From cyber threats facing companies big and small to technology that’s shifting insurance distribution channels and a dire need for new talent to replace retiring experts, the insurance industry is seeing change on all fronts. Brokers and underwriters are looking to help clients prepare for ever-present and emerging risks, and, at the same time, leadership is meeting change head on and transforming internally to ensure their businesses stay relevant.
The themes of change and evolution took center stage at a panel featuring top executives in the industry during a leading insurance wholesaler’s annual forum. H.W. Kaufman Group, a parent company of Burns & Wilcox, and its global network of companies as well as its carrier partners converged in Detroit, MI for the 36th Kaufman Leadership Meeting to find out how the business is performing and where it’s going in the coming years. The meeting foreshadowed a significant anniversary that’s coming up for Kaufman – 50 years of business in 2019 – and identifying as well as preparing for challenges that are affecting the insurance industry have been key to the group’s success so far and are necessary for its continued growth in the market.
A panel of carrier CEOs and presidents – led by Jodie Kaufman Davis, corporate senior vice president, board member of H.W. Kaufman Group and managing director of Burns & Wilcox Canada, and moderated by Chris Zoidis, corporate executive vice president for H.W. Kaufman Group – gave a glimpse into the top-of-mind issues for the industry as leaders debated the force of technology, the wholesale broker of the future, and the range of evolving risks impacting clients. The conversation started off by zeroing in on the rumblings at Lloyd’s of London as the global insurance and reinsurance market struggles to regain its footing with CEO turnover and underperforming lines of business, which has had reverberations for insurance companies worldwide.
“Lloyd’s, first and foremost, needs to decide what it wants to be and I think it’s going through a bit of an identity crisis. [I] applaud the franchise’s efforts to address profitability – it’s important to all of us,” says Jonathan Ritz, president of Western World Insurance Group and CEO of Validus Specialty, adding that corrective actions taken by Lloyd’s are impacting lines of business that have performed the worst, such as direct and facultative property insurance. The question of what the market will look like in the coming years is still, however, up in the air. “I think the jury’s out as to whether Lloyd’s is going to return more to a specialty market as opposed to being more of a generalist market, which is what it has been probably for the last 15 years.”
Nonetheless, there are product lines that have been performing well for Lloyd’s and what domestic carriers need to be aware of now is how aggressive Lloyd’s will be in the marketplace on those lines, commented Bryan Sanders, president of Markel Assurance.
How are carriers embracing technology?
A conversation around change in insurance is incomplete with a mention of insurtechs and the solutions they’re bringing to the table. The panel’s carrier leaders are well aware of the benefits of technology and their potential to disrupt the business as we know it today.
“As we see a lot of competition in the brokerage channel, is there going to be any disintermediation? You’ve got the Lemonades and others going out there trying to provide a direct solution. We continue to believe that there’s a critical role for the wholesale broker in the distribution channel, but that channel is going to get compressed,” explains Chris Lewis, president of IFG Companies, which has been making investments in technology to work with wholesalers. The goal is to collapse the channel, but preserve the critical role of the broker within that so they can continue to add value in advising the retail broker and the insurer on their options as new and difficult risks come up.
“We don’t believe that it’s necessarily just going to go direct and that the whole channel is going to be disintermediated. It’s not in our interest, it’s not in your interest, and frankly if you look at surveys of small businesses, they’re still looking for that trusted advisor, so there’s ways of using the same technology that are being used by the insurtechs and others within the existing distribution but really make it much more efficient, much more powerful, and that’s what we’re focused on,” added Lewis.
The products are changing too, as insurance integrates with technology to provide fresh solutions to customers. Nationwide E&S Specialty’s president Tom Clark says the company is on its way to incorporating technology into its products, but understands that there’s so much more it can contribute to the insurance buying process as the technology arms race charges forward.
“We look at technology truly as that enabler. Then for us to take our wealth of data and really look at predictive analytics and predictive modeling to drive the insurance buyer through the retailer or wholesaler and ultimately to us,” he says. “How do we drive greater speed, ease, and efficiency through that pipe because I think that’s going to be the name of the game and how we win.”
Claims processing is another crucial area where technology is allowing carriers to gain efficiencies as is customer acquisition. More broadly, these tech-enabled solutions have a role to play in driving down expenses as margins in the binding business get squeezed.
“We need to find solutions for that ease of doing business because the competition isn’t going away – it’s only going to get worse,” Clark points out.
The wholesale broker of the future
Striking a balance between investing in the future and bringing business in through the door today is one that successful wholesale brokers will have to master if they want to be here years down the road. Technology again is an important component of fortifying brokerages, but the impacts of investment aren’t always beneficial to the bottom line.
