In a Competitive Market, Specialty Insurers Look to Adapt and Improve

Specialty insurers have traditionally made less use of automation than insurers in other sectors. They are now differentiating themselves in a competitive marketplace through investments in distribution (especially new business submission), product development, underwriting, and claims.

The pandemic has spurred rate increases for most specialty lines.
Most lines are seeing increased rates and/or reduced capacity. Social inflation is a driver for liability lines. Insurer consolidation is also a factor, particularly for medical professional liability and surety. Rate levels can vary widely by geography or subsector, and new coverages are always emerging. Specialty expertise looks to be a differentiator. Novarica has previously commented on the pattern of more business becoming, essentially, program business.

Data privacy and related regulations have increased compliance costs.
State regulations such as the California Consumer Privacy Act are driving the need for increased cyber risk coverage, especially for financial institutions and third parties doing business with them. New York State cybersecurity regulations have pushed this forward, as has the EU General Data Protection Regulation (GDPR). These regulations continue to be clarified and modified.

The conditions of the pandemic led to several regulatory impacts on insurance. Some are positive, like New York State’s reduction of civil liability for health-care workers or the potential increased demand for cyber-liability insurance. Others are negative, like proposals from several states that force insurers to cover pandemic losses under business interruption coverages, even if exclusion language is in place. Federal and state governments have relaxed some regulations in the wake of COVID-19. Legislators have proposed a federal pandemic backstop, like the terrorism backstop created by the Terrorism Risk Insurance Act (TRIA), to reduce the burden on insurers of potential pandemic-related business interruption claims.

So has Brexit.
An additional wrinkle for specialty insurers operating as part of Lloyd’s is that the European Union is assessing whether the UK data protection regime is broadly equivalent to that of the European Union post-Brexit. The EU-UK Trade and Cooperation Agreement incorporated a bridging mechanism for data flows from the EU to the UK through April 2021, which may be extended through June 2021. That mechanism will no longer apply if the UK makes changes without the agreement of the EU-UK Partnership Council.

The US and the EU are discussing the potential for a Privacy Shield 2.0, following the European Court of Justice’s striking down of the original agreement. The European Court of Justice did rule that the validity of standard contractual clauses for data transfer remains. Binding corporate rules governing the transfer of personal data outside the European Economic Area may be the best option for multinational insurers. However, changes may be necessary to ensure compliance with UK and EU regulations.

The pandemic has disrupted the courts and normal ways of conducting business.
Courts are dealing with a backlog of cases, which impacts liability lines and speedy claims resolution. Health-care providers have faced the need to triage care in response to limited resources. Both factors may lead to increased claims severity and the need to increase claims reserves.

Many states instituted social distancing and stay-at-home ordinances, disrupting the routine in-person business meetings, lunches, and handshakes inherent in relationship building between brokers and underwriters.

As of 2020-Q4, many insurers and reinsurers across sectors saw higher COVID-related losses and are increasing reserves. PeriStrat LLC estimates global insurance and reinsurance losses of $50B, with the potential for another $14B in future quarters. As of early April 2021, PeriStrat reported public pandemic-related losses, IBNR reserves, and estimates at almost $38B.

Specialty insurers continue to increase automation and improve speed to market and underwriting.
Specialty insurers are prioritizing reporting tools and investing in data science capabilities to optimize their portfolios and improve underwriting as part of long-term data strategies. Ingesting unstructured text is a newer area of focus, leveraging artificial intelligence, machine learning, and natural language processing.

They are also upgrading to highly configurable policy administration systems to improve underwriting and enable product development flexibility to accelerate entry to profitable niches.

Another area of focus is investigating automation support for ingesting new business application documents and building out broker platforms. Specialty insurers are deploying digital broker platforms and API catalogs to assist in automation of new business and renewal processes.

For a more in-depth look at the trends in this space, read Novarica’s report Business and Technology Trends: Specialty Lines.

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