Tag Archives: insurance executives

Where is Real Home for Analytics?

One of the fascinating aspects of technology consulting is having the opportunity to see how different organizations address the same issues. These days, analytics is a superb example. Even though every organization needs analytics, they are not all coming to the same conclusions about where “Analytics Central” lies within the company’s structure. In some carriers, marketing picked up the baton first. In others, actuaries have naturally been involved and still are. In a few cases, data science started in IT, with data managers and analytical types offering their services to the company as an internal partner, modeled after most other IT services.

In several situations that we’ve seen, there is no Analytics Central at all. A decentralized view of analytics has grown up in the void – so that every area needing analytics fends for itself. There are a host of reasons this becomes impractical, so often we find these organizations seeking assistance in developing an enterprise plan for data and analytics. This plan accounts for more than just technology modernization and nearly always requires some fresh sketches on the org chart.

Whichever situation may represent the analytics picture in your company, it’s important to note that no matter where analytics begins or where it currently resides, that location isn’t always where it is going to end up.

Ten years ago, if you had asked any senior executive where data analytics would reside within the organization, he or she would likely have said, “actuarial.” Actuaries are, after all, the original insurance analytics experts and providers. Operational reporting, statistical modeling, mortality on the life side and pricing and loss development on the P&C side – all of these functions are the lifeblood that keep insurers profitable with the proper level of risk and the correct assumptions for new business. Why wouldn’t actuaries also be the ones to carry the new data analytics forward with the right assumptions and the proper use of data?

Yet, when I was invited to speak at a big data and analytics conference with more than 100 insurance executives and interested parties recently, there was not one actuary in attendance. I don’t know why — maybe because it was quarter-end — but I can only assume that, even though actuaries may want to be involved, their day jobs get in the way. Quarterly reserve reviews, important loss development analysis and price adequacy studies can already consume more time than actuaries have. In many organizations, the actuarial teams are stretched so thin they simply don’t have the bandwidth to participate in modeling efforts with unclear benefits.

Then there is marketing. One could argue that marketing has the most to gain from housing the new corps of data scientists. If one looks at analytics from an organizational/financial perspective, marketing ROI could be the fuel for funding the new tools and resources that will grow top-line premium. Marketing also makes sense from a cultural perspective. It is the one area of the insurance organization that is already used to blending the creative with the analytical, understanding the value of testing methods and messages and even the ancillary need to provide feedback visually.

The list of possibilities can go on and on. One could make a case for placing analytics in the business, keeping it under IT, employing an out-of-house partner solution, etc. There are many good reasons for all of these, but I suspect that most analytics functions will end up in a structure all their own. That’s where we’ll begin “Where is the Real Home for Analytics, Part II” in two weeks.

New Data Strategies for Workers’ Comp

Workers’ compensation is widely recognized as one of the most challenging lines of business, suffering years of poor results. Insurance companies are under increasing pressure to achieve profitability by focusing on their operations, such as underwriting and claims.

Insurers can no longer count on cycles, where a soft market follows a hard one. The traditional length of a hard or soft market is evolving in a global economy where capital moves faster than ever and competitors are using increasingly sophisticated growth, segmentation and pricing strategies.

Insurance executives also cite regulatory and legislative pressures, such as healthcare and tax reform, as inhibitors of growth. Furthermore, medical costs continue to rise, making it particularly difficult to price for risk exposure. The long tail of a workers’ compensation claim means that the cost to treat someone continues to increase as time elapses and becomes a compounding problem.

Despite recent improvements in combined ratios, there are still many challenges within workers’ compensation that have to be reconciled. The savviest insurers are evaluating the availability of technologies, advanced data and analytics to more accurately price risk – and ultimately ensure profitability.

The ‘Unknown’ in Workers’ Compensation

Information asymmetry has made it difficult for insurers to accurately determine who is a high-risk customer and who is low-risk. At the point of new business, a workers’ compensation insurer is likely to have the least amount of information about those they are insuring, and it’s easy to understand why. The insured knows exactly who is on the payroll and what types of duties employees have. Some of that information is relayed to an agent, and then finally to the carrier, but, as in any game of telephone, the final message becomes distorted from the original.

