Insurance Product Development Archives

Opportunities in the Growing Collector Auto Movement

By: Michael Goldman and Natasha Paz

Classic cars are unique properties for which coverage under a standard auto policy might be insufficient. For insurance companies, pricing these products isn’t as straightforward as traditional auto policies. Whereas traditional auto policies are built around a vehicle’s depreciation over time, collectible car policies consider that the asset’s value potentially appreciates with age.

While classic car ownership was once a specialized market, today’s owner demographics are shifting. Many car collectors are still of the boomer generation, but more and more younger drivers are investing in collector cars as hobbies or as stylish rides around town. This shift is fueled by younger drivers with more disposable income, a heightened interest in classic car restoration, and a rising appreciation for vintage vehicles.

The definition of a “classic car” is changing, too. “Classic” no longer refers solely to chrome-heavy sedans from the 50s and 60s. Now, certain cars from the 1970s – and even the 80s and 90s – are categorized as “modern” classics. As the U.S. vehicle fleet ages and more consumers shift to hybrid or electric, a niche market for classic combustion engine vehicles is emerging, and supplies will continue to shrink over time.

Per Credence Research, the vintage car market is expanding rapidly, expected to double in size¹ over the next decade. Though classic cars still often obtain coverage from standard auto insurance carriers, specialty insurance policies offer benefits to both policyholders and insurance companies. This all adds up to an opportunity for insurance companies to develop products that are appropriately priced to take advantage of this growing market sector.

Here are some insurance product development insights from the actuarial consulting experts at Perr&Knight to keep in mind when writing new classic car programs or re-evaluating your existing programs.

Value of the Vehicle

Unlike standard automobiles, where the value of the vehicle is expected to decrease with usage, the value of collector cars usually rises over time. Establishing the value of a classic car isn’t as straightforward as with a modern vehicle. One of the main challenges is that there is no standard, agreed-upon industry definition of a “classic” or “collectible” car.

Autos that often fall into this category do share some features, such as:

Most (but not all) are at least 25 years old
Exotic cars (e.g. Lotus, Maclaren, Maserati)
Cars with historical value (e.g. Model-T, hot rod)

From there, insurance companies work with policyholders to establish a predetermined “agreed value” of the vehicle. This value can be established based on appraisal data, interviews with the insured, and research on the value of similar vehicles. The agreed value becomes the amount paid in the case of total loss or theft and is used to determine if the vehicle will be repaired or considered a total loss. The “agreed value” also protects the policyholder against vehicle depreciation in the event of a claim.

Discounted Rates

Though drivers of classic cars tend to have many years (potentially decades) of safe driving behavior under their belts, the shift towards a younger demographic means that many collector car drivers have shorter driving histories. That said, collectors of any age tend to be extra careful with these vehicles – both on the road and in storage.

Classic vehicles are usually not driven as often or with the same risk tolerance as a modern daily ride, so these behaviors can play a factor in insurance product development when establishing rates.

Because of this careful driving and increased attention to maintenance, collector vehicles are generally involved in fewer accidents than their modern counterparts. This factor can result in pricing differences when compared with traditional policies and potentially lower rates for classic vehicle owners.

Pricing Classic Car Policies

One of the most useful ways to gain intelligence on pricing is to review competitor filings and look at the kinds of variables used in successful programs. Not all states make filing information public, but for those that do, reviewing market share, checking financial statements for profitability, and looking at the pricing variables in their programs are all solid indicators of how a competing program might function in the same jurisdiction. For states without public records, information from available sources creates a solid foundation, which can then be adjusted based on other known variables for the region.

Actuarial consulting experts like the team at Perr&Knight have extensive experience evaluating multiple factors – some obvious, some less common – to develop profitable pricing strategies for classic car programs.

State-Specific Nuances

As with all insurance product development, regulation varies by state. Our actuarial consulting and product development departments have decades of experience navigating the ins and outs required by individual states. Therefore, consulting with experts throughout product development and filing can save time and increase speed to market by spotting and correcting issues that might be questioned by regulators.

