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How catastrophes and inflation drove insurance loss ratios in 2022

It is no longer just a hypothesis that more and bigger natural disasters, together with general inflation and social inflation, drive up insurance companies’ claim costs. New data shows that loss ratios increased in 2022, especially for property and casualty insurers, to a loss of $26.5 billion. With claims costs continuing to rise, along with more assets in high-risk areas for catastrophic disasters, insurers may be wondering what they can do to reduce costs which is under their control.

2022 was a tough year for insurance claims

It seems like every year it tops the one before it in terms of the frequency and severity of storms, fires and other natural disasters. A major difference in 2022, however, was the presence of high inflation in the US and the world. That spelled bad news for U.S. property and casualty insurers, which reported an aggregate loss ratio of 104, up from 100 in 2021, according to AM Best.

Large-scale catastrophic events

Hurricane Ian, Hurricane Fiona, Texas hailstorms, tornadoes and flooding in the Southeast and Midwest, and wildfires in the western United States are just the tip of the iceberg of 2022’s devastation. The National Centers for Environmental Information (NCEI) says there were 18 weather or climate-related catastrophic events in 2022 that each incurred over $1 billion in losses.

While 2022 wasn’t the costliest year overall for natural disasters in recent memory (that honor goes to 2017), it ranks third overall since 1980, and the insurance industry suffered particularly high losses due to the coinciding rise in inflation.

Rampant inflation and rising costs

Inflation began rising dramatically month-on-month around March 2021, peaking at 9.1 percent in June 2022, according to data from Trading Economics and the US Bureau of Labor Statistics. And this increase in inflation affected more than gas and milk.

For insurers, claims costs increased as supply chain disruptions and inflation made it more expensive to replace homes, cars and other insured assets lost in 2022’s devastating natural and man-made disasters. Data from Swiss Re estimates about $125 billion in insured losses from natural disasters and another $7 billion from man-made across the U.S. in 2022. As staggering as that number is, Swiss Re estimates that total losses (not just insured losses) totaled 284 billion dollars.

How insurance companies can reduce losses

Bringing in more money than it gives out is what drives an insurance company’s profitability. This can come from a combination of factors such as collecting more in premiums, paying out less in claims and reducing operating costs. Insurers looking to reduce loss ratios should consider some of the following potential approaches.

Pricing policies to accurately reflect risk

Affordability is certainly a concern for insurance companies looking to attract and retain customers. But no insurer can survive in the long term if policies are not priced to reflect the level of risk the company is taking on. This could mean raising premiums in the highest risk areas, or even exiting certain markets altogether if they are simply too risky to underwrite. This is not good news for consumers who rely on insurance coverage.

On the other hand, the inability to get insurance due to living in an extremely risky place may encourage people to move out of flood zones (for example) as is happening in the city of Milwaukee. If there are fewer insured assets in the riskiest locations, insurance companies can price policies correctly without going so high as to scare away customers.

Keep customers

Conventional wisdom is that it is more expensive to acquire new customers than to retain existing ones. Aside from those customers who are far too high-risk to continue to insure (see our previous point), it’s a good idea to do what you can to retain—and even increase business with—your current customers. And sure, insurance companies sometimes sell directly to customers, putting 100 percent of the retention burden on you. But you can also rely on your downstream distribution channel partners to keep those customers happy.

If your distribution channel includes independent agents and agencies, one thing you can do is work on keeping those relationships healthy so that agents want to do more business with you and continue to do so year after year.

Tightened conditions

Insurance companies can reduce part of what they pay out in damages by tightening their insurance conditions. This may mean increasing the deductible, having a lower benefit maximum or adding exclusions. It may also include incentives for customers who perform risk reduction activities or exclusions for those who do not. If you’re going in this direction to reduce costs, it’s important to make sure customers understand what’s in their insurance contract so they’re not misinformed or surprised by a denied claim later.