This imbalance of information is one reason why fraud is rampant, and why insurers ultimately pay the price. Payroll misclassification – or “premium fraud” – occurs when businesses pay salaries off the books, misrepresent the type of work an employee does or purposely misclassify employees as independent contractors. Some misclassifications are not nefarious. But whatever the cause, they create significant revenue and expense challenges for carriers that rely on self-reporting.

The ‘Silent’ Killer

Without the right insight or analytical tools, insurance companies have a hard time discerning between their policyholders and making consistent and fair decisions on how much premium to charge on each policy. When an insurer begins to use predictive analytics, competitors that are still catching up run the risk of falling victim to adverse selection. When we hear executives say things like, “The competition has crazy pricing,” it raises a red flag. We immediately begin looking for warning signs of adverse selection, such as losing profitable business and an increasing loss ratio.

The problem is that it takes time to recognize that a more sophisticated competitor is stealing your good business by lowering prices while also sending you the worst-performing business. By the time you recognize adverse selection is occurring, you’re falling behind and have to respond quickly.

The Power of Actionable Data

Fortunately, there are technologies available for insurers of all sizes to make more informed, evidence-based decisions. But when it comes to data, there is still some confusion: Is more data always better? And how can carriers turn data into actionable results?

It’s not always about the volume of data that an insurer has; it’s about the business value you can derive from it.

If an insurer is just beginning to store, govern and structure its data, it is likely not receiving actionable insights from historic data assets. Accessing a more holistic data set with multiple variables (from states/geography, premium size, hazard groups, class codes, etc.) through a third party or partner can help to avoid selection bias, while encouraging rigorous testing and cataloging of data variables. Having access to a variety of information is key when it comes to making data-driven decisions.

The conundrum insurers face when delivering actionable intelligence that underwriters can use is that they only know the business they write. They know very little about business they quote and nothing about business they don’t even see. What complicates this picture is that an insurer’s data is skewed by its specific risk appetite and growth strategies. It’s up to the insurer to fill in the blind spots in its own data set to ensure accurate pricing and risk assessment. As we know, what an insurance company doesn’t know can hurt it.

As insurers increasingly turn to advanced data and analytics, the next question that keeps insurers up at night is, “When everything looks good, how do I know what isn’t really good?” One way that Valen Analytics is helping insurers answer that question is by providing companies with a “Risk Score,” a standard measure of risk quality. By tapping into Valen’s contributory database, workers’ compensation underwriters can have better insight into all the policies they write – even historically loss-free policies. In fact, the Risk Score accurately identifies a 30% loss ratio difference between the best- and worst-performing loss-free policies. This is one example of how the power of data can push the industry forward.

Despite its many challenges, the workers’ compensation industry is becoming more analytically driven and improving its profitability. A comprehensive data strategy drives pricing accuracy and business growth while allowing insurers to achieve efficiencies in underwriting decision-making. By keeping up with technological advances, insurers can use data and analytics to grow into new markets and areas of business, while also protecting their profitable market share.

While NCCI’s annual “State of the Line” report labeled workers’ compensation as “balanced” this year, we may soon see the integration of data and analytics push the industry to be recognized as “innovative.”

Waves of Change in Rapid-Growth Markets

Global expansion into new markets represents a powerful opportunity — especially as economic performance languishes in much of the developed world. As a result, insurance executives must regularly evaluate and refresh their strategies to identify which international markets are most likely to offer the best prospects.

As regional markets around the world become more connected and complex, however, understanding how best to optimize the balance between opportunities and risks in individual countries remains a significant challenge. Even in a world linked closer together by macroeconomic trends, mobile phones and the Internet, regulatory and cultural differences persist, and even nations that share a common border may diverge markedly when it comes to future risk.

To help executives better understand the rebalancing now taking place across the insurance landscape in rapid-growth markets, we will highlight growth opportunities in specific countries around the globe.

While once-flourishing BRIC economies Brazil and India are now expanding at a slower pace, the U.S. is rebounding, and the U.K. and the Eurozone are at last rising from their doldrums. At the same time, a cluster of emerging markets, such as Malaysia, Indonesia, Mexico and Turkey, are making regulatory changes that could produce significant opportunities.

