How insurers can respond to rising risks and costs

The insurance industry has experimented unprecedented losses due to the increased frequency and severity of weather, the impact of hyperinflation on goods and services, and social inflation leading to a proliferation of substantial legal judgments.

This triple threat has led insurance companies to aggressively raise rates, change coverages and, in extreme cases, exit or significantly reduce exposure in certain segments and geographies. To improve future performance, the industry must deepen its ability to successfully navigate these trends – and do so proactively.

1. Identify trends and issues earlier and react faster

While hyperinflation is subsiding, extreme weather and social inflation continue to accelerate, further testing insurers’ ability to respond in a timely and effective manner – and exposing weaknesses that include aging technology infrastructure, immature data and analytics capabilities, and isolated operating models. Many transport operators have been slow to recognize market fluctuations and even slower to implement changes, leading to the need for more drastic responses. To avoid falling further behind, insurers must think “speed to know” and “speed to leave.”
Speed ​​to know it’s about recognizing trends earlier. Insurers need to use the data to determine what is happening and what it means, financially and operationally. This requires mature data capabilities, including comprehensive and granular data, as well as the ability to freely share data across operational silos (claims, actuarial, underwriting, etc.) and aggregate lead and delay metrics to produce insight that the business can act.

Departure speed refers to acting on information by implementing rapid operational changes. These complex macro trends involve many parts of the organization – claims, actuarial, underwriting, marketing/sales and others. However, traditional organizational silos prevent departments from quickly sharing information to enable quick decisions and responses. Claims can see something happening in real time, but they need to coordinate with the actuarial and underwriting teams so the organization can respond effectively.

Increasing responsiveness and agility involves both process and technology. Process improvements should focus on bringing functions together at the right time to solve problems together, with an eye on how each function’s role contributes to profitability. In a digital marketplace, insurers also need technology infrastructure that can facilitate faster implementation of pricing and underwriting changes in the marketplace. Process changes can be quite rapid, but technological changes will take longer – hence the urgency to address this now.

2. Engage distribution partners and customers in risk and loss mitigation

Insurance carriers have the opportunity to reduce losses through more active education and involvement of customers and distribution partners in risk management.
Insurers need to share more information about the factors driving risk and cost changes and the actions a policyholder can take to improve their risk profile relative to where they live/operate to receive better rates – by for example, clearing brush around a structure in a high fire risk area, installing an alarm system or turning off water, or improving employee safety programs such as driver safety or telematics.

Taking this further, consider updating customer models that offer policy options that customers can select based on affordability and risk tolerance – for example, usage-based coverage for commercial and personal auto insurance and more coverage limits and deductibility options for property coverage .

Many companies do this to some degree, but not to the extent that these growing market forces should give them credit for. The good news is that a modern digital infrastructure makes it faster and more efficient to engage and customize services – for example, by providing customers with simple tools for shaping policy construction and pricing.

3. Increasing normative and legislative influence

Finally, the insurance industry must continue to work proactively with parliaments and regulators to address these trends head-on through tort reform, better and stricter enforcement of building codes and other steps.
Driving tort reform is especially critical given the increase in both the number and size of nuclear verdicts—substantial jury awards of at least $10 million—resulting from accident litigation involving insureds and insurers. For example, in the last decade, the median nuclear verdict for product liability cases has grown 50% from $24 million in 2013 to $36 million in 2022—much faster than inflation.

Again, this comes down to effective education about the root causes of these trends and the improvements that can help address them. Such efforts have proven effective in the past. For example, building code improvements made in the wake of Hurricane Andrew had a demonstrable impact. Insurers use the claims data to analyze the construction’s performance against the weather. As they produce new insights, they should share them not only internally but also externally with policymakers to drive change that will reduce claims over time.

It’s time to reduce the effort

Severe weather, hyperinflation and social inflation require strong business coordination, a fact-based foundation that comes from the ability to leverage and analyze data, and effective communication and engagement with key stakeholders. Many insurers do these things, but not enough for the increasing level of threats they face today. Increasing these capabilities creates a common path for addressing three of the industry’s most existential threats to future profitability.