Today, many opportunities exist to augment business with new classic car policies or update existing coverage. The challenges related to pricing these policies also offer opportunities to create unique products. Differences in the definition of “classic” – along with all the expected complexity of developing any insurance policy – mean that classic car product development could benefit from a seasoned actuarial consulting team. Keeping the above in mind will help you steer clear of obstacles when developing or updating your classic/collectible auto program.

Contact Perr&Knight today to chat with our actuarial consulting team or for insurance product development support.

https://www.credenceresearch.com/report/north-america-classic-cars-market ↩︎

An Insurance Odyssey: The Future of Insurance in the Dawning Space Age

by Saša Gavrilovic

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

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
Zisk, Rachael (2022, October 31). The Space Insurance Landscape. https://payloadspace.com/the-space-insurance-landscape/
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/
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
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/
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/
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/
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: What You Should Know

by Tyler Reed

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.

How AI Is Reshaping the Insurance Industry: Efficiency, Innovation, and Customer Focus

by Rob Berg

It’s no secret that the insurance industry is ripe for disruption. Customers expect personalized experiences. Competitors are finding ways to offer better service for lower premiums. Legacy systems make staying agile a significant challenge.

Thankfully, the industry’s evolving embrace of Artificial Intelligence (“AI”) offers a meaningful solution.

From enhancing the insurance product development process to improving experiences for your customers and staff members, AI has the power to transform the insurance landscape, driving efficiency, innovation, and customer-centricity.

Streamlining Operations and Reducing Costs with AI

AI can automate many repetitive and labor-intensive tasks across the insurance value chain. From claims processing to policy underwriting, AI can analyze data, make informed decisions, and reduce the workload on your human team. Imagine AI-powered chatbots that provide 24/7 support for customers or algorithms that automatically identify fraudulent claims.

The potential cost savings are substantial, allowing insurance companies to optimize their bottom line and stay competitive.

Fueling Innovation with AI-Driven Insights

Historically, insurance product development has relied on static risk models that don’t always capture individuals’ and businesses’ complex and ever-changing risk profiles.

AI changes all that.

With real-time data from sources like telematics, wearables, and even weather patterns, AI can personalize risk assessments, leading to the development of new, innovative insurance products and premiums best aligned to the actual risk. Think usage-based insurance for drivers, dynamic cybersecurity insurance for businesses, or health insurance that promotes preventive care.

Elevating the Customer Experience with AI

In today’s crowded insurance market, customer experience is everything.

AI allows insurers to deeply understand their customers, personalize their offerings, and provide proactive support. Consider virtual assistants that answer questions and guide policyholders through processes, as well as sentiment analysis tools that proactively identify and address potential customer dissatisfaction. This results in loyal, happy customers – essential for retention and growth.

Successful AI Implementation: The Role of Strategic Guidance

While exciting, implementing an AI-driven solution in insurance carries its own complexities.

Data quality, legacy systems, regulatory compliance, and employee adoption all need careful consideration. This is where partnering with experienced AI consultants can make a tremendous difference.

The right partner helps you develop a clear AI strategy, prepare your data for AI success, ensure regulatory adherence, and get your team on board for a smooth AI adoption process.

Get the Full Picture: Download Our White Paper

This blog post has offered a brief glimpse into the transformative power of AI for the insurance industry.

However, if you’re ready to explore the possibilities in greater detail, we invite you to download our comprehensive white paper, The Transformative Power of AI in Insurance: Unlocking Cost Savings, Innovation, and Competitive Advantage.

In this white paper, we’ll dive into specific use cases, proven strategies, and crucial considerations for navigating your AI journey.

Download the white paper today and discover how AI can revolutionize your insurance business.

