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In 1735, Benjamin Franklin wrote that “an ounce of prevention is worth a pound of cure.” He was referring not to medicine but to fire safety, since central Philadelphia where he lived consisted of connected wooden row houses. In fact, he was a founding member of The Philadelphia Contributorship, the first fire insurance company in America. Today, prevention may very well be the cure for the ailing insurance industry.
Throughout the history of risk and insurance there have been periods of crisis and reform. In 1971 no-fault auto insurance was adopted in Massachusetts spreading to 19 states by 1974 with promises of lowering high auto premiums. In the mid 1980s, liability insurance rates soared leading to tort reform. Most recently, the states of Florida, California and Louisiana, facing threats from weather, inflation and legal system abuses are actively enacting reforms. How those reforms play out can only be evaluated over the longer-term beyond early indications of relief on the horizon.
As the property/casualty insurance industry struggles with the severe impact of extreme weather events, rapidly shifting market conditions, growing social and economic inflation and a rapidly transforming automotive and alternative transportation landscape, it has become obvious that fundamental structural change is necessary and inevitable. Each of these single pressure points are individually striking and collectively may represent the “new normal.” Either way, the cost of insurance is on the rise while availability has become problematic with both consumers and businesses absorbing the impact.
How Did We Get Here?
Catastrophic weather trends receive the most attention for good reasons but are not exactly new. According to a study by Insurance Information Institute, average insured CAT losses were up 700 percent from the 1980’s through 2020, spiking throughout each decade with noteworthy hurricanes; Andrew, Katrina, Wilma, Rita, Harvey, Irma and Maria. There’s little argument that there are more frequent events causing higher values of damages but these trends have been moving upward for some time.
Since the adoption of special, all-risk homeowner policies from previous limited or named peril policies in the 1980s, courts have further broadened insurance coverage. There is a residual tension between coverage for fortuitous loss and what some say are—or should be—uncovered maintenance costs with much debate over exclusionary language. Meanwhile, U.S. homes have grown in size, averaging 2,522 square feet, doubling from 1975 to 2022, according to Statista. Likewise, home building materials, amenities and construction design have added to rebuild costs with increased construction in more disaster-prone regions as population shifts to the Southeast and Southwest in particular. Between 2018-2021 the average annual homeowner rate change was 3 percent and through the first three quarters of 2023 averaged 8.8 percent, according to S&P.
Just prior to the Pandemic, auto insurers were engaged in a race to the bottom. Switch and save marketing flooded the market. Fast-forward and inflation on auto parts, building materials, labor rates are current state conditions and despite some leveling-off remain high and are perpetual “sticker shock” realities. Auto repair technician shortages, social inflation, distracted driving behavior are newer and growing influences with no signs of alleviating in sight. Still, less obvious factors driving up rates are global reinsurance premiums.
On the commercial lines side, business auto has struggled with 11 of the last 12 years combined ratios over 100, amounting to underwriting losses per Fitch Ratings. Miles driven, demand for commercial trucking, driver shortages are among the root causes, again with no clear change in sight.
Just the Beginning
P&C insurers are pulling all the levers. Rate increases are across the board in auto, home and commercial lines. Tighter underwriting rules, restrictions on new writings, pull back in select states or product lines are reverberating throughout the industry. Some insurers are scheduling roof limits based on roof age or only offering ACV protection. Higher deductibles or percentage of limit deductibles are emerging or instantly become the only option in coastal areas when homeowners have little to no choice and are pushed into state wind pools or non-admitted E&S insurers. The end result is more cost, less coverage serving as a shift to greater self-insurance.
Cost of reinsurance is now being factored into agent commissions, effectively “pay cutting” agents as recently announced by Allstate becoming effective in 2024. All combined, cost of insuring risks are projected to increase and also remain high for the next few years—double-digit rate increases are just the beginning.