These shifts are causing insurance executives to reassess their strategies to determine which rapid-growth markets (RGMs) represent the most attractive investment options. To help navigate this rapidly evolving landscape, EY has created a matrix that analyzes the risks and opportunities for insurance firms across 21 RGMs. Our study identifies the following RGMs as particularly attractive for insurance investment:

Turkey offers a greater level of opportunity than any other RGM in the study but also poses substantial risks. An economic downturn cannot be ruled out. While political turmoil has cooled in recent months, tensions could return. In addition, markets for some lines of coverage are relatively mature.

Indonesia also offers an extremely strong economic growth picture — second only to China and Vietnam in our forecasts. However, it is challenging to obtain licenses, so acquisition is the main entry route.

China, despite a recent slowdown in growth rate, continues to boast extraordinary income growth that spurs auto and home ownership. In addition, an aging population will drive the development of the life and health markets. However, market entry remains difficult for foreign firms.

Malaysia offers an attractive mix of demographics and strong economic growth and has become a base for the development of takaful, sharia-compliant insurance.

Hong Kong (a special administrative region of China) ranks low for opportunity but presents less risk than any other market in our study. Hong Kong can also serve as a trade route into the rest of Asia.

The United Arab Emirates (UAE) has become the fastest-growing insurance market among the Gulf States, with a compound annual growth rate (CAGR) of 17% over the past six years. Regulatory changes may create greater opportunity for expansion of takaful products.

Our analysis does not merely focus on markets with the highest opportunity and lowest risk but provides a more nuanced picture of the shifting landscape. Depending on a firm’s appetite for risk, a second tier of RGMs also shows considerable promise:

Brazil remains an important opportunity, though slowing growth rates have revealed festering economic risks. Following a program of liberalization, Brazil is the most accessible of the BRICs for foreign insurance companies. Brazil’s key advantage is scale: Of the markets in our study, it has the third-largest forecast growth in insurance premiums in US dollar terms, following China and India. Moreover, record new car sales are propelling robust growth for automobile lines.

South Africa follows Brazil with the fourth-largest absolute growth in insurance premiums. In addition to scale, South Africa may be a good trade route into sub-Saharan Africa, as South African companies have been among the most successful in penetrating other African markets.

Vietnam has become one of the most exciting RGM opportunities. Its income growth and premium growth rates (when considered in percentage terms) place it among the top two markets we assessed. But investors face significant corruption and sovereign risks when entering Vietnam.

Mexico has undergone a program of extensive liberalization, opening its market to foreign insurers. On some measures, Mexico is the most open insurance market in our study. Yet the pace and unpredictability of regulatory change can be risky for investors.

India’s opportunity is impossible to ignore, given that it is second only to China in terms of absolute forecast growth in insurance premiums. Yet, the regulatory environment has proved extremely challenging for investors. In addition, a large current-account deficit and reliance on portfolio capital inflows elevate liquidity risks.

Our analysis suggests that while investment in RGMs will continue to be vital for global insurance firms, outsized returns will not come easily. Companies that carefully tailor products and develop market-entry strategies suited to particular economies and their cultures will see the greatest rewards.

Key factors influencing market selection

When investing in RGMs, insurance executives will want to carefully consider four important waves of change:

1. The speed of regulatory change.

Some RGMs, such as South Africa and Mexico, are moving quickly to adopt new insurance regulations and may surpass advanced economies in the stringency of their risk-based regulation or consumer-protection requirements.

2. Customer adoption of insurance products.

The rise of social media and the growing popularity of overseas educational experiences are among the forces breaking down traditional barriers to insurance penetration. Many markets where traditional cultures tended to limit adoption of insurance products, such as Vietnam and Saudi Arabia, are now experiencing rapid premium growth.

3. Government fiscal policy.

Offering tax incentives for insurance products can significantly affect how customers choose savings and pension services. At the same time, a lack of confidence in public pension and welfare schemes can encourage adoption of private insurance alternatives.

4. Government attitude.

In most RGMs, the government considers the insurance sector strategic. This is in part because of the crucial role insurance plays in facilitating savings, investment and entrepreneurship. Understanding the government’s goals for the sector’s long-term development is therefore crucial. Some governments will focus on the potential growth benefits of insurance development and seek as much foreign expertise as possible in developing the insurance sector. Others will wish to have the insurance market dominated by domestic companies over the long term.

Download the full report here: Waves of change: the shifting insurance landscape in rapid-growth markets