Innovation Spurred by Pandemic Persists Among Insurers, Reinsurers

The COVID-19 pandemic not only changed the way we live and work, it forced insurers and reinsurers to change many of the ways they do business, creating new incentives and rewards for innovation, according to A.M. Best.

In a Best's Special Report titled Insurer Innovation Accelerated by COVID-19 Continues Post-Pandemic, the rating agency notes that the challenges that confronted insurers and reinsurers resulting from the emergence of the pandemic in 2020 continued into 2021, with low investment yields and stagnant growth adding further pressures on the industry. Then, 2022 saw inflation and rising interest rates for the first time in more than 2 decades. Throughout, technological changes continue to alter consumer behavior.

"These trends have created challenges and opportunities for insurers, accelerating the need for innovation and rewarding the most innovative insurers," the August 25, 2023, Best report says.

In response, insurers accelerated their shift to digital technology while intensifying their focus on product innovation, Best says.

While some lines of insurance lend themselves more readily to innovative strategies, in other lines innovation can be more difficult, the report suggests. "As the pace of innovation accelerates, the top performers in more complex lines may be those that overcome the innate challenges of their segment to develop new products, processes, sources, and business models," Best says.

Reinsurers have taken the lead in innovation, according to the Best report. Among other things, they're using knowledge gained from predictive modeling and artificial intelligence (AI) to develop products that will help clients better manage their risks.

"Reinsurers are one or more steps removed from the ultimate policyholder and therefore have had to innovate in areas of enterprise risk management, portfolio construction, and risk accumulation," the report says. "This has become evident recently with the series of losses due to significant natural catastrophic storm activity, which has been exacerbated by secondary perils and heightened inflation."

As they face the challenges of high-severity events and competitive pressures, reinsurers have been forced to embed a culture of innovation to remain solvent, relevant, and profitable, Best says. While during soft phases of the market cycle they've had to deal with relatively low pricing and considerable competition, as the market has hardened reinsurers' focus has shifted to issues of risk appetite and risk selection.

The Best report says that the relatively straightforward nature of most reinsurance contracts lends itself to innovation, as ceding companies are responsible for much of the complex underwriting and claims functions.

"Some offshore domiciles have embraced innovation, enabling reinsurers to craft terms and conditions and charge rates that incorporate the results of sophisticated risk modeling, contingent pricing, and novel ways of approaching difficult risks," the Best report says. "These efforts may include tailored cyber coverages, introduction of alternative capacity vehicles, and products that specifically address frequency and severity issues regarding secondary perils."

Best suggests that a reinsurer's value proposition is closely associated with an innovative culture that rewards creative product design and relies on internal risk modeling to identify profitable opportunities.

Best also found that reinsurers have benefited from matching informed risk modeling with third-party capital through sidecars, catastrophe bonds, and other insurance-linked securities structures. "These strategic partnerships benefit reinsurers by providing flexible off-balance-sheet capital, while the capital providers benefit from a more informed view of risk," the report says.

Reinsurers are also using the knowledge gained through predictive modeling and AI to develop new products such as supplemental information beyond standard catastrophe models that will help clients manage risk and make the reinsurers more valuable business partners.

"Large reinsurers with economies of scale have made more advances in this area by partnering with technology firms, investing in accelerators, and engaging with innovators," the report says. "However, reinsurers—as well as primary carriers—understand that the line between primary and secondary perils continues to blur, making the modeling of catastrophic risks challenging."

In the property-casualty insurance segment, the impact of innovation has varied, a function of the segment's diversity of size and scale, Best says.

Best notes that property-casualty insurance has always been a data-centric enterprise, and has used analytics and data for decades. But the pandemic boosted insurers' focus on innovation, the rating agency says. The report cites several examples of that innovation focus.

• Digitization has allowed companies to become even more data driven.
• Predictive modeling offers insurers an advantage as they look to better match premiums to underlying risk.
• Data obtained from such sources as telematics or social media is expanding data mining opportunities.
• Insurers can use Big Data to better understand individual customers allowing them to provide personalized offers, facilitate cross-selling opportunities, and enhance customer experience.
• The digitization of the economy has led to a variety of technology platforms that are reshaping the insurance distribution landscape.

The explosion of data—along with more advanced analytics—is transforming underwriting across all insurance segments and lines of business, the Best report says. "The more innovative players are looking beyond routine automation and increasingly leveraging machine learning and data sources to enhance underwriting capabilities," the report says.

The more innovative insurers have also turned to data analytics to help them to develop more specialized products and solutions for emerging risks, such as in the evolving cyber-insurance market, Best says.

Combining advanced analytics with Big Data is also allowing innovative insurers to gain insights that can help them increase top-line growth by either improving risk selection or enhancing the customer experience, the Best report says.