Monthly Archives: January 2022

Business Insurance, Business Risk, Disaster Preparedness, Disaster Resilience, Insurers and the Economy, Risk Management

Weather, Supply Chain, Inflation Drive Up Commercial Property Insurance Prices

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By Max Dorfman, Research Writer, Triple-I

Construction material costs rose dramatically in 2021, altering the underwriting and pricing of commercial property insurance. A recent report by Westchester – Chubb’s excess and surplus specialty product group – details the causes of rising commercial property insurance prices and how they can be mitigated.

The report cites three main factors driving the increase:

  • More frequent and severe insured losses due to extreme weather;
  • A supply chain crisis that has generated higher costs for construction materials; and
  • Rising inflation, which totaled nearly 7 percent in December 2021 from the previous year’s period and is the largest one-year increase in the past 40 years.

Weather, extreme and unpredictable

According to NOAA National Centers for Environmental Information, there were 20 weather-related disasters with losses exceeding $1 billion occurred in the United States between January and September 2021. Between 1980 and 2020, the average number of these types of losses was seven.

In the first half of 2021, about $42 billion in insured property losses were recorded by the insurance industry, representing the highest figure in a decade, according to Swiss Re.

Despite this dramatic rise in losses, the report says, catastrophe risk models “may not fully capture the potential losses attributable to unusual weather events like the December 2021 tornado outbreak, Hurricane Ida, and Winter Storm Uri.” The unpredictability of these storms, alongside a need for better hydrological, topological, and geospatial data gathering and analysis, continues to pose a threat for insurers trying to anticipate risks associated with commercial properties.

Supply chain

2021 also saw a fluctuation of pricing changes for many materials — particularly those used for building – courtesy of the pandemic’s disruption of the global supply chain. Although the exorbitant lumber prices fell in the second half of the year, the prices of materials like copper piping and tubing dramatically increased, according to the report. This posed a challenge for insurers to approximate future costs for underwriting and pricing purposes. 

If an unexpected major storm hits a heavily populated region, thousands of homes may need to be repaired or replaced at the same time, pushing the cost of goods and labor – and, ultimately, insurance – even higher. In November 2021, the report says, it was estimated that commercial properties were undervalued for insurance underwriting purposes by more than 30 percent.

Inflation

In addition to pandemic-driven cost increases, underwriters are concerned about the broader inflation picture and its potential impact on interest rates.

“High inflation of the 1970s and early 1980s, for example, adversely affected the industry, resulting in weaker underwriting performance and reserve levels,” the report says. “Rising interest rates, on the other hand, deteriorated the value of fixed income assets.”

Economists recently polled by Reuters said they expect the U.S. Federal Reserve to tighten monetary policy to tame persistently high inflation at a much faster pace than they believed a month earlier.

 Where do we go from here?

Westchester’s report offers several strategies to help combat rising commercial property insurance costs:

  • Insurers, reinsurers, modeling firms, brokers, and risk managers need to develop more accurate and near-real-time data on building condition, drainage systems, real estate trends, and access to construction materials and labor;
  • Risk managers and property owners should consider entering agreements with contractors before weather events to ensure that materials and services are available when the need arises;
  • To ensure more comprehensive underwriting of a building’s replacement value, more frequent and in-depth property damage risk appraisals from qualified sources are needed; and
  • Insurers should consider upgrading loss prevention services provided to commercial property owners and rewarding policyholders with discounts and credits for taking certain risk-mitigation measures.
Careers and Employment, Technology

Invest in Technology — But Don’t Forgetto Invest in People

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A recent survey of insurance underwriters found that 40 percent of their time is spent on “tasks that are not core” to underwriting. The top three reasons they cited are:

  • Redundant inputs/manual processes;
  • Outdated/inflexible systems; and
  • Lack of information/analytics at the point of need.

The survey – conducted by The Institutes and Accenture – also found that underwriting quality processes and tools are at their lowest point since the survey was first conducted in 2008. Only 46 percent of the 434 underwriters who responded said they believe their frontline underwriting practices are “superior” – which is down 17 percent from 2013.

“While underwriters believe technology changes have improved underwriting performance, 64 percent said their workload has increased or had no change with technology investments,” Christopher McDaniel, president at The Institutes Catastrophe Resiliency Council, told attendees at Triple-I’s Joint Industry Forum.

