2017 OUTLOOK - Valen Analyticslearn.valen.com/rs/331-LIT-031/images/2017 Outlook... · 6 2017 Outlook Report: Property & Casualty Insurance 2017 The P/C buying cycle is inefficient

© Valen Analytics 2017 © Valen Analytics 20171 2017 Outlook Report: Property & Casualty Insurance www.valen.com

MARKET DYNAMICS IMPACTING PROPERTY & CASUALTY INSURANCE

AN INDUSTRY MINDSET

2017 OUTLOOK

© Valen Analytics 20172 2017 Outlook Report: Property & Casualty Insurance www.valen.com

In our 2016 Outlook Report, we identified a crossroads moment for the US P/C industry. It was easy to see the tidal wave of innovation funding hitting insurance, but it was unclear whether the industry would embrace change or dig in its heels. A year later, a lot has changed. InsurTech has real traction and is here to stay. The number of investment deals in 2016 surpassed the record highs of 2015. In fact, per CB Insights, InsurTech companies have raised $5.67B across 464 deals since 2011. Compare that to the measly $85M raised in 2010, and you get a real sense of the momentum building.1

What’s particularly interesting, beyond the growing number of InsurTech deals, is how market pressures and low investment yields are spurring an explosion of innovation from the reinsurance market. CB Insights points to a 20x rise in reinsurance investments into private tech companies from 2013 to 2016. The Insurance Information Institute reports the US low-interest environment saw investment income decline by $5B or 16% in the first half of 2016 compared to the first half of 2015.2 Low investment yields also demand better underwriting profits from primary insurers. This ongoing economic climate is the most significant force driving the need for modern approaches to underwriting and customer engagement.

The industry made the smart crossroads choice by recognizing that change is here to stay. Now, the trick is to shatter the mindset limitations that persist as a formidable obstacle to innovation. Multiple surveys acknowledge the insurance profession lacks the necessary skills to innovate.3 The known issues of being risk averse, lacking transparency, and feeling insulated by regulatory and capital hurdles for new entrants, keep real transformation at bay for the moment. But, looking back at the P/C industry over the past 12-24 months, it’s clear a great deal can change in a short amount of time - and those companies that take the leap will create their own distinct advantages.

Beyond the crossroads moment is aMINDSET SHIFT

http://www.valen.com


Tech giants and insurers have differing holistic views

A picture of the inefficient, complex buying cycle

You cannot solve what you do not own

What is in the way?

Back to basics is a way forward

Sources & Resources

4INSIDE THISREPORT

6

8

9

13

14


Insurers aren’t thinking holistically about how consumers research and buy in the same way tech-based companies do. Tech giants see the world in terms of platforms, operating systems, and devices that create an engaging and interactive experience. Then they add new vertical offerings to further serve a loyal consumer base. That’s why many experts will point to the fact that disruptors come at incumbent industry players ‘sideways’ versus trying to interrupt a myopic view of a market’s ecosystem.

If insurers continue to believe that agents are their primary customer, policyholders are secondary customers, and other insurers are their sole competitors, they’ll have a hard time making the leap to the new consumer experience model. It doesn’t require the end of agents as trusted advisors, but it does require insurers to start creating their own platform and interactive experiences, using a ‘new ecosystem’ way of thinking.

Tech giants and insurers have differing holistic views

Traditional view of the insurance ecosystem

Limiting thinking to this view fails to take a bigger picture view of how consumers are served by companies that enjoy a high degree of loyalty.

Insurer Agent/ Broker

Policyholder

Customer Experience



Platform

Operating System

Technology-driven view of consumer engagement

Places(devices, online, offline)

Variety of customer service and product offerings

Broadening the consumer engagement view would lead insurers to ask themselves different questions about how they intersect with their customers, and think about their value prop much differently. Instead of offering insurance policies as the core value prop, an insurer could think about how to enable their customers to take risks and dream big, while staying protected.

Did you know these US stats?4 • Together, Apple and Amazon outmatch the

retail revenue of all other major retailers combined

• Amazon represents 25% of all retail growth

• 90% of the Top 100 CPG brands have lost market share

• Google and Facebook own 83% of the mobile ad market

Every industry is wise to see these companies as direct competitors.


The P/C buying cycle is inefficient and complex

The question is often asked: What will force a change toward the customer and how will innovation became mainstream in insurance? Insurers will certainly shift and adapt as a result of InsurTech, regardless of whether the early startups in this latest wave make it to fully scaled companies. This influx in investment is a good catalyst in that it provides a bright spotlight on the need to better serve consumers, and to push the industry forward.