New Ideas for Supplemental Health

by Jennifer Choe

By: Jennifer Choe and Juliann Schiano

March 2023 marked ten years since the Affordable Care Act (ACA) was signed into law, and much has changed over the last decade. Health coverage has evolved in response to ACA-related regulation, challenges associated with COVID-19, and a new post-pandemic “normal” that has impacted everything from employee working conditions to vacation plans.

States are changing their requirements for health-related insurance products – and your company’s portfolio should reflect current regulations. For example, the excepted benefits in your current benefit structure may no longer be considered “excepted.” Another example is that rates in Washington state must be refiled every seven years.

As the leading providers of life and health actuarial consulting and product development to insurance companies throughout the nation, we are seeing some key trends in supplemental health coverage. If your company has not updated these products lately, now is the time to take another look.

Critical Illness

Health insurance providers are broadening the suite of what critical illness covers. Here are some opportunities that might enhance your portfolio:

Extended hospital expense coverage
Transportation benefits for travel to and from a hospital
Reconstructive Surgery benefits if certain conditions are met

Accident

Supplemental health benefits due to accidents have changed in recent years as people are vacationing and working differently. Here are some emerging product types that our product design and actuarial consulting experts have identified:

Accidental Death Recreational Vehicle Travel benefit if death occurs as a result of an injury while the insured is a driver or passenger in a recreational vehicle, while in a vehicle pulling a fifth wheel, or while at a campground
Work From Home benefits such as alternative workspace, psychological trauma counseling, and temporary childcare
Telecommuting Coverage benefit for insureds when they telecommute and work from home

Hospital Indemnity

New hospital indemnity coverages are also gaining traction:

Pregnancy Indemnity coverage when the insured becomes confined in a hospital due to pregnancy

Life

Today’s supplemental products for life insurance further ease some of the burden on loved ones after a death. Here are some products that are gaining in popularity:

Charitable Giving benefit that allows the owner to select a charitable beneficiary to receive a charitable gift amount defined as a percentage of the policy death benefit
Final Expense coverage that provides a set death benefit and fixed premiums through a type of whole life insurance coverage and is intended to cover funeral and burial costs and medical bills such as hospital stays and nursing home expenses
Travel or Reunion Expenses coverage for benefits or reimbursement for travel expenses so that family members may be able to attend the funeral

Other Supplemental Health Benefits

Finally, here are some additional emerging supplemental health benefits identified by our insurance product development experts that reflect the changing times:

Telemedicine benefit to provide coverage for remote or virtual care from a physician
Inflation Protection benefit, which automatically increases the benefit amounts with a certain percentage for each insured
Military Pilot coverage, which provides a benefit for loss that occurs from a flight in a military airplane while the insured is acting in the capacity of pilot or crew member
Firearm Accident benefit, which is paid when death or injury is caused by a firearm accident
Term Life rider, which allows the insured to purchase additional term coverage on top of an existing life insurance policy

Partner with Experts to Update Your Portfolio

Updating your portfolio can be a time-consuming, detail-heavy process, especially if your company writes policies in multiple jurisdictions. Working with life and health actuarial consulting experts and experienced insurance product development teams like those at Perr&Knight can streamline your path to approvals.

Here are some of the services we offer to support insurance companies, insurtechs, and those looking to expand their product offerings in the A&H space.

Competitor studies: We have access to the most comprehensive filing database in the industry, enabling us to check policies and rates against comparable competitor filings. We use this insight to ensure coverages and rates align with industry standards and that our clients offer the most competitive programs possible.

Developing new forms and rates: We have resources that can help with creating appropriate policy forms and associated forms, as well as pricing benefits, including those for whole and term life.

Filing: Our state filings teams possess unmatched experience in filing forms and updates in all fifty-one jurisdictions. We can provide support to your filing department at whatever level you require.

Whether you want to refresh your company’s portfolio with new products to increase your competitive edge or update existing filings to ensure regulatory compliance, our life and health actuarial consulting teams can support the entire process of insurance product development, filing, and beyond.