“The firms that invest in the technology and still have access to the business are the ones that are going to win,” says Sanders, yet he cautions, “I think that it’s part of the reason why we’re seeing so much consolidation, particularly in the wholesale space of smaller firms, and some of the challenges that take place with paying for the technology and then continuing to develop the technology.”
Specialist expertise will likewise give wholesale brokers a leg up in a competitive landscape, commented Ritz, as will investing in the development of transaction platforms, given that wholesale brokers perform an aggregator function in the marketplace. This in turn will allow carriers to focus on their areas of expertise, including data analytics, pricing, risk selection, and risk management, which will create better partnerships going forward.
H.W. Kaufman Group and by extension, Burns & Wilcox is already uniquely positioned in the market for longevity, highlighted Clark. The company is family-owned and not beholden to private equity, which gives leadership the freedom to make wise investments for the long-term, such as the recent acquisition of Stonemark, a financing firm based in Texas that will now offer insurance premium financing services for property and casualty brokers across all lines of business.
A catastrophe-prone forecast
Preparing for the future also means addressing risks that are growing in frequency and severity. Hurricanes Florence and Michael, alongside the deadly trio of hurricanes from the 2017 season, had devastating consequences in the US as flooding, storm surge and heavy rainfall submerged communities and resulted in levels of damage that are expected to reach into the billions.
These water-dominated forces have opened up opportunities for the private flood insurance market as the National Flood Insurance Program (NFIP) decides that it can no longer bear the burden alone and has introduced legislative changes that give the private market some room to maneuver, though hurdles persist.
“The difficulty we have found is really in the distribution, in the education to the insured, and trying to put a private product into the marketplace where through the normal and historical distribution channels you can actually create a spread of business that matches up with your understanding and modeling of the risk,” says Ritz. “That’s an incredibly difficult, if not impossible, thing to do with the way the product is distributed and controlled today.”
Due to regulation and the long-standing anti-competitive flood insurance market, it’s a challenge to try to compete by charging a price on the coverage that’s fair for both the insured and their insurer, commented Lewis, not to mention the likelihood that climate risks will only grow in number and size.
“If you look at the risk of climate change, one of the biggest things with increasing temperatures is that you have more severe periods of precipitation,” he explains. “With that, even if we could price for the risk as we see it today, there is a material risk that future floods would actually be more severe and I’m not sure there’s the political will to actually allow you to charge for that in a way that makes it attractive from an economic perspective.”
Along the same lines, cyber risk is likely to increase as experts predict a ‘cyber hurricane’ is likely to hit companies across the world in the coming years. Today, coverages are expanding quickly and broadly, and are merging with property policies as physical assets are put at-risk during cyber incidents.
“It’s a massive exposure, I think it’s an exposure that’s really, really, really hard to understand, and it worries me that as an industry, we’re going to wake up one day and find a […] $100 billion cyber loss,” says Ritz.
Major threats to the E&S marketplace
Leaders can arm themselves today and strengthen their companies in the face of an uncertain future. That means fixing what’s broken by addressing weaknesses that are undermining the success of the business. One panelist sees complacency as the biggest threat facing the E&S space today, among a litany of others.
“Trying to do things the same way is really not going to get us to where we need to be,” says Clark. “We have pressure on our returns – those aren’t going to go away. I see a lot of companies out there using technology or their technology investments as paving the cow path. I don’t think that’s really going to get us to where we need to be either. It’s going to be a joint effort and working collectively to see how do we improve the returns for both the wholesaler and the retailer?”
With the fundamental changes going on in the economy, as well as in insurance products and how the industry conducts business, Lewis is worried that we’re not selling products that will respond to the needs of insureds this year, next year, and five or 10 years down the road.
“We need to be more creative in terms of how we design products that meet their needs. We need to work very entrepreneurially to design the solutions that can foster this next generation of products, and that takes a collaboration, that takes cooperation, that takes thinking that, I think, to some extent has gone a little latent in the industry, and people rely on the existing products and are not being as aggressive,” he explains.
At the heart of insurance, however, is the customer, and working to deepen and protect the relationship with them is a goal that insurance industry participants need to keep in mind as the uncertain future unfurls.
“One of the things that has really made our end of the industry extremely special through the years is our ability to have great relationships,” said Sanders. “Continue to invest in those relationships because we know that as much business as we can put through a portal, in order to get the deals done that have some complexity, it takes a relationship. So, the biggest question I have over the next five or 10 years is, are we going to be able to sustain that level of relationship that we have had for the amount of time that E&S has been around?”