The survey’s findings with respect to talent may shed some light on this. The number of organizations viewed as having “superior” talent management capabilities for underwriting fell 50 percent since 2013 across almost every measure of performance evaluated.

“Training, recruiting, and retention planning had some of the biggest drops, particularly for personal lines,” McDaniel said. About a quarter of personal lines underwriters said they view their company’s talent management programs as deficient.  That rate rose to 41 percent for talent retention; 37 percent for in succession planning; 33 percent for in training; and 30 percent for recruiting

“While technology investment may have improved underwriting performance” in terms of risk evaluation, quoting, and selling, McDaniel said those improvements “appear to have come at the expense of training and retaining underwriting talent,” McDaniel said.

Even before the pandemic and “the great resignation,” insurance faced a talent gap.  Part of the challenge has been finding replacements for a rapidly retiring workforce, as the median age of insurance company employees is higher than in other financial sectors.

A McKinsey study that assessed the potential impact of automation on functions like underwriting, actuarial, claims, finance, and operations at U.S and European companies found that as underwriting  becomes more technical in nature it also will require more social skills and flexibility. Respondents to the McKinsey survey said automation and analytics-driven processes will produce a greater need for “soft skills” to shape and interpret quantitative outputs. Adaptability will also become more important for underwriters to stay responsive to changing risks and learn new techniques as technology changes.

“Underwriters will not become programmers themselves,” the McKinsey report said, “but they will work extensively with colleagues in newer digital and data-focused roles to develop and manage underwriting solutions.”

Technology

NFT & Insurance: Is It “A Thing”?

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Non-fungible tokens (NFTs) are a hot topic, gaining attention from pop culture to the business press. Most of this notoriety has been associated with the buying and selling of digital collectibles, but the underlying blockchain technology and this specific application of it have implications for tangible assets and for insuring both digital and physical properties.

For this reason, the Institutes RiskStream Collaborative – the risk-management and insurance industry’s first enterprise-level blockchain consortium – recently launched a free educational series about NFTs.

What are NFTs?

“Non-fungible” means an object is unique and can’t be replaced with something else. A dollar is fungible – you can trade it for another dollar bill or four quarters or specific numbers of other coins, and you still have exactly one dollar.  An individual bitcoin is fungible. A one-of-a-kind trading card isn’t fungible – if you trade it for a different card, you would have a different thing, and you would lose possession of your original card.

NFTs are unique digital markers that can be associated with an asset to identify it as one-of-a-kind.

Want to understand more? Watch the first episode.

Insurance potential

In the second episode, the RiskStream Collaborative brings in Jakub Krcmar, CEO of Veracity Protocol, to discuss the concepts of computer vision, digital twins, and NFTs of physical products. The ability to create a unique digital twin of exact replicas – like identical baseball cards or identical automobile gears – to create an NFT may have major insurance implications. One example was the potential for NFTs to be associated with high-value physical objects to demonstrate authenticity of ownership and reduce or eliminate fraud opportunities.

Episode three features Natalia Karayaneva, CEO of Propy, who explains the potential for NFTs in real estate transactions. She highlights some of the benefits of the NFT approach, underscoring the efficiencies brought to primarily paper-intensive processes. The potential for insurance also is discussed.

In episode four, Kaleido CEO Steve Cerveny wraps up the series by describing the tokens themselves. He highlights the ability to create NFTs to represent any asset. These tokens are programmable “things” on a blockchain, which can help with business processes. Blockchains are basically ledgers or databases. Like any ledger, they record transactions; unlike traditional ledgers, however, blockchains are distributed across networked computer systems. Anyone with an internet connection and access to the blockchain can view and transact on the chain.

This open, consensus-based nature of blockchain – with everyone on the chain checking the validity of every transaction according to an established set of rules – enables conflicts to be resolved automatically and transparently to all participants. This dispenses with the need for a central authority to enforce trust and allows participants to build in automation through smart contracts.

The Riskstream Collaborative is the largest blockchain consortium in insurance, with over 30 carriers, brokers, and reinsurers as members who lead governance and activity. An “associate member ecosystem” is beginning to be established, and RiskStream is inspecting use cases in personal lines, commercial lines, reinsurance, and life and annuities.