Contact Perr&Knight today to start the conversation.

Lessons from the Super Bowl: Why Insurance Products Fail (and Four Tools to Avoid the Same Fate)

by Kyle Hales

Breaking into the insurance industry can be intimidating for new entrants, venture capital firms looking to invest in insurance startups, the startups themselves, and even established businesses looking to embed insurance into the goods they sell. One of the most important aspects presented by the insurance industry is the unknown cost of the insurance product itself. When key variables are still unknown during the insurance product development stage, estimating appropriate risk poses a challenge.

For most trades, the cost of the final product is understood before the goods are sold or the services provided. However, in the insurance industry, the cost of the indemnity itself is very much unknown when the product is initially sold. It may be years before an insurance carrier has a good handle on the costs of the underlying insurance product. Additionally, the majority of an insurance product’s expenses, such as commissions, acquisition costs and taxes, are tied directly to the cost of the underlying insurance product.

Actuaries do their best to estimate the frequency, severity, and timing of claims using historical data or other proxies. With so many variables, determining accurate indemnity costs is extremely challenging. Even with a statistically significant set of reliable data anticipated to be predictive of future events, actuarial estimates are exactly that: estimates.

Our insurance product development experts possess decades of experience helping insurance carriers assess risk to protect profitability. Here are some of their insights into why insurance products fail – and how your organization can sidestep costly consequences.

Lessons from a Streaker

We’ll begin by examining an industry that faces similar cost uncertainty. Specifically, the world of professional gambling.

Like the insurance industry, casinos and sportsbooks make estimates related to the likelihood of Team A beating Team B, or the two teams scoring over or under certain point totals. Accurate estimates mean the money wagered on each side of the bet will approximately even out. Sportsbooks are acting more like market makers, primarily making a profit by matching bettors on opposite sides of the ledger.

However, if their estimates are off – and people placing bets know this – then more dollars will bet on one side versus the other, and the sportsbooks’ likelihood of losing money increases significantly.

Sportsbooks tend to offer many unique and unusual bets for the Super Bowl. Prior to the start of Super Bowl LV in 2021, a sportsbook offered a wager that would pay +750, (i.e. a $100 bet wins $750, plus a return of the original wager) if a fan ran onto the field during the game.

Unfortunately for the sportsbook, there indeed was a man who ran onto the field during the game wearing not much more than a pink leotard.

This streaker, however, had done his homework. He and his friends made a series of bets, totaling around $50,000, that someone would streak the field during the Super Bowl. With the odds on this bet being +750, he was looking at a payday of over $370,000 – all because he knew more about the likelihood of this event than the sportsbooks did¹.

This example outlines another challenge presented to insurance carriers: we live in a world of imperfect information. The purchaser of an insurance product may know more about their likelihood of needing to use the coverage than the carrier selling it. In the same way the sportsbook was tricked by this Super Bowl streaker, insurance companies must account for a similar unknown.

Historical Premium Information Isn’t Enough

Let’s shift to another example: pet insurance. The policyholder pays a premium calculated based on factors such as pet type/breed, pet age, etc., in return for a policy that covers veterinary procedures.

If a dog owner discovers their pet needs a $3,000 surgery, and their insurance policy has a monthly cost of $100, the pet owner could easily save $2,900 and shift that burden to the insurance company. Theoretically, the pet owner could then cancel the policy immediately after the completion of the surgery.

This example shows that historical premiums are not adequate to cover the prior claims. Actuaries reviewing such data may suggest increasing the product’s overall premium level.

However, increasing the premium discourages owners of healthy pets from purchasing coverage, continuing this cycle and eventually leaving only the owners of unhealthy pets as the entirety of the market participants. At some point, the premiums get too high, even for the owners of unhealthy pets, and the product completely fails, causing significant losses to the insurance industry.