High Premiums Here to Stay
There’s lots of evidence to forecast that high premiums are here to stay. Thus far, loss costs have outpaced rate increases and once they do catch up there is no reason to believe premiums will reduce. Insurance to value (ITV) is emerging as property values and rebuild costs have soared. The aforementioned population shift to disaster-prone areas is not slowing. Auto technology, EV repair and parts costs on top of more expensive OE car manufacturer repair procedures are all on the rise. Social inflation fueled by juror attitudes, nuclear verdicts of $10M or higher and more directly through litigation funding are gaining more attention even though the term was first coined by Warren Buffet as long ago as 1977 in a shareholder letter, according to the NAIC/CIPR Research Library. In many cases, consumers choose to reduce coverage or drive uninsured. Per Bankrate there are an estimated 32 million uninsured driver in the U.S. which is likely to grow.
The implications can be distilled to greater proportion of self-funded risks for consumers and businesses.
Predict and Prevent
A new paradigm of predict and prevent is gaining traction. IBHS has encouraged the insurance industry influence improved construction and greater building resilience standards. Sensor technology combined with preventative measures, such as moving assets from harm’s way show promise but have a long way to go balancing efficacy with pragmatic actions. Distracted driving avoidance and driver coaching is making a difference in larger fleets with much room to improve smaller fleets and personal auto. However, predicting and prevention is also being applied more broadly, such as shoring up storm walls in places like Manhattan and Miami. Meanwhile the devastating Maui fires illuminate major gaps in prevention and how controversial measures to clear vegetation get in the way of progress.
The Role of InsurTech in Risk Transformation
Enabled by new and emerging technologies and funded by professional investors with the highest amount of available capital in history, numerous InsurTechs have introduced first generation solutions to insurance risk management. These solutions have primarily focused on a small number of high visibility applications, including quoting, underwriting and distribution and claims. But few if any of these products have materially impacted Combined Ratios and thus profitability, leaving insurers with no good response to current conditions other than talking rate.
Enabling InsurTech Solutions
- Sensors are a relatively low-cost, easy to deploy technology with large numbers of application across homes and businesses and “wearables,” all of which can alert users and carriers of impending risks, providing time to respond and avoid a loss, or at least limit the damage.
- Telematics widen the use cases of sensors to include the integration of large volumes of contextual data to more accurately predict and prevent accident frequency, severity and injury. Crash detection, automated FNOL, accident response and emergency services are one of the more powerful set of applications emerging from smartphone enables telematics.
- Artificial Intelligence (AI), while it has been used for many years in information and data management, has grown to include other more powerful iterations, including Natural Language Processing (NLP), Robotic Process Automation (RPA), Machine Learning (ML), Computer Vison CV) and the latest and most fascinating Generative AI. While not all of these AI solutions support risk prevention, many enable material cost savings. Computer Vision has already been adopted for almost 40 percent of auto physical damage claims, enabling early total loss identification, automated repair estimate generation and parts procurement with limited human interaction.
- Geospatial Data and Analytics together has high potential to identify, limit and avoid property risks from extreme weather and catastrophes. On the front end of the insurance process, pricing and underwriting, this data can ensure higher accuracy as well as risk avoidance. InsurTech geospatial platforms are expanding through partnerships and integrations, making it faster, easier and less expensive for insurers to consume and use multiple applications.
- Parametrics is a form of risk prevention in that it limits a carriers’ exposure to a specific, narrowly defined “micro-event” which vastly simplifies the pricing and underwriting of each covered event, eliminates most traditional claim costs and provides greater predictability of total exposure.
However, many of these young companies, and their existing and emerging solutions, still have the potential to enable the insurance industry to shift its paradigm from “insure and pay to predict and prevent”
Of course, none of these solutions can have real impact until insurers decide to aggressively embrace and comprehensively implement them. Otherwise, the industry will continue to react ineffectively to elements of the current crisis which will then be followed by reform which could well lead to greater customer self-funded risk management which defies the founding insurance principle of risk transfer and has limits. We trust that the industry will recognize that Benjamin Franklin was right about prevention and cure and will embrace these solutions, sooner than later.