Greater focus on risk assessment and management

We’ve said it before: Prevention is the new solution. For insurance companies looking to reduce losses and become more profitable, paying out less in claims because their customers incur fewer losses is a win-win. There are many ways insurers can focus on risk reduction: from new technologies like telematics to a good, old-fashioned site visit with a risk management consultant.

Reduce operating costs

The insurance company’s operating costs are no joke. A 2015 McKinsey study found that the operating costs of the industry’s best-performing carriers were typically about 60 percent lower than the operating costs of the lowest-performing companies.

While we’re not talking about health insurance specifically, another example of the outsized cost of insurance operating costs is how much of every health care dollar is spent (or even wasted) on administrative costs. Research shows it’s between 15 and 30 percent, just in case you were wondering—with almost half of what’s spent estimated to be wasteful.

In almost all cases, it’s about reducing operating costs, doing more with less, being more efficient, more productive and less wasteful. It’s no surprise that technology plays a big role in achieving these goals for insurance companies.

How can insurance companies reduce operational costs with insurance technology?

However you approach the question, the answers boil down to some version of these five points.

1. Optimize operations

Operational functions such as IT, finance, payroll, invoicing and legal can account for a large part of an insurance company’s budget. If each of these departments is not functioning effectively, the result is wasted time, effort and money. To begin with, do an audit of how each department works and which personnel do which tasks. See if there is room to automate some of the busy work to make room for internal experts to do higher-level work.

2. Automate functions whenever possible

Throughout the business, from sales and marketing to underwriting, people likely do work by hand that could be done much faster with modern technology. Automation features not only save time and reduce the scope for human error, they also make your people happier because they’re not stuck doing parts of their jobs that feel manual and repetitive. Having happier people leads to better attraction and retention of employees, which (surprise, surprise!) lowers operating costs.

3. Leveraging Artificial Intelligence (AI) and Machine Learning (ML)

Artificial intelligence will not replace your valuable human staff. It will only empower them to work better, and at the kinds of things that only humans can do. Instead of expecting AI to handle the entire insurance or claims handling process from start to finish, it will realistically be able to speed up parts of those processes.

For example, AI can help an insurance company quickly sift through more insurance applications than a person ever could in a day, flagging things for human review that need a closer look. Speeding up these processes and creating operational efficiencies benefits employees, customers, your reputation and profit margins.

4. Reduce time and costs for agent onboarding

A major operating expense for insurance companies is the appointment fees you pay to each state for each licensed producer. This cost is often unnecessary considering that most producers you appoint will not even sell a policy! To help, many states allow carriers to use Just-in-Time (JIT) appointments so you only pay for producers who actually sell on your behalf. But tracking down these producers and when, where and what each is selling – manually – is no easy feat! This is just one area of ​​many where technology can help reduce the time and cost of agent onboarding.

5. Use insurance technology to automate and manage producer license compliance

From carriers to MGAs and MGUs to insurance agencies and individual agents and producers, everyone has an obligation to ensure that producers are properly licensed and selling in accordance with all applicable laws. This is easier said than done, especially when you’ve moved beyond a single producer in a single state selling a single product.

The time-consuming nature of managing manufacturer compliance often means insurers have far too many people devoting far too many hours to this work when everyone involved would rather be doing higher-level activities. This can mean that your internal experts’ time is wasted on boring tasks. Or it could mean that the amount of license verifications needed is far beyond the capabilities of your teams, leading to regulatory risks. It can even mean that producers wait weeks or months to be ready to sell, which is not good for them and can damage your relationship with your downstream agency and producer partners.

On the other hand, using technology to automate and manage producer license compliance, including operator appointments, can lead to a happier team and better partner relationships.

AgentSync helps insurance companies reduce operational costs with modern insurance infrastructure

We can’t make your loss ratios go down by controlling the weather. But AgentSync can help insurance companies, MGAs, MGUs and everyone else in the insurance distribution channel stay compliant without any heavy lifting. You can reap the benefits of giving your compliance staff time back in time and enabling real-time automated compliance for your agency partners. Ready to see how? Contact us or watch a demo today.

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