It is no longer just a hypothesis that more and bigger natural disastersWith headline inflation and social inflation, are raising the costs of claims for insurers. New data shows accident rates increased in 2022specifically for personal lines property and casualty insurers, at the rate of a Loss of $26.5 billion. As claims costs continue to rise, along with more assets located in areas at high risk of catastrophic disasters, insurers may wonder what they can do to reduce expenses. What are they under your control.
2022 was a tough year for insurance claims
It seems that each year exceeds the previous one when it comes to the frequency and severity of storms, fires and other natural disasters. However, a big difference in 2022 was the presence of high inflation in the US and the world. This spelled bad news for property and casualty insurance companies in the US, which reported a combined loss ratio of 104, up from 100 in 2021, according to AM Best.
Large scale catastrophic events
Hurricane Ian, Hurricane Fiona, hailstorms in Texas, tornadoes and flooding in the Southeast and Midwest, and wildfires in the western US are just the tip of the iceberg for the devastation of 2022. The National Centers for Environmental Information (NCEI) say there was 18 weather or climate-related disasters in 2022, each causing more than $1 billion in losses.
While 2022 was not the most expensive year overall in recent memory In terms of natural disasters (that honor goes to 2017), it ranks third overall since 1980, with the insurance industry incurring particularly high losses due to coincidental rising inflation.
Rampant inflation and rising costs
Inflation began to rise sharply month-over-month around March 2021, peaking at 9.1 percent in June 2022, according to data from commercial economy and the US Bureau of Labor Statistics. And this increase in inflation impacted more than the cost of gasoline and milk.
For insurers, claims costs have skyrocketed as supply chain disruptions and inflation made it more expensive to replace homes, cars and other insured assets lost in the devastating natural and man-made disasters of 2022. Swiss Re data estimates about $125 billion in insured losses from natural catastrophes and an additional $7 billion from man-made catastrophes in the US during 2022. As staggering as that number is, Swiss Re estimates that total losses (not insured losses alone) amounted to $284 billion.
How insurance companies can reduce losses
Attracting more money than it pays out is what drives the profitability of an insurance company. This can come from a combination of factors such as charging more in premiums, paying less in claims, and lower operating costs. Insurance companies looking to reduce loss ratios should consider some of the following potential practices.
Pricing policies to accurately reflect risk
Affordability is certainly a concern for insurance companies that want to attract and keep customers. But no insurer can survive in the long term if policies are not priced to reflect the level of risk the company is assuming. This could mean raising premiums in higher risk areas, or even abandoning some markets altogether if they are simply too risky to write. This is not great news for consumers who rely on insurance protections.
On the other hand, the inability to obtain insurance due to living in an extremely high-risk location could incentivize people to move out of flood zones (for example) How is it happening in the city of Milwaukee?. If there are fewer insured assets in the highest-risk locations, insurers can accurately price policies without going up so much that they scare off customers.
Common wisdom is that it costs more to acquire new customers than to retain existing ones. In addition to those customers who are too high risk to continue insuring (see our point above), it’s a good idea to do what you can to maintain, and even increase business with, your current customers. And sure, insurance companies sometimes sell directly to customers, putting 100 percent of the retention burden on you. But you can also rely on your downstream channel partners to keep those customers happy.
If your distribution channel includes independent agents and agencies, one thing you can do is work to keep those relationships healthy so that agents want to do more business with you and continue to do so year after year.
Stricter Terms and Conditions
Insurance companies can reduce part of what they pay in claims by tightening the terms and conditions of their policies. This could mean increasing deductibles, lower benefit maximums, or adding exclusions. You can also include incentives for customers who perform risk mitigation activities or exclusions for those who don’t. If you’re going in this direction to reduce costs, it’s important to make sure customers understand what’s in their policy contracts so they’re not misinformed or surprised by a denied claim later.
