The Future of American Insurance & Reinsurance (FAIR) campaign is highlighting the importance of risk-based pricing and the innovations happening in the insurtech space.
This fall, the Insurance Information Institute (Triple-I) attended Insuretech Connect—the world’s largest insurtech event. The annual meeting in Las Vegas showcases the new technologies which are lowering costs and creating efficiencies for both insurers and policyholders.
The growing amount of data available to insurers, for instance, is not only reducing the amount lower-risk policy holders pay for insurance coverage. It also incentivizes all policyholders to adjust their driving behaviors in exchange for lower premiums.
We’ve all heard, “you get what you pay for.” Now insurtech innovators are letting policyholders only pay for what they use when it comes to auto insurance. Technology is also speeding the claims-settlement process, so insurers and policyholders are completing transactions digitally.
Risk-based pricing — the practice of insurers charging policyholders different rates depending on their different risk characteristics — incentivizes policyholders to reduce the chance of financial harm not only to themselves, but to those around them.
For example, through risk-based pricing, policyholders are more likely to engage in safer driving practices or invest in fire prevention measures for their homes in exchange for lower monthly premiums.
The Future of American Insurance & Reinsurance (FAIR) campaign is educating stakeholders on the importance of risk-based pricing in its five-part video series.
In this final segment, Dr. Charles Nyce, Associate Professor of Risk Management and Insurance at Florida State University, explains how incentives created by risk-based pricing will lead to safer behaviors and fairer premiums.
The availability of data for insurers has not only reduced the amount that lower-risk policy holders have to pay, it also incentivizes existing high-risk policy holders to adjust their behaviors in exchange for lower insurance costs.
Moreover, if today’s insurers are restricted from using certain risk characteristics or rating variables, large tech companies that already collect large amounts of data may make moves to enter the insurance market, leaving current insurers at a competitive disadvantage.
The Future of American Risk & Insurance (FAIR) campaign is educating stakeholders on the importance of risk-based pricing in its five-part video series.
In this segment of Triple-I’s five-part video series, Dr. Charles Nyce, Associate Professor of Risk Management and Insurance at Florida State University, explains how the democratization of big data in insurance now will lead to safer behaviors and preempt higher insurance premiums down the line.
Insurance is a market just like any other good or financial product — firms compete to provide the best “product” and offer the lowest price to attract consumers.
Innovation plays the same role for insurance as it does for any other market. Restrictions on insurers’use of data will hinder risk-assessment ability and lead to artificially high premiums.
The market inefficiency created by restrictions on insurers’ ability to analyze risk data reduces the incentive for policyholders to engage in lower-risk behavior and leads to higher premiums.
Earlier in the summer, the Future of American Risk & Insurance (FAIR) campaign released a five-part video series educating stakeholders on the importance of risk-based pricing.
In this latest segment, Dr. Charles Nyce, Associate Professor of Risk Management and Insurance at Florida State University, discusses the importance of innovation in insurance markets, and how advances in data analytics for insurers will benefit society overall.
Business Insurance was one of the few media outlets to cover a federal appeals court’s ruling earlier this month in favor of an insurer in a COVID-19-related business interruption (BI) insurance coverage dispute. The first two paragraphs of the trade publication’s story (Policyholder loses federal appeal of BI ruling) are below:
“In what may be the first federal appeals court ruling on the issue, the 8th U.S. Circuit Court of Appeals on Friday [July 2] ruled against an oral surgeon’s practice as to whether a policyholder can recover for COVID-19 losses under its business interruption coverage.
In its ruling in Oral Surgeons, P.C. v. The Cincinnati Insurance Co., a three-judge panel of the St. Louis-based appeals court agreed with the U.S. District Court in Des Moines, Iowa, that the practice’s policy required ‘physical loss’ or ‘physical damage’ to trigger business interruption and extra expense coverage.”
ESG (Environmental, Social, and Governance) is fast becoming one of the most important metrics by which investors, consumers, policymakers, and employees assess the obligations of businesses. The world has changed, and so have expectations of the private sector’s responsibility in the face of new and emerging issues—whether related to climate change, racial justice, or worker and consumer safety, among many others.
For many companies, this will mean reevaluating supply chains, reforming governance structures, and moving from paper to digital documents, among other activities. Insurers, for their part, are looking at these activities too.. In few industries are the incentives between the private sector and ESG best-practices as aligned as in insurance. ESG is more than just a “checking the box” exercise for insurers; the continued success—and in some cases, the continued survival—of the insurance industry depends on our collective ability to tackle the environmental, social, and governance issues of our time.
Insurers and climate risk
Perhaps the clearest example of the interconnectedness of insurers’ interests and society at large is climate change. There is no question that catastrophic natural events are becoming more common. Eight of the top ten costliest natural disasters in U.S. history came after the year 2000, with the other two coming in the 1990s. Average inflation-adjusted natural catastrophe losses rose from $5 billion annually in the 1980s to $35 billion each year in the 2010s. Overall losses from the 2020 Atlantic hurricane season alone totaled $43 billion, $26 billion of which were insured. Insured catastrophe losses for 2020 altogether totaled $67 billion.
As the country’s financial first responders, insurers are not just responsible for providing relief to the communities affected by natural disasters, but also for planning for the potential catastrophes to come. The long-term resilience of both the communities impacted by disasters and of the industry itself depend on preparedness and improved risk-mitigation. Insurance has been looking at climate risk for decades, but insurers understand they need to plan and be prepared for a future that can and will see even more evolution. Insurers are moving from the historic posture of “detecting and repairing” to a more innovative stance of “predicting and preventing” This trend is helping both society and the industry’s business interests.
