Predictive modelling needs company-wide approach

Property and casualty insurers have increased their use of predictive modeling in virtually every line of business over the last year – but they need a company-wide approach for all core functions, according to a recent survey.

Risk Management News

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Property and casualty insurers have increased their use of predictive modeling in virtually every line of business over the last year – but they need a company-wide approach for all core functions, according to a recent survey.

“The survey demonstrates a real willingness by carriers to embrace predictive modeling programs,” says Brian Stoll, director of P&C practice with Towers Watson, the company that conducted the survey. “But in many instances, the actual investment in, or execution to establish these frameworks, has been incomplete or targeted to specific business lines or operational needs.”

Towers Watson’s fifth annual Predictive Modeling survey explored the ways insurers are applying predictive models to support their underwriting, pricing, claim management and other core functions. The survey found that in most cases, insurers are not applying their data-driven analytics uniformly throughout the enterprise, while overall usage fluctuates significantly by line of business and company size.

Stoll offered several possible reasons why.

“It could be due to the financial crisis that insurers put many investments on hold and renewed focus on the expense side of the balance sheet, or maybe a narrow vision of predictive modeling’s applications and potential,” he said. “Perhaps data, people or cultural challenges are a factor, or some are only applying data-driven analytics when an area is underperforming. Whatever the reasons, a compelling case can be made that well-executed predictive modeling provides better pricing guidance to underwriters.” (continued.)
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The survey revealed that more personal lines carriers – 80 per cent personal auto, 62 per cent homeowners – are currently using modeling techniques than commercial lines carriers – 33 per cent general liability, 32 per cent commercial property – which have been slower to adopt modeling but also have plans to introduce them into their business (60 per cent commercial auto, 53 per cent commercial property).

Specialty lines carriers expressed an interest in applying predictive modeling to their business with nearly half (45 per cent) saying they plan to do so in the future.

Nearly all carriers said predictive modeling has led to favorable bottom-line results, with positive impacts on:
- rate accuracy, 85 per cent personal, 96 per cent commercial;
- profitability, 80 per cent personal, 78 per cent commercial; and
- loss ratio improvement, 80 per cent personal, 74 per cent commercial.

Respondents saw less significant benefits to their top-line results, such as modeling’s positive impact on the expansion of their underwriting appetite, 45 per cent personal, 48 per cent commercial; and on market share 35 per cent personal, 39 per cent commercial. (continued.)
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“Respondents are really tailoring their programs to focus on specific market realities,” says Klayton Southwood, senior consultant, Towers Watson. “Personal lines carriers operate in a highly competitive, mature market, so it’s not surprising a high percentage have adopted many aspects of modeling.”

On the other hand, commercial lines carriers face less intense pricing pressure in some segments, added Southwood, in part due to heterogeneous risks and the heightened reliance on individual risk underwriting expertise, particularly in large risk/specialty lines.

Large carriers are much more likely to use models than small carriers, as in the case of homeowners, 74 per cent versus 38 per cent.

According to the survey, the majority of small carriers, 61 per cent, noted that while they use predictive models when necessary, they seek to differentiate themselves via service and claim-related matters rather than by modeling.

Large carriers are more active in using predictive analytics to improve the financial performance of their claim departments, and see greater benefits to their top and bottom lines, while some smaller carriers have concerns about adverse top-line ramifications related to defending market share and retention of existing business.

Many automobile carriers that have successfully implemented predictive models have built on their modeling initiatives with usage-based insurance (UBI) programs.

Forty-five per cent of survey respondents that write personal lines automobile now have formal UBI plans (a 10-percentage-point increase from last year). Of the 12 per cent of commercial automobile carriers have either launched UBI products or plan to do so in the next year, a notable upswing from last year, when none of the respondents had launched commercial auto UBI programs and only 4 per cent of commercial auto carriers had plans to start one.

 

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