Commercial and Specialty Lines in a World of Increasing Risks

Published on

March 23, 2023

Those of us in the insurance industry often read breaking headlines through an insurance filter. When we hear or read about something like the Norfolk Southern train derailment in East Palestine, Ohio, we naturally think about the people of the town, but we also sort through questions regarding claims and preventive measures. I found myself wondering about these topics: 

Is there railroad liability coverage or E&S coverage in force for this derailment, including the train’s contents, the ensuing claims from residents, and the massive, probably multi-year cleanup?

What, if anything, can insurers do to prevent and mitigate large-scale disasters such as these?

Would cameras or sensors or EHS policies have helped operators do anything differently?

In the following weeks, the derailment headlines kept piling up. On February 16, 21, 24, and March 1, derailments filled the headlines. Just last week there was another derailment in Ohio. Is train derailment a growing trend?

As it turns out, it isn’t. There are commonly more than 1,000 derailments in any one year. Most are non-fatal, non-injuring, and non-threatening to the environment. But doesn’t it seem like a number that could be reduced? Which products or technologies might be able to add insights to railroad liability coverage and improve railroad safety?[i]

But the bigger question is this: Can commercial and specialty insurers create new trends of their own by turning growing risks into reduced events and claims through agile development of improved products and creative answers to prevention?

Commercial and specialty lines at the forefront of BIG coverage

Commercial and specialty lines make a fascinating business case because some of their potential coverages and payouts are so uncommon. Excess & Surplus carriers, for example, are continually writing policies for uncharted territories of insurance. In many ways they are ground-breaking. Yet, what matters most is not what they write or for how much; it’s how they help the companies they serve be profitable while maintaining their own profitability and how they manage to craft an understanding of uncommon markets and products.

I recently asked C&S carrier expert, Mike Adler, Principal, Advisory, Insurance Customer and Operations, with KPMG US,to join me in a discussion about new product trends that are affecting commercial and specialty lines carriers. In a very short span of time, Mike and I were able to cover a number of pressure points that commercial and specialty carriers encounter when it comes to creating new products.

New Product Trends — A bit of background

The conversation around new product trends is really a conversation about everything, everywhere. New products are tied, not only to trends in life and business but they are also tied to the growth of technologies that have been built to monitor, prevent and protect. Data enters the picture. The kinds of products that are possible today for commercial and specialty insurers might rely on capabilities such as how quickly data can be captured, analyzed, and used. Because data collection for a commercial entity might involve one or thousands of devices, carriers need flexible methods for creating real-time views and insights.

The same data that feeds underwriters may be the data that alerts the business to new risks and the data that initiates a claim. So, the burden of understanding the business may actually lie within the core systems that tie it all together. Commercial and specialty insurers can’t exist without vital core systems. In light of these needs, we began looking at trends within carriers.

Are there any commercial or specialty product trends that you are noticing at this time?

Mike Adler

We continue to see a new focus on products in spaces that are becoming really important to the world and to the industry and to business. We are engaging now with clients that have a particular interest in ESG and in renewable energy, and things of that nature. So, we’re beginning to see products that are being developed to support capabilities around ESG and capabilities around renewable products that didn’t exist before.

The products are designed to help clients that are investing in those areas find ways to mitigate the risk of engaging in some of the newer, less proven technologies and capabilities.

Denise Garth

Commercial and specialty market leaders are already experts at handling complex risks and producing products that handle complex risks, but we are clearly in a changing risk environment, where even carriers with great expertise will need new products and new technologies to meet the new risks. New technologies, like modern core systems and more importantly, cutting-edge digital underwriting workbench, digital loss control, and data/analytics will help with assessing risk and driving profitability. Insurance leaders must use new methods to assess and manage risk.

Mike Adler

Right. We’re seeing companies using IoT and new technologies to help monitor and proactively prevent losses and to minimize maintenance.

How is the changing risk environment pushing the boundaries of current operating models?

Mike Adler

For a time, many carriers that were starting up, especially those based in Bermuda, were focusing on these new products as standalone capabilities, but now we are seeing entities that are rethinking the operating model. They are asking themselves, “Are there packages of products we can bring together to provide a more robust value proposition? Are there efficiencies that can be gained by bringing some of these specialty products together and selling and servicing them more holistically to potentially create a single view of the customer or a single viewer by agent or broker?”

That’s the crucial motive for an operating model change — bringing value to the relationship in a way that it pays off long-term. It’s interesting to watch some of these startups and new entrants, and even some of the mature players. They are all taking a step back and saying, “Okay, we’ve got our products into the market. How do we really create longer-lasting relationships, maintain retention, and give higher customer lifetime value?”

Denise Garth

I would add that if we look at risk in the past, and loss patterns in the past, what’s happening today is totally different. And we expect that patterns of risk will continue to change even more in the future. Because of this risk volatility and unpredictability, the types of products, the types of data and the types of technology needed to really assess risk had to evolve.

