Business pressure forces decisions. It can force bad decisions, such as short-sighted moves and impulsive choices made to relieve pressure. Pressure can also force good decisions, when companies execute on strategic priorities to be relevant and competitive.

Most insurers are in a sort of pressure-cooker situation where challenges are creating pressure and good decisions need to be made. They are looking at their financials, growth, profitability, pace of technology change, increasing risk, and customer demands to determine next steps with their technology foundation. These are tough, deep concerns. Answers don’t always come easily. Yet, times like these have a way of revealing innovative answers if we are tuned into the opportunities and open to thinking differently.

What kinds of decisions are you having to make right now? Let’s look at current industry pressures with some expert commentary. I recently asked three of my creative and respected colleagues to share insights on how insurers might respond. For the full conversation, see 2024 Trends Reshaping the Insurance Business — Are You Ready?

Our panelists were:

Matteo Carbone, Founder and Director, IoT Insurance Observatory

Lisa Wardlaw, Founder and President, 360 Digital Immersion

Bryan Falchuk, Author of The Future of Insurance and President and CEO, PLRB

And myself, Denise Garth, Chief Strategy Officer, Majesco

Let’s begin!

Denise Garth

Right now, the industry is dealing with some monumental pain points. We have companies with really significant loss ratios that won’t improve in 2024, possibly not even in 2025.

We have challenges from a macroeconomic perspective. There is inflation and its pressure on claims costs, whether it’s medical or it is physical damage to homes and businesses. There is an increasing protection gap for our customers. Some customers can’t afford their insurance and they are decreasing the amount of insurance they have or not purchasing it all together.

Operationally, we still have lots of legacy systems and business models that can’t respond to the market shifts and demand. What’s holding the industry back?

Bryan Falchuk

It can be frustrating to see the focus on operational expenses, as opposed to investments that improve the loss ratio. Many carriers are over 100 on their combined ratio. This isn’t just because of the size of their expense ratio. The things they can control within the expense ratio are not enough to do anything about it. If we don’t get down to addressing the loss ratio — underwriting, pricing, risk selection, and claims management — for many carriers, even if they cut costs by 100%, they’re still not going to be profitable. Raising rates, for example, does not keep up with macro changes.

I know of one carrier during COVID that saw the price of lumber quadruple in six months. Their rate change cycle is annual. So they had to sit with that for those six months and then another six months while they waited, and the price didn’t flatten out. That’s where some of our traditional expense-focused thinking is going wrong. How can we rethink our investments?

We have to go back to some basic questions. How do we define exposure? How do we rate for that kind of exposure? The answer isn’t to pull out of every market. If you pull out of each market that’s no longer viable, you’re left with too little market for your survival. Most carriers are not set up to operate at a massively reduced scale without going out of business. We have to find a way to make exposures viable for us, and also for our insureds. People who can’t afford insurance will start losing their houses because they’re not meeting their mortgage requirements. That’s not a cycle we want to get into. It isn’t viable.

Matteo Carbone

I agree. The strongest need for the sector is to address the loss ratio in many different business lines.

If you look at the biggest cost on the income statement of an insurer, it is always claims. If you find a way to reduce the amount of expected losses, this is the game changer. There are some positive things that emerged during 2023 regarding risk prevention.

Here is a positive trend, for example. US commercial Property and Casualty insurers have obtained incredibly high results in avoiding water, non-weather losses, using IoT solutions for risk prevention.

We have recently heard claims of 300% and 700% return for each dollar invested in prevention. I am critical of this. I think it is too high, meaning that there is a long tail of risks where the return on investment will be 20-60%. These are still missed opportunities if insurers aren’t taking advantage of them, and they represent a large portion of the portfolio of commercial property insurers. I hope in the next 12-18 months, carriers will start extending these programs into larger parts of their portfolios.

These opportunities are feasible in any business line. We are starting to see it on homeowners insurance. Insurers are giving devices to policyholders that address these problems in order to improve the loss ratio. This applies to auto as well. We can change driver behavior with decent rewards programs and telematics. At the international level, many players have already obtained a reduction in the loss ratio.

Denise Garth

From an operational optimization standpoint, this is also the year, “Hubris comes home to roost.” We have a lot of great ideas. We have built some great solutions. A lot of money has been invested. But does the level of profitability reflect what’s been invested? It seems like we could actually see a fire sale of some of the companies that are unable to transition into profitability.

This isn’t just related to operational optimization within the insurance companies, but also within startup insurers, startup MGAs, and even technology companies. Money is tight and operations are expensive. This the year companies need to establish and maintain profitability. Are companies making the profits they should be from InsurTech?

Lisa Wardlaw

It’s amazing how making money and profitability still matters! I think we all agree — it’s time to throw out the old playbook.

If, as a carrier or an InsurTech, you went in on an OpEx (Operational Expenditure) play, and your valuation or savings is OpEx, that isn’t going to scale. It won’t save your loss ratio. If you are an InsurTech, it isn’t going to make your valuation.

