In an era of insurance transformation, where process simplification and flawless customer service are expected, innovation in policy and product is a must—especially when it comes to the non-traditional coverage aspects of specialty insurance. Whether it's reputational, cyber, gig economy or supply chain risks, insurers are meeting the growing demand for products addressing new perils.
Many times, innovation in specialty lines product and coverage comes from brokers—those on the receiving end of customer demand. "As brokers, we are constantly helping clients assess their risk and pushing coverage to address those risks," said David Lewison, senior vice president and national personal lines practice leader for AmWINS Group. "The insurers likely wouldn't offer new coverage in a vacuum; it's the brokers that push for change."
Managing general agents and underwriters have even more influence than standard carriers when it comes to flexibility and innovation. "MGUs can't survive unless they offer differentiated products and/or services," said Kieran Dempsey, executive vice president and chief underwriting officer for Ryan Specialty Group. "Many times, the differentiation comes via innovation in product, underwriting, distribution or service."
Yet some see the customer as the impetus for innovation in specialty products and services. "I agree that MGAs are more nimble, but the innovation in coverages is typically driven more by the buyers' needs—represented by the broker—or the carriers and MGAs seeing an opportunity or developing need of the buyer that can be underwritten because adequate data is available…for example, parametric covers," said Bob Petrilli, president of AmWINS Underwriting.
Create or Update?
The question surrounding newer risks is whether carriers should create entirely new policies or simply update language within existing contracts. Views as to which path to take vary widely.
"The industry must respond to emerging product needs, but in many cases the tried-and-true coverage forms can work with modest modifications," said Dempsey. "We've attempted entirely new coverage forms in the past, and many times brokers reject them as they are difficult to compare to the competition. Coverage comparisons become difficult as the product drifts from ISO. That said, for entirely new products with limited competition, custom coverage forms can work."
Lewison and Petrilli agreed. "It's rare that you need a whole new type of insurance," said Lewison. "Most of the insurance out there is triggered by known perils. Cyber is an exception. There wasn't a good fit for it on traditional policies because the perils were so different."
"As buyers' needs change, the industry adapts," said Petrilli. "For example, coverages like non-physical damage business interruption didn't exist, but as corporate supply chains became more critical and single source, there was a need for developing this innovative coverage, and the industry responded."
On the other hand, Doug O'Brien, national practice division manager for casualty and alternative risk at USI, feels entirely new policies are needed to protect new risks. "No, traditional policies don't work just fine," he said. "Again, with all these new emerging enterprise-type risks, most of the current policy forms that exist are inadequate to provide the type of coverage necessary to protect the insured."
Innovation — whether it's creating entirely new policies or adjusting language in existing policies— is important now and moving forward.
"Without question, almost daily we're being challenged with new developments," said O'Brien.
Whether brokers and their carriers can stay ahead of the curve or even keep pace is the question.
Risks to Watch
The following examines several newer risks where policy innovation is underway.
The sharing economy refers to individuals sharing goods and services, often through a third-party, digital network. According to Statista, there were 44.8 million users of the sharing economy in 2016. By 2021, that number is expected to reach 86.5 million—a 93 percent increase in five years.
"The way things are evolving with the whole shared economy, Uber and Airbnb and similar 'shared economy' type companies, it brings a whole new exposure to loss and a new risk profile that these types of companies represent," said O'Brien.
The market represents a huge opportunity for insurers; however, traditional policies may not cut it as the sharing economy blurs the lines between personal and commercial lines. A 2018 report from Lloyd's of London found that consumers in the sharing economy expect to be protected from the risks of transacting and that there is a significant untapped market of potential sharers who would be more willing to participate if protected by insurance.
The gig economy refers to individuals who work on a contract or freelance basis for potentially several employers—for example, a driver who works for both Uber and Lyft. According to Intuit, 43 percent of the U.S. workforce will be classified as such by 2020.
"A lot of these individuals are sole proprietors or independent contractors," said O'Brien. "While they might represent Uber, they don't necessarily work for them. Workers' compensation, as an example, may not cover these types of individuals, so we have to look for other types of policies that would provide the proper type of coverage for them."
To meet their insurance needs, the industry, including Ryan Specialty, has had to think outside of the box. "We see increased interest in gig economy products where premium would be tied to the 'gig' rather than an annual policy," said Dempsey.
More businesses are relying on overseas suppliers, and if a company's operations depend on the arrival of raw materials, parts or finished products from overseas locations, then a business could be in serious financial turmoil when goods are delayed or fail to arrive altogether. According to the Insurance Information Institute, it can take a business two years or more to recover from a supply chain failure. Supply chain insurance is becoming increasingly popular to protect against such events.
"There are more and more companies in the supply chain for any given product or solution," said USI's O'Brien. "And you really need to get your arms around who's in the supply chain. What are they doing exactly, and does the policy that you have now—for example, a business interruption policy—does that cover some of the exposure that might emanate from one of your suppliers down or up the supply chain? The answer is typically no."
Many traditional business interruption policies don't cover certain events such as non-physical damage. "For example, for a food manufacturer, if one of their key suppliers is shut down by the FDA, they may not have coverage for that business interruption event that might occur," O'Brien said.
Telematics technologies can report on vehicle location, mileage, engine on/off times, driver behavior, fuel usage, vehicle performance and more. The data they collect on fleets and drivers can be analyzed to make better decisions regarding driver training and safety, as well as tailor insurance coverage.
"We are seeing significant interest around telematics where you can track insured behavior and apply highly specific selection and pricing tools," said Dempsey. "Some will develop into usage-based premiums or 'pay as you use.'"
While telematics offers a range of benefits, there are also privacy concerns. Some states require disclosure of tracking practices and devices. Other barriers include cost and legislation. Insurers must manage telematics regulatory requirements within the states in which they do business.
Many brokers are working to keep pace with new coverage terminology, but matching the speed of cyber threat developments is a challenge.
"Cyber is evolving," said O'Brien. "It's obviously been on our minds now for many years, but it continues to evolve in ways that we never even imagined two or three years ago. All the hacking and ransomware obviously are part and parcel of that, but it's evolving to more extensive exposures to new technologies and the impact that all these new technologies have on increased interconnectivity. Without question, you have to develop new policies and new markets and language to make sure your clients are properly covered."
More than half of states have legalized some form of medical or recreational marijuana, with demand continuing to increase. But the division between state and federal status makes it difficult for businesses to receive inclusive, affordable coverage and often leaves policyholders with restrictive plans.
In terms of risks, cannabis-related businesses face several, including theft, general liability and product liability, not to mention banking restrictions due to federal regulations. But changes are happening, albeit slowly at times.
"As the legislation changes around insuring cannabis-related risks, the opportunities [for insurers] will expand rapidly," said Lewison.
Other newer risks such as climate change, reputation, pandemics, cryptocurrency, artificial intelligence, terrorism, drones and active shooter are also on the minds of brokers as they work to innovate coverage for such perils.
This article is republished from the September/October 2018 issue of Carrier Management Magazine, the publication for the property/casualty insurance C-suite.
About Emily Holbrook
Emily Holbrook is owner of Red Label Writing LLC, a writing, editing and content strategy firm catering to the insurance and financial services sector.