2016 outlook - valen analyticslearn.valen.com/rs/331-lit-031/images/2016 outlook report... ·...

© Valen Analytics 2015-2016 © Valen Analytics 2015-20161 2016 Outlook Report: Property & Casualty Insurance www.valen.com

MARKET DYNAMICS IMPACTING PROPERTY & CASUALTY INSURANCE

INNOVATION CROSSROADS

2016 OUTLOOK

© Valen Analytics 2015-20162 2016 Outlook Report: Property & Casualty Insurance www.valen.com

THE INNOVATION ECONOMY IS DISRUPTIVE EVERYWHERE

The rules for established industries are changing. Consider:

- John Deere is in a tiff with farmers as Deere now retains ownership of tractors because it operates the software.4

- Industries who’ve long relied on regulatory protection, captive markets, and capital assets are in the backseat of the sharing economy, driven by companies like Uber and Airbnb.

- Retail giant Penney’s with strong Q3 ‘15 sales saw stocks tumble because of sluggish Macy’s & Nordstrom numbers. Investors fear the lure of going to a physical store is waning.5

Everyone’s talking about innovation — the world is changing rapidly and insurance isn’t as insulated as in the past. We’re facing competition from the likes of Google and Facebook, as well as a growing contingent of insurers embracing new technologies. Add in the mix an up-and-coming generation with expectations of a hyper-responsive customer experience, and it’s easy to see the large-scale changes hitting the industry.

Insurance isn’t alone in this time of turbulence, though it can be tempting to dismiss news of disruption as hype. Some wonder how quickly Google Compare will gain traction and point to insurance technology disruptor Zenefits, as they struggle to meet tech investor expectations.1 But that’s missing the point. Not only is the early growth of Zenefits impressive, especially in an industry that admittedly struggles with innovation,2 but the overall economic context is important. A study from Silicon Valley Bank shows technology innovators are bullish on a business climate ripe for growth.3 There are plenty of signals that the innovation economy is more rooted in reality than speculation, and taking hold across traditional industries.

Why a CROSSROADS?

http://www.valen.com


Key innovation considerations

Market shake-up

Staying ahead

Don’t let the market drive

The human side of innovation

Pulling it all together

Sources & Resources

4INSIDE THISREPORT

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Three key indicators back up the surveys

and speculation that

insurance companies

struggle to innovate.

Now is a good time to

think about where your

company stacks up in

these areas. Innovative

companies facilitate

thought provoking

conversations internally

and decide where to

focus on improvements.

Key innovation considerations

Customers aren’t happyAccording to Ernst & Young, insurers rank at the bottom for consumer trust at just 70% (banks are at 82%).6 Nearly half say they don’t interact with their insurers, and only 21% are highly satisfied with insurer communications.

Today’s consumers want a relationship with you.



Insurance is gaining steam in investing resources and strategic focus on analytics. Research analyst firm, Celent8, reported that for the first time in over a decade, analytics has outpaced core systems replacement for top new projects in 2015.

Industry disruptors like Netflix, Google, Capital One and Progressive share a common thread that drove their success. They were data-driven and analytical innovators that had a fresh take on how to serve their market and propel growth.

By leveraging analytics, these disruptors were able to focus on customer acquisition and segmentation to better understand their end users, build products, and present offers and pricing in real-time by leveraging their analytics.

Valen Analytics’ 2015 Summit survey 7 of P/C executives shows early adoption of analytics in customer acquisition, and how quickly those who aren’t using analytics plan to do so in the near future.

Analytic building blocks are lagging behind

Insurers not using underwriting analytics plan to start within 12 months.

Insurers using predictive analytics in underwriting have been at it less than 2 years.

45% 56%


People are fighting change and each other

Underwriter adoption is a big concern when deciding to implement analytics7

2 top reasons for resistance (30% each)“I’m concerned predictive analytics will put me out of a job.”

AND “I don’t trust predictive analytics.”