Today’s commercial policy distribution model is complex, clunky and ripe for disruption. Valen created this sketch to illustrate the sheer number of steps and back-and-forth hand offs that occur in binding just one commercial policy. The inefficiency costs everyone involved in this supply chain. Insurers don’t benefit from this scenario, as our analysis shows that on average, 80% of policies quoted by an insurer aren’t bound, and the process takes a painful 30-60 days to complete in many cases.



It’s not a zero-sum game

Profitability and customer satisfaction are linkedA 2016 J.D. Power study on customer satisfaction for large commercial insurers notes some key findings. The insurers who scored the highest rankings from customers (XL Caitlin, CNA, Chubb), also have some of the strongest combined ratios in the industry. As the Insurance Information Institute notes, “This suggests that the most profitable insurers are able to support more flexible underwriting standards to meet customer needs more effectively.”5

The quality of advice given by agents and brokers is also a key driver of satisfaction, and is not limited to interactions with large insurers. J.D. Power reports in another study that customer satisfaction is falling for the largest US auto insurers, while inching up for smaller insurers. As Insurance Journal reported based on commentary from J.D. Power analysts, “One key reason smaller insurers are doing better is the value brought by their independent agents.”6

Profitability and customer satisfaction are linkedA 2016 J.D. Power study on customer satisfaction for large commercial insurers notes some key findings. The insurers who scored the highest rankings from customers (XL Caitlin, CNA, Chubb), also have some of the strongest combined ratios in the industry. As the Insurance Information Institute notes, “This suggests that the most profitable insurers are able to support more flexible underwriting standards to meet customer needs more effectively.”5

The quality of advice given by agents and brokers is also a key driver of satisfaction, and is not limited to interactions with large insurers. J.D. Power reports in another study that customer satisfaction is falling for the largest US auto insurers, while inching up for smaller insurers. As Insurance Journal reported based on commentary from J.D. Power analysts, “One key reason smaller insurers are doing better is the value brought by their independent agents.”6


You cannot solve what you do not own

While InsurTech is making waves, many of these startups provide only a partial answer. Front end distribution startups own a small part of the whole distribution /customer experience problem. Providing transparency, efficiency, and a true sense of fairness in the coverage and price of a policy is a much needed first step. However, if a new quoting system is followed by the same cumbersome process for binding the policy, billing and administering claims, the customer experience won’t be all that different.

Taking the friction out of the entire system from product offerings, quoting, binding, billing and claims handling, is where the real transformation lies. Direct models from companies like Lemonade, Berkshire, and Hiscox are encouraging. Reinsurers are well positioned to make a similar impact, and aren’t shackled by the many legacy issues of traditional insurers. All of these players have the potential to go well beyond what many VC backed startups are able to influence today.

The winning advantage for insurers and reinsurers



So...what is in the way?

The goal is to shift the traditional insurance mindset. We’ve already covered two key changes: the importance of viewing the policyholder as the primary customer, and understanding how tech giants win at customer loyalty against incumbents in many industries. Another challenge is a lack of knowledge on using the fundamental building blocks of technology-driven solutions, namely data and analytics. There are three areas where new thinking and skill sets are needed.

1. MYTH: There are good and bad risk classes, and predictive analytics is a magic bullet that will tell us which classes to avoid.

Commercial auto presents a real challenge to many insurers today, as Thomas F. Motamed, retiring chairman and CEO of CNA Financial, called the entire line a “black eye” for the industry. Fitch agrees, reporting that commercial auto is a “chronically underperforming product segment” due to overly aggressive pricing and heightened claim severity.7

Many insurers are looking to different sources of driver or telematics data as a way to cherry pick particular vehicle classes and improve profitability during a tough soft market environment. That mindset is problematic, particularly as a growing number of insurers are recognizing that the key is not a broad stroke approach, but rather the magic is in having the tools that allow a view of risk quality at the policy level.

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

1 2 3 4 5 6 7 8 9 10

Service or Utility Trailer

Semi-Trailers, or any Trailer

Private Passenger

Other

Medium Truck

Light Truck

Heavy Truck-Tractors

Heavy Truck

Extra-Heavy Truck-Tractors

Extra-Heavy Truck

The graph shows an analysis from a handful of insurer portfolios in Valen’s commercial auto consortium. Pockets of high and low risk are indicated in each vehicle class —debunking the “magic bullet” theory of eliminating an entire vehicle class to improve loss ratio.

