Predictive Modeling Helps Commercial Insurers Hold Prices

While commercial insurance prices continue to remain relatively flat for the sixth consecutive quarter, insurers using predictive modeling in their pricing and risk selection report that they were better able to hold price levels.

That’s according to professional services company Towers Watson’s most recent Commercial Lines Insurance Pricing Survey (CLIPS).

Overall, commercial insurance prices in aggregate declined by 1 percent during the second quarter of 2010, according to the survey, which compared prices charged during the second quarter of 2010 to the prices charged for the same coverage during the same quarter in 2009. While data for most lines indicate flat prices, the Commercial Property, Directors and Officers Liability, and Employment Practices Liability lines show price reductions.

However, those companies that use predictive modeling techniques for pricing and risk-tiering reported slight price increases — on average — compared to companies that do not use predictive modeling. Insurers that have yet to implement predictive modeling experienced price decreases greater than the overall decline of 1.0 percent.

The most recent survey was the first time Towers Watson queried respondents on their use of predictive modeling and, while these indications are preliminary, they point to the power of predictive modeling.

“The bottom line is that effective predictive modeling enhances underwriting and pricing profitability,” said Bruce Fell, practice leader of Towers Watson’s risk consulting and reinsurance brokerage services to the P&C industry in the Americas. “The commercial lines insurers that are taking advantage of predictive modeling are finding new rating variables and sources of data, and are applying the results in new and innovative ways.”

CLIPS results indicate that accident-year-to-date 2010 loss ratios deteriorated 4 percent relative to year-to-date 2009. This deterioration — which is based on six months of information and is therefore preliminary — is consistent with an estimated deterioration of 4 percent for accident-year 2009 over 2008. The firmer prices in year-to-date 2010 on an earned basis are offset by somewhat higher claim cost inflation indications than that observed in 2009.

CLIPS data are based on both new and renewal business figures — when available — obtained directly from carriers underwriting the business. CLIPS participants represent a cross section of U.S. property/ casualty insurers that include many of both the top 10 commercial lines companies and the top 25 insurance groups in the U.S.