Strategies to Overcome the Unknown

Thankfully, there are some ways to address the issue of imperfect information head-on:

Define Coverage Limits

Insurance products typically apply limits of coverage (both per claim and in aggregate), contain deductibles, and/or require coinsurance. It is important to clearly define how much the policy will pay an insured for each claim and how much could be paid in total (aggregate) throughout the policy period.

While this won’t define an exact cost of offering insurance, these coverage restrictions give us a better idea as to the expected cost to the provider.

In the pet insurance example, had the policy contained a $2,500 per event limit, with a $100 deductible and a 25% coinsurance, the cost to the insurance company would have been reduced from $3,000 to $1,800 [= ($2,500 limit – $100 deductible) x (1 – 0.25 coinsurance)].

The application of policy limits, deductibles, and coinsurances has the added benefit of encouraging policyholders to shop the market to locate a vet who will perform a similar, but less expensive, surgery. In the example above, the insurer pays $1,800 and the remaining $1,200 is the responsibility of the pet owner.

Say, for example, the owner shops around and finds a vet willing to do the same surgery for $2,000. In this scenario, the insurer will be responsible for $1,425 = [($2,000 procedure – $100 deductible) x (1 – 0.25 coinsurance)]. While the insurance carrier’s costs are reduced by $375, it’s the policyholder who receives most of the benefit, as their costs drop down to $575 vs. $1,200 previously.

Outline Policy Prerequisites and Coverage Triggers

A policy prerequisite allows the insurer to establish a condition or series of conditions that must take place before coverage is provided. Policy prerequisites act as an additional form of underwriting and can dissuade customers from purchasing coverage for a specific event they know will take place. Similarly, a coverage trigger allows an insurer to reduce coverage to only certain pre-specified events or otherwise specifically exclude coverage for a pre-determined list of events.

A policy prerequisite for pet insurance could require a diagnosis from a qualified veterinarian to identify the pet’s pre-existing conditions. From there, policy exclusions can list any procedures that would not be covered by the pet insurance policy. This would exclude coverage from the surgery presented above.

Enact Coverage Waiting Periods

An insurance company can also establish a coverage waiting period between the date a policy is purchased and the date coverage is enacted. This waiting period can keep an insured from purchasing a policy immediately before they know a covered event will take place.

In the case of the pet insurance policy, a coverage waiting period could possibly have prevented the insured from buying a policy as soon as they found out surgery on their pet was required.

Establish Fully Earned Premiums

One final tool in an insurer’s arsenal is to fully earn the policy’s premium, where allowed by statute. This prevents a policyholder from canceling coverage – and, more importantly, receiving a return premium – just after a covered event triggers. This is more common for policies such as warrantees, extended reporting periods on claims-made coverages, special event policies, etc.

In the end, the streaker from Super Bowl LV did not get his winnings as his bets were voided by the sportsbook after he bragged a bit too loudly about his master plan. Although insurance companies need to account for instances where the policyholder knows more about their likelihood of using an insurance policy than the carrier does, insurers do have some tools and strategies to prevent a situation like the sportsbook example above.

Can your insurance products can stay afloat and ward off metaphorical Super Bowl streakers?

Contact the insurance product development experts at Perr&Knight today to help.

https://sports.yahoo.com/super-bowl-streaker-says-bet-211422994.html?guccounter=1

Pet Insurance Policies: Top 3 Form Compliance Issues

by Susan Cornett

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)

10 Questions to Answer Before Launching a New Insurance Product

by Kyle Hales

Throughout our decades of designing, developing, and providing actuarial support for insurance products, we have seen firsthand what it takes to bring new insurance products to market. Unfortunately, a good idea isn’t enough. Even established companies are often surprised at the depth of detail and scope of supporting documentation required when developing a new insurance product.

Here are ten critical questions from the experts at Perr&Knight to consider throughout the insurance product development process, whether you are a traditional insurance company, InsurTech firm, startup, Managing General Agent (“MGA”), Managing General Underwriter (“MGU”), Program Manager, captive owner, insurance agent / agency, or insurance entrepreneur.