Increased focus on risk assessment and management
We have said it before: Prevention is the new solution. For insurance companies that want to reduce losses and be more profitable, paying fewer claims because their clients incur fewer losses is a win-win. There are many ways insurers can focus on risk reduction – from new technologies like telematics to a good old-fashioned site visit with a risk management consultant.
Reduce operating expenses
Insurance company operating expenses are no joke. A 2015 McKinsey study found that operating expenses at the industry’s top-performing carriers were typically about 60 percent lower than operating expenses at the worst performing companies.
While we’re not specifically talking about health insurance, another example of the bloated cost of insurance operating expenses is how much of every health care dollar is spent (or even wasted) on administrative expenses. Research shows that it is between 15 and 30 percentIn case you’re wondering: It’s estimated that nearly half of what’s spent is wasteful.
In almost all cases, reducing operating expenses boils down to doing more with less, being more efficient, more productive, and less wasteful. Not surprisingly, technology plays a significant role in achieving these goals at insurance companies.
How can insurance companies reduce operating costs with insurance technology?
Regardless of how you approach the question, the answers boil down to some version of these five points.
1. Optimize operations
Operational functions like IT, finance, payroll, billing, and legal can account for a large portion of an insurance company’s budget. If each of these departments doesn’t work efficiently, the result is wasted time, effort, and money. To get started, do an audit of how each department works and which staff are doing which tasks. See if there’s room to automate some of the heavy lifting to make room for higher-level work to be done by in-house experts.
2. Automate functions wherever possible
Across the business, from sales and marketing to underwriting, people are likely doing manual labor that modern technology could do much faster. Automating functions not only saves time and reduces room for human error, but also makes your humans happier because they aren’t stuck doing parts of their job that feel manual and repetitive. Having happier people translates to better employee attraction and retention, which (surprise, surprise!) reduces operating costs.
3. Take advantage of artificial intelligence (AI) and machine learning (ML)
Artificial intelligence is not going to replace your valuable human staff. It will just empower them to work better and at the kinds of things that only humans can do. Rather than expect AI to handle the entire underwriting or claims management process from start to finish, you will realistically be able to speed up parts of these processes.
For example, AI can help an insurance company quickly screen more insurance applications than a person could in a day, and flag things for human review that need to be looked at more closely. Speed up these processes and creating operational efficiencies benefits employees, customers, your reputation and profit margins.
4. Reduce agent onboarding time and costs
A major operating cost for insurance companies is the naming fees it pays to each state for each licensed producer. This expense is often unnecessary since most of the producers you name won’t even sell a policy! To help, many states allow shippers to use Just-in-Time (JIT) quoting so you only pay producers who actually sell on your behalf. But tracking those producers and when, where and what each one sells, manually, is not an easy task! This is just one of the many areas where technology can help reduce agent onboarding time and costs.
5. Use insurance technology to automate and manage producer license compliance
From carriers to MGAs and MGUs, insurance agencies to individual agents and producers, everyone has an obligation to ensure that producers are properly licensed and sell in compliance with all applicable laws. Easier said than done, particularly once you’ve moved beyond a single producer in a single state selling a single product.
The slow nature of managing producer compliance often means insurance companies have too many people putting in too many hours on this job when everyone involved would rather be doing higher level activities. It can mean that your internal experts’ time is wasted on tedious tasks. Or it could mean that the number of license checks required far exceeds the capacity of your teams, leading to regulatory risks. It could even mean that producers are waiting weeks or months to be ready to sell, which is not good for them and can damage their relationship with their brokerage and producer partners.
On the other hand, using technology to automate and manage grower license compliance, including shipper appointments, can lead to a happier team and better partner relationships.
AgentSync helps insurers reduce operating costs with a modern insurance infrastructure
We can’t make your loss rates go down by controlling the weather. But AgentSync can help insurers, MGAs, MGUs, and everyone else in the insurance distribution channel to comply without any heavy lifting. You can reap the benefits of giving your compliance staff time back in their day and allowing your agency partners with automated compliance in real time. Ready to see how? Contact Us either watch a demo today.
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