Covering larger risks? Why subscriptions may be the way of the future

As claims from Cat events and other external risks get larger, the simplest solution to cobbling together coverage might be a subscription approach that spreads risk and reduces individual insurers’ losses.

“Subscribing the risk is better for the industry,” George Longo, president and CEO of Excess Underwriting told a recent Gallagher Talks session. “The concept of sharing isn’t new…. Instead of hanging out the entire risk with one carrier, it spreads it out among many underwriters and it allows them to stay within their comfort level.”

During the past five years, Longo said, the P&C industry focused on obtaining rate adequacy through premium increases. That came at the possible expense of losing good-quality business risks and in some cases maintaining more difficult, less profitable risks.

“It’s a delicate balance, finding the point where the need to gain rate doesn’t sacrifice a good and profitable risk without compromising the quality of the book of business,” he said. “This happens a lot, particularly with domestic carriers over the past while where they’re saying, ‘We’re not willing to take on 100% of the risk.’ They’re looking for participants.”

Revenue will naturally remain a priority for all stakeholders, but Longo argued it shouldn’t be the only measure of success. And insurer unwillingness to take on an entire risk makes a case for MGAs being more active in the sharing of coverage across markets and with multiple partners.

And, while capacity reduction started many years ago, Longo said the pandemic, recent economic turmoil and increasingly severe storms triggered by climate change have compounded the problem. That’s affected pricing across both property and casualty lines.

“Additionally, investment income for these insurers has depleted [and] reinsurance costs have gone up over the past handful of years,” he added. “As a result, rates went up and insurers were forced to reduce the limits that they’re willing to put on a single risk, fearing a full catastrophic loss.”

In that light, subscriptions can be in the best interests of clients, said Longo, because they spread out potential losses, avoid single-market shock and help stabilize books of business for carriers and brokers.

“Every business deserves the ability to get coverage,” he said. “As an industry, we should find a way to respond to those risks and make sure they have proper coverage instead of simply declining over and over.”

Feature image by iStock.com/PeopleImages