Are We In A Hard Market?
According to MarketScout, the average property/casualty rate increased by 5% from 2011 to 2012, with this same upward trend continuing into 2013. And yet, just last week the Council of Insurance Agents & Brokers (CIAB) reported that rate increases in the second quarter did not keep pace with the previous two quarters. CIAB believes the hardening market is moderating. Fitch Ratings also weighed in, noting that the increased premiums in Q1 and Q2 are helping, but they "believe this trend is likely to diminish as strong capital levels and ample underwriting capacity promote market competition." However, it's unlikely that short-term price increases will be enough to make up for several years of pricing inadequacy. The reality is that, while carriers are seeing much lower returns on investment income, there is an increase in total surplus dollars relative to total premium. This dynamic makes sustaining a hard market difficult and therefore pricing competition for the best risks continues to be fierce.
From an underwriting perspective, there's some good news to report as well as mixed results when you look more closely at specific lines of business. Overall, the Property & Casualty market saw improvement in underwriting performance with combined ratios falling to 103.2 in 2012, down from 108 in 2011. Within specific lines of business, workers' compensation also improved to a combined ratio of 109 in 2012 compared to 115 in 2011. The homeowners market, a historically volatile line with wide performance swings year-to-year, has an average combined ratio of 113 from 2008 to 2011. Bottom line, there's still more work ahead to make underwriting profitable.
The gains in underwriting performance may signal an intentional focus from carriers to counter the significant losses in investment income. But, making up for these losses is a long-term proposition that cannot be remedied quickly. Recently, the CEO of a global insurer compared declining investment returns to one of the biggest catastrophic weather events. "The lack of investment income continues to be an issue that the industry hasn't fully addressed," the CEO said. "We call it 'the hidden catastrophe,' equivalent to more than a Katrina-sized hit to profitability every year relative to the long-term baseline."
Tackling Economic Stagnancy
A sluggish economic recovery affects insurance premiums. For commercial lines carriers, the slow growth in payroll means that overall exposure is not increasing at the same rate as medical inflation. Various estimates put medical inflation in the 4% range for 2012 and payroll growth under 2%. This puts pressure on both claims and underwriting. Underwriting must be more stringent and selective to avoid unnecessary loss on the front end while mitigation strategies need to improve in claims. These new challenges require advanced tools and methodologies that provide real-time information and relevant data in order to reduce the insurer's risk, and simultaneously generate more profit per policy.
According to the 2013 KPMG survey, 60% of executives stated that regulatory and legislative pressures served as the most significant inhibitor of growth in the coming year, a 13% increase from the 2012 survey, and 19% from 2011's. Contrarily, 59% of executives noted cost as being their primary growth concern in 2011. Healthcare and tax reform are two of the most significant regulatory pressures weighing down on insurers, with over half of those surveyed naming the Affordable Care Act as the most significant individual measure.
The non-renewal of the Terrorism Risk Insurance Act (TRIA) poses a similar challenge, as the probable addition of a terrorism premium to policies will put added pressure on discretionary pricing, especially for the better risks.
"Insurers have experienced a significant shift in the marketplace; in just two years, industry executives have abruptly diverted their attention from pricing concerns to regulatory matters," said Laura Hay, national leader of KPMG LLP's insurance practice, as reported in the 2013 KPMG survey. "This turnabout is even more significant when you consider that economic conditions have only slightly improved during this time period, so the combination of these two factors creates an exceptionally challenging market."
Further to this point, the head of KPMG's U.S. insurance regulatory group, David Sherwood, added to the survey news saying, "Regulators continue to ask tough questions and regulatory intrusion is set to increase in the coming years. More than ever, regulations and agendas established internationally, in Washington, as well as in local jurisdictions, have as much influence on the industry as market conditions and consumer confidence."
Data Access & Literacy
Plain and simple: big data helps carriers leverage empirical evidence in their decision-making. Combining data with analytics allows underwriters to take a holistic approach to their craft, which exponentially increases the efficacy of the process.
According to the same KPMG study, only 55% of execs claimed that their company demonstrated advanced data and analytics literacy. That means that just under half of U.S. insurance companies are still not using big data to its full potential, crippling their ability to improve underwriting performance. If the other 45% wants to stay competitive, they need to make analytics a top priority moving forward.
As carriers increase their "data literacy", they will become more concerned about issues like selection bias. When carriers are limited to a selective or small data sample, it is impossible to draw accurate conclusions. As an example, if a carrier does a great job selecting the best roofing companies to insure and they model future policy performance using only their own data, the analysis will conclude that all roofing companies are good risks. Intuitively we all know that's not true — it's a simple example to illustrate the importance of a diverse and large data set when making important business decisions.
Big data is now a board level conversation, and carriers are being asked: "What is your big data strategy?" When that question arises in your meeting, will you have a good answer?
Not only do you need advanced data and analytics to meet the financial challenges of the current insurance climate — you need these more sophisticated tools to keep your company competitive in the employment race. In addition to the increases in risk-pricing competition, the competition for the top mindshare of the best agents is increasing substantially. The industry is estimated to have 400,000 positions to fill by 2020, and 20 percent of underwriters will retire in the next few years. This up-and-coming generation of workers expects to be equipped with sophisticated tools and advanced technologies in the workplace. Young people have been raised in a technologically driven world and are inherently tech savvy; the industry must match their technological expectations if we hope to recruit the next generations' best and brightest. The more technology savvy carriers will be able to use this as a recruiting tool.
Of course, implementing data and analytics across your organization is not something that can be done overnight. Do not be afraid to start small. Whether your company already has some form of predictive analytics in place, or you're just at the conceptual stage, you can build on early wins to develop measurable results in securing organizational buy-in. Good advice is to start small and build from there — don't cross your fingers, go all-in and hope for the best. The best advice is to begin now, this is no time to sit back and wait, letting the fast-paced changes in the industry pass you by.