Underwriters & actuaries at odds over pricing9

To shed light on long-standing, internal obstacles, Valen Analytics conducted two surveys of P/C professionals. The findings illuminate that innovation troubles come from a lack of trust in the process and the data.

UNDERWRITERS RESIST ANALYTICS

Why at odds? #1 reason (43%) Underwriters dismiss data for their own judgment.

82% MISALIGNMENT CONTINUES

77%



Market shake-up

In the 2015 Valen Analytics Outlook Report10, we pointed to the market share consolidation that has already occurred in personal lines and projected that commercial lines would soon follow suit. Consolidation from M&A and competitive pricing have taken hold in commercial lines.

Mergers & Acquisitions Competition: The historically troubled line of workers’ compensation is profitable for the first time since 200613 at the same time significant shifts in market share appear amongst the top 10. There’s notable growth for companies known for their holistic use of analytics, like Travelers and Berkshire Hathaway.14 These indications point to more targeted and sophisticated customer acquisition strategies that are likely to further consolidate market share.

Workers’ Compensation Insurance Market Share

NWP ($M) % Share

+61%

The upward trend of M&A is apparent on a global scale, with the U.S. showing the most activity at a 61% year-over-year increase.11 Commercial insurance deals Ace Ltd/Chubb, XL Group/Caitlin, and Towers Watson/Willis have many analysts confident the trend will continue.12

Company 2014 2014 20091 Travelers 3,840 8.8% 7.9%

2 Hartford 3,012 6.9% 7.3%

3 AIG 2,436 5.6% 11.2%

4 Liberty Mutual 2,236 5.1% 12.6%

5 Berkshire Hathaway 1,742 4.0% 1.1%

6 State Comp Ins. Fund 1,511 3.5% 3.9%

7 Texas Mutual 1,176 2.7% 2.0%

8 Chubb 1,109 2.5% 2.2%

9 W. R. Berkley 1,085 2.5% 1.8%

10 Zurich American 1,033 2.4% 2.7%

Source: SNL Financial, Fitch Ratings


Staying ahead

Every insurance company is swimming in data. The trick is to unlock that information to learn something new and extract tangible business value. Analytically-driven insurers know more about the market, the risks they insure, and what their customers want. Valen has recently conducted a number of studies recently that reveal some of the key insights available through advanced analytics.

THIS ISN’T YOUR FATHER’S SOFT MARKETThe signs of a soft market are here. The question to ask is “when will you recognize it and what is the best response in your target market”?

The study we conducted, represented by this graph, shows how insurers who leverage analytics in underwriting to acquire profitable market share and the impact on those who do not.15

A competitive advantage in today’s marketplace requires more granular market segmentation to target the business that fits your goals, while getting the price right. That’s how analytically-driven insures grab profitable market share. Loss Ratio Benefit

Benefit an insurer can expect by using predictive analytics to compete against insurers using traditional pricing methods.

Cost of Doing Nothing Quantifies the impact of adverse selection from using traditional pricing methods to offer discounts to retain good business, without raising prices on worse than average risks.

Profit Vulnerability to Predictive AnalyticsPotential loss ratio shift for the incumbent from the competition using analytics to steal the best business, leaving incumbents with the worst performing risks which are not priced appropriately.

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Loss Ratio benefit Cost of Doing Nothing Profit Vulnerability to Predictive Analytics

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Commercial Lines Underwriting Study Benefit/Vulnerability from Predictive Analytics

in Discretionary Pricing

Source: Valen Analytics Commercial Lines Data Consortium



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Percent of portfolio premium - Policies rank ordered by predicted profitability

How Much of Your Profit is in the Best 10% of Your Book?

Source: Metastudy of Valen clients - WC, BOP, Commercial Auto

Over 50% of portfolio profit in just 10% of the premium

Portfolio profitability maximized at 75th percentile of premium

Increase profits by 60% if worst 10% is eliminated entirely

HINDSIGHT WILL COST YOUDiscovering that just 10% of your book contributes over 50% of expected profit, shows how the rules are changing in commercial insurance.

