It's Time to Rethink Commercial P&C Insurance

The standard market insurance industry, due to its sloth, greed, incompetence, whatever other applicable descriptive, is a categorical failure in providing the value it was created to provide. That is not one opinion of a consumer advocate group. It is a fact reported by the industry itself.

Here is the proof:

According to the Aon/Ponemon Institute 2024 report, “Intangible Versus Tangible Risks Comparison Report”:

• The average Probable Maximum Loss (PML) of information (i.e., intangible assets, but not all intangible assets) is $1.155 million.

• The average PML of Plants, Property, and Equipment (PP&E) (i.e., tangible assets), is $846 million, or almost 27% less important.

• The value of information assets (intangible) averages $1,239 million versus PP&E of $1,088 million, or 12% less important.

  
  

And yet insurance companies largely will not insure intangible assets. After all, why insure the most valuable assets?  Why insure less than 50% of the market? Imagine Microsoft saying, “I think it’s a really good idea to refuse to sell Windows to more than 50% of the market, no matter how much more money we could make or how much better life would be for those businesses that could really benefit from Windows.”

According to the same report, the probability of loss is higher for these intangible assets. And you are thinking, “That’s why carriers will not insure them!” No one needs insurance for something that is not at risk. The money is in insuring what is most important, most valuable, and most at risk for the right price. People will pay extra for what is most important, provided they understand what is most important versus what is mandated. I’ll get to that difference later.

• The likelihood of information assets being lost at 50% of PML at 5% and 100% loss is 3%. 

• PP&E losses, respectively, are estimated at 2% and .55%.

• This means insurance for information is far, far more important.

  
  

And yet, the industry does not even insure PP&E well: PP&E assets are only 60% insured!

Total tangible assets are 47% of the total and only 60% of the 47% is insured. We’re batting .270!  It’s incredible insurance company CEO’s are paid so well for failing to insure 75% of all assets, and then only insuring the least important assets.

And this does not even consider how other studies show the vast majority of structural property is materially under-insured.

Consider how much is insured in standard markets. Surplus lines now constitute about 25% of the commercial market according to A.M. Best. Now, the admitted market is at 75% of 27% or 20%.

Several years ago, I read a report showing that alternative risk transfer premiums constituted 52% of all commercial premiums. Often ,material savings exist in the ART market, so this would not be an apples-to-apples comparison because if insureds save 10%, then the market share equivalent would likely be around 55%. To be conservative, I’ll assume that 20% of commercial premiums are in the ART market.

Now we are at 80% of 20% or 16%. Wow! Let’s celebrate! The industry has managed to insure 16% of the least important assets! How can anyone consider this successful? Another way to look at is this: give a client a proposal to insure 16% of their building and see how that goes over.

The complexity of commercial risk combined with an industry incapable of explaining the full assets at risk is key to enabling this level of incompetency. And then there is the complacency of the insureds, which is partially attributable to no one ever offering them a solution for the 84% they need. I am fairly certain insurance agents do not bother thinking about buying coverage for their most valuable asset, the asset that using publicly traded brokers’ 10k’s show constitutes about 95% of their asset value, because a product does not exist to insure it.

The admitted commercial market is a dinosaur, antiquated, out of touch on almost every level. If not for a 100 years of momentum, it would probably die tomorrow rather than continuing a slow complacent glide to the grave.

The opportunity is to educate and offer solutions to clients. Take business from complacent carriers and distributors. Standout. Be different. Do not offer the same proposal for a 16% solution. Markets are developing, and risk managment solutions exist. Simply creating awareness benefits clients. If you are a company and your strategy is to compete to insure the same 16%, probably emphasizing light manufacturing, you have a bad strategy.

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NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.