Predictive Modeling Improving Insurers’ Bottom Lines, Market Share

February 2, 2011

Property/casualty insurance carriers currently utilizing predictive modeling continue to see their bottom lines improve and almost 4 out of 10 say it has helped them increase market share.

For this and other reasons, predictive modeling also continues to gain momentum among North American insurers, with most carriers either expanding current implementations or planning new or additional predictive modeling applications, according to the second annual survey on the topic by global professional services company Towers Watson.

Of the 43 U.S. companies that responded to both surveys, 88 percent said the use of predictive modeling enhanced rate accuracy (up from 77 percent when the survey was first conducted in 2009).

Seventy-six percent said they realized an improvement in loss ratio and 68 percent said that it improved profitability. Both figures were up from a year ago.

Additionally, 42 percent said the use of predictive modeling has furthered the expansion of their company’s underwriting appetite, while 39 percent indicated it helped increase market share.

Predictive modeling uses advanced statistical modeling techniques, along with company and external data related to individual policyholders, competitors, marketplace conditions and customer behavior.

“Effective implementation of predictive modeling enhances risk selection and pricing — leading to greater insurer profitability and the potential for growth in market share,” said Brian Stoll, Towers Watson senior consultant and the survey’s coauthor.

The current use of predictive modeling in the U.S. is up by roughly 10 percent across all lines of business except commercial property/business owners package (BOP), which remained relatively flat.

Among personal lines, 83 percent of auto carriers said they use predictive modeling (versus 76% in 2009), while 61 percent of homeowners carriers have implemented predictive modeling (versus 44 percent).

In the standard commercial lines segment, predictive modeling usage in workers compensation has increased to 32 percent, up from 18 percent last year. Other increases include commercial auto (32 percent versus 21 percent). Commercial property/BOP was essentially flat at 25 percent (versus 23 percent in 2009).

Predictive modeling implementation in general liability lines has increased to 22 percent, up from 14 percent in the previous survey, and to 17 percent in specialty lines, up from 5 percent.

Personal lines carriers have been much more active in core predictive modeling activities over the past two years. Turning to the future, personal lines carriers are significantly broadening their focus, while standard and specialty commercial carriers are pursuing aggressive plans across all aspects of predictive modeling over the next two years.

U.S. commercial large account/specialty carriers plan to expand their focus . Sixty-three percent revealed they would extend predictive modeling to additional product lines, while 74 percent said they were going to enhance modeling approaches.

“Personal lines and commercial lines carriers are seeing that predictive modeling benefits greatly exceed the costs and, overall, their plans clearly indicate a desire to move forward,” said Klayton Southwood, a Towers Watson senior consultant and the survey’s other coauthor.

“Throughout the industry, insurers are planning to be much more active in enhancing their underwriting acumen. Although personal lines carriers are currently more aggressive than their commercial lines counterparts across many dimensions, most commercial lines companies are planning to broaden their focus on a wider range of predictive modeling issues in the near- to mid-term and strive to narrow the gap.”

Other Findings

Among other key findings from the survey:

While most carriers invest in some level of competitive market analysis, only a minority of carriers are pursuing more complex and informative qualitative and quantitative competitive market analyses, and working to fully understand the competition.

For the 18 percent of personal and/or commercial automobile carriers in the U.S. currently using or planning to implement telematics in the next two years, 83 percent said that they are using — or would use– telematics to measure annual mileage; 72 percent are using — or would use — the technology to provide information to insureds to improve driving behavior (e.g., loss control), and 72 percent indicated they would use telematics to track how the vehicle is being driven (e.g., speed, acceleration).

U.S. carriers have generally been successful in securing regulatory approval for their pricing predictive models — keeping them proprietary and confidential has been a bigger challenge. When asked how often they have encountered difficulty securing regulatory approval for new iterations of pricing predictive models, nearly half (49 percent) said less than 10 percent of the time. However, when filing for regulatory approval, 48 percent said they face challenges in keeping the details of their predictive models proprietary and confidential at least 25 percent of the time.

About the Survey

One hundred and nine executives from U.S. and Canadian property /casualty carriers participated in Towers Watson’s second web-based survey on predictive modeling.

Was this article valuable?

Here are more articles you may enjoy.