Insurance Product Development

Unique insurance high-risk products are often eligible for the non-admitted market, but one needs to determine whether to launch the product on an admitted or non-admitted basis. The decision between these two pathways involves regulatory compliance, product strategy, and market appeal.

Below are the top six factors our team of insurance product development experts recommend you consider as you plan your product launch:

1. Regulatory Requirements and Compliance

A primary difference between admitted and non-admitted (“E&S”) insurance is the level of regulatory oversight. Admitted products are subject to stringent regulations from states’ Department of Insurance (DOI), including rate, rule, and form approval, which can be time-consuming and costly.

E&S products also have more flexibility in pricing and form language. While the products are primarily required to follow surplus lines laws, there are some states where admitted product laws must be followed. In addition, E&S products must be written on insurer paper with the appropriate E&S license, and the product must be placed through a licensed Surplus Lines broker.

E&S products include surplus lines taxes and fees, which are not required with admitted products. These taxes and fees are many times in addition to (versus in place of) surcharges, assessments, and taxes required with admitted products. E&S also has a unique requirement for surplus lines data reporting, primarily completed by the surplus lines broker. However, in many states, this includes reporting reconciliation of a non-admitted insurer.

2. Market Accessibility and Reach

Admitted insurers generally have broader access to the insurance market because their products are approved by the DOIs in the states where they are licensed. They must also participate in state guaranty funds, which protect policyholders if the insurer becomes insolvent. This can be a significant advantage, as many insureds and brokers prefer working with admitted insurers due to perceived stability and policyholder protections. 

In addition, many standard products that are broadly available, such as private passenger auto or homeowners, generally cannot be written on an E&S basis. On the other hand, E&S insurers offer products that may be higher-risk or unique for the admitted market. These products allow E&S insurers to tap into niche markets or provide coverage that admitted insurers may not offer. Insurers must consider whether they can effectively reach and serve their target market as an admitted insurer, or if the E&S market offers a better fit for their specific product.

A recent development in market access is the rise of Domestic Surplus Lines Insurers (DSLIs). Unlike traditional surplus carriers, which are typically admitted in a single state and must operate on a surplus basis elsewhere, (leaving at least one jurisdiction unavailable), DSLIs can write surplus lines business in all U.S. jurisdictions where they meet the requirements set forth in the Nonadmitted and Reinsurance Reform Act (NRRA) and any state- specific exceptions. 

This status allows insurers to operate nationwide in the E&S space with fewer regulatory constraints, offering broader reach and continuity.

3. Capital Requirements

In addition to holding reserves to pay future claims, admitted insurers must maintain a minimum level of capital and surplus. Each state has its own minimum capital and surplus requirements, which also vary by line of business. 

E&S insurers do not participate in the states’ guaranty funds; thus, they are typically required to hold a larger level of capital and surplus, usually exceeding $15 million. For example, New York requires a U.S-domiciled E&S carrier to hold a minimum of $49M in capital. Both admitted and E&S insurers must comply with solvency requirements, ensuring they maintain adequate reserves proportional to their level of underwriting risk.

4. Export List / Declinations

Products become eligible for the E&S market through either an export list or by the surplus lines broker obtaining the required number of declinations. Some jurisdictions issue export lists that detail classes of insurance coverage automatically eligible to be written in the E&S market without any additional due diligence. 

In order to write a product in the E&S market in states without an export list or where the class of insurance is not listed on the export list, the surplus lines broker must obtain the required number of declinations, typically two to three, from an admitted carrier that is not in the same holding company structure as the E&S carrier in which the product will be written. 

Another important consideration is “whitelisting,” a process by which surplus lines carriers become approved or eligible with specific state insurance departments. Being on a state’s whitelist can streamline compliance for brokers placing business and enhance a carrier’s credibility. Many large brokerages require that surplus carriers be whitelisted before agreeing to place business with them, making this an important strategic step for market access.

5. Pricing Flexibility

One of the most significant advantages of E&S insurance product development is the flexibility afforded in setting rates without the requirement to follow the admitted product regulatory filing process for regulatory approval. This flexibility allows E&S insurers to respond quickly to market conditions, offering competitive pricing or specialized products that might not be feasible in the more regulated admitted market. 

However, this freedom comes with trade-offs – such as a higher price for non-admitted policies based on additional surplus lines taxes and stamping fees – that are not experienced in the admitted market.

6. Product and Policy Form Flexibility

Admitted insurers often must file policies and associated forms (“forms”) for approval with each state, which may limit their ability to quickly meet specific client needs. This can be a significant drawback in markets requiring unique or highly specialized coverage. 