One way that insurers are preparing for this future is by keeping close eye on their policyholders’ surplus. It is the amount of money remaining after an insurer’s liabilities are subtracted from its assets and acts as a financial cushion above and beyond reserves, protecting policyholders against an unexpected or catastrophic situation. The industry’s resilience is demonstrated by the fact that even through times of severe stress, such as the 2007-2009 recession and the COVID-19 pandemic, the industry-wide policyholders’ surplus has not fallen below the $400 billion mark, the minimum base line set forth by regulators . The industry has continually been able to meet its financial obligations—in fact, the industry’s cumulative policyholders’ surplus reached an all-time high of $914.3 billion in 2020.
The bottom line — ESG is in insurers’ DNA
In many ways, ESG is in insurers’ DNA. While there is always room for improvement, the industry has long been focused on the three pillars of Environmental, Social, and Governance.
— Environmental: Insurers are investing in order to ensure they have the financial wherewithal to keep promises and pay claims as climate risks evolve, and using data and analytics to model risk and protect communities. Insurers simply could not be in business if they failed to pay attention to the changing landscape.
—Social: Insurers understand their unique position in society comes with added responsibilities. Close to three million Americans were employed by the insurance industry in 2019, with over $400 billion in claims paid that year alone. Insurers understand that fairness is a core expectation that stakeholders have of the industry, which is why they continually invest in making risk-based pricing models fairer and provide i consumers with premium relief when circumstances allow them to do so.. During the COVID-19 pandemic, for example, insurers provided over $14 billion in auto insurance premium relief to consumers as driving hours decreased. In addition, the industry has long supported non-profit organizations such as the Triple-I, the Insurance Institute for Business & Home Safety (IBHS), the Insurance Institute for Highway Safety (IIHS), and the Insurance Industry Charitable Foundation (IICF) to improve consumer safety and improve consumer understanding of insurance.
—Governance: Insurance is a highly-regulated industry. In the US, insurers are overseen by over 50 regulatory jurisdictions. In addition, they must regularly self-audit and submit assessments of their current and future risk to regulators through the Own Risk and Solvency Assessment. A collaborative, multi-stakeholder approach between insurers and state-based regulators is necessary to ensure the continued resilience of the industry.
The Washington state Insurance Commissioner’s ban on insurer use of credit scoring could result in higher insurance costs for the state’s lower-risk policyholders, according to a recent editorial in The Daily Herald in Everett, Wash.
Written by the Professional Insurance Agents Western Alliance’s Executive Vice President, the editorial explores the unintended consequences of the Commissioner’s policy decision. In fact, Washington’s state lawmakers were unwilling to enact what the Commissioner imposed unilaterally.
Dr. Charles Nyce, Professor of Risk Management and Insurance at Florida State University, explained in a recent video the types of information insurers need to make sure lower-risk policyholders pay less for coverage, and vice versa.
Policyholders who pose lower risks to insurers generally benefit financially by paying lower premiums. Auto insurance is a perfect example, as drivers with a safe driving record are rewarded through lower prices.
That’s what incentivizes many policyholders to behave in a less risky manner. It’s also what some insurance experts call “internalizing the cost of risk for social good.”
The Future of American Risk & Insurance (FAIR) is bringing clarity to the subject of risk-based pricing in an ongoing educational video series.
In this segment, Dr. Charles Nyce, Florida State University Associate Professor of Risk Management and Insurance, explains how restricting insurer use of either certain risk characteristics or rating variables when pricing policies carries the risk of reducing some of the social good that insurance provides.
The Future of American Risk & Insurance (FAIR) is taking our subscribers back to school this week to understand how lower-risk policyholders subsidize higher-risk policyholders in markets where the risk-based pricing of insurance products is either discouraged or disallowed.
In this initial segment of what will be a FAIR video series, Dr. Charles Nyce of Florida State University (FSU) explains how insurers’ rigorous data analysis allows them to understand the risks they are assuming on behalf of a policyholder and then price accurately the policies insurers sell. Both criteria must be met for risk-based pricing to exist.
Given the close regulatory scrutiny insurers face, the cost of insurance policies in the U.S. are neither excessive, inadequate, or unfairly discriminatory, he notes, while stressing risk-based pricing is essential to make sure lower-risk policyholders pay less.
Dr. Nyce is FSU’s Tallahassee, Fla.-based Robert L. Atkins Associate Professor of Risk Management and Insurance. In addition, he is the Associate Director for the Center for Risk Management Education and Research in the Department of Risk Management/Insurance, Real Estate and Legal Studies at Florida State University’s College of Business.
The video segment can be accessed below. For more information and resources, visit fairinsure.org
Building upon the success of its Future of American Insurance & Reinsurance (FAIR) campaign, the Insurance Information Institute (Triple-I) is unveiling today an updated FAIR 2.0 website.
The website’s address remains the same—fairinsure.org—yet its future content will be expanding to other topical issues beyond pandemic-related business income (interruption) insurance matters.
To start, FAIR 2.0 will now address growing interest surrounding risk-based pricing of insurance products with educational resources such as fact sheets and blog posts, in addition to longer white papers.
In the coming months, the Triple-I will subsequently expand FAIR 2.0’s website to include the latest news on insurer Environmental, Social, and Governance (ESG) initiatives and human-centered innovation.
The pandemic gave rise to the Triple-I’s FAIR campaign, but the insurance industry’s essential role in the U.S. economy is always evolving and we want to continue to be a resource to media, policymakers, and broader industry stakeholders.
FAIR 2.0 will tell that story.
Best, Sean Kevelighan President and Chief Executive Officer Insurance Information Institute
