November 3, 2014
How to Win in Commercial Lines
by Dax Craig
With nontraditional competitors appearing and with Millennials changing the customer mix, working the market cycles is no longer enough.
Commercial lines insurance is tricky. On the one hand, it’s one of the last bastions of niche underwriting expertise — there are specialist writers who know their markets better than anyone else and enjoy customer loyalty and consistently superior profits as a result. On the other hand, it’s still simply insurance — and it’s experiencing many of the same symptoms that the rest of the P&C insurance industry is facing:
- Increasingly sophisticated underwriting and pricing models, opening the door to adverse selection
- An ever-shrinking number of market-dominating insurers
- An evolving marketplace, with technology companies entering insurance and a customer base increasingly made up of Millennials
These three issues are forcing fundamental changes in the way insurers operate, creating a dynamic in which there will be clear winners and losers. It’s important to recognize the changing conditions to be successful both today and in the future.
New players entering insurance
A look at recent headlines reveals some well-recognized brands that are now turning an eye toward insurance. Tech companies like Google and Facebook, e-commerce giants like Amazon and Overstock and retailers such as Walmart and IKEA are all making waves. It’s also not just personal lines that’s being affected; Overstock’s new insurance agency offers business insurance, including workers’ compensation. Why is there a sudden interest from new players? These companies oftentimes see opportunities for profit and growth in industries when there are fundamental inefficiencies that can be exploited, and generally start by employing data-driven strategies to compete on customer acquisition. Insurance executives understand this threat, as evidenced in a recent survey by the Economist that identified distribution (i.e., acquisition of customers) as the No. 1 vulnerability for disruption.
What’s particularly troubling is that half the respondents in the survey were unsure of how well prepared the industry is for the changes coming in the next five years. With competition from non-traditional companies that are technologically savvy, are trusted by consumers and have money to burn, insurers simply cannot afford to be uncertain about their future.
Catering to a new generation
Numbering 76.6 million in the U.S., Millennials are the largest population in the country. Unfortunately for the industry, this group also happens to be the demographic most dissatisfied with insurance products and services. The U.S. Census Bureau notes that Millennials represent $1.68 trillion in annual purchasing power, which means insurance has no choice but to adapt to the needs of their future customers, business owners and employees. The industry tends to categorize Millennials as a personal lines concern (homeowners and personal auto, specifically), but commercial lines will fall behind and be caught off guard without a new mindset.
Although insurance doesn’t carry the best reputation among Millennials, there is an opportunity to educate them and win their loyalty. According to a poll by the Griffith Insurance Education Foundation, Millennials know very little about the insurance industry — 80% of students answered that they didn’t know anything about the industry at all (and only 5% claimed to be very knowledgeable. This is likely why Millennials tend to purchase insurance from companies with easy-to-navigate websites and don’t always base decisions based on price alone, according to a 2014 J.D. Power survey. If insurers don’t make the Millennial generation a priority, the likelihood of them buying insurance from other companies with better name recognition grows more and more likely, even if that company isn’t a traditional insurer.
The risk of adverse selection grows as insurers get smarter
The increased use of advanced technologies among insurers spells trouble for those that are still playing catch up — the risk of adverse selection grows as competitors leverage predictive modeling techniques and gain access to new data sources that provide a broader view of the market.
As analytics becomes more pervasive in commercial lines underwriting, leading insurers will become more adept at increasing their market share. Insurers without advanced analytical tools are more likely to bind higher-risk policyholders at inadequate rates and less likely to bind lower-risk policies by failing to match their competitor’s lower-price offering.
Adverse selection is an insidious threat, because it’s completely invisible until well after it has infected a portfolio. Accurate pricing and superior risk selection are key, and predictive techniques have served as an important competitive advantage, going beyond traditional heuristics alone.
How winners gain their advantage
Workers’ compensation is, in many ways, a leading example for the rest of commercial lines. Combined ratios continue to decrease, making it more attractive for companies (both traditional and non-traditional) to come in. This crowds the market, forcing the industry to adopt more sophisticated competitive strategies.
When properly developed and implemented, the use of predictive models is a recipe for success. It helps to achieve the pricing precision needed to stay ahead of the competition while avoiding adverse selection in the marketplace. Insurers without the ability to identify and react to adverse selection will lose their competitive advantage and simply not survive.
As we’ll share in Valen’s annual outlook report for commercial lines this week, the benefit to using the latest analytical tools are huge, and the cost of doing nothing is equally as significant. Working the hard and soft market cycles no longer brings competitive differentiation — the competition is fierce in target market segments ,where superior risk selection and pricing clearly determines who the winners and losers are.
This article first appeared on WorkCompWire.