Filing is not required for E&S forms, which can facilitate quick tailoring to the unique risks associated with each policy. This flexibility can be a competitive advantage, particularly in complex or emerging markets. That said, it is important to note that E&S policy forms must be compliant with the applicable state laws and regulations. It should be further noted that flexibility exists in some states with the regulatory language (e.g., termination language). Always perform a thorough review of all non-admitted policy language prior to writing business in the E&S market. Insurers should consider whether their product requires a high degree of flexibility or if the form language options available in the admitted market will suffice.

The Advantage of Partnering with Experts

Determining whether an insurance product will be launched on an admitted or E&S basis is complex and multifaceted. Product managers must carefully evaluate regulatory requirements, market accessibility, pricing, and product flexibility. By considering these factors, insurers can make a strategic decision that aligns with their business objectives and market opportunities. 

The insurance product development experts at Perr&Knight can guide you through the myriad of choices when deciding these two very different paths around your new business venture.

Contact Perr&Knight today to see how we can assist in developing the right products for your market. 

Insurance has always been at the forefront of exploration. From the Dutch East India Company insuring its fleet in 1613 to underwriting the first successful transatlantic flight by the Bremen aircraft in 1928, insurance fills in the gaps created by uncertainty.

Fast forward to 2024. The insurance industry is faced with an opportunity to do what it has always done: insure the future.

With the private sector’s new moon bases, luxury orbital hotels, and a future amongst the stars, the costs and risks of these pioneering endeavors are astronomical. Forward-thinking insurance product development will be required to help these projects become a reality.

HOW DID WE GET HERE?: FROM SPUTNIK TO SPACEX

A little under a decade after the historic launch of Sputnik in 1957, Lloyd’s of London wrote the first space insurance policy in 1965 for Intelsat 1, the first-ever commercial communications satellite.

Today, many space insurance policies still cover satellites, typically from launch through the end of the satellite’s operational life. Satellites, like those that enable the GPS on your phone, are part of what the industry calls the “space-for-Earth economy” (as opposed to its counterpart, the “space-for-space economy”).

Space-for-earth is broadly defined as any goods or services that originate in space but benefit life on Earth. This sector accounts for 95%¹ of space insurance revenue, representing an annual premium revenue of about $450-850 million² per year since 2010.

But the market is on the verge of disruption, primarily due to innovative work being done by SpaceX. Through advances in technology and engineering, the SpaceX team achieved a historic feat in April of 2016³ when their first-stage booster returned to the launch site to be reused for future launches.

This moment marked a paradigm shift in the industry.

By making launches sustainable – and even profitable – the industry has taken a huge step towards addressing the challenge of scalability and ultimately expanding humanity’s reach in the cosmos.

That said, the proliferation of space activity also brings another growing challenge: space junk⁸. Collisions with debris can cause substantial damage or destruction of valuable assets, creating risks to operational satellites, space missions, and even the International Space Station (ISS). Robust insurance solutions must consider the rising risk associated with this ever-growing problem.

EMERGING PLAYERS, EXPANDING FRONTIERS

The World Economic Forum projects the space industry to grow by about 9% per year, and to reach a market size of about $1.8 trillion⁴ by 2035.

One notable example of the growing demand for insurance to support the space economy is the work being done by Starlink. In an effort to bring low-cost internet to remote or infrastructure-light areas around the world, Starlink is partnering with SpaceX to build a “mega constellation” by launching thousands of satellites into Earth’s orbit. Upon completion, the constellation is estimated to be a network of 42,000 satellites spanning the globe, working in tandem to provide high-speed internet anywhere with sky visibility. With a projected cost of $1.2 million for each satellite⁵, it’s easy to see how the risk portfolios and insurance premiums for these projects can balloon.

Beyond SpaceX, other private companies provide a glimpse of what a truly space-for-space market might look like. Each of their solutions requires unique insurance product development:

• Made In Space, Inc.¹ aims to bring manufacturing to space using 3D printing technology. The company’s mission is to leverage the zero-gravity environment to improve the manufacturing process and potentially build infrastructure that would be impossible on Earth.
• Deep Space Industries¹ set out in the 2010s to become a pioneer in asteroid mining. The mission was to provide raw materials acquired from asteroids and other celestial bodies to the broader space-for-space market. Though the nascent market never took hold, the idea still lives on.

INSURING GOVERNMENTS AND THE PRIVATE SECTOR

Recognizing the strategic importance of space, global superpowers also recognize the opportunities and challenges. In addition to economic opportunity, governments must contend with the military implications of a space-faring civilization.