1. Who is your target market?

Upfront legwork like this will help you establish whether there is indeed a need for this product in the marketplace. Clearly defining your target buyer will also aid in determining how to market the product and how big of a return you can expect.

2. What is your projected premium volume?

Before diving into the product development process, it’s helpful to assess the size of the market for this product. Depending on the product type, this information might be easy to compile – or it might require deeper research. Experienced actuarial consulting partners like the team at Perr&Knight can help draft reasonable estimates for premium volume.

3. Who are your competitors?

Competitive research is valuable for many reasons. First, it lets you know if the market is already saturated or has room for more players. Second, you can learn from the successes or failures of similar existing products. Finally, if a similar product is already available, you can use this information to determine on what basis you can compete.

4. What type of insurance will your product provide?

Will your product fall under the scope of Property & Casualty (“P&C”), Accident & Health (“A&H”), or another type of coverage? Will you be providing group or individual coverages? Different coverages are subject to different regulations that also vary by jurisdiction. The answer to this question establishes a foundation that will inform nearly all other decision-making during product development. The structure of the product once again comes down to its type and use: commercial vs. personal, will your product be based on policy language already in use by bureaus, or will you need to develop independent policy language? Articulating your product’s structure will help set realistic expectations for timelines and cost estimates.

5. What triggers a claim under your product?

Defining the parameters to trigger a claim can tell you much about your product. Determining what doesn’t initiate a claim is equally important. Your actuarial consulting team will use this information to calculate the frequency and severity of potential claims, helping you to determine how the product will help potential policyholders cede insurance related risk.

6. How will the rates be supported?

How will the rating work? Can you base your rates on existing data, or will your actuarial consulting team need to obtain independent data? Are there similar products in the marketplace offering analogous coverages or will your actuaries need to use other data as proxies for the frequency and severity of losses?

7. Do you plan to retain risk or cede it off?

Many new entrants will not initially retain risk and will only make a commission on the product’s sale. However, over time, as premium volume grows and the market becomes well established, you may decide to retain risk and make a profit on underwriting. Structuring the right deal upfront with the insurance carrier is essential.

8. In which states will you offer this product?

This question is particularly important for overseas companies, who don’t fully appreciate the magnitude of difference between insurance product regulations in 51 independent U.S. jurisdictions. This is where partnering with actuarial consulting and insurance product development experts like those at Perr&Knight is critical. We understand all state-specific regulatory nuances and will help you sidestep avoidable pitfalls.

9. How challenging is the regulatory environment?

Again, each jurisdiction has a different set of regulations and expectations. Waiting until you’re deep in the filing process to discover state-specific requirements can create a last-minute runaround that can slow your time to market or even result in disapproval. Insurance experts like the team at Perr&Knight can explain well ahead of time what to expect so you can prepare all documentation before it’s time to submit to regulators.

10. Do you plan to write in the admitted or alternative market?

Products in the admitted market are often more “every day, run-of-the-mill” exposures. It’s the insurance product development process most people in the insurance industry are already familiar with. The advantages of writing business in the admitted market are that the taxes are often lower. However, the regulatory environment could make the approval process much more challenging.

Meanwhile, never-before-seen products have the advantage of being first to market. Although, there are some considerations when writing business in the alternative (or non-admitted) market. You will have to demonstrate that there is no admitted market for this product, which can require obtaining three declinations for standard types of insurance. The tax reporting requirements are also significantly more challenging. This isn’t to say that writing in the alternative market doesn’t have major advantages – avoiding much of the rates, rules, & forms regulatory process and cornering the market from the get-go can be a huge upside. It’s important to be aware of the challenges of the alternative market before you get too deep into product development.

Developing a new insurance product is an exciting process. However, failure to thoroughly think through the details of your product, target consumer, market, and regulatory environment will present hurdles that can be avoided. Adequate planning, preparation, and partnership with experts increases your chances of success.

