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Insurance company industry trends, Q2 2020

Key issues to watch

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By Kevin Kirby | October 5, 2020

Key concerns and recommendations for insurance companies.

Technology – Disruptor

Observation:

The successful IPO of Lemonade is an example of the belief that streamlined InsureTech firms pose a significant threat to traditional insurance companies. Lemonade has recently entered the pet insurance space and a number of other InsureTech ventures (i.e. Hippo, Root Stockholdings and Metromile) aim to leverage AI in an effort to disrupt the insurance industry.

Concern:

Absent continued innovation and adaptation, longstanding insurance companies stand to lose market share to AI-based InsureTech firms. This dynamic is especially true among the younger generations, where ease of use and social consciousness are viewed as increasingly necessary characteristics.

Considerations:

Tenured insurance companies can expect underwriters to ask questions about any initiatives being implemented to combat this potential shift in the marketplace – whether created in-house or through acquisition. Highlighting improvements or achievements in terms of social governance and charitable giving would also be viewed favorably by carriers.


Technology – Opportunity

Observation:

The coronavirus pandemic forced many insurance companies to quickly convert to agile working arrangements. With many of the initial technological hurdles now addressed, insurers now have a framework for deploying tools like virtual claims adjusting to more efficiently evaluate property claims, without needing to be in an office or on-location.

Additional benefits can include improved employee satisfaction, which results in lower turnover and less reliance upon costly travel as a means of accessing insured locations.

Concern:

Adjusting claims without traditional in-office oversight of claims handlers could raise concern among ICPL insurers regarding oversight of adjusters and escalation when issues arise.

Considerations:

Underwriters have inquired about plans to implement remote working arrangements for adjusters. It is important that insurance companies can articulate how they plan to implement and enforce robust controls outside of the office.


Cost of Insurance – Universal Life

Observation:

With interest rates at historical lows and stock markets in freefall, carriers with Universal Life Insurance exposure are struggling to keep associated cash value accounts above water. In order to sustain the policies, insurers have been forced to adjust the premiums charged to policyholders and have faced significant litigation as a result.

Concern:

Insurers face challenges both from regulators and from class action policyholder suits as to whether adjustments to premiums are illegal or outside contractual bounds. Several such cases have settled with amounts in excess of $100M. According to the WSJ, regulatory bodies were already aiming to implement new disclosure rules prior to equity markets being decimated by COVID-19.

Considerations:

Insurance companies need to secure the broadest regulatory and investigations coverage possible. Care must also be taken to limit the applicability of exclusions pertaining to underwriting, contractual liability and inadequacy of reserves. Coverage specific to sales & marketing practices may also be implicated.


Cyersecurity requirements for insurers

Observation:

The National Association of Insurance Commissioners (NAIC) proposed a Data Security Model Law in 2019 which has been adopted by 8 states, with other states likely to follow the lead of NY and CA in implementing their own regulations. Outside of the US, General Data Protection Regulation (GDPR) in Europe applies stringent guidelines and threatens substantial penalties for failure to implement appropriate controls and procedures.

Concern:

Failure to juggle an increasingly complex and evolving regulatory framework could result in substantial fines and penalties. Insurers must be able to demonstrate that they have maintained a robust information security program.

Considerations:

Insurers – particularly those operating on a national or international basis – must ensure that all applicable regulations are being accounted for and adhered to. Interplay between the D&O, E&O/ICPL and Cyber insurance policies should be carefully considered, especially where the market may look to address “silent cyber” through an exclusion.


Climate change

Observation:

Insurance companies face exposure to climate change on multiple fronts. There is risk for P&C carriers which insure against natural disasters, reputational risk in insuring companies connected to fossil fuels and challenges both as an investor (in selecting which firms to invest in) and as an investment (attracting partners seeking ESG adherence).

Failing to address any of the foregoing exposures could result in liability for Directors and Officers, coming from regulators, shareholders and potentially sovereign nations as a human rights issue.

Concern:

Leadership at insurance companies – particularly those which are publicly-traded – may be held liable for taking inadequate steps to prepare against Climate Change risks.

Considerations:

Coverage for investigations and special sublimits like Public Relations Costs and Asset Protection Costs are especially important given the focus on individual accountability.


Social inflation

Observation:

The term “social inflation” has featured prominently in recent earnings calls and commentary among leadership in the P&C insurance industry. Many executives have attributed challenges in profitability to this dynamic, particularly when it comes to commercial auto insurance and general liability.

Concern:

Social inflation is anticipated to drive an increase in frequency, cost to defend and ultimate settlements for certain classes of business.

Considerations:

Limit purchase should be revisited to account for the substantial increase in settlement values – particularly as it applies to extra-contractual liability.

Conversely, insurers of ICPL are looking to impose higher retentions and premiums to counter this same dynamic.

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

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