How Predictive Analytics Boost Commercial Insurance Profits, Smooth Cycles

April 5, 2018

“Underwriting cycles have been impacted by the quicker determination of underwriting, pricing and claims trends and the ability of companies to react to them through the depth of analysis made possible by the integration of data and predictive analytics in insurance,” the report said. “The evolution of more sophisticated underwriting tools, along with improved company risk management capabilities and greater scrutiny by regulators, has paired with the proliferation of enhanced data and predictive analytics to dampen the highs and lows of underwriting cycles.”

A.M. Best said a number of factors over the last decade within the commercial lines market segment have made predictive analytics a more useful and successful tool. Among the more impactful advancements: enterprise risk management technology advances.

“Enhanced enterprise risk management processes have helped companies improve decision-making through different disciplines,” A.M. Best said.

As an example A.M. Best cites how this helped carriers process record commercial lines catastrophe losses in 2017.

“Despite catastrophe losses within the commercial lines segment nearly doubling in 2017 from multiple events, the losses were most often within stated risk tolerances and fell within company catastrophe retentions,” A.M. Best noted. The reason: advances among commercial lines insurers’ enterprise risk management programs. A greater use of data and analytics has also enabled better underwriting choices.

“Greater utilization of data and analytics has led to better insights into risk selection – when and where to grow or to shrink – and the establishment of technical prices while expanding into other areas, such as claims management,” A.M. Best said. The ratings agency added that these actions, in its view, have helped dampen “the effects of the commercial lines underwriting cycle,” benefiting carriers that used data and analytics to help them respond better to market changes.

Quick vs. Slow Adapters

Successful carriers use the new data/analytics/enterprise risk management systems to gain better insights and make quicker decisions than their rivals, according to A.M. Best, which added that this trend should spread over time as the use of these newer technologies grows.

A.M. Best also warns, however, that carriers that don’t properly use these technology tools to adapt to market changes will suffer.

“Those that do not improve their responsiveness risk being adversely selected against in their chosen markets,” A.M. Best said. “Simply investing in technology and analytics will not ensure success for commercial lines insurers. Those companies best positioned to outperform competitors in the future are those cognizant of the limitations of data and which acknowledge that predictive models are just tools. More data does not directly correlate to better insights.”

A.M. Best’s full report is “Predictive Analytics Aids Performance, Balances Underwriting Cycles for Commercial Lines Insurers.

Source: A.M. Best

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