How insurers can respond to rising risks and costs

The insurance industry has experienced unprecedented losses due to increased frequency and severity of weather, the impact of hyperinflation on goods and services, and social inflation that is driving a proliferation of substantial legal judgments. 

This triple threat has led insurance companies to aggressively raise rates, change coverages, and in extreme instances exit or greatly reduce exposure in certain segments and geographies. To improve future performance, the industry must sharpen its ability to successfully navigate these trends—and do so proactively. 

Identify trends and issues earlier, and react faster

While hyperinflation is curbing, extreme weather and social inflation continue to accelerate, further testing insurers’ ability to react in a timely and effective manner—and exposing weaknesses that include dated technology infrastructure, immature data and analytics capabilities, and siloed operating models. Many carriers have been slow to recognize market fluctuations and even slower to implement changes, leading to the need for more drastic responses. To avoid falling further behind, insurers need to think “speed to know” and “speed to go.” 
Speed to know is about recognizing trends earlier. Insurers must use data to determine what’s happening and what that means, financially and operationally. This requires mature data capabilities—including complete and granular data, as well as the ability to share data freely across operational silos (claims, actuarial, underwriting, etc.) and aggregate leading and lagging indicators to produce insight upon which the business can act. 

Speed to go is about acting on insights by implementing rapid operational changes. These complex macro trends involve many parts of the organization—claims, actuarial, underwriting, marketing/sales, and others. Yet traditional organizational silos still prevent departments from sharing information quickly to enable rapid decisions and responses. Claims may notice something happening in real time, but it needs to coordinate with actuarial and underwriting teams so that the organization can respond effectively. 

Increasing responsiveness and agility involves both processes and technology. Process improvements should focus on bringing functions together at the right time to solve problems together, with an eye toward how each function’s role contributes to profitability. In a digital marketplace, insurers also need technology infrastructure that can facilitate faster deployment of pricing and underwriting changes into the market. Process changes can be fairly swift, but technology changes will take longer—thus, the urgency to be addressing this now. 

Engage distribution partners and customers in mitigating risk and losses

Insurance carriers have an opportunity to reduce loss through more active education and engagement of customers and distribution partners in managing risk. 
Insurers need to share more information about the factors that are driving risk and cost changes, and the actions that an insured can take to improve their risk profile relative to where they live/operate to receive better rates—for example, clearing brush around the structure in an area at high risk for fires, installing an alarm system or water shutoff, or enhancing employee safety programs such as driver safety or telematics.  

Taking this a step further, consider updating customer models that offer policy contract options that customers can select based on affordability and risk tolerance—for example, usage-based coverage for commercial and personal auto insurance, and more coverage limit and deductible options for property coverage.

Many companies are doing this at some level, but not to the extent they should be given these accelerating market forces. The good news is, a modern digital infrastructure makes it faster and more efficient to engage and personalize services—for instance, providing customers with simple tools for modeling policy construction and pricing. 

Increase regulatory and legislative influence 

Lastly, the insurance industry needs to continue working proactively with legislatures and regulators to address these trends head on through tort reform, better and stricter enforcement of building codes, and other steps.
Driving tort reform is particularly critical considering the increase in both number and size of nuclear verdicts—substantial jury awards of at least $10 million—emerging from casualty litigation involving insureds and insurers. For example, over the past decade, the median nuclear verdict for product liability cases grew 50%, from $24 million in 2013 to $36 million in 2022—significantly faster than inflation.

Again, this comes down to effective education about the root causes of these trends and the improvements that can help address them. Such efforts have proven effective in the past. For example, building code improvements made following Hurricane Andrew have had a demonstrable impact. Insurers use claims data to analyze construction performance relative to weather. As they produce new insight, they should be sharing it not only internally, but externally with policy makers to drive changes that will lower claims over time. 

It’s time to dial up the effort

Severe weather, hyperinflation and social inflation all require strong business coordination, a fact-based foundation that comes from the ability to harness and analyze data, and effective communication and engagement with key stakeholders. Many insurers are doing these things—but not sufficiently for the growing level of threats they face today. Elevating these capabilities creates a common path for addressing three of the industry’s most existential threats to future profitability.