Data, Analytics and the Next Generation of Underwriting

2014 marks an opportunity to use technology, data and analytics in innovative ways to achieve excellence in underwriting. Homeowners insurance will be an especially fertile area.

There appears to be violent agreement that 2014 is the year of advanced technology, data and analytics in insurance. Of course, these kinds of prognostications don’t sneak up on anyone. A convergence of growing organizational eagerness and sophisticated tools is allowing momentum to build for the next generation of underwriting to emerge.

Market dynamics are always an important factor in what ultimately makes the cut from strategic planning to implementation. The investment environment, increasing regulatory pressure and rising costs are influencing a more analytical approach to underwriting to increase profitability. With its historically volatile performance, homeowners insurance will be a particular focus in personal lines this year, as carriers adopt new approaches to drive profitability through underwriting.

2014 will provide a focus on shoring up the foundation needed to enable insurers of all shapes and sizes to become more analytically driven. And while carriers make progress, securing the necessary talent needed to succeed is a growing and industry-wide concern.


Shifting Focus Toward Homeowners, Following Trends in Auto Market

Analysis of the auto insurance market proliferated at the end of 2013, with some declaring pure direct writer Geico the inevitable winner in the “battle of the titans” against Progressive and other major players because Geico is unencumbered by an agency force. Time will tell if that’s the case, but one thing is clear: Scaling profitable market share in auto can only be done by technology focused and analytically driven carriers, with substantial marketing resources.

The trends in the auto market foreshadow what other lines of property and casualty insurance will face in 2014 and beyond, most urgently in homeowners. Consumer demand for online shopping increases pricing competition and customer-acquisition costs and at the same time lowers retention rates – the combination of which can squeeze margin for carriers that do not have advanced pricing tools. This dynamic forces insurers to sharpen their pencils and produce strategies to differentiate their brands and gain a competitive advantage. For carriers not as advanced as the larger auto carriers, the dynamic can represent fundamental shifts in their business and operating models.

Partially because of continuing market share consolidation and pricing stagnation in auto, there is increasing focus on homeowners insurance. A recent report by Aon Benfield shows 15% growth in direct written premium for homeowners between 2009 and 2012, compared with just 6.5% for direct personal auto premium. With the historical volatility and poor performance of the homeowners line of business, a number of new underwriting approaches are entering the market. At the same time, the industry is adapting to a changing consumer and regulatory landscape.

Consumer Demographics Changing the Game

“Show me the money (i.e., discounts), give me all the info I need wherever I am and in real time, and make sure your customer service is stellar or I’ll write up what a horrible experience I just had in 140 characters and share it instantly with all my friends.”

Exhausted yet?

The Millennial generation, at 77 million strong, demonstrates very different buying behaviors and demographic patterns than previous generations. These young consumers are having a notable impact on personal lines insurers. They primarily choose urban living, with very little difference between those who are parents vs. non-parents, according to a study from the American Public Transportation Association. They are less likely to drive cars and prefer multiple modes of transportation. In fact, a study from USA Today shows that Millennials are less concerned about owning either a home or a car.

This budget-conscious generation is reacting to the dismal economy and job market they encountered upon entering the workforce, as well as the significant levels of student loan debt many of them carry. They are much more sensitive to taking on long-term debt and minimizing monthly expenses. Because they have a job-scarcity mentality, Millennials value being unburdened in case they need to relocate for their career.

These trends also affect home building. While the news about housing starts is promising (up 22.7% in November 2013), real estate developers are responding to the Millennial generation’s desire for high-density urban living and hesitancy to commit to a mortgage – at least for now. While no one can predict how the home-ownership trend will play out for the long term, the insurance industry needs a product mix and customer-service approach that meets the needs of this demographic population.


Advancements in Advanced Data & Analytics

Traditional property inspection methods being used today only deliver an actionable result 25% of the time, which means 75% of inspections are a waste, according to a Claims Journal study. This ineffective use of resources isn’t sufficient to address the profitability issues that have plagued this line of business for years. In fact, since 1990, the homeowners industry has only experienced four years with combined ratios below 100. To combat the high combined ratios, carriers divide losses into two categories – catastrophe and non-catastrophe – and continually perform analyses to determine what characteristics about a home, the insured and the weather have the greatest impact on controlling losses.

Again, the auto insurance industry shines as being out in front of the P/C market with usage-based insurance and data collection on individual behavioral attributes. While it’s still an uphill battle for consumer adoption, the technology momentum is here to stay. Insurers are leveraging new data sources and analytical insights to improve their strategic approach to marketing, underwriting and claims.

For the full white paper by Valen on this topic, see their website.

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