Commercial Lines: A Hardening Market, but Otherwise More of the Same

Traditional perception is that the commercial lines business is complex, relationship-based, and slow-moving. It has lagged personal lines in embracing technology. Still, 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 continues to turn more of its attention to leveraging technology.

A commercial lines hard market is expected to persist through 2021 due to COVID-19 and the related economic downturn. Insurers continue to seek growth in expanded jurisdictions and new products and adopt 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 2021-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; others (e.g., event cancellation) see direct impacts. Insurers note 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 have seen 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. 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 use AI and machine learning for a range of cases, 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.

AXIS Insurance partnered with Slice Labs to offer insurance for home-based small businesses on the Slice Insurance Cloud Services platform via omni-channel distribution. An emerging area is the use of AI for the ingestion of unstructured text for claims and underwriting, which Aite-Novarica covered in its report Intelligent Text Ingestion: Overview and Prominent Providers.

Growing Comfort with RPA

Novarica has heard from insurers that they use RPA to improve claims and straight-through processing 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 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.

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 (e.g., drones, IoT, telematics) for automotive and commercial property underwriting and claims in addition to data from external third-party data providers (e.g., web and social media data aggregators) 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 an in-depth look at the trends in this space, read Aite-Novarica’s report Business and Technology Trends: Commercial Lines.

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