Policyholders key to winning commercial P&C insurance strategy
Current events have significantly accelerated the rise of the policyholder.
Across commercial property and casualty (P&C) insurance segments — small commercial, middle market, large commercial, and assumed reinsurance — there is an opportunity to break away from the fabric of traditional P&C insurance and develop truly customer-centric value propositions.
This is not a new concept, but current events have significantly accelerated the rise of the policyholder. As we gradually resume “normal” business activity, some insurers will retrench as they have after past catastrophes. However, the ones that invest in the most customer-centric approaches will be strategically victorious.
Customer-centricity takes different forms across commercial P&C segments because of different levels of buyer sophistication. On one end of the spectrum, small business owners are typically under-informed about their insurance needs, so they value easy-to-understand bundles of products that are tailored to their industry and business model. On the other end of the spectrum, risk managers of large corporations generally know exactly what to buy and generally value more innovative risk transfer and capital management ideas.
However, our experience is that even these savvy risk managers can struggle to “connect the dots” across their portfolio of risks and realize economic value across an aggregation of individually negotiated risk transfer solutions.
Small commercial clients
The complexity of business interruption coverage is a good example of the disconnect between customer needs and insurance products, especially in small (including micro) commercial insurance.
In the United States, tort law requires regular contract wording changes. Over time, these changes have resulted in insurance products written in dense legalese, which is difficult for many small business owners (and even agents) to understand. The disruptions of 2020 point to the need for small commercial insurance policy simplification.
An operational benefit of policy simplification is a code and rate refresh that will flow across the value chain, which is important both internally and externally:
- A rationalized, higher-quality data structure enables more insightful and timely reporting, which is crucial for small commercial portfolio management as low-to-no touch underwriting requires greater and more timely levels of analysis and oversight.
- Simplified products enable more refined underwriting appetites, to which agents can more efficiently produce.
- A fresh look on the primary-side facilitates a corresponding fresh look on the assumed-side, not only through capacity support of simplified products, but also regarding potential contributions to, or input on, the drafting of simplified policy language that should carry-over to simplified small commercial treaties.
Policy simplification is only the first step, however. Insurers also can offer digital needs assessments for small businesses, along with digitally enabled education programs that profile the types of risks that are covered under simplified policies (i.e., those risks that are generally under-insured and, significantly, those that are not insured). If information from programs like these reflects gaps in desired coverage, then insurers could consider and roll-out new offerings. In this way, customer needs, not the legal system, would drive product offerings.
The middle market
A long-term enabler of middle market underwriting is knowledge and insight into the risk drivers of insured industries. However, beyond well-intended marketing materials, once you get “under the hood” of middle market underwriting, it is largely conducted on a specific line of business basis. While offerings may be coordinated across lines for certain accounts, the rating and profitably of each line generally stand on their own.
Prescient insurers already have been looking across their middle market customer bases, products and data layers to identify ways to round out account offerings. At the center of these efforts is the belated recognition that policyholder needs must be the focus of the effort. This means account-level underwriting will need to more efficiently and economically process middle market risk transfers.
The driver of account-level underwriting is a deeper understanding of industry risk profiles, which inform underwriters and agents/brokers regarding the product lines that require more rate/tighter terms and those that require less rate/broader terms to effectuate economical risk transfer across an account. To successfully accomplish this requires account-based underwriting processes and models, which have several distinguishing characteristics:
- First, there is an overall manager who is responsible for the structure and pricing of cross line account insurance offerings.
- Second, there is a performance management system that is account-based rather than line-based. Taking an aggregate view of cross line performance explicitly recognizes that some lines will out-perform while others may under-perform. So long as the account-level result is consistent with insurers’ and agents’/brokers’ profit and growth goals line profitability variations are acceptable.
- Last, a reward system is needed that follows the performance system being account-based rather line-based.
Account-level underwriting is very different from current practices and has special requirements that require technological enablement. This is important because customer-centric offerings must be carefully and continuously tracked for underwriting control and risk management purposes. However, this historically has been a struggle for commercial P&C insurers. That said, account-level underwriting has broad applicability across industries and segments. For example, assumed reinsurers are generally as product-centric as direct insurers. Accordingly, there is an opportunity for both assumed brokers and reinsurers to take a more unified approach to client management.
Large commercial buckets
By its very nature, large commercial insurance is heavily account-based. Despite relatively successful cross-selling efforts, account-level strategies tend to be line-focused and pertain solely to insurance products. However, insurance is only one form of risk transfer that many larger businesses purchase.
Several large businesses have been retaining risk through some form of captive insurance structure for the working layers of their P&C coverage towers. Some of these are beginning to explore the next generation of risk transfer through more expansive, integrated risk transfer solutions that better and more economically facilitate their total risk transfer needs.
While integrated risk transfer solutions take many forms, they have three basic characteristics:
- First, they begin with a comprehensive evaluation of all risk exposures.
- Second, they identify potentially significant operational and insurance coverage gaps. For example, the 2011 Thai Floods identified the widespread impact supply chain disruption could generate, which can be difficult to insure. Additionally, the subject of a “cyber catastrophe” has been much discussed, and while no-one knows what one will look like, it is expected to cause significant disruption, which may or may not be adequately insured.
- Last, it is determined if targeted financial products/derivatives are economically available to incorporate into a risk transfer offering to mitigate operational and/or insurance coverage gaps. Consider recent financial market turmoil. Some firms dependent on equity financing entered 2020 with equity tail risk hedges, which paid off when global stock markets reversed in February and March of 2020. These firms purchased their financial protection/equity derivatives and insurance policies separately, but there is no strategic reason why both couldn’t be offered by a large commercial insurer and intermediated by one of their larger agents/brokers.
This approach has broad applicability across global industries and is something that large assumed reinsurers can offer to their larger direct insurance clients. However, integrated solutions, like ones for the middle market, have specialized requirements that need technological enablement. Because large commercial P&C systems are generally in need of upgrades, more integrated solutions could help inform the next generation of system-builds for direct insurers, agents/brokers and assumed reinsurers alike.
Innovative solutions
A good way for commercial P&C insurers to escape the vicissitudes of increased regulatory scrutiny and public opinion often informed by political reaction, is to take a step back from “business as usual” and look across books of business for opportunities to more efficiently and economically fulfill policyholders’ risk transfer needs. This holds true across small commercial, middle market, large commercial, and assumed reinsurance.
There has been a great deal of talk over the years about making P&C insurance more customer-centric, but it has resulted in very few innovative solutions. What we’ve seen in the market stresses so far this year is a clarion call for change across many industries. P&C insurers, agents/brokers and reinsurers should heed this call to transform their value propositions. In so doing, they will enhance the commercial P&C industry’s reputation along the way.
This article was drafted by PwC solely for publication by PropertyCasaulty360.com and NU Property & Casualty magazine. It cannot be reproduced for any purpose. PwC retains ownership of this content.
Marie Carr (marie.carr@pwc.com) is a partner with PwCStrategy&. Joseph Calandro (calandro.joseph@pwc.com) is managing director of PwC. Francois Ramette (francois.ramette@pwc.com) is a partner with PwCStrategy&.
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