The theme of 2024 is “new challenges, new rules, new mindset” for the personal lines insurance industry. While combined ratios are expected to improve this year as increased rates take hold, expediting the return to profitability will require finding new ways to solve profitability issues. According to McKinsey, carriers who double down on innovation can create up to 20 times more value than their competitors, making this year a prime time for insurance carriers to boldly innovate. Meeting market challenges will be accomplished utilizing the next-generation tools that are shaping the future for the insurance industry. Carriers standing head and shoulders above the competition are the ones embracing innovation and thinking of how they solve problems differently.
Keep Your Best Policyholders
Consumers hit hard with renewal policies fraught with rate increases and personal lines experiencing the industry combined ratio as high as 103.4% at the end of September 2023. P&C Specialist reported auto insurance rates were up 12.3% over the previous year, and homeowners industry-wide rates increased by 10.3%. It’s been a rough-ride for everyone.
As carriers experience loss ratios and combined ratios rising, the cumulative impact of inflation and rising loss costs are problems big enough they cannot be solved by one increase. The challenge will be to keep the best customers and move away from rating plans using the lowest risk individuals to subsidize the losses seen with their highest risks.
Rising Personal Lines Shopping
Additionally, the industry is seeing a rise in personal lines shopping. The first-quarter of 2023 saw the most shoppers in more than 2 years. Unlike previous years, shopping is not solely by price-sensitive consumers. P&C insurers have been seeing more of their best, most loyal, and most profitable customers shop around for new coverage to ensure that they are getting the best rate. A recent TransUnion study found over the past 2 years the insurance shopping population has had more people with high credit scores compared to the traditional “shoppers” who were higher-risk consumers.
While carriers scrambled to increase rates in 2023 to fix profitability, many cut advertising. Yet, with rising price shopping, investing in advertising spend is advantageous due to the large groups of shoppers and will reap benefits. The key strategy is to avoid adverse selection and to understand which customers have an adequate rate and who falls outside of the rating plan at the earliest possible point.
Reduce Tech Debt To Win
Gone are the days of allotting all technical resources to replacing legacy policy administration systems and programming rate changes. In an effort to keep ahead of market challenges, carriers are starting to shift thinking about long-term initiatives that tie up technology resources. Those who are able to devote resources leveraging new tools and digitizing the service and claims experience, in addition to supporting core operational functions of their businesses, will emerge as big winners in the evolving industry landscape.
Development in AI Regulation
Key states like New York, Connecticut, California and Colorado have been early in contemplation of how to regulate the industry’s use of Artificial Intelligence, and most recently the NAIC approved a blueprint for using AI and third parties. The bulletin provides guidance for development of AI-system programs to mitigate the risk to customers through governance, risk management controls and internal audits and guidance for contractual relationships with vendors providing AI solutions.
Carriers should continue forging the path forward to use AI-powered solutions to solve their biggest challenges, and become more educated on how to evaluate both internal controls as well as that of their vendor partners to understand the appropriate risk management framework while leveraging AI.
Measure Fairness Differently
Building on the focus on AI regulation, carriers focusing on understanding how to clearly define fairness in the industry will be well-prepared in the coming years. In 2021 Colorado’s governor signed Senate Bill (SB) 21-169 to protect residents from unfair discrimination “on the basis of race, color, national or ethnic origin, religion, sex, sexual orientation, disability, and gender identity” by requiring insurers to test their data, algorithms and predictive models to ensure they are not discriminating against protected classes. Through dedicated discussions, the industry seeks to understand how to objectively measure existing bias in current insurance rating and practices and how to measure this among various protected classes. It’s certain that new perspectives in rating and underwriting practices are required to ensure the industry upholds its standards of fairness.
Seamless Digital Service and Digital Claims Handling
With the price shopper market, carriers focusing on improving the service and claims experience can emerge successful by using technology to provide a more seamless customer experience in the policy service and claims process. JD Power reported personal lines insurance companies having a “very easy” digital claims process see twice as many customers renewing. However, the aim of efforts is not only to provide a great customer experience, but also drive efficiency to reduce expenses. Incorporating new data sources at every operational point, furthers the seamlessness of how processes are designed. Optimizing the digital customer experience for customers with new policies, policy changes and during a claim is key to profitability, customer retention, and operational excellence.
Large Language Models (LLMs)
Generative AI and LLMs (large language models) are a hot topic as carriers consider how these technologies can be harnessed to automate processes. Key learnings for carriers can center on what LLMs can and cannot do, and where human support will be needed. As the rate of new technology increases, carriers are cautioned that the traditional approach of not being first-movers but fast-followers may not be a sustainable position.
Beyond Proof of Concept to Test and Learn
The insurance industry deserves high praise for its willingness to test new technologies and innovations. However, the number of initiatives lost in the operational priorities of the business are astounding. This often happens when the company culture penalizes failed initiatives. The most innovative insurers are those adopting a “fail fast” mindset where teams become less afraid of failing and see the opportunity cost of never trying to innovate. The message for industry leaders is to empower teams to move initiatives with compelling business results beyond the Proof of Concept phase into an environment of “test and learn” to see real-world results, and act in an agile manner.
2024 will no doubt bring about major changes as carriers course-correct to improve profitability. Some of these solutions will take form in the traditional measures of changing rates and revisiting underwriting rules and some will incorporate emerging technologies and new ways of thinking. Ultimately, insurers will need to start doing things differently to ensure a competitive advantage.
Sponsored by ITL Partner: Pinpoint Predictive
