Specialty Lines & Technology

The internet is having a profound impact on how society interacts and how business is conducted, and this extends to the insurance business.  Companies like GEICO and Progressive operate online as well as in person – the client chooses.  Has the use of technology impacted the specialty lines insurance segment as well?

A recent article in Insurance Journal highlights some of the challenges, and the perceived lack of progress, in the specialty lines market (see here).  Our perspective – different – is noted below.  The article is a summary of an interview with Jeff Ward, a director of London Market reform technology specialists TriSystems.  Key points in the article:

• the wholesale market is miles behind the retail market...they haven't even come close to the level the retailers have.
• In most cases - other than certain specialty lines - a potential wholesale buyer gets only limited information.
• The London market basically doesn't do business electronically
• It [electronic transactions] may not work for complex risk[s]...They will probably always require face to face negotiations, but there's a great deal that can be done electronically. Much of the actual work is not so complex that computers can't handle it.
• For wholesale business, a true global electronic market is probably many years away. Retail will get there first.

This characterization of the specialty lines market is only partially correct, and not because the specialty lines market has failed to adopt technology.  The specialty lines market (see here) is composed of insurance accounts that do not neatly fit into the rigid underwriting boxes of the standard markets due to more risky exposures, unique operating characteristics or adverse loss experience. 

The key is the underwriting approach in the specialty lines business - art, not science.  It is all about risk assessment.  Different underwriters will look at the same account differently, and will want to review different information.  And because the exposures presented can vary substantially, underwriter requests for information are not always consistent.  Additionally, the terms that are provided are not consistent between accounts or between underwriters, and are often negotiated.  This makes it difficult to neatly define the information needed by underwriters for large parts of the specialty lines business.

The article points out that some complex risks may require face to face negotiation.  Maybe, maybe not.  But today many complex risks are negotiated by specialty brokers, like Mercator Risk, and specialty underwriters without face to face meetings.  How?

Specialty lines brokers and underwriters are actually heavy users of technology.  The primary method of communication today, and of exchanging exposure and quote information, is email, and many specialty lines organizations (including Mercator) are completely paperless.  Negotiation of complex risks takes place every day via email and phone.

Most specialty lines rating and quote systems today are electronic, at least in some form.  They differ substantially from their standard market peers in that they allow for significant customization of rating and terms by underwriters.

While most of the business written in the specialty lines business is customized, there are significant segments that are handled completely electronically, online, by end to end underwriting and rating systems.  Mercator, through its MercatorPro division, provides online quoting for its retail insurance broker clients on its website for some lines of business.  The challenge for the specialty lines business is that some percentage of the business gets rejected from these systems due to the exposure variations or coverage adjustments inherent in specialty lines business.  Specialty lines brokers like Mercator have built in processes to efficiently handle this rejected business to ensure that, in most cases, the specialty lines applicant receives terms.

Bottom line, the nature of the specialty lines business is the driver of the differences in the use of technology, not a failure to adopt technology.  The use of technology in specialty lines is significant and continues to grow, but how technology is used will not exactly match the commodity-like approaches of the standard lines businesses.

Readers should note that this subject is very complex, the specialty lines business large and equally complex, and that this short commentary does not do the subject justice.

Brought to you by MercatorPro.

Comments

[Terry Quested]

You're right about this being a complex subject! - Technology is changing how certain specialty lines products can be delivered.

Perhaps risks traditionally sold only through wholesalers can now be analyzed, quoted and bound in a rules-based environment, and the wholesale intermediary function becomes superfluous! -

If specialty carriers have direct access to the top 5%/15% of retail agencies, those trustworthy enough (or certified trained) to deliver a specialty lines product, then those retailers have a higher incentive to exploit the product.

I suggest this will have more success for carriers than expanding the number of wholesalers with access.

[Ray McLure]

I am a retail agent in California. I found a new company that offers the ability to outsource trust account management. It reduced my back office work by more than 60%. Anyway I am sharing this with agents out there because finally something has been produced that actually allows agents to know where they stand financially. I have the ability to show the solvency of my agency. Manage commissions for all my producers. I am not trying to sell anything here simply trying to get the word out so everyone can spend more time marketing and selling instead of spending time managing money. Absolutely awesome!!!

[Free Insurance Quotes]

It is very interesting how technology has changed the insurance industry. The insurance agent has become somewhat obsolete and pricing more competitive with quick comparison's and online quoting. This is a complex subject and look forward to more posts from your site. Thanks!