Premium

Lower Risk Higher Risk

Commercial Auto Premium by Risk Quality

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

1 2 3 4 5 6 7 8 9 10

Service or Utility Trailer

Semi-Trailers, or any Trailer

Private Passenger

Other

Medium Truck

Light Truck

Heavy Truck-Tractors

Heavy Truck

Extra-Heavy Truck-Tractors

Extra-Heavy Truck


2. MYTH: It’s a race to the bottom. Advanced data and analytics give every insurer the same information and the same ‘answers’ about individual risks.

Valen study: Is a predictive model resilient to direct competitors also using a model? Study details:

Scenario 1: How much business can Insurer B take from Insurer A?• Insurer A’s data, portfolio make up the market share• Each insurer uses their own model to compete

Scenario 2: How much business can Insurer A take from Insurer B?• Insurer B’s data, portfolio make up the market share• Each insurer uses their own model to compete

67.1% premium

loss ratio

32.9% premium

loss ratio

59.4%

63.9%

Insurer A wins a majority of the premium with a 4.5% loss ratio advantage.

The two models did not provide the same pricing recommendations.

• Head-to-head simulation analysis of competitive models in production today in Nevada*

• Each insurer uses their own model to offer a competitive price. • In a tie result, or where the price had less than a 10% differential, the policy

remained with the incumbent. A small portion of premium was declined by both.

• Study was conducted in two phases. • Scenario I: Insurer A’s data and portfolio make up the total market share.

Insurer A is the incumbent and uses their model to retain their existing portfolio, while Insurer B uses their model to grab profitable business from Insurer A.

• Scenario 2: Insurer B’s data and portfolio make up the total market share. Insurer B is the incumbent and uses their model to retain their existing portfolio, while insurer A uses their model to grab profitable business from Insurer B.

In 2016, we reported 56% of insurers had been using predictive analytics in underwriting for less than two years.8 The change management required to incorporate analytics into daily risk selection and pricing decisions is a process that evolves over time. It was no surprise a common theme emerged when we asked insurers to identify their burning questions about the efficacy of analytics: If we all start using predictive models, won’t we all be getting the same answers and there will no longer be a competitive differentiation?

Valen conducted study to illustrate how best practices for analytics implementation are designed to achieve specific business goals for each individual insurer, not drive toward a singular goal across insurers.

94.8% premium

loss ratio

5.2% premium

loss ratio

61.7%

65.3%

Insurer B wins nearly all of the premium with a 3.6% loss ratio advantage.

*State changed for anonymity



Valen Study answers the question: Is a predictive model resilient to a direct competitor who also has a model?A head-to-head simulation analysis of competitive models in production today in Illinois*

*State changed for anonymity

What does this really mean in practice?

Advanced data and analytics allow insurers to know more about what they insure and make better decisions. It enhances, rather than removes, the ability to differentiate from competitors.

Key takeaways: • Model uniqueness and

innovation provides a durable advantage

• Competitive differentiation comes from an insurer’s goals and expertise combined with the innovative use and implementation of analytics

• The model is a tool, not a strategy

Scenario 3: How much business can Insurer D take from Insurer C?• Insurer C’s data, portfolio make up the market share• Each insurer uses their own model to compete

Scenario 4: How much business can Insurer C take from Insurer D?• Insurer D’s data, portfolio make up the market share• Each insurer uses their own model to compete

51% premium

loss ratio

41% premium

loss ratio

69.2%

85.4%

Insurer C wins a majority of the premium with a 16.2% loss ratio advantage.

The two models did not provide the same pricing recommendations.

85% premium

loss ratio

11% premium

loss ratio

58.7%

68.1%

Insurer D wins a vast majority of the premium with a 9.4% loss ratio advantage.

(CONTINUED FROM PG. 10)


3. NEEDED: Skill development and tools to leverage new analytical tools and unleash the power of data to effect real-time decisions.

A Novarica study pointed to a small 22 percent of insurers who can provide real-time decision support into an employee’s workflow. That step, amongst others, is imperative to becoming an analytically-driven organization. Valen’s Applied Analytics framework outlines the critical practices, skills and tools needed to match business priorities with analytics to effect strategic outcomes. This framework applies to internal or third-party assisted analytics projects.

