Invent, Reinvent, Repeat

By Frank J. Coyne

cover imageProperty/casualty insurers' spending on advertising provides direct insight into the intensity of competition in insurance markets. From 1980 to 2010, insurers' advertising rose more than 2100% to $5.2 billion (see Figure 1). Other Verisk Analytics research shows the number of property/casualty insurers serving the United States fell from 1,378 in 1995 to 1,094 in 2010 (see Figure 2), excluding residual market carriers and risk retention groups. Putting the pieces together, more than one-fifth of all insurers were either driven from the field or absorbed by stronger competitors in just 15 years.

The long-term escalation of competitive pressures in insurance markets is only one of many challenges now confronting insurers. Consider weather risk. Last year, we experienced the most active and deadliest tornado season in more than half a century, and three times the average amount of precipitation in the Ohio Valley led to historic flooding along the Mississippi. Yet Texas suffered wildfires associated with the most severe drought to hit the state since record keeping began.

The effects of those and other weather-related events were staggering. Thirty weather-related catastrophes struck the United States last year. They generated 4.9 million claims and $33.6 billion in insured losses — roughly three times the $10.8 billion per-year average since 1970 and the third highest annual total in the past 42 years, after adjusting historical amounts for inflation. Even those numbers understate the weather's effects on insurers because of losses from the many routine weather events that were not severe enough to be declared catastrophes.

Leading-edge insurers using satellite and radar data to measure and respond to weather risk will have a distinct advantage over competitors lacking such capabilities. And with accurate property replacement costs being vital to underwriting, pricing, and claim settlement, insurers using the best available data and state-of-the-art tools to estimate replacement costs will have a competitive edge growing top-line revenue and bottom-line profits.

But the management of weather risk and estimation of property replacement costs are only two of many areas in which a combination of competitive pressures and advances in technology are forcing game-changing innovation. In the personal auto arena, the application of advanced analytics to telematics data about where, when, and how people drive can fundamentally alter competitive dynamics.

On the claims side, text mining is now unlocking vast amounts of previously inaccessible data hidden away in claim adjusters' notes. Simultaneously, sophisticated network analysis is making it possible to understand the relationships between all parties involved with any claim and how they relate to those involved with other claims. All of this and advanced predictive modeling will speed fair resolution of meritorious claims, while empowering insurers to stop much of the claim fraud now costing $30 billion per year.

For insurers at the forefront applying sophisticated analytics to claim settlement, the rewards include increased customer satisfaction and all the associated benefits. Those same insurers will also be able to use savings from the reduction in claim fraud to develop additional competitive advantages or to price more competitively. Either way, insurers who lag behind are apt to have an increasingly difficult time attracting and retaining good business.

Figure 1
Property/Casualty Advertising Spend (1980 to 2010)

COA Dashboard: Settled Date Trend

Insurers' spending on advertising provides a direct read of the intensity of competition in insurance markets. From 1980 to 2010, insurers' advertising spend rose more than 2100% to $5.2 billion. As a percent of net written premiums, insurers' advertising spend rose from less than one-quarter percent to about 1.2 percent.

In sum, an explosion in data, technology, and analytics is revolutionizing the business of insurance. Underwriting is becoming more intelligent. Pricing is becoming more refined. Claim settlement is becoming fairer and faster. Reinsurance decisions, alternative risk transfer mechanisms, and enterprise risk management are becoming more scientific. Moreover, these changes will fuel further changes as insurers link their databases and workflows in ways that allow each business process to benefit from data generated by other processes.

Figure 2
Private Property/Casualty Insurers* (1995 to 2010)

*Excludes risk retention groups and residual market carriers

COA Dashboard: Settled Date Trend

Excluding residual market carriers and risk retention groups, there were 1,378 property/casualty insurers serving the United States in 1995. Fifteen years later, there were fewer than 1,100. In just a decade and a half, more than one-fifth of all property/casualty insurers were driven from the field or absorbed by stronger competitors.

To survive and prosper in the challenging times ahead, insurers will need huge volumes of high-quality data from a vast array of sources, systems capable of analyzing and executing against all of those data assets, and the people who can make it all work. Insurers will also need interconnected systems and processes empowering them to use information from each link in the value creation chain to create additional value at other links. Lastly, survival in the insurance business will always require solid underwriting, pricing, loss adjudication, and enterprise risk management. But the nature of superior execution against the core fundamentals will change continually as more data becomes available, computers become more powerful, and innovative analytics enable competitors to extract more insight from the information at their command.

Bottom line, survival in the increasingly competitive insurance business will require continual reinvention guided by an unfailing focus on the fundamentals and the discipline to adhere to decisions based on data and analytics. Invent, reinvent, repeat.

Frank J. Coyne is chairman and chief executive officer of Verisk Analytics.