Contact Perr&Knight’s accredited actuaries and experienced product development team to discuss your new insurance product.

P&C Carriers: A Strategy for Entering the A&H Market

by Susan Cornett

By Susan Cornett, FMLI, AIRC, CFE

P&C insurance carriers recognize the opportunity to expand product lines and increase revenue by expanding into Accident & Health products. However, the differences between P&C and A&H product development are significant and what applies to P&C may not apply to A&H from a regulatory standpoint. Understanding those differences will allow P&C carriers to enter the A&H market with faster speed-to-market along with high-quality products.

During decades of providing insurance product development and actuarial support for insurance companies across the US, Perr&Knight has zeroed in on a low-risk A&H entry product for P&C: blanket accident policies.

Why develop a blanket accident policy?

Commercial entities, schools, universities, and other organizations often need supplemental blanket A&H policies to fill gaps in medical coverage to further support their staff or students. With fewer mandated benefits, these policies are the perfect starting place for P&C companies looking to break into the A&H market and provide additional coverage options to existing clients. Blanket Accident policies also fit nicely with General Liability policies and allow brokers/agents to offer comprehensive insurance protection from a single carrier.

Differences between P&C and A&H product development

Established P&C carriers may think they have the requisite experience to develop A&H coverages. However, a few significant differences between these two types of insurance product development are worth noting.

Rate support: Rate support requirements in A&H are different than P&C, usually requiring an actuarial memorandum describing the benefit in the rate structure as well as a signed certification attesting that the rates are reasonable in relation to benefits.
Forms and rates standards: On the P&C side, rates tend to receive more scrutiny. On the A&H side, regulators examine policy forms more closely. Though some states are outliers, we find this is a reliable trend.
Bureau forms: Many P&C carriers adopt ISO or other bureau forms as part of their P&C portfolio. For most lines, A&H doesn’t have this option. Most insurers rely upon proprietary forms.
Statistical reporting: Data reporting is important on the P&C side. But except for a few lines of business, statistical reporting requirements aren’t widespread on the A&H side. Besides ad hoc data calls, most supplemental A&H coverages don’t require such detailed stat reporting.
Rate certifications: Although a few states require certification of the rates or rate filings on the P&C side, some states require carriers to attest to their ability to meet target loss ratios for A&H lines.
Variable benefits: A&H policies typically rely on the use of variable language to allow inclusion or exclusion of benefits, terms and conditions. It’s not unusual for a blanket A&H policy to be 50+ pages because the benefits are included in the policy and not attached as optional endorsements. From an implementation perspective, this means programming one form with many options instead of 75 forms with no options — another way these policies diverge from P&C.
Verbiage differences: Terms and definitions vary between A&H and P&C. For example, P&C uses the phrase “loss costs” while A&H calls these “claim costs”. Unfamiliarity with terms could lead to filing errors.

Commonly asked questions

P&C carriers eager to enter A&H should know a few basic things before moving forward. Here are the most commonly asked questions from P&C insurers.

“Does our license cover A&H?” Short answer, maybe. P&C carriers may already have the ability to write A&H lines of business depending on what is included in their Certificate of Authority. Licensing requirements vary by state. Our licensing experts can help determine whether anything additional is needed. There are important differences in insurance product development and approvals, even for supplemental health policies, so P&C carriers should proceed with caution even if currently licensed to write the business.

“Can we offer blanket A&H on a non-admitted basis?” Simply, no. In the world of A&H, the concept of surplus lines is virtually non-existent. Companies may develop an A&H program thinking it will be available under surplus coverage guidelines, but state export lists rarely include any A&H coverage. The consequences for non-compliance can be steep and may jeopardize a company’s good reputation with state regulators.

“Can we ‘me too’ our A&H policy development?” Unlike P&C, “me too”-ing rating information from competitors’ existing programs is generally not acceptable. Different requirements for rate filing and support are a prime example of a P&C process that has no transferable correlation to A&H.

