Innovation in the Large Commercial Property Insurance Business
Data: a Boon to the Commercial Insurance Industry
Last month, leading innovation hub Insider Engage sat down with key leaders from the commercial property insurance industry to analyze the market’s trends and predict its incoming shifts. High on that list of important areas was the transformative value of data, particularly the impact that AI-powered data will have on the quantity and quality of trust in the market as a whole.
While most improvements in insurance can lead to proprietary advancements in zero-sum structures, data improvements typically lead to win-win-wins. As data creates more knowledge, it promotes trust, removing risk from the system and expanding the overall size of the pie.
Here, let’s take a look at some of the highlights from the Insider Engage panel, and what they might mean for the commercial insurance market as a whole:
Disparate, Low-Quality Data: a Pervasive Problem
“The commercial property market is a complex web of maddening inefficiency and scattered pockets of data that leads to insurance products and pricing that doesn't always seem to match the risk.” – Mike McGavick, former CEO of XL Group, now AXA XL, a leading provider of global commercial insurance.
Low-quality or absent data plagues the commercial property market. While homeowners are by-and-large static owners, folks who manage commercial portfolios invest and divest from properties frequently, creating new information that nothing in the current market tracks effectively. These scattered pockets of information include unknown excel spreadsheets and localized expertise in isolated organizations. Since insurance claims are fundamentally based on actuarial data, the commercial insurance market is worse than underinsured: many of its policies include misestimations and financial cop-outs.
Looking forward, this problem is only slated to increase. With market and environmental changes prompting greater uncertainty, insurance has a key role to play in de-risking society and promoting economy-wide resilience.
Today, a full 59% of risk managers aren’t satisfied with their property insurance and only 36% of risk managers have a favorable view of their brokers or insurers. With 71% of risk managers also dissatisfied with their understanding of how the markets use data to underwrite and price risk, the whole market seeks a better method.
AI-Informed Analysis: an Important Acceleration
“Insurance is a socialized business mechanism to create incentives for common behavior and common resilience. And when those price signals are right, there's an enormous acceleration in what society can do, and the economy expands.” – Mike McGavick, former CEO of XL Group.
The data on commercial real estate already exists: it simply needs to be assembled, ingested, and analyzed. Harnessing it and ensuring it’s useful, systematized, and trustworthy can lead to whole new products and market categories.
AI-backed digital innovations are accelerating across the commercial real estate industry. Archipelago’s risk data analysis platform, for instance, serves the entire market, not merely a small number of partners. As McGavick articulates, “companies like Archipelago… are scratching at this problem and going to break down the gates.” In the near future, AI-enabled insights could create:
- More accurately-priced policies
- More understandable pricing for the client
- Clearer methods for customer improvement of their portfolio
- Greater trust
- Less overall risk
While these first three benefits are clear, data’s impact on trust would benefit from further explanation. Insurance is fundamentally built on trust, which itself stems from information. When that information is lacking or inaccurate, portfolio-holders must submit bad applications that require accommodations and improvisation. As Michele Sansone, President of Property Insurance & Chief Underwriting Officer for the Americas at AXA XL, reflects, “As an underwriter, if I have any doubt that the values are incorrect, I’m going to use occurrence liability endorsement, or I'm going to use a margin clause, which… protects the insurance company when a claim happens [but] doesn't get us the right premium to the exposure.” On the flipside, organizing information & streaming high-quality data with integrity, quality, and consistency can solve the problem more fundamentally to the benefit of all the parties.
Then, once trust is established, it forms a backbone for greater innovation and improvement. Insurance is a profoundly fundamental marketplace, deeply important to our economy. In addition to coverage, it provides actionable insights about the drivers of risk. If all sides can incorporate improved data, the market will naturally wring risk out of the system, creating more global resiliency. While the commercial property insurance industry is large, it could be much larger if it accounted for the actual magnitude of risks.
From her experience at AXA XL, Sansone reflects on the similarity of the industry’s current issues to its history. As she describes: “When I first got into the insurance business, how manual the underwriting process was: You received a submission through the mail… You’d analyze it by location. Everything was done with a calculator and a pencil… We had no computers, we had no spreadsheets, no anything. I want to say that the industry has changed since then, but it hasn't been dramatic enough.” Now, underwriters are electronic but still follow the same process: looking at every location individually. A high-quality data analysis platform changes how underwriters look at new things, now creating a level playing field.
In 2019, Sansone named data as one of the commercial insurance industry’s top 3 risks. Still today, two years later, data is rarely used proactively. In the near future, however, approaches like Archipelago’s will offer greater efficiencies, accuracy, and speed.
Data: Driving Forward
“My own belief, you are actually watching the [data-backed] transformation we all want in real time, and it's having delightful and unexpected revelations along the way, especially with the clients themselves.” – Mike McGavick, former CEO of XL Group.
Already, data has been applied to consumer insurance. Next, expect it to transform commercial real estate.
These days, a mere handful of institutions own over $100 trillion in asset value (large corporations, real estate pools, university systems, hospitals, and infrastructure providers). A straightforward improvement could rapidly be adopted, improving both the industry’s technological and cultural issues.
New data enables trust and creativity, allowing for freedom to improve understanding of where the risk really exists and the solutions you can use. Looking to the future, Archipelago CEO Hemant Shah recognizes, “This is how positive change happens. It's not about a silver bullet. It’s about… building a consensus and a coalition catalyzing that with the first flywheels, and then building and earning trust.”
In the next few years, expect challenges and opportunities for strategic innovation in the large commercial property insurance space, including evolving end-customer expectations, data & technology, and market dynamics creating a call to action across the market.
Systems change typically starts slowly and then accelerates rapidly. Insurance is rapidly approaching an inflection point where new technology and tools will drastically improve the industry.
This highlight reel of key takeaways is only a small section of the Insider Engage deep dive. For more, watch the panel itself.