Issues every insurance organization must tackle to remain competitive
Risk management and insurance organizations must stay committed to moving forward with innovation and strong leadership.
I think it is fair to say the last few years have been transformational for insurers. Carriers were forced by the pandemic into a reckoning of the traditional in-office business model. Along with other risk management organizations, insurance companies had to increase their reliance on technology and embrace new ways of doing business remotely.
It’s encouraging to see how far insurers have come in the last few years, but there is still a long way to go. Insurance leaders are tackling the challenges of attracting new talent, educating society about risk, and improving traditional risk transfer tools. They are working to innovate.
Though the day-to-day pandemic challenges appear to be behind us, risk management and insurance organizations must stay committed to moving forward with innovation and strong leadership to remain competitive and viable.
A new approach
The goal is to keep insurance organizations thriving for the long term. Here are three areas where leaders can start.
No. 1: Shift from “detect and repair” to “predict and prevent” business model.
For more than 300 years, most insurance organizations have effectively used the detect and repair business model. When an insured suffers a loss, insurance steps in to make them whole.
But as claims frequency and severity continue to go up, a better strategy is to try to avoid loss in the first place.
Insurance companies experienced $125 billion in natural catastrophe losses in 2022 — the fourth highest total on record, according to Swiss Re. Insurers recorded a $26.9 billion underwriting loss in 2022, the largest since 2011, report Verisk and the American Property Casualty Insurance Association (APCIA).
As the costs of claims and repairs rise, insurers must provide more viable, cost-effective, and affordable products to remain solvent. That’s why it’s more important than ever that insurers adjust their approach to one that helps insureds avoid loss in the first place — a predict and prevent business model.
To adopt a predict and prevent business model, insurers must embrace opportunities for innovation and tools that help customers improve resilience. Fortunately, there are many ways to do this, thanks to insurtechs that are swimming in data, analytics and methods to help insurers understand and avoid risk.
Embedded risk management is one option, with telematics that can save on claims costs by alerting the risk of problems before they happen.
For example, usage-based insurance (UBI) programs for auto insurance use telematics to link “insurance premiums more closely to actual individual vehicle or fleet performance” which “allows insurers to more accurately price premiums,” as noted by the National Association of Insurance Commissioners (NAIC).
UBI programs also encourage policyholders to reduce their mileage and establish better driving habits, NAIC found, with their studies showing crash risk goes down by 50% thanks to the technology.
Additionally, as climate risk affects society, insurer support and investment in resilience efforts could go a long way toward helping us adapt to the increasing risk of extreme weather events. Building better public infrastructure and adopting and enforcing stronger building codes is especially important in areas more prone to catastrophes like hurricanes and wildfire.
A report from the National Institute of Building Sciences (NIBS) found that every $1 spent in upfront construction costs and long-term maintenance to make existing facilities more resilient, or toward building more higher-quality construction projects, leads to $11 in potential benefits, and more importantly less-devastating losses and increased safety.
Insurers can also play a larger role in supporting flood prevention by informing the public of flood risks before businesses and people purchase property.
Innovation that generates better risk data and resilience go hand in hand, but unfortunately, insurers are lacking when it comes to developing a “replicable innovation process rather than reacting ad hoc,” a recent AM Best Insurer Innovation survey found.
While AM Best noted insurer innovation scores had improved since the pandemic, 94% of those surveyed were “in need of improvement when it comes to transformative initiatives,” which it defined as those that “create value, improve customer engagement and experience, help create superior business models, or significantly enhance growth opportunities.”
No. 2: Build internal knowledge and skills to support new ways of thinking and processes.
To effectively shift their business model, insurers must first change their mindset. Insurance is no longer a loss recovery business; insurance companies are in the business of making people’s lives safer.
So, what does that mean for how insurers conduct business? They already are changing their mental model to focus on finding new ways to provide value and lower costs, effectively embedding risk management into the products they sell.
They bring value to their customers not only by lowering insurance costs, but also by becoming true financial risk advisers.
Opportunities are available to insurance professionals who are looking for support on their journey. The Institutes, for example, are a not-for-profit enterprise of brands that connect the various stakeholders in risk management and insurance — the policymakers, insurers, trade organizations, insurtechs, and more, all with varying viewpoints and expertise. We are committed to facilitating their success by educating them through resources to enable better decision-making, elevating issues of importance for both consumers and insurers, and connecting various stakeholders to exchange knowledge. Through knowledge and skill building, we can better prepare those in the essential disciplines of risk management and insurance to tackle future challenges and to be leaders in predict and prevent.
No. 3: Build external knowledge, educating consumers to help them avoid risk and correct their misconceptions of insurance.
Most people — except insurance professionals — don’t like to talk about insurance. While they recognize that insurance provides necessary financial protections, few people understand its importance as a major driver of the global economy.
As noted by Dr. Steven Weisbart, former chief economist for the Insurance Information Institute (Triple-I) and current nonresident scholar, the insurance industry “is at the heart of the growth and progress of every modern economy.” He has outlined the multiple ways in which insurance companies support our society — not only as financial first responders and risk mitigators, but also as protectors and infusers of capital funds, sustainers of the supply chain, and partners in social policy.
Insurers are “among the largest investors in the world,” Weisbart says. Statista reports that in 2021 U.S. insurers held nearly $13 trillion under management. And their “investments often include private and municipal bonds that help communities grow and thrive,” Weisbart observes, making them community builders.
Weisbart’s assessment is reinforced by the New York Insurance Association, which has reported on the economic impact of insurers on that state: “Insurance companies invest the premiums they collect in state and local municipal bonds, helping to fund the building of roads, schools and other public projects. They provide businesses with the capital for research, expansions and other ventures through their investments in corporate equities and bonds.”
Next, Weisbart says, insurers are infrastructure enablers and innovation catalysts, noting that “insurance has been a critical driving force” of every industrial revolution, “and thus is central to a developing economy.” And insurers are credit facilitators.
With such resources and powers, few industries are better placed to be public educators. From risk management to the economy, from cybercrime to climate risk, insurers amass vast amounts of data that not only can be used to protect consumers, but also to educate them. Who better to inform consumers and businesses of emerging risks and how to mitigate them?
It could be argued that, with their knowledge and solutions to help insureds avoid risk before it happens, insurers have a moral imperative to educate society on how to live safer.
Peter Miller, CPCU, is president and CEO of The Institutes, a global not-for-profit organization composed of diverse affiliates that educate, elevate and connect people in the essential disciplines of risk management and insurance. He is also the host of The Institutes Predict and Prevent™ podcast.
These opinions are the author’s own.
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