How Specialty Carriers Approach Product Innovation: Research, Repeat and Reuse

By | October 30, 2019

Specialty insurance carriers have a unique “toolset” that helps them grow through innovation. This toolset includes their flexibility to write for both admitted and non‑admitted markets, their appetite for developing new coverage that is untested and making adjustments as the product performs, and more recently, their growing skill in reusing product components and repeating creative processes efficiently

McGiffin, a principal in EY’s insurance practice and an EY global underwriting leader, who works with carriers looking to innovate and grow, shared her insights in a recent conversation with Carrier Management.

Specialty and excess and surplus carriers come in all sizes and shapes. There are global carriers that have dedicated specialty divisions. There are the “pure-play” specialty writers, some of which were started in the 1980s or even more recently. There are other traditional carriers that when they go direct in commercial lines are tending to go after excess and surplus business. The alternative capital category may also be seen as a form of specialty. The widening definition also encompasses program business.

Market Flexibility

Above all, specialty insurers are defined by their ability to innovate, and an undeniable key to that ability is the flexibility they have to write for both non-admitted and admitted markets.

“A lot of these specialty products go to market on a non‑admitted basis as a way to test and learn and see if there’s market take‑up. Eventually, they can move into admitted if that’s anticipated to be the dominant buyer market. That’s been a historic phenomenon around specialty insurance,” McGiffin said, noting that the non-admitted market’s freedom of form and rate makes experimentation possible.

Ideation Process

But where do the ideas they test come from?

“A lot of the ideation that occurs for product innovation is coming from the marketplace. It’s coming from the brokers to the underwriters. That’s a main channel of ideation,” according to McGiffin.

The other main fountain of new ideas is the research that specialty carriers invest in on their own into the industries and niches they write.

“They’re spending time with clients, brokers, with industry associations, and really getting to know, deeply, what is going on with the different sectors” that they are serving—for example, industry segments such as financial institutions, life sciences or museums, said McGiffin.

They research the emerging legal, regulatory, social, technology and other trends happening within their sectors and then ask not only, “How do I need to either evolve my product, maybe tailor it more?” but also, “What might be a potential gap?”

The research may require additional capabilities including analytics and third‑party data.

Gail McGiffin

McGiffin said the specialty writers that have the strongest brands are the ones that have managed to combine their product innovation with their leading underwriting capabilities, including their ability to adjust to emerging exposures. “It’s that combination that’s so important,” she said.

While there may be individual or momentary inspirations, the competitive business world requires a process that is more sustainable than that. The specialty world has embraced the idea that “innovation is a repeatable capability,” that the whole undertaking needs to be a discipline and competency, captured and organized to be accessible over and over again, according to McGiffin.

EY is seeing the leading carriers “really industrializing not just their ideation process but actually their entire product development process, from identifying customer and distribution needs and opportunities to investing in product architectures and technology that enable product component reusability and speed-to-market.”

Speed to Market

Coming up with products is one challenge; getting them to customers is another. Distribution is another key element in the toolset for specialty carriers.

“I think that in specialty it’s important to have a diversification of channels,” McGiffin said.

These channels might encompass the large brokers, independent agents, Lloyd’s, Bermuda markets, wholesalers and other retailers. The channel options increasingly include a direct channel, as well as affinity plays and e‑partnerships, according to McGiffin “We’re seeing a lot more of that,” she said.

Specialty carriers have to have the systems, research and talent to uncover new product ideas and the channels to get them to market. But they also need more than that.

Most important, specialty carriers have to be very focused on speed-to market, McGiffin said. They want to get the product to market fast, test it, see what the take-up is, and see what they can learn from the exposures and the claim activity.

She said the best product innovators always are going to “underwrite the risks” and they’re going to “tailor the product” to mitigate unforeseen incidents.

“That’s the art form of the best product innovators and the best underwriters. It’s not a one-size-fits-all, and it is important to get it to market and learn from it,” she said.

She acknowledges there is some risk with this approach, but the best innovators and underwriters “know how to manage that risk and continually modify the product or their underwriting rules.”

One way of accomplishing speed-to-market involves creating “reusable product components” that an insurer can plug-in to quickly configure new products. An example might be a coverage component such as errors and omissions (E&O) that can be readily tailored for different industries or introduction of a new dynamic pricing approach that incorporates real‑time updates of exposures.

