In the commercial insurance industry, business can be segmented into two distinct archetypes – complex and flow – which require different methodologies for underwriting and processing insurance policies. As middle market business becomes increasingly consolidated in the broker space and sought after in the large carrier space, approaching each risk across the complexity spectrum with the appropriate operating model will be critical to competing effectively and maintaining a healthy expense ratio. Getting this right will be a ticket to growth.
Complex business refers to insurance that undergoes desk underwriting, where an underwriter plays an active role in risk assessment, form selection, and pricing. The underwriters manage specialized risks with complex wording and coverages, navigate across multiple jurisdictions, and handle large limits and capacity. Complex business is typically commercial business distributed through brokers via individual submissions.
Flow business is characterized by automation and technology-enabled processes, with underwriting done primarily through proprietary platforms, portals, or out-of-the-box SaaS solutions. Underwriting operations and decisions are surfaced with little to no support from human underwriters, as the end-to-end process is fully automated for straight-through processing (STP). Industry-leading flow platforms efficiently handle large volumes of submissions via application programming interfaces (APIs) and portals and provide responsive quote turnaround times, while still delivering bespoke customer interactions. Flow business can be distributed to customers through various channels, including brokers, agents, alternative distribution channels, partner organizations, or direct-to-consumer (DTC).
Challenges in the Insurance Flow Segment
The flow segment of the insurance industry represents a $350 billion global market, which is primarily composed of small to medium enterprises (SMEs). This segment of the industry has historically been underserved by large carriers due to the high cost of booking this business manually and technology constraints preventing them from leveraging STP. As a result, SMEs face limited insurance offerings despite accounting for approximately 90% of businesses worldwide.
Low-touch carriers, such as Hiscox and The Hartford, have established themselves as leaders within the SME business segment. As new entrants in the market, small carriers and insurtech firms were able to build technology stacks from the ground up geared toward serving the SME segment of the market. These low-touch carriers typically provide coverage for lines such as commercial property, general liability, and professional liability, which involve relatively standard risks and straightforward underwriting criteria. These lines may also have higher transaction volumes but lower individual premiums, making them less attractive for larger carriers with higher operational costs.
Established insurance carriers have the expertise to understand the underlying risks and process policies in this segment, but they lack the IT infrastructure to do so efficiently. Studying the blueprint laid out by new entrants can provide valuable insights for larger carriers. By understanding the needs of the flow segment and strategically investing in flow-enabling technology, large carriers can efficiently serve this market.
While flow business strategies prove highly effective in certain lines of business such as SME, they may be less applicable or successful in other lines. Specialty, complex commercial risks, and high-net-worth personal lines often require more nuanced underwriting, personalized risk assessment, and specialized coverage solutions that cannot be easily standardized or automated. Therefore, carriers operating in these segments should strike a balance between automation and personalized service to meet the unique needs of their customers.
A shift in consumer behavior has also driven demand for flow strateges. In today's technology-driven world, people are more likely to purchase insurance online – specifically for smaller risks like property and general liability insurance. To remain competitive and win business, carriers should adopt a lean operating model: a centralized referral underwriting team to handle any complex cases, and standardized product structures that allow for scalability.
Benefits of Adopting a Flow Platform
Automated and streamlined workflows will allow carriers profitability by allowing underwriters to focus primarily on higher-margin, complex business, resulting in lower expense ratios and more gross written premium (GWP) per underwriter. Faster turnarounds produced by the low-touch flow platforms will improve customer satisfaction and engage more brokers with its ease of use. Additionally, technology-enabled operating models have integrated systems and data sources, allowing for increased scalability across all lines of business and geographies.
Implementing the future-state operating model requires heavy investment that poses some challenges and risks for carriers. There are large costs associated with the technological development required to separate flow and complex business, particularly with API and artificial intelligence (AI) integration and developing digital trading solutions. Disjointed systems should be rationalized and integrated with one another, and the carrier will need all the internal systems previously described for the investment to be worthwhile and expand business. The system capabilities should either be built internally or purchased from an insurance-in-a-box platform.
How to Adopt a Flow Platform
Many large carriers are relying on shared service centers and underwriters to assess and triage submissions in a manual, time-intensive process, as well as manually quoting, booking, binding, and issuing policies that are straightforward and low risk. This leads to carriers incurring a high fixed expense basis, which would require low loss ratios to remain profitable and competitive. Instead, underwriters should focus their time on complex business that cannot be conducted through STP and handle requests for flow business through an exception-based referral process. This allows underwriters to use excess capacity to go after more complex business, while maintaining the same fixed expense basis and simultaneously increasing market share in the underserved flow market segment through low-touch STP.
To capture flow business while optimizing efficiency and competitiveness, carriers should develop flow platforms and processes that prioritize simplicity and scalability. Although generative AI is gaining traction in the insurance industry, its high development and maintenance costs may not improve loss ratio enough to bolster the carrier's competitive advantage. Instead, flow solutions should leverage simpler rules engines and decision models, providing a cost-effective way for carriers to enhance automation and take on more of this business with minimal manual intervention. Embracing exceptions within the flow process is crucial, as an optimal model will decrease exceptions over time, thereby enriching and accelerating automation while laying the groundwork for future AI-augmented automation. This approach enables underwriters to direct their focus toward complex business that necessitates their expertise, while efficiently handling flow business through an exception-based referral process. Implementing this type of flow solution can simultaneously reduce operational costs, increase market share in the underserved flow market, and strengthen carriers' competitive position in the evolving insurance landscape.
High operational costs and poor expense ratios for flow business are just two of the hurdles insurers venturing into flow business face today, especially as this sector becomes increasingly commoditized. The expenses associated with transacting flow business and the need to streamline operations to remain competitive make it difficult for carriers to find the value in investing in flow, but the potential for carriers to differentiate themselves by investing in flow remains. Carriers also face fragmented and outdated internal systems that prevent them from embracing technological advancement. These systems may be difficult to rationalize, but modernizing these systems presents an opportunity to improve efficiency and cost management. As the insurance landscape evolves and competition intensifies, carriers must prioritize updating their infrastructure to reduce costs and improve their competitiveness in both the flow and complex markets.
Developing a Flow Solution
To capitalize on the growing SME market and expand into the lower middle market, insurers should build a flow platform that can integrate with an underlying policy admin system, supporting workflow (including referrals), and simplified raters for flow business. Once this has been established, carriers will be able to engage with brokers digitally to underwrite and service business. Brokers expect that carriers will provide immediate turnaround times on simple transactions, with the convenience of obtaining issued policies at any time, not limited by standard business hours. Brokers are turning to carriers that can offer products with agile pricing through digital service distribution, which includes full-service online portals that are user-friendly, as well as API connectivity into in-house broker platforms or trading marketplaces (e.g. Lloyds).
Carriers that are currently excelling in the flow segment of the insurance market have these flow platforms and are heavily investing in digital trading solutions. These solutions offer full-cycle online services (quote, buy, amend, renew), sophisticated pricing models, and integrated AI. Future underwriting operating models will use integrated APIs and AI to auto-populate submission fields and use a rules engine to triage submissions, categorizing as either flow or complex. If the submission is flow, it will be end-to-end processed through a flow platform for STP. If the submission is complex, generative AI will be harnessed to produce an output with pertinent information for underwriters to refer to in their quoting process.