We have to change the economics. In order to substantially change the loss ratio, we have to change risk selection. We have to prevent more risk from occurring. We have to change the economics of repair and replace. The only way we can change those economics is by leveraging all of these amazing technologies, including IoT, the sensors, the on-demand, the streaming, the data, to change our underwriting appetite — not to exit but to start buying good risks to offset the bad.

Also, we have to use the technology to pre-purchase necessary materials. I would start buying lumber as a NatCat event is occurring. I would go out to the derivative and the market, and I would start changing the economic yield curve. If we can’t prevent the storms, how do we change the economics of repair?

You have to have a new playbook. The playbook still needs to be focused on what continues to make our industry great — which is that we are an economic balance sheet. We thrive on the economics of loss ratios. But managing the loss ratio, now, means that you need a new approach. That to me is the trend of 2024.

Bryan Falchuk

Your example reminds me of Southwest Airlines after the Great Financial Crisis. Fuel prices shot up, Southwest had hedged their fuel costs by buying oil futures. Essentially, they bought contracts that allowed them to lock in their fuel prices far below market rates. And that’s how they were profitable, whereas the rest of the airline industry was losing money.

I wonder how many insurance carriers today are actually thinking, “If we are a cog in this financial transaction ecosystem, why are we only looking at it in one direction?” Of course, this is also a great example of how the tools we have today don’t necessarily place us in the position to do something like what Southwest did. But the tools are out there — a mix of people and analytic systems that can change the economics.

There are a number of factors that are throwing off insurance economics right now. In June 2023 for example, a number of carriers had already met their attachment points with their reinsurer for CAT claims without there having been a single named storm. This was just from severe convective storms, which are basically wind and hail. Hail was enough to put everyone over the line.

Of course, the attachment points have now increased. And for a number of smaller Midwestern carriers with heavy hail exposure, they couldn’t just swallow another $20 million of loss that their reinsurers were forcing them to take. They have to eat it and their balance sheets can’t afford that. So they liquidated. They shut down the company.

Insurers need to consider completely different approaches. There’s a parametric company, for example, that could cover this type of exposure. Their standard coverage would go to customers that wish to cover their deductible. But some carriers are now thinking, “Even if our customers don’t want to buy that to offset the deductible, maybe we want to look at it as a form of reinsurance and helping to keep the package affordable for the insured.”

These types of thoughts are seemingly out of left field. They would have been impossible not long ago. The takeaway is that we have to use these types of ideas to find answers because the underlying economics are not sustainable in the way that they used to be.

Matteo Carbone

I agree with changing the model of repairing. At the international level, I have seen auto insurers building their own network of body shops, and buying parts for the body shops. They are finding a way to be more efficient in purchasing the parts that are necessary, and they purchase these for all the body shops that they are using. This kind of idea is certainly a lever that insurers or reinsurers can exploit.

I disagree on utilizing the entire long list of technologies. I feel that could kill innovation. We need to be selective because there are some previously touted technologies and services that haven’t been demonstrated to work. It doesn’t mean that someone may not make it work in the future. But for example, with “on demand,” there were many players and much investment, but none that have truly paid off yet.

Instead of placing all new technologies in a basket, we need to select those that make sense and demonstrate a strong return on investment. We have learned over the past five or six years, that there are some technologies where the probability of failure is pretty high.

Lisa Wardlaw

But some of those technologies were being used for point solutions. They weren’t being used in the midst of a reimagined process. They failed in demonstrating ROI because they were being used for things that were facts-oriented, not for the economic transformation of the business.

Denise Garth

So, we have come full circle with the idea that profitability is crucial, which is something that we all seem to agree on. If I can summarize here, when it comes to operational optimization, we need to change the economics of the equation. At a high level, we learned that:

• Insurers are being hit with circumstances where operational optimization is crucial to maintain profitability, but it’s going to take more than operational optimization to make them profitable. A good first step might be to ask, “What can we do to recalibrate our loss ratio?”
• A new playbook needs to be used, where insurers use their knowledge and next-gen technology foundation to reimagine the entire process, including how to manage outside costs. Analytics and AI may hold promise for new statistical approaches to control and guide the repair and replace ecosystem.
• Using next-gen technologies effectively require choosing those that will impact the business and profitability when they are used holistically.
• You cannot wait! Your competitors may be advancing in their use of new technologies and understanding the data that many of these technologies generate. Don’t let your competition widen the gap.

Thanks, once again, to our panel for their excellent insights! In our next article, we’ll cover how expanding products and channels will also provide some measure of relief and help insurers prepare for uncertain futures. The challenge for insurers is getting the right systems in place to handle product and channel expansion.

For a closer look at how revolutionary new tech platforms can help insurers reinvent their operating models, be sure to read Realignment in Insurance: Legacy Core Impact. Also, for more great discussion from our panel, don’t miss the full Majesco webinar, 2024 Trends Reshaping the Insurance Business — Are You Ready?

By Denise Garth