In recent years, China and Russia have increased their counterspace capabilities to challenge the U.S.’s broad military reach and influence⁶. In response, the United States created the Space Force in late 2019 and has partnered with private companies to expand military capabilities via the Commercial Space Strategy⁷ initiative.

These private-/public-sector collaborations necessitate innovative insurance solutions to address any damages or liabilities arising from military space activities.

NEW HORIZONS REQUIRES NEW EXPERTISE

While the recent advancements in the space industry are promising, we’re still far from mass adoption. Most of the space industry is providing services for Earth’s inhabitants, so most of the risk is still in familiar territory.

However, if a true space-for-space market emerges encompassing manufacturing, tourism, mining, and more, the associated insurance products will require tailored solutions. Insurers, underwriters, and actuaries will need to revisit traditional assumptions to address the new challenges brought about by this demand.

What does a construction project in low earth orbit even look like? How will the threat of space debris and solar flares be accounted for in this expanding ecosystem? What are the effects of long-term exposure to the sun’s radiation outside of Earth’s protective magnetic field?

New data, models, and expertise will be required to address these novel risks.

INNOVATE OR GET LEFT BEHIND

The space industry is gaining momentum, fueled by groundbreaking technology and significant capital investments. As high-stakes space activities become an increasingly integral part of our global economy and strategic interests, the need for innovative insurance product development and risk management solutions will continue to grow.

Insurers and consulting firms looking to carve out a niche for themselves will be rewarded if they get ahead of the crowd, as the proper insurance solutions will enable the expanding space industry to continue to flourish for generations to come.

Contact the experts at Perr&Knight today to discuss innovative solutions for insurance product development.

 REFERENCES

1. Weinzierl, M. (2023, September 28). The commercial space age is here. Harvard Business Review. https://hbr.org/2021/02/the-commercial-space-age-is-here
2. Zisk, Rachael (2022, October 31). The Space Insurance Landscape. https://payloadspace.com/the-space-insurance-landscape/  
3. Klotz, I. (2017, March 30). SpaceX successfully launches first recycled rocket booster. Reuters. https://www.reuters.com/article/technology/spacex-successfully-launches-first-recycled-rocket-booster-idUSKBN1711JO/
4. Space is booming. Here’s how to embrace the $1.8 trillion opportunity. (2024, September 10). World Economic Forum. https://www.weforum.org/stories/2024/04/space-economy-technology-invest-rocket-opportunity/#:~:text=1.,growth%20rate%20of%20global%20GDP
5. Rosenberg, Z. (2024, September 5). Starlink soars: SpaceX’s satellite internet surprises analysts with $6.6 billion revenue projection. SpaceNews. https://spacenews.com/starlink-soars-spacexs-satellite-internet-surprises-analysts-with-6-6-billion-revenue-projection/
6. U.S. Department of Defense. (n.d.). Space-Based capabilities critical to U.S. national Security, DOD Office. https://www.defense.gov/News/News-Stories/Article/Article/2629675/space-based-capabilities-critical-to-us-national-security-dod-officials-say/
7. Bellamy, D. (2024, September 25). Commercial space’s critical role in the race to outpace adversaries. SpaceNews. https://spacenews.com/commercial-spaces-critical-role-race-outpace-adversaries/
8. Worthy, Mica  Nguyen, et al. “The Current ‘Universe’ of Space Insurance.” Insurance Laws and Products – Insurance – United States, 21 Sept. 2023, www.mondaq.com/unitedstates/insurance-laws-and-products/1368560/the-current-universe-of-space-insurance/

Parametric insurance provides coverage that is triggered solely by the occurrence of a narrowly defined (“parametrized”) event, mostly eschewing the lengthy process of determining the loss amount and instead pre-defining a dollar payout based on the magnitude of an event and not a claim adjustment process. The NAIC defines parametric insurance as, “a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy.”

Dating back to the mid-1990s, some of the first instances of parametric insurance emerged as developing nations in Asia sought to design index-based insurance to counter the risk of severe weather on agricultural communities. Parametric insurance continues to grow in areas prone to climate risk due to its flexible and efficient coverage.

As the name implies, parametric insurance pays out a set dollar amount automatically when an event with pre-defined parameters occurs, which may not align with actual damages sustained by the insured. Typically, these pre-defined parameters are narrowly designed so that it is very likely that the insured does in fact sustain damages from the event. A parametric version of automobile collision coverage might trigger coverage if a deceleration from 60 MPH to 0 is detected in a period of under 1.5 seconds – while this event does not guarantee that the insured sustained damage, it is very likely that they did.

