The problem for carriers is that legacy systems were not designed to run on mobile devices. However, SaaS, with its more modern coding, is able to provide both a better user interface and operational efficiency for smartphones and tablets. SaaS allows insurers to distribute products through a variety of new channels (e.g., banks, car dealerships) that would not be possible with legacy systems.

Creating and recreating websites and portals quickly and inexpensively means that insurers can more readily compete with “disrupters” that use a direct-to-consumer model. Insurers can design multiple portals for different geographies, languages and associations in near-real time. Deloitte reiterates the importance of mobile and other delivery channels for insurers: “No one can afford to take their distribution systems for granted. More insurers are likely to grow bolder in exploring alternative channels to capture greater market share, catering to the needs and preferences of different segments while cutting frictional costs.”

IMPERATIVE 6: COLLABORATE WITH THIRD PARTIES

Insurers are increasingly relying on third parties for a variety of integration services, including regulatory compliance, sophisticated data analysis, geo-location capabilities for risk assessments and risk ratings for more accurate underwriting and risk pricing. Integration between carrier legacy systems and third-party providers is typically problematic because of proprietary file formats and other issues that make it difficult to share data. In contrast, SaaS provides links to existing interfaces for access to third-party databases. Integration reduces costly, error-prone and time-consuming manual intervention.

IMPERATIVE 7: IMPROVE THE CUSTOMER EXPERIENCE

The majority of insurers (91%) believe that future growth depends on providing a special customer experience, according to Accenture’s survey. However, getting the relevant and up-to-date data they need to give customers a personalized experience is a critical challenge for 95% of respondents.

In the same survey, only 50% of insurers say that their carrier leverages data about customer lifestyles to determine the products and services most likely to meet customer expectations; 70% rate themselves as “average” or “weak” in their ability to tailor products and services to customers’ needs. A similar number (64%) give themselves low ratings for their ability to provide innovative products and services. Poor service — or even average service — is no longer acceptable. Consumers are accustomed to personalized experiences such as shopping on Amazon or booking airline tickets on a travel site, and expect a similar type of experience from their insurer.

Thomas Meyer, managing director of Accenture’s insurance practice, says, “To pursue profitable growth, insurers need to achieve the kind of differentiation that allows organizations like Apple to charge a premium while building customer loyalty. As Apple has shown, the answer is consumer-driven innovation that creates an exceptional user experience.” SasS enables insurers to access the data points they require to differentiate their products throughout the customer experience. In a market commoditized by regulations and related factors, insurers that can leverage SaaS to deliver a straightforward, simple process to customers will give themselves a competitive advantage.

 CONCLUSION

In an accelerated market where change is the new constant, P&C insurance carriers cannot afford to continue to do business as usual. Imperatives such as speed-to market, responsiveness to customer demands, new delivery channels, cost reduction and improved underwriting make it necessary for insurers to explore new methods of providing products and services to customers. SaaS, with its flexibility, scalability and low cost, is a technology imperative if carriers hope to grow and remain competitive.

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