The Coming Consolidation in P&C Insurance

Those who use the best analytics create positive selection, gaining profitable market share.

A weak economic recovery and regulatory issues are providing significant challenges to traditional business models in property and casualty insurance, especially in commercial lines. Carriers can no longer rely on investment income, and market-share consolidation should be a growing concern leading into 2014.

History tells us that the winners will be companies that are more progressive in their use of new operating models and tools, including advanced data and analytics.

Nigel Morris, managing director of QED investors and co-founder of Capital One, recently said: “In the late ‘80s and early ‘90s, Capital One was at the vanguard of a revolution deploying data-driven strategies in the credit card industry ... I believe that insurance carriers increasingly have the same opportunity to grow the size and profitability of their businesses by more specifically meeting their customer’s needs.”

The credit-card industry shows what might happen in P&C. During that time in the late 1980s and 1990s, new marketing and risk-assessment strategies fundamentally changed the credit-card industry. Technology and information-based companies like Capital One flourished and garnered significant market share while those that clung to traditional methods floundered. The agent of change? Analytics. In 1988, Capital One (originally Signet Bank) was founded because it saw an untapped opportunity to leverage credit-score and consumer-spending patterns to find the best risks within the subprime market and revolutionize the credit-card industry.

Similarly, Progressive Insurance pioneered the use of analytics, also leveraging credit scores, to insure nonstandard risks at profitable rates and shake up the auto-insurance market.

The adoption of sophisticated technologies essentially creates a perfect storm. Those who use the best analytics create positive selection, gaining profitable market share. Those who don’t use analytics suffer from adverse selection, ending up with poorer-performing risks because they are working with outdated pricing and risk-assessment strategies.

As Matthew Josefowicz, managing director of Novarica, wrote in a recent report, “The massive proliferation of easily accessible data combined with the increased power of modern analytical tools has the potential to transform the insurance industry dramatically over the next decade. The strategy and operations of insurers in the near future could be nearly unrecognizable to current market leaders.”

Data and analytics will only continue to evolve and change the way business is done, whether it’s in insurance, banking, healthcare, shopping or another industry; the accessibility to personal information is truly transforming the world we live in and how we do business.  In the insurance world, companies like Valen Analytics are creating solutions and providing insights to help drive overall success, for instance by helping carriers manage and segment their portfolios to drive underwriting profitability.

Valen’s 2014 Outlook: Commercial Lines report sheds light on the industry’s top challenges and offers information to help better prepare and adapt for 2014; it is available in full here.

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