Traditional perception is that the commercial lines business is complex, relationship-based, and slow-moving. It has lagged personal lines in embracing technology, but as more business processes become digitized, commercial lines insurers have access to more data they can analyze with more powerful tools. Technology then augments and supports relationships rather than replacing them. As this happens, the commercial lines business is turning more of its attention to leveraging technology.
Commercial lines insurers are raising rates despite COVID-19, seeking growth in expanded jurisdictions and new products and adopting analytics more broadly. Insurers want to drive down the cost of service, refine pricing and underwriting, and pursue growth.
The Impact of COVID-19
Insurers are broadly reporting losses as of 2020-Q1—a combination of CAT losses, equity market losses, increased reserving against potential losses, and reduced premium. The effects of reduced economic activity and shelter-in-place restrictions on claims are mixed. Some lines may see reductions in exposure, while others (e.g., event cancellation) see direct impacts. Insurers are seeing that some plaintiffs’ attorneys are now more willing to settle claims. Outstanding questions include whether state regulators can force insurers to cover pandemics in business interruption policies and to what extent they can shield businesses from COVID-19-related liabilities.
COVID-19 has also affected commercial lines premiums. Almost all commercial lines are seeing rate increases, but closed facilities and operations reduce business interruption and property values. Policyholder bankruptcies also lead to reduced premium income. Policyholders are pressuring insurers to offer some degree of premium returns.
A hard market will likely continue through 2021 due to COVID-19 and the economic downturn. Insurers are restricting coverage, including the pursuit of communicable disease and related exclusions.
Positive effects include the fast-tracking of digital initiatives that might have encountered institutional resistance before COVID-19.
Growing Comfort with AI
Commercial lines insurers are using AI and machine learning for use cases that range from contractor insurance verification and customer experience to claims and underwriting. Deloitte and Google Cloud announced industry-specific offerings, including a commercial property data platform for property insurers worldwide that leverages AI and third-party open data for underwriting. TrustLayer announced it is offering an online insurance verification system leveraging AI, distributed ledger, and machine learning, partnering with residential construction network Builder Partnerships.
An emerging area is the use of AI for the ingestion of unstructured text for claims and underwriting. Novarica has a forthcoming report on this topic.
Growing Comfort with RPA
Novarica has heard from insurers that they are using RPA to improve claims and STP and free up agents and employees for more value-added work. Some vendors offer a combination of AI and RPA for systems integration with insurers that lack developed APIs.
Continuing Interest in Commercial from InsureTechs
Direct small commercial sales currently command a small market share, but Novarica has seen increasing investments from startups and major insurers. Small commercial business is like personal lines in many ways, allowing insurers and InsureTechs to leverage proven technologies in that sector. The small commercial market is fragmented, but it is also growing rapidly and is less dominated by a few large insurers and distributors than the large commercial market.
Several startups acting as brokers or MGA have targeted this space, offering a range of value propositions: analytics to understand customers better, modern UI and UX, and more efficient operations that lead to lower prices for insureds.
Mergers and Acquisitions
More personal lines insurers are expanding into commercial lines to compensate for shrinking margins in their core businesses and future pricing pressures from autonomous vehicles. Novarica anticipates an increase in mergers and acquisitions in commercial lines, given existing personal lines pricing pressures.
Insurer M&A activity declined in 2019 due to concerns over reserving adequacy, higher asking prices for quality targets, and pricing increases that reduced the need for inorganic growth. However, producer mergers and acquisitions are continuing unabated.
Technology Priorities
Commercial lines insurers continue to invest most heavily in distribution across digital, data, and core. Support for agents remains key to customer acquisition and retention, and direct sales capabilities will grow more important for small business products and program business.
Insurers are leveraging new data sources such as drones, IoT, and telematics for automotive and commercial property underwriting and claims, in addition to data from external third-party data providers for all lines of business. They are using AI and analytics in claims, customer service, and underwriting to improve claims outcomes, augment customer satisfaction, and optimize risk selection and pricing.
For a more in-depth look at the trends in this space, read Novarica’s report Business and Technology Trends: Commercial Lines.
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