Insurance in 2021: A tale of the ant and the grasshopper
Expect a hardening environment in the year ahead with fewer policies, higher premiums and restrictive coverage.
The insurance hardening market cycle that began more than three years ago is being exacerbated by falling investment returns from the low-interest-rate environment as well as the onslaught of risks associated with the coronavirus pandemic and climate change. Insurers experienced higher claims across almost all product lines in 2020.
Global commercial insurance pricing increased by 20% in the third quarter of 2020, according to Marsh’s Global Insurance Market Index. It was the largest quarterly increase in more than eight years.
In the U.S., large and complex excess risks witnessed the greatest increases in pricing, ranging from 30% to 60%. U.S. commercial property pricing increased 22%, despite less use during the pandemic. Surprisingly, auto pricing also increased by 7% in the U.S. in the third quarter.
While the frequency of accidents declined during the pandemic from less driving, the severity of accidents spiked sharply as people drove faster and adopted new driving patterns. Since the Spring lockdown, traffic fatalities are up 4% even as mileage driven fell 12%, according to James Lynch, chief actuary at the Insurance Information Institute.
This pricing trend isn’t likely to reverse anytime soon. Expect a hardening environment in the year ahead with fewer policies, higher premiums, restrictive coverage, and more stringent underwriting standards in line with insurers’ shrinking risk appetites.
Insurers will face pressure from contracting economic activity from the pandemic. High levels of unemployment and bankruptcies will dampen premium volume growth.
Another issue is customer loyalty and retention. When prices spike in a hard market, corporate clients might turn to alternative arrangements, including captive insurance, self-insurance, and other alternative risk transfers. Already there are reports that U.K. insurers are seeing sharp rises in premium volumes from U.S. businesses.
Insurers must be careful not to mistakenly attribute increased premium to sales efficiency or innovative products, especially where none existed. Doing so will lead to poor results when the cycle ends. Like Aesop’s ant, insurers must take this time to plan and prepare for winter. They must look for sustainable ways to increase market share, reimagine customer engagement, and modernize pricing infrastructures.
Tailored risk pricing
Insurers have an opportunity to leverage new technologies like AI and telematics to price coverage based on data associated with the individual or business instead of relying on statistical sampling and risk pools. Many carriers are taking the opportunity to create new and innovative products to distinguish themselves in a segment. Products can be tailored to the customer’s loss-prevention measures, usage and risk.
In a May 2020 survey of 1,000 licensed-drivers, analytics provider Arity found 50% of survey participants were willing to share data about their driving habits in exchange for lower premiums. Root Insurance employs an innovative approach to pricing auto insurance in which the carrier takes into consideration demographics, credit scores and location. As part of an effort to weed out bad drivers, the Ohio-based startup tracks applicants’ driving habits for a few weeks before giving them a quote. Good drivers who make the cut enjoy reduced premiums. Root’s recent IPO raised more than $724 million, successfully positioning the company to be a disruptive force in insurance.
Meaningful engagements
Hardening markets are challenging for insurance buyers. Nobody likes to pay more for the same or less coverage. These are pivotal turning points where positive interactions with a knowledgeable broker or representative can make all the difference to build loyalty, and ensure renewals and acquisitions. Insurers must redouble efforts to build a digital-ready sales force and remote selling capabilities. This hard market provides insurers with a unique opportunity to differentiate themselves and engage meaningfully with their customers.
Set a fair target price
Insurance companies also must find ways to inject more agility and adaptability into their pricing practices to react with accuracy and speed to evolving market conditions. Pricing should be ambitious yet fair.
More than ever, insurers must leverage AI, big data, and advanced analytics to support technical and-market pricing. Technical price frameworks can ensure pricing aligns with capital, cost, actuary, and other corporate targets. Market price frameworks can help sales teams understand the deal environment, recognize the customer’s lifetime value and cross-sell potential, and accurately adjust pricing and deal structure.
Nick Frank (nick.frank@simon-kucher.com) heads the North American insurance practice, and Wei Ke (wei.ke@simon-kucher.com) heads the financial services practice at pricing, marketing, and sales consultancy Simon-Kucher & Partners.
These opinions are the authors’ own.
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