The Analytics Divide Fuels Negative Commercial Lines Outlook

Incorporating analytics helps hone an insurer’s strategy, drive innovation, and new core competencies to protect and grow competitive.

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A.M. Best gave a negative outlook on commercial lines moving into 2017, citing increased competition on pricing across the entire segment as a prominent reason. This was largely driven by the inability for “market following” companies to challenge industry leaders, who are using advanced analytics to more effectively price business. This is an unsurprising analysis of the market, since the analytics divide—the widening gap between insurers that use advanced analytics and those that don’t—has caused a similar pattern of market share consolidation across other lines of insurance.

An Old Tale with New Characters

Insurance market share consolidation first occurred in personal auto in the 1990s, when Progressive used advanced analytics to adequately price high-risk drivers that other traditional companies wouldn’t write. To build their portfolio on these subprime policies, Progressive needed to become skilled at customer segmentation and aligning price to risk. Once they took their customer segmentation and pricing analytics to the mainstream market, it elevated the company to the market dominators we see today.

More recently, this approach (and subsequent consolidation) has occurred in commercial lines with workers’ compensation, where insurance carriers like Berkshire Hathaway and Travelers, who experienced some of the most substantial growth since 2009, are also known for their holistic use of data and analytics (see chart 1).

Valen illustration for June 15 2017 byline

There are signs that Commercial Auto may experience the same type of market consolidation as a result of advanced analytics, as a recent Fitch Rating report indicated. While  U.S. commercial auto insurance has produced an underwriting loss for six years,  Fitch concluded that data analytics and other tech improvements are having a significant impact on all aspects of business, including risk selection, distribution, claims management, pricing, and policy administration. The takeaway is that analytics are a major differentiator for insurers showing an underwriting profit in what could be called a troubled line of insurance.

It isn’t just the insurance industry that experiences these market shifts. Capital One disrupted the credit card market in 1980s using information business systems (IBS) to offer credit cards to high risk individuals no other companies would touch. 

Closing the Gap Begins and Ends with Strategy

Acknowledging analytics as a main source of market share consolidation, and knowing its positive effect on business, makes the decision to adopt data-driven approaches obvious. But there are certain factors that make some smaller insurers feel they will inevitably fail at implementing these tools. A recent Fitch report reinforces the concern, highlighting the limitations of big data and analytics for small carriers that lack the resources of larger insurers. Tier-1 carriers have massive amounts of data to load into their models and keep current. They are also more likely to attract and invest in tech talent that can drive analytics initiatives forward. However, the Fitch report mentions that niche underwriters with strong underwriting skills and data built into their DNA can succeed as well.

Insurers must combine analytics with a strong underwriting strategy that syncs with the entire corporate approach. For small to mid-sized carriers, the ability to compete requires obtaining or outsourcing analytics with third-party vendors in order to build a predictive model. This gains insurers the necessary skill sets for the initiative, and access to contributory data that negates sample bias in a predictive model (using appropriate external data when there isn’t enough in-house data available). Additionally, carriers can use predictive analytics monitoring tools to confidently measure and manage their predictive models over time to ensure and increase accuracy.

Small and mid-sized carriers will have trouble succeeding if they view analytics as ancillary, instead of critical. Incorporating analytics helps hone an insurer’s strategy and add new capabilities within an organization, similar to the steps Progressive took to become market leaders. These capabilities drive innovation and new core competencies to protect and grow competitive advantages.

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Dax Craig // Dax Craig is the co-founder, CEO and president of Valen Analytics, a provider of proprietary data, analytics, and predictive modeling to help all insurance carriers manage and drive underwriting profitability. Valen leverages its large contributory data assets to help carriers price insurance policies more accurately and achieve lower loss ratios. Prior to founding Valen in 2004, Craig was founder and CEO of Xertex Technologies, which was acquired by global leader in the wireless antenna industry, Centurion Wireless. Craig served as VP of global business development at Centurion, where he was directly responsible for global business development including sales, market definition, market segmentation, market research, strategic planning, and market development.

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