An insurer may start with a low-key approach at first because it doesn’t know how well the product will sell, but at the same time the insurer must be ready to scale as that product takes hold. “All of a sudden, that new-to-market product may generate more of a volume‑based business,” she said.

Technology

Like every other business, specialty carriers need to invest in technology so they can grow without continuing to add more people and costs. According to McGiffin, some specialty insurers may be “a little behind the curve” in updating their technology after having initially prioritized the hiring of underwriting, claims and finance talent at their start.

She said they have a need not just for policy, billing and claims automation but also for underwriting workstations, agent portals and analytical capabilities. These foundational technology platforms then position them to leverage new capabilities offered by InsurTechs, for example.

Startups or smaller carriers up to $100 million in revenue might get away with limited technology, but once a carrier tops “half a billion and climbs toward a billion, now you need a scalable enterprise.”

They are now getting up to speed on technology. “We actually have been seeing an uptick in investments, with specialty insurers realizing that now’s the time to make those investments. You cannot live in Excel spreadsheets forever or Word documents for your policies,” she said.

In addition to needing automation to scale growth, there’s also pressure to have more digital capabilities to keep up with regulatory compliance, McGiffin said.

Specialty carriers are also investing more in shared services and in offshoring some of their processes, which standard commercial lines carriers have been doing for a while, as they look to gain efficiencies and lower costs.

These transformations are more than just “lifting and shifting” roles and processes overseas. It’s more complicated because specialty is so heavily siloed. “If you’re looking to get efficiencies and share operational resources, all of these siloed processes and technologies get in the way of that,” McGiffin noted.

Technology presents different challenges for specialty insurers too. For example, new policy administration systems don’t typically come ready-made for specialty lines. “The systems don’t come out of the box with preconfigured products, rules and things like that,” she said.

Name Brand Underwriters

Specialty lines carriers are heavily dependent upon their ability to attract, develop and retain quality talent, particularly in underwriting. Specialty lines is a business where there are name-brand underwriters that have market reputations for either products (such as directors and officers, errors and omissions, surety, marine), industry segments (such as life sciences and technology) or program business (channeled through managing general underwriters).

The talent war can sometimes play out in an interesting way in this environment. McGiffin described a situation going on in specialty where underwriting teams leave, as a group, to go to another company. She said the traditional reaction used to be that it’s no big deal because the broker is the party that owns the customers. However, in reality these days, she said, the name‑brand underwriters and their teams attract those brokers due to their proven expertise and relationships.

“It’s a dynamic in specialty that we just don’t see in other areas; it’s unique to specialty. That talent attraction and retention is huge for specialty,” McGiffin said.

Some standard lines carriers that don’t have the underwriting expertise or products to offer their own specialty products sign cooperative marketing arrangements with specialty carriers. In McGiffin’s view, this may not be a sustainable strategy.

“If I’m a middle-market standard lines carrier that has an arrangement with a specialty writer to provide those products, what happens when that specialty writer acquires standard lines product and underwriting capabilities? I’m going to compete with them now,” she said.

She also cautions about regional insurers doing this to complement their product offering. “I just worry about whether that’s a long‑term sustainable model, given that everyone is writing specialty these days,” she said.

Future Products

As for where these talented underwriting teams will be looking to create tomorrow’s products, McGiffin is certain: technology.

“The pace of innovation and underwriting sophistication has to keep up with the pace of what’s happening with technology and data in the world around us,” she said.

Underwriters will be building new products around not only the new technology-driven exposures but also the new forms of data the technologies are generating and around the convergence of technologies.

“The best product innovators and underwriters are watching where the technologies are going and then thinking, ‘OK, how will that affect the businesses that I insure,” she said as an example.

McGiffin said the converging of technologies will not only create a need for new products for new exposures but will also present more complicated settings where there is a “convergence or clash of potential coverage triggers.” This means there could be five or six insurance products that are very intertwined.

“Take a look at what’s happening around us—not just through the conventional lens of insuring known risk, what’s happening in the world around us with the pace of technology capability and new forms of information in our personal lives and in our business lives. Those are the emerging exposures that innovative specialty writers are watching and monitoring, figuring out how to quantify those new risks and adjusting current products or inventing a new coverage response for,” she said.

Republished from Wells Media’s publication for the P/C insurance C -suite, Carrier Management.

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