Personal lines transformation: underwriting in the age of innovationBy Neil Spector | November 3, 2016
If guesswork is the enemy of business efficiency, then precision is efficiency’s closest friend. Whether speaking about an automaker’s assembly line or a consumer’s wireless communications, this concept carries weight. In terms of data science, precision technologies are making information for underwriting decisions more abundant and accessible than ever before, with predictive analytics multiplying the power of data to measure and price risk.
For insurers, these changes have contributed to unrelenting competition.
That competition is driven not only by price but by customers’ rising expectations for ease of doing business across multiple platforms—from smartphones to desktops to call centers. Many consumers are drawn to leading-edge technology that delivers a seamless, personalized experience and a competitive price. Traditional insurers often can’t keep up, but creative disruptors from the emerging InsurTech segment are working hard to grow their market share with innovative, unconventional business models.
It’s a new kind of race, and established insurers may have to run it with fresh strategies, fusing their deep knowledge of risk with technology and innovation.
Laggards may find themselves bleeding market share to competitors with more optimized offerings or losing profitability in the pursuit of growth—or in the worst case, grappling with both issues at once. They won’t be alone. Just 1 in 5 premium dollars hits the “sweet spot” of profitable growth in the personal lines market, which grew to $289 billion in written premium in 2015, representing a rise of 4.9 percent for that year. (The analysis used private passenger auto and homeowners multiperil data reported to A.M. Best. It defined “sweet spot” insurers as maintaining or growing market share in combination with either outperforming the industry average or improving upon past performance for adjusted loss ratios between 2012 and 2015.)
One example of a new, less cyclical underwriting environment may be the spike in frequency and severity of personal auto claims that emerged in 2015. This partly reflected a surge in annual miles driven, which in turn may be tied to a continuing economic recovery and plummeting gasoline prices. Beyond those cyclical trends, however, are factors that may become more permanent. The high cost of repairing modern automotive safety technology is likely driving new records in severity. Between 2007 and 2011, when new vehicle sales were in a slump, average annual severity for auto collision coverage increased only 0.27 percent. Yet as sales rebounded between 2011 and 2015, average annual severity jumped by 3.10 percent. For more details, see Auto Claims Frequency, Severity: What’s Behind the Rise?
Property insurers, meanwhile, are finding that catastrophe experience can cut two ways. While the relatively light cat losses of recent years have been a welcome respite on the claims side, a three-year run of profits has supported stiff competition in the market. This threatens to leave some homeowners insurers with portfolios that are potentially overexposed and underpriced when cat activity spikes again—as it’s bound to do, given the long-term escalation of severe weather events.
These trends underscore the importance of finely honed underwriting and pricing, especially as low interest rates offer no prospect of relief through an insurer’s investment portfolio. At the same time, some revenue continues to escape by way of premium leakage—omitted or misstated underwriting information leading to rates that don’t match the true risk and ultimately undermine appropriate pricing.
Verisk Analytics estimates leakage at $29 billion each year just for auto insurers, reflecting factors such as hidden drivers, inaccurate mileage, incorrect garaging addresses, and a host of other omissions or misstatements from customers or agents. On the homeowners side, incomplete information from failing roofs to undisclosed renovations can mean wrongly priced business on the books and policyholders sometimes left with inadequate coverage.
A way forward
Capturing critical pricing information, understanding trends, identifying misstatements and errors, and delivering an appealing customer experience must become key areas of focus for insurers. Any one of these might appear daunting, and bringing them all together may seem impossible. This is a gut check that can’t be avoided: Will insurers be able to innovate in ways that keep themselves competitive in a fundamentally changing and challenging environment?
Transform the customer experience: from purchase to renewal
Developing a more streamlined and personalized buying experience can have a rapid effect on growth, profitability and expenses. At the top of the sales funnel, data-driven tools can direct marketing dollars strategically toward the most promising shoppers. As conversion rates decline and competition for new customers stiffens, drawing prospects in and winning their business will require insurers to undergo a digital transformation.
The insurer that manages to become the Uber or Amazon of the insurance world will be in a formidable position. Market leaders of the future will deliver fast and transparent buying experiences that meet the expectations set by digital disruptors in retail and service industries. Buyers will likely continue to gravitate toward companies that make insurance shopping both personalized and efficient, such as making the first quote the final quote. This will depend on readily available and easily verifiable data, introduced at the beginning of the quote flow.
But insurance is more than a one-click order or a 30-minute ride; it’s a potentially long-term relationship. Beyond the point of sale, market leaders will help maintain such relationships with customer-centric purchase and renewal strategies that deliver touch points at key stages of the policyholder’s journey—through the customer’s channel of choice. According to Bain & Co.’s brief, Customer Loyalty in P&C Insurance,satisfied customers who promote a brand have seven times the lifetime value of detractors and boost insurers’ bottom lines.
Invest in advanced analytics, data-driven insights
The very technology behind these competitive pressures can offer potential ways to endure and flourish. “Big data” may be the current buzz phrase, but without context or focus, the related information can be just an overwhelming pile of numbers. The challenge is to harness the power of data through the use of groundbreaking predictive analytics.
- Data can drive pinpoint underwriting and pricing to help customers get the best price for the risk.
- Data can help find premium leaks from point of sale through renewal and help make sure customers are adequately insured in the event of a loss.
- Data can power automated workflows that simplify the buying and renewal process and help your customers have a positive experience.
Understanding industry trends through the lens of data can help set a solid foundation for a business to respond in a timely manner to changing market conditions and exposures. Early integration of customer-specific data, filtered through robust business rules, can produce quick, accurate initial quotes at the point of sale, providing customers with an accurate price at the very first quote. It’s more than just window dressing. The “right” price for the customer can also be the right one for the insurer, helping to build a profitable portfolio on sound underwriting data that captures each risk more completely while better protecting policyholders
Leverage transformative technology
Even the smartphone that looms as a potential driving distraction can become a sales representative in a customer’s pocket that delivers hassle-free, online purchasing. Millennials in particular expect approaches by smartphone, given their online experience with everything from shopping to banking to hailing a ride. Emerging technologies and data streams can help put underwriting, pricing and the customer experience on an entirely new footing.
Harnessing data from the Internet of Things (IoT)—from connected cars to smart homes—can improve on traditional rating factors such as credit and loss history.
The property at risk can tell its own underwriting story through the real-time data it transmits. Smart-home technology can verify the presence of alarm systems, and data analytics can discover how various connected devices throughout a residence affect risk, for good or bad.
Vehicle telematics enable usage-based insurance (UBI), which can be augmented into much more than a risk-transfer arrangement. Not only can pricing be more tailored to the customer’s unique driving profile, UBI programs can also add features such as driver feedback and a streamlined claims process powered by real-time data. Working from above, remote aerial imagery can help homeowners carriers achieve accurate insurance to value (ITV) on properties and carry out inspections without tying up staff and disrupting customers with on-site visits.
Get there by innovation
Sometimes, the possible may seem practically daunting, especially for insurers that tend to be late adopters. Some carriers lack the infrastructure to face these issues alone. But for those with the will to move forward, there are partners that can help connect the industry’s present to its future. It takes long experience and a deep well of industry data—joined to a spirit of boundless innovation—to tackle the unique challenges of today’s insurers.
In the modern underwriting environment, innovation points to the strategic use of granular data analytics from point of sale through renewal. Insurers that miss the opportunity to tap into data science will expose their portfolios to underperforming business and the loss of high-potential policyholders. The time has arrived to reach out for the resources that can meet these challenges.
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