Specialty Lines: Moderating Rate Increases, but Continuing Economic, Political, and Regulatory Uncertainty

Specialty insurers have traditionally made less use of automation than insurers in other sectors. But that’s beginning to change. These carriers are now differentiating themselves in a competitive marketplace.

This is happening through investments in distribution (especially new business submission), product development, underwriting, and claims. In addition, ChatGPT and other large language models (LLMs) have spurred conversations about broader AI strategies.

Here are six of the top developments happening in the specialty lines market:

  1. Specialty lines renewal rate increases are moderating.

The specialty lines market is seeing moderating rate increases for many lines, greater underwriting capacity, and increased breadth of coverages. Economic, political, and regulatory uncertainty is impacting several lines, including environmental, healthcare professional liability, kidnap and ransom, marine hull and liability, and terrorism and political risk.

Higher reinsurance pricing is impacting rates for some lines, and ongoing concerns (labor shortages, social inflation, supply chain issues) also play a role in limiting rate decreases.

  1. Regulations around data protection and privacy will only grow.

State regulations such as the California Consumer Privacy Act (CCPA) are driving the need for increased cyber-risk coverage, especially for financial institutions and third parties doing business with them. These regulations continue to be clarified and modified.

Other states have passed or are considering data protection and privacy legislation. As of April 18, 2023, 18 states had active legislation, according to Husch Blackwell's 2023 State Privacy Law Tracker. There has been no progress toward federal legislation, though concern over AI and TikTok may move things forward.

  1. The war in Ukraine is mostly impacting non-U.S. specialty insurers—for now.

London market aviation insurers have imposed sublimits for confiscation-type risks within the aggregate limit applicable to hull war cover and are now imposing blanket exclusions related to Russia, Belarus, Ukraine, and Crimea. There is still significant appetite for marine cargo, with Aon calling out interest in project cargo and delay-in-startup insurance for renewable energy project clients. Protection and indemnity club insurers are cancelling war risk cover for Belarus, Russia, and Ukraine, following pullouts by reinsurers.

Other impacted lines include agriculture, energy, surety, and trade credit. The invasion is also driving inflation and market volatility, in addition to the direct impact on claims and premiums, which could pressure insurers’ capital and margins.

  1. There is an increase in both creation and consolidation of MGAs.

Insurers are both establishing and purchasing managing general agencies (MGAs). MGAs offer expertise in attractive markets; they are a means for insurers to expand to new geographies without the expense associated with hiring personnel, building offices, etc. and can free up balance sheet capacity for more attractive purposes.

  1. Specialty lines insuretech firms continue to obtain funding.

Some insuretech firms have transitioned from MGAs to become full insurers, especially in the cyber insurance space. Other insuretech firms focus on offering innovative products. The focus on ESG has led to increased attention on climate risk and related insuretech firms. Incumbent specialty insurers also partner with insuretech firms on solutions to business problems. Insurers and other parties are continuing to invest in insuretech firms.

  1. Specialty insurers are still investing in data and analytics and automation.

Specialty line insurers are prioritizing cloud data warehouses, reporting tools, and data science investments to optimize their portfolios and improve underwriting; upgrading to highly configurable policy administration systems to improve underwriting and enable product development flexibility to accelerate entry to profitable niches; and investigating automation support for ingesting new business application documents and building out broker platforms. Digital broker platforms and API catalogs are also assisting within automation.

If you’d like to discuss these key findings for the changing environment for specialty carriers, please read our new report Business and Technology Trends, 2023: Specialty Lines or contact myself ([email protected]), Eric Weisburg ([email protected]), or Mitch Wein ([email protected]) to continue the conversation.

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