Because of the nature of how coverage is triggered, there are some unique aspects to this type of coverage. Here’s what you should know before diving into parametric insurance product development.

Third-party verification required

The NAIC continues, “The amount of payment, the parameter, and a third party responsible for verifying that the parameter was triggered must all be specified in the contract. The third-party will usually be a government agency; for example, earthquake magnitude could be determined by the measurement issued by the National Earthquake Information Center. There will often be a tier of third-party verifiers as a contingency plan in case the primary agency is incapacitated.” In the automobile example above, there may be a vendor that provides a device for real-time vehicle diagnostics in order to verify the deceleration metrics.

Benefits of parametric insurance

Parametric insurance delivers fast, transparent, and customized coverage tailored to the specific needs of insureds, offering support and peace of mind when it matters most. Here are some of the main benefits of this type of coverage.

Instant payout

Parametric insurance pays out a defined amount within days of a triggering event, eliminating the time drain and complexity of assessing actual damages associated with traditional claim processing. The speed of claim verification and defined payout dramatically streamline the claim process, resulting in an improved experience for customers.

Reduced overhead expense

The simplicity of claim verification and payouts dramatically streamline the claim process, resulting in lower claim adjusting expenses and thus, competitive pricing.

Time-critical response

Insureds have access to payout funds almost immediately, providing relief during the period right after a triggering event, which is especially helpful in the case of natural disasters when aid in the immediate aftermath is crucial. The speed of payouts dramatically streamlines the process of filing a claim, resulting in an improved experience for customers.

Fills unique coverage gaps

Parametric insurance policies can be designed to fill coverage gaps in cases where loss adjustment would ordinarily be difficult or impossible. Since coverage is triggered by event magnitude rather than loss magnitude, coverage can be afforded to perils where that loss magnitude can be difficult to calculate.

Tailored to specific risks

Parametric insurance product development is often the result of professionals in a specific field who have first-hand knowledge of risks in their respective industries that fall outside of the scope of traditional insurance coverage.

Basis risk challenges

Basis risk in parametric insurance refers to the discrepancy that may occur between the payout triggered by the parametric coverage and the actual loss experienced by the policyholder. Depending on how the triggering event is defined and on the payout selected, the claim payout could be higher or lower than actual damages sustained since no claim adjustment exists. The payout selected should align with expected damages, which often includes expense items such as unexpected travel costs, deductibles, and debris removal. To minimize basis risk, the parametric product can be designed to use sliding scale payouts or other innovative product features to ensure effective risk transfer while supporting reasonable company profitability. On the other hand, if there is a chance that the policy overcompensates the insured, the underwriter can be exposed to a significant moral hazard. This is why it is imperative to carefully define the triggering event.

Limited historical data requires careful analysis

One of the benefits of designing a new parametric product is that a company may be first-to-market. However, the absence of a direct competitor also means a lack of available competitor pricing data. Pricing for parametric insurance is often done from first principles.

When designing specific triggers, accurate interpretation of historical data is critical. Working with experienced actuaries is essential to ensure that their interpretations of the data result in accurate risk assessment and pricing. The actuarial consulting team at Perr&Knight has deep experience developing pricing from raw data and our rigorous peer-review process further bolsters confidence in the interpretation of available data.

Parametric insurance product development checklist

Insurance innovators looking to develop a parametric product should keep these considerations in mind.

Is parametric coverage beneficial?

Many scenarios that seem like they might suggest the development of a new parametric insurance product are covered by existing policies or might actually not be an insurable risk at all. For parametric products in particular it is also necessary to ensure that the insured has an insurable interest related to the event being triggered. Since coverage is triggered based only on the occurrence of an event, the insured must plausibly sustain damages from the occurrence of the event. Consulting with insurance product development experts during initial ideation is essential to avoid investing too heavily in a policy that may be redundant or might not even fall within the scope of insurance.

Obtain accurate data

Coming to the table with a set of high-quality data speeds along the process of accurate rate development and reliable parametric triggers. Policies designed around easily obtainable and verifiable data require less time to develop pricing. Better access to real-time data from satellites, weather stations, etc., has allowed insurers to create more accurate and reliable parametric triggers in the catastrophe space.

Be aware of jurisdictional nuances

Understanding what is required by state departments of insurance (DOIs) is a challenge for all types of insurance product development, but it’s especially tricky for parametric policies. Though all 50 U.S. states and the District of Columbia have examples of approved parametric policies, many state DOIs are still very skeptical of the benefits to consumers. This is where partnering with experienced insurance consultants like the team at Perr&Knight can be hugely beneficial. Our filing experts understand the small but important variations in requirements in jurisdictional requirements and they have the expertise to guide you to the most practical regulatory implementation of your product idea, whether it be the admitted market or surplus lines.