Valen studied the portfolios of commercial insurers and found that this surprising statistic holds true across a diverse set of companies and lines of business.16 This helps demonstrate the real advantage, and potential threat, of data analytics.

The insurer who can accurately identify the best 10% of the market is going to be able to compete on, and win, this business.

Bottom line: If you’re not using data analytics to empower underwriting, you’re relegated to gaining insights in hindsight, making it tough to compete with data-driven insurers.


PREDICTING YOUR PORTFOLIO PERFORMANCEWhat could you improve if you had a reliable forecast of accident year loss ratio by the end of June? The forward-looking statistics made possible through predictive analytics offer an entirely new set of top-down, portfolio-level management tools.

Valen produced this graph to illustrate how Embedded Profit can be used to provide a novel forecast of AY loss ratio.17 At the midpoint of each year, inforce Embedded Profit (represented by the orange line) intersects the final AY loss ratio, highlighted in each of the red circles.

Embedded Profit = (Collected Premium) — (Predicted Loss + Predicted Expense)

This example is just the tip of the iceberg when it comes to the new frontier in leading indicators of portfolio risk quality and overall performance using predictive analytics.

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Embedded Profit Over Time and By Accident Year

Monthly Profit Embedded Profit AY 2011 AY 2012 AY 2013 AY 2014



Don’t let the market drive

One of the more surprising potential consequences of underwriting with incomplete information comes from an observation about market cycles. Willis Re does an annual market cycle study, and their insights on workers’ compensation are shown in this graph.18 As you can see in the blue line, representing accident year loss ratios from 1987 to present, work comp has been experiencing dramatic cycles. This comes as no surprise to anyone who’s been in the industry for a while. In fact, we expect it and find it normal.

But there is something new to learn looking at the losses and pure premium – specifically the losses divided by payrolls (represented by the green line). It’s been almost perfectly flat since 1995. Losses aren’t driving these market cycles. So...what is?

Overlaying the rates in red reveals the surprise: market cycles are driven 100% by the rates charged. Rates go down, loss ratios go up. It’s that simple. We want to be able to underwrite with precision

– matching the price to the risk. If we can do that, we can make consistent profits regardless of the risk, regardless of where we are in the market cycle.

Leading carriers are deciding where they want to play in a market cycle, not getting pushed around by it.

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Workers' Compensation Market Cycle

Net AY Loss & ALAE RatioDWP/PayrollNET AY Loss & ALAE / Payroll


The human side of innovation

It’s easy to get swept up in all the scientific proof that data-driven decisions produce superior results. While true, it’s also important to remember that technology is an enabler, and it’s humans that generate actual results.

How important are people in the mix? Valen conducted a study of a regional P/C insurer to show how powerful the results are when there isn’t a resistance to using analytics in underwriting.19

We started by asking: What predictive power did their underwriters have? You can do this at your company too – inside every underwriter’s head is a predictive model. We get to see the underwriters’ predictions by looking at what tier they placed a risk in, or how much debit or credit they selected (represented by the green line). This underwriting organization did in fact separate risks from best quality to worst quality. The best risks had a loss ratio about 20% better than average. The worst were 30% to 50% worse than average. Not bad.

Next we looked at a predictive model (represented by the red line). This improved the overall differential between “best and worst” – the best risks are 50% better than average, and the worst are about 75% worse than average.

Finally, we took the average of the underwriter’s prediction and the model’s prediction, which is represented by the blue line on the graph. It has by far the most lift from 75% better than average, all the way up to 120% worse than average.

This study is indicative of results we see consistently – the combination of human expertise and analytics is the winning combination.

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Comparing Predictive PowerThe best results combine analytics with underwriter expertise

Written Premium Underwriter Underwriter / Model Combination Predictive Model



Pulling it alltogether

Find your fitCompanies armed with

advanced analytics continue to specialize. Whether it’s

targeting a niche market or more granular segmentation

of mainstream business, competition is happening on

a micro level.

Make a commitmentTo remain relevant, the

decision to innovate for the long-term is a strategic one.

Decide what game you want to play and get senior management on board to

lead the charge.

