It's been nearly 3 years since I last wrote about the E&S industry for PropertyCasualty360.com.
Back then, I tried to make an analogy between the changing dynamics in the E&S market and the gaming industry by pointing to thriving casinos in Las Vegas, which evolved beyond relying on gaming to cater to the modifying tastes of their customer base. I suggested that the ‘rules’ of the insurance industry house seem to be changing, and our ability to adapt will be key to our ability to thrive.
Alternately, I considered the risk profile a failed casino in Atlantic City. Financial backers had the luxury of knowing the risk inside the house, at the tables, was a lock. They knew that math would guarantee they’d win, if they got gamers to play.
E&S markets, however, are exposed to both external factors and the risk inside the house. Carriers should be so lucky as to have the certainty that a casino has: guaranteed underwriting profit, if only enough bets are made.
That article published in the days leading up to NAPSLO 2014, when some risk factors of note were injections of hedge funds’ capital to off-shore property markets, an escalation in size, scale, and speed of class action suits ready to sue public officers of companies whose stocks had dipped, emerging concern on concussion litigation, as well as activist re-definitions of "occurrence."
Fast forward three years
Today, NAPSLO is WSIA, and we have a new host of risk factors that we now call "disrupters" like Uber, a growing global cyber threat, a national opioid crisis, automated driving, shared economy insurance companies and technology platforms with predictive analytics and big data.
The insurance industry is on this great precipice for a technological revolution. Like Las Vegas, the insurance industry is clearly evolving and innovating to meet customer needs while also addressing the new risk factors.
But are we placing enough focus on the deals at the tables?
The customer experience is changing, too. But how are the old insurance models holding up?
While our industry remains dynamic and is ever-changing, insurance principles remain the same. Getting back to basics, the rules of engagement are constant. Any policy that we write could always result in a loss. We have to think of the impact that a loss could make on our book of business. What is the likelihood that this could happen and what would the ultimate result be from that loss? Are we assessing the risk the right way? Is our policy going to make us profitable — after all of our possible costs incurred may hit?
And if we don’t meet all of our principles of underwriting, should we walk away?
Adaptation is the key to survival
The insurance industry must adapt while remaining true to the basics. We have to continue to evolve, utilizing all of our existing tools, and leverage new tools now available to us.
However, we also must heed Albert Einstein's famous advice: "Information is not knowledge." In other words, as we strive to adapt and use data analytics and sophisticated modelling tools, it's worth remembering that simply having more data does not mean better outcomes.
Whether a deal happens through apps or on a bar napkin, a poorly conceived deal will not have the best result.
There is no doubt that the data and delivery in our industry will advance. The tools of the trade are definitely improving. Whether or not we are able to transform better data and predictive analytics in the hands of underwriters who are paid to make up/down decisions every day on policies that could be adversely affected by factors they don’t even know about yet remains to be seen.
At the end of the day, even great data and tools can be over-ridden by bad decisions made by the people in this business. Perhaps with better tools, this result will be better measured, and the consequences more immediate.
Three years from now, I’m certain we will be walking into WSIA with a completely different set of risk factors. The insurance industry will have evolved even further in its use of technology and data. The underlying principles, however, will be the same. Those who focus on relationships, underwriting expertise and discipline, and client service will still have chips on the table.
Derek R. Broaddus, CPCU, ASLI, is senior vice president and Excess Casualty Division manager at Allied World. The opinions expressed here are his own. He can be reached by sending email to firstname.lastname@example.org.