By Tom Kussurelis, National Programs COO, as published in Carrier Management.
As 2023 began, property insurance markets were struggling with the fallout of massive losses from Hurricane Ian in fall 2022. Ian was accompanied by 17 other billion-dollar storms in 2022’s significant disaster season. And those came on top of $596 billion in costs from weather events over the past five years, according to the National Centers for Environmental Information of the National Oceanic and Atmospheric Administration.
This string of catastrophe losses has constricted insurance capacity, a trend made worse by higher interest rates that are drawing investment away from the insurance industry toward competing opportunities. Further crimping capacity is that some carriers are shying away from property lines in favor of liability business that seems less volatile.
Indeed, Hurricane Ian was a tipping point in the property catastrophe insurance market.
But what is the market tipping toward now?
I believe the property catastrophe market’s focus is tipping toward quality performance — toward ensuring that each link of the insurance value chain provides positive, repeatable results, jointly creating high-grade performance. The resurgence toward quality will continue through 2023 and future years. That’s a good trend, as it’ll help the property CAT sector recoup profitability and improve market position.
Before I talk more about why I say that, let’s look at the industry context. In addition to the storm losses of the past several years, like all corners of the insurance industry, the CAT market has been emerging from the stresses of the pandemic.
2022 was a time when many in the market were reconnecting: with business partners and distributors, with customers, with the realities of what the risks in the business looked like on the ground and even with colleagues they once sat down the hall from.
One result of all that disruption is that many insurance professionals have been hungering for improvements to the quality of the industry: from their reinsurers and carriers, their business partners, their distributors, their processes and technology and their people.
The pursuit of high quality — often referred to in the context of the management theory of total quality management (TQM) — is not a new concept. In fact, its origins in the business world date back to the 1950s with business pioneer W. Edwards Deming. ASQ, an international quality membership organization, defines TQM as a “management approach to long-term success through customer satisfaction. In a TQM effort, all members of an organization participate in improving processes, products, services and the culture in which they work.”
In the insurance industry, the “organization” as defined by ASQ includes all business partners along the insurance value chain, from distribution firms to technology partners to wholesalers to insurance carriers to reinsurers.
The philosophy and tools of quality management can play a key role going forward. Quality management is the focused, intentional “blocking and tackling” that make up the day-to-day activities of the insurance industry in creating the customer experience. To be considered a high-quality player, a managing general agent (MGA), underwriter or any other entity must live up to rigorous standards across millions of transactions across numerous platforms for customers, carriers and producers.
Where we are today, though, is that the last five years, capped off by Ian in 2022, exposed which carriers and business partners were delivering high quality — and profit — and which weren’t.
Cycle of value creation
The insurance value chain begins with the capacity that insurance carriers bring to the market through their retained earnings, their capital-raising efforts and their reinsurance backstops. The leaders of those carriers face crucial decisions on where and how to allocate that capacity (either through their own underwriting processes or with partners such as program administrators and MGAs).
Carriers allocate capacity based on expected profit and total insured value. Each carrier only has a limited quantity of business they’re able and willing to write, so business partners and buyers must compete for access to that capacity. In fact, every partner must have a message to carriers as to why they should be the partner of choice.
This year that capacity is more limited. Prices are higher and terms are tougher. As referenced earlier, this is due to higher reinsurance rates, as well as high interest rates, underwriting losses, operational inefficiencies and claims inflation.
Wherever they direct their capital, carriers must have confidence in the allocation of their insurance capacity.
The pursuit of high quality plays into this equation because underwriters and wholesalers turn capacity into insured value and earnings using underwriting and claims capabilities. They convert capacity to profit through underwriting decisions about the property risks being insured.
Along this pathway are decisions centering around three aspects of underwriting:
- What are the most important attributes of a risk to consider in underwriting?
- Is structure B a better risk to insure than structure A based on those attributes?
- Given the selected risk, what is the appropriate premium rate to balance risk and potential underwriting earnings?
High quality in the insurance business also is achieved by an underwriter’s ability to choose the right risks and set the right rate for the carrier. This is true whether the carrier conducts its own underwriting or partners with a wholesaler.
Another aspect affecting quality is the relationship between the carrier and business partner, especially the quality of their communication. Often that is driven by the reporting of underwriting and claims results. Business partners that set up proactive communications generally achieve higher quality, since the carrier can expect to hear about progress and results no matter what they are.
I’ve only mentioned claims in passing, but claims are a major indicator of quality for an insurance partnership. If the business partner has access to the right adjusters to get a claim settled fairly and expeditiously (and properly reported to the carrier), then there’s a good chance of a superior quality insurance transaction for carrier, business partner and claimant.
In short, the thread of insurance value creation weaves from the carrier’s allocation of capital and capacity, through underwriting and delivery of the rate, into the business reporting and conversations around it, through claims management and payment — and then all the way back around. Then, as the shampoo bottles read: Lather, rinse and repeat.
That’s how the insurance industry creates value and superior quality. It’s not new. What’s different now, though, is that Hurricane Ian and a rash of other losses have laid bare which carriers and business partners have been able to establish and maintain high quality through a variety of market cycles.
The retrenchment going on in the market as 2023 began was a healthy if difficult sign. Beyond that, though, reinsurers, insurers, wholesalers and retail distributors all need to wrestle with how to move forward. Watching our Ps and Qs — especially the “Q” of quality — in the property CAT market is an appealing and rewarding way forward.