Start with blanket accident, then expand

After developing a blanket accident policy, companies can easily expand into other supplemental health lines. After getting your feet wet with blanket accident, product lines such as hospital indemnity, critical illness, disability income insurance, and gap medical generally follow the same product development process.

Work with experts

Developing a blanket accident policy may seem straightforward on the surface, but there are lots of opportunities to fall into little-known traps. Partnering with experienced insurance product development partners like Perr&Knight can save P&C carriers from wasting time and money on mistakes.

With our deep experience providing insurance product development and actuarial support services for carriers across both P&C and A&H lines, our professionals act as the “decoder ring” between the two. Working with knowledgeable professionals helps insurance companies step into a new world with greater confidence and ease.

Ready to test the A&H waters with a blanket accident policy? Contact Perr&Knight for help.

A New Wave of Insurance Products – Protecting Digital Assets

by Kyle Hales

A little over 100 years ago the steel, oil & gas, and mining industries represented over half of the assets of the top 50 largest companies in the United States. Companies such as U.S. Steel, American Telephone & Telegraph (AT&T), Standard Oil, and Bethlehem Steel dominated the corporate world. What made these companies unique and valuable was that they were large manufacturing entities that owned hard assets such plants, machinery, inventory, storage facilities, phone lines, etc. These companies sought insurance coverage to protect these hard assets in the form of traditional insurance coverages such as commercial property, inland marine, machinery/equipment, etc.

Fast forward 50 years and industries such as technology, telecom, and film, along with oil & gas, now make up over 50 percent of the assets of the top 50 largest companies in the US. It’s also the first time companies in the medical industry have begun to make their way onto this list. Another shift takes place when the assets of these large companies start to become ‘softer’. Intellectual property begins to make its way onto the balance sheets of these larger firms. The film and medical industries were largely able to protect their assets through copyright and patent laws. Additionally, most telecom and technology firms still manufactured hard assets such as computers and phone lines. As such, the insurance industry remained largely unchanged in the coverages that were offered.

After the turn of the millennium, there is a significant change in the makeup of the top 50 list. The largest industries are now led by technology, financial services, and medical companies. Interestingly, the steel industry, which was by far the dominant industry in the early 1900s does not have a single company in the top 50. Now, five out of the top six firms are technology companies, but unlike their predecessors, today’s tech companies’ main assets include intellectual property such as software and data; otherwise known as digital assets. A digital asset is anything that is stored digitally and is uniquely identifiable that organizations can use to realize value. Examples of digital assets include consumer data, documents, audio, videos, logos, slide presentations, spreadsheets, and websites.

Unfortunately, the insurance industry hasn’t caught up with the ever-changing landscape of protecting companies’ digital assets. Crime coverage protects assets that are held by a custodian or investor, while cyber insurance covers first-party losses and third-party liability associated with system failure events, network security, and data privacy. However, most of these policies do not cover the actual loss of data or access to the data. For companies looking for coverage in the emerging digital asset space, it can be challenging to find reasonable insurance capacity at affordable pricing.

At Perr&Knight, our insurance product development experts have designed, developed, and supported numerous products for unique and debutant industries. Our clients have received approvals and started writing numerous products in practically all states. We can assist with actuarial rate and rule development, as well as drafting and reviewing policy language. We also offer compliance services such as licensing and filing work. If you are thinking of expanding into offering a digital asset protection program, please contact us today to discuss your strategy.

The digital asset insurance world is still uncharted territory with a lot of work to be done. However, if you take your time and proceed carefully, you’ll be in the best position to break in early to this market opportunity. Refer to our “From Concept to Reality” brochure for tips on navigating the successful launch of your new insurance products.

Source: https://www.forbes.com/sites/jeffkauflin/2017/09/19/americas-top-50-companies-1917-2017/?sh=2ae1292e1629