Past loss patterns could factor in single points of risk data or maybe factor a few together, but that doesn’t apply today. Think about how climate change has impacted past loss performance areas, or how environmental volatility has affected secondary perils, such as flooding. Today’s underwriting has to take in a host of additional data to keep pace with potential risks.

Let’s use a self-driving, electric vehicle as an example. Yes. A self-driving vehicle should be safer. There’s less human error. But now we have to factor in new variables: the quiet vehicle and pedestrian safety, the costlier accident from the replacement standpoint, and the unknowns of lithium-ion batteries in accidents. Actuarial expertise is built over time. What happens when risks come to market before risk products fully “understand” them? That will change the carrier business model.

Can loss control and risk insights improve in the face of increasing risks?

Mike Adler

Yes. Though, we are in the early days on some of this, like some of the new data that’s coming in on climate. It has been a couple of years, and still, COVID still has an impact on many businesses and how they operate. We are getting all of this new data that’s critical to making decisions around underwriting and risk and loss, yet some of this data does not have a track record — a longstanding history of results. Everyone is trying to figure out, “What’s the right combination of data sources to give me that edge so that I can predict better?”

Denise Garth

Certainly, loss control is one of the answers. It becomes even more important for some of these complex risks because it improves an understanding of what you have — equipment, buildings, etc. It isn’t that commercial carriers are entirely blind to what they are insuring, but with loss control, you gain new layers of insight on the conditions of the risk. Is the equipment in good shape or does it present its own risk to itself and everything around it? What do these buildings really look like? Then, when you layer in ESG or climate or cyber, you begin to get a better, clearer view in the midst of the complexity of the risk. It follows that you make changes in how you underwrite to improve your effectiveness.

How will data change the market and carrier landscape?

Denise Garth

Depending upon what products companies are assessing for risk, some of their insights will have to rely upon real-time assessment of real-time data.

If IoT devices and telematics devices are added to machinery, buildings, and vehicles — carriers will need to have ways to view, assess and react. It’s the real-time aspect of this data that is different than what we’ve done in the past. Even this data, though, will need something new added to it. If carriers look at past weather patterns, or past loss patterns and determine “Oh, that’s a safe risk,” it may not be. Even real-time data is going to need new layers to factor in areas of increasing risk, such as climate, cyber and social risk.

These different dimensions of risk may require new models for the underwriting process, and it’s not just about the technology, it’s about the people too.

We have to have talent in place to know how to interpret some things differently. And it’s not about straight-through processing. It’s about leveraging the expertise of underwriters combined with the data and information that gives insights that they can make a good decision. These commercial and specialty risks are too complex. These decisions can’t all be made by machines.

Mike Adler

Yes. I agree. This is not a space that straight-through processing is going to dominate. As you know, there’s a role for it in certain products and within certain segments, but in the majority, it’s going to still require human intervention. As far as bringing in new data and technologies, I see a bit of a divide occurring between carriers.

First, I think you’ll see carriers that have the DNA and the culture and the set of products that are willing to take some risk. They are willing to bring in these new sources of data, with the understanding that the data may not have a long track record. They will operate agile so that they can introduce products, tweak products, get into products and get out of products. These are carriers that want to be first movers. They want to have some kind of competitive advantage. They’ll take the actions to gain the insights they need to grow the business.  

Second, you’ll see a different set of carriers that just don’t want to take the risk in some of these areas where they have very good, established distribution channels and good relationships, brokers, agents, and customers. They’ll think, “We don’t need to do that. We can rely on our current product base and portfolio and how we’ve always done things because our relationships will carry us through.”

Using the Bermuda firms as an example, a big part of the culture of many of these firms is that they would take a little bit more risk. And you know, when you look at some of the growth patterns, the smaller companies who took risks in the early days are now pretty big. They were the first movers and it paid off.  

There are some “no regret” moves that would fit any carrier, such as becoming more agile, and setting up a strong data architecture. This will help carriers to not just rely on traditional data sources, but to bring in some new data sources — structured, unstructured, video, geolocation, etc. And of course, there’s another no regret move, which is to be more collaborative in the market and build up a strong ecosystem.

Which technology solutions are the “right” solutions for commercial and specialty carriers?

In our next conversation, we’ll cover technology-specific solutions. We’ll discuss why commercial and specialty carriers will want to utilize a combination of solutions to enable their business models and give them creativity in product development.

It’s this creativity that will allow carriers to become true partners in the process of insurance and protection, no matter what they are insuring, and which risk trends are on the horizon.

For more on commercial P&C customer trends, be sure to read, Resiliency in Times of Change: Rethinking Insurance to Help SMBs Thrive, or tune in to the Majesco/KPMG podcast on The Role of Underwriting in the Digital World.

[i] Black, Thomas, Rail Industry Pushes Sensors Over Brakes After Ohio Train Crash, Bloomberg, February 26, 2023