How specialty insurers can overcome current underwriting challenges

Ask industry veterans, and they’ll tell you they haven’t seen a market quite like this in at least 40 years. A confluence of factors — from inflation and economic uncertainty to supply chain crunches and escalating natural catastrophes — makes it increasingly challenging for underwriters to assess clients’ risk profiles accurately.

Specialty insurers aren’t immune from these pressures. At Pennsylvania Lumbermens Mutual Insurance Company (PLM), we serve a unique niche: protecting companies in the lumber and building materials industry. And while our new realities differ slightly from those in other niches, I see plenty of commonalities and even a few silver linings for specialty insurers within the thickening storm clouds.

Successfully assessing risk in today’s market — no matter which niche you serve — comes down to three time-tested principles: collaboration, communication and innovation.

Collaboration

Determining adequate property values in the face of inflation is one of the biggest challenges facing all P&C insurers, and specialty lines are no different.

The problem stems from two issues. One is the skyrocketing cost of building materials, driven by both inflation and supply chain shortages. The second is the systemic underinsurance that, until recently, plagued our industry for years.

In the past, underwriters could rely on replacement cost estimators to set property values. But many of those calculators reflect only present values and don’t account for inflation. That’s why today, producers, carriers and insureds must work together to ensure they set accurate property values on each policy.

The good news for underwriters is that we’re seeing more teamwork among producers, carriers and insureds around this issue than ever before. This type of collaboration benefits everyone. Carriers can calculate their loss cost more accurately. Insureds get a policy that will be indemnified fully. And producers and agents greatly reduce their risk of E&O claims.

Communication

Times of financial uncertainty create considerably more work for all insurers, plain and simple. One of the biggest reasons is because we have to have tougher conversations with our insureds. These are folks, who are already stressed by the rising costs of everything and now find themselves struggling to understand why their premiums are going up, too.

Because specialty insurers serve a very specific clientele, they can zero in more quickly on factors impacting their customers — whether it’s modeling and catastrophe exposure or labor and material costs — than can general insurers, who have varied books of business. For our team, we have a bit of an added advantage because our customers already understand the reasons for rising reconstruction costs. After all, many of them work in the wood products space and sell those same products to their customers every day.

That said, these conversations still aren’t easy to have, and you will always have pushback. Yet keeping the lines of communication open is important so you can answer your clients’ questions and guide them toward making the best decisions for their businesses.

Innovation

Underwriters who specialize in a specific niche develop deep expertise in every factor that impacts a policy, from building values and business income to inventory values and periods of restoration. This helps to position them as trusted advisors for their insureds. It also helps spark a spirit of innovation that they can use to help their clients manage risk better.

We identified such an opportunity during the pandemic when great fluctuations in softwood lumber costs led to erratic inventory values. To help guide our insureds — and their customers — through the chaos, we created a stock reporting tool that allowed businesses to report on furniture, machinery, equipment, and other changes affecting inventory values.

Today, the post-pandemic market brings new challenges as insurers look to increase their productivity and drive efficiency in the face of rising loss costs. Solutions to these problems won’t be one-size-fits-all, but each specialty carrier must embrace flexibility and find innovative ways to move forward.

That may mean changing the way you do business, which is something we’ve done at PLM. Traditionally, because our insureds’ losses are driven by severity and not frequency, we preferred to perform physical surveys of all of our insureds’ risks. Doing so allowed us to price policies based on actual characteristics we saw inside a place of business. But doing so is also labor intensive, time consuming and costly, especially considering we have a national footprint.

Better times on the horizon?

Unfortunately, there is no indication that the hard market will end anytime soon. And while the current pressures on the property side will likely temper at some point, the outlook on commercial auto still looks bleak, especially given the nationwide shortage of experienced truck drivers.

Yet times of turmoil unite people toward a common goal. The more brokers, agents and carriers collaborate, communicate and innovate to weather this storm, the better off our industry will be in the future, no matter what challenges arise. 

Stephen Hicks, MBA, is the assistant vice president of underwriting for Pennsylvania Lumbermens Mutual Insurance Company, the nation’s oldest mutual insurance company dedicated to the lumber and building materials industry. He holds the chartered property casualty underwriter designation. Stephen can be reached by email at shicks@plmins.com. 

Opinions expressed here are the author’s own. 

Related: 

• The challenge of insuring to value
• Navigating the bumpy road ahead with an eye toward insurance’s future
• How stability ratings help agents find the right carrier partner 

Want even more of the latest E&S and specialty insurance news delivered directly to your inbox every week? Sign up for the PropertyCasualty360.com Specialty Markets Insights newsletter, delivered every Monday morning.