Parametric insurance policies offer ways to better serve customers by protecting them against hard-to-place risks, filing gaps in their existing coverages, and paying out quickly. However, hasty product development can lead to trouble down the line with regulatory requirements, or pricing inaccuracies that could lead to financial or reputational risk.

Partnering with insurance product development experts early on and leaning on their experience throughout the design and filing processes can help insurance companies and entrepreneurs sidestep avoidable errors and focus on bringing a quality product to market faster.

Contact the experts at Perr&Knight today to discuss your parametric insurance product.

Pet ownership in the U.S. is on the rise. As of 2023, 66.6% of U.S. households own a pet¹. Dogs are the most popular pet in the U.S. (65.1 million households) followed by cats (46.5 million households)¹. As a result, the popularity of pet insurance has grown rapidly. At the end of 2022, 4.84 million pets were insured in the U.S.². Gross written premium reached $3.2 billion by the end of 2022¹.

Why is pet insurance legislation necessary?

With the growth in the market comes a need for clarity and oversight in the pet insurance marketplace. Market conduct findings in recent years identified issues with unlicensed sales, illegal inducements and rebating, improper use of rates, and unlawful claims practices. 

In April 2019, the National Association of Insurance Commissioners (“NAIC”) created a working group tasked with reviewing an NAIC White Paper, A Regulator’s Guide to Pet Insurance. A request for model law development related to pet insurance was adopted in 2019, and the Pet Insurance Model Act was adopted by the NAIC’s Property and Casualty Insurance Committee in August 2022.

Until recently, only California had statutes in place to address pet insurance. NAIC’s model adoption has attracted the attention of state regulators and is slowly gaining traction. Maine was the first state to adopt the model, and an additional six states (as of this writing) have adopted the model in part or in whole. The model addresses a number of issues including consumer disclosures, sales practices for wellness programs, and insurance producer training.

What are three key form compliance issues?

The model includes form considerations insurers must keep in mind during insurance product development for domestic animal owners.

1. Disclosures: Insurers need to disclose several items to consumers through both a link on the insurer’s or program administrator’s website and at policy issue. Items to be disclosed include identification of exclusions for pre-existing conditions, hereditary disorders, congenital anomalies or disorders, and chronic conditions. The disclosure must also advise the insured of a 15-day period to examine and return the policy. Another key component of the disclosure is the basis on which claim payments are determined. Insurers paying claims on a reasonable and customary basis need to describe how that determination is made. 

2. Waiting periods: The model limits waiting periods to 30-days for illnesses and orthopedic conditions not caused by accident. There is no waiting period for accidents or orthopedic conditions caused by accident. The model further states that an insurer utilizing a waiting period must include a provision that allows the waiting period to be waived upon completion of a medical examination. Pet insurers can require the examination by a vet after the purchase of the policy. Waiting periods may not be applied to renewals.

3. “Wellness programs” vs. insurance policies: The model provides a definition for wellness programs, stating that a wellness program is separate from an insurance policy and would seemingly be exempt from insurance code. However, if the program meets triggers as defined by each adopting state, the program meets the standards of transacting the business of insurance and is subject to the insurance codes of the states. It must be clear to consumers whether or not a wellness program is insurance. 

How does this impact your organization?

Current pet insurance programs should be reviewed to determine necessary changes based on state adoptions of the NAIC Pet Insurance Model Act. Amendatory endorsements or revised policy forms should be filed to address changes in definitions, terms and conditions, and waiting periods. 

In recent filings, some insurers have followed the model requirements for waiting periods while others have eliminated waiting periods altogether. Insurers should prepare and, in some states, file a disclosure to include required elements. 

Finally, insurers should review their wellness program and triggers for benefits. Insurers should contemplate both new and in-force policies when developing a plan to address needed changes. 

The upward trend in pet ownership unlocks more opportunities for insurers looking to capitalize on the emerging pet insurance market. However, new regulations require close scrutiny of both existing products and new product development. Understanding the nuances of the Pet Insurance Model Act will save insurers from slipping into non-compliance or developing new policies that are destined to receive objections.

Partner with product development experts when developing new insurance products. Contact Perr&Knight today. 

Notes/Sources

1: American Pet Products Association press release (March 2023)

2: North American Pet Health Insurance Association (May 2023)