Engage your peopleYou can’t afford internal battles and resistance to change. Your people will

support change with a solid road map and clear success metrics. Start small, build on

early wins and bring the team along in phases.


Sources1. “Highly Valued Startup Zenefits Runs Into Turbulence”. Wall Street Journal, November 12, 2015.

2. “A New World of Opportunity: The insurance innovation imperative”. An international survey from KPMG, September, 2015

3. “Innovation Economy Outlook 2015”. Silicon Valley Bank, January 2015.

4. “We Can’t Let John Deere Destroy the Very Idea of Ownership”. Wired, April 21, 2015.

5. “Nordstrom, Penney, Macy’s: Don’t Investors Know It’s Christmas?” Wall Street Journal, November 13, 2015.

6. 2014 Global Consumer Insurance Survey. Ernst & Young, November, 12 2014.

7. 2015 Summit survey. Valen Analytics, March 2015. Infographic online

8. “Driving Growth With Intelligent Analytics” presentation by Celent. March 5, 2015.

9. Underwriter and Actuary Pricing Conflict survey. Valen Analytics, August 2015. Infographic online

10. Valen Analytics 2015 Outlook Report: Commercial Lines. October, 2015 Available online

11. Clyde & Co, Worldwide: Insurance M&A Activity: A Global Overview 2015. Last Updated: 11 September 2015.

12. “Commercial insurance sector poised for further consolidation”. Business Insurance, July 7, 2015.

13. “Workers Comp Insurers Post First Underwriting Profit Since 2006”. Carrier Management, May 26, 2015.

14. “Shakeup in Top 10 Workers Comp Writers: 2014 vs. 2009”. Carrier Management, June 28, 2015.

15. “Commercial Lines Underwriting Study of Benefit/Vulnerability from Predictive Analytics in Discretionary Pricing”. Valen Analytics, June 2015. 1 minute video overview

16. “Commercial Lines Study of Portfolio Profitability Rank Ordered by Most Profitable to Least Profitable”. Valen Study, June, 2015. 1 minute video overview

17. “Embedded Profit Over Time and By Accident Year Study”. Valen Analytics, June 2015. 1 minute video overview

18. “Willis Re Market Cycle Survey”. Raj Bohra, Willis Re, 2013.

19. “Underwriting Profitability Study of a Regional Workers’ Compensation Insurer”. Valen Analytics, September, 2015.

Resources• The Punch List:

Implementing Analytics Guide walks you through three key areas to a successful roll-out of your next analytics project.

• This Week in Analytics Blog summarizes all the relevant news about data analytics in insurance to share the most important highlights.

• Links to Valen’s research in this report are included in the “Sources” information to the left. Our entire resource library is available online.


http://valen.com/press-room/2015-valen-summit-survey-results/

http://learn.valen.com/rs/331-LIT-031/images/2015%20Underwriter%20vs%20Actuary%20Pricing%20Conflict%20Survey%20Infographic.pdf

http://learn.valen.com/2015-Outlook-Report.html

https://www.youtube.com/watch?v=sflqp0orZJY

https://www.youtube.com/watch?v=0Uf3FcUOayY

https://www.youtube.com/watch?v=SEB3htqwoik

http://learn.valen.com/NP-Punchlist_Implementing-Analytics-Guide.html



http://valen.com/category/this-week-in-analytics/

www.valen.com/blog

www.valen.com/resource-center


About Valen Analytics

Valen Analytics is an advanced data and analytics provider for property and casualty insurers. We work with insurers who are actively looking to utilize modern approaches to pricing, risk selection, claims triage, and premium fraud. Our customers are focused on increasing competitive pressures, fighting adverse selection with innovative solutions, and raising awareness for the impending “experience gap” with initiatives such as Insurance Careers Month. Our customers span many lines of business including Homeowners, Personal Auto, Workers’ Compensation, Commercial Auto, Commercial Package, Commercial Property, and BOP. Learn more about Valen at www.valen.com.

http://insurancecareertrifecta.org/

http://insurancecareertrifecta.org/


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