Address the industry’s talent crisisAs the number of near-term insurance retirees is measured in the Hundreds of thousands, the industry isn’t well positioned to attract new talent. EY estimates 70,000 professionals will retire next year, and The Institutes reports that just 5% of Millennials consider a career in insurance.9 Valen spearheads an all-volunteer, grassroots initiative with over 600 companies to make the industry attractive to next gen talent, called the Insurance Careers Movement. Hundreds of young professionals working in insurance are sharing their career stories as an authentic connection to the talent the industry desperately needs to attract. Learn more at insurancecareertrifecta.org.

Step 1Incorporate analytics into an overarching corporate strategy with C-Suite buy-in

Step 2Define measurable success metrics that are clearly outlined

Step 3Create a training and user adoption plan and involve the team early on

Step 4Build or leverage a platform for data warehousing, predictive modeling and integration into the user workflow


http://insurancecareertrifecta.org


Address the industry’s talent crisisAs the number of near-term insurance retirees is measured in the Hundreds of thousands, the industry isn’t well positioned to attract new talent. EY estimates 70,000 professionals will retire next year, and The Institutes reports that just 5% of Millennials consider a career in insurance.9 Valen spearheads an all-volunteer, grassroots initiative with over 600 companies to make the industry attractive to next gen talent, called the Insurance Careers Movement. Hundreds of young professionals working in insurance are sharing their career stories as an authentic connection to the talent the industry desperately needs to attract. Learn more at insurancecareertrifecta.org.

While it’s not a new trend, the persistent hammer of low investment yields has driven many insurers to find new tools to improve underwriting profit. This push towards underwriting profitability was a catalyst for the overall rise of analytics and data-driven decision making. The silver lining in this trend is that, at the same time as billions are being invested in disruptive technologies built on an analytics foundation, forward-thinking insurers are setting themselves up to play in the Innovation Age. By focusing in on the basics of risk selection, pricing, and better profitability, your customers also win. It’s a fortuitous cycle for insurers willing to challenge status quo thinking and look through a different lens for defining how they create value for policyholders.

A.M. Best explained why they are maintaining a negative outlook on commercial lines, “Intensifying price competition has emerged through virtually the entire commercial lines space…The need to manage through the continuing downward period in the underwriting cycle will be particularly challenging for companies that have failed to adopt the advanced analytics and enhanced data that enable their competitors to more effectively select and price business and manage claims.”10

Valen’s 5-year study results shown in these charts, reinforce the analysis from A.M. Best that insurers who understand how to use data analytics to support their underwriting strategy will outperform competitors who are falling behind the analytics curve. The study includes a dozen work comp clients who used an Applied Analytics framework to fine tune their competitive differentiation in an increasingly sophisticated market. Even in an environment where work comp improved, these insurers greatly outperformed the industry averages for both loss ratio reduction (2x) and premium growth (3x).11

Back to basics is a way forward

2x loss ratio

improvement

3x premium

growth

http://insurancecareertrifecta.org


Sources1. “State of Insurance Tech Trends” Presentation. CB Insights, September 2016.

2. “Financial and Market Conditions: 2016 - Commentary On First Half Results”. Insurance Information Institute, October 2016.

3. “The Future of General Insurance Report”. Atlus Consulting, December 2016. KPMG Insurance Report & Survey, Sept. 2015.

4. “The Four Horseman”. NYU Professor Scott Galloway, January 2016.

5. “J.D. Power 2016 Large Commercial Insurance Study”. J.D. Power, December 2016. “How to Keep Commercial Insurance Customers Satisfied”. Insurance Information Institute, December 2016.

6. “Why Customer Satisfaction Is Falling for Large Auto Insurers, Rising for Small: J.D. Power”. Insurance Journal, April 2016.

7. “U.S. Commercial Auto Insurance A Chronic Underperformer”. Fitch Ratings, April 2016.

8. Valen Analytics 2016 Outlook Report: Property & Casualty Insurance. Valen Analytics, December, 2015. Full Report

9. “2017 US Property-Casualty Insurance Outlook.” EY, December 2016. “Millennial Generation Attitudes About Work and The Insurance Industry” Survey. The Institutes, 2012.

10. “Commercial Lines Outlook Remains Negative as Market Conditions Become Increasingly Competitive Across the Segment”. A.M. Best, December 2016.

11. “Valen 5-year results study of loss ratio and premium growth in workers’ compensation”. Valen Analytics, September, 2016. Infographic | Press Release

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://learn.valen.com/2016-Outlook-Report.html

http://valen.com/wp-content/uploads/2016/09/Valen_Infographic_vF.pdf

http://valen.com/press-releases/shattering-industry-average-valen-analytics-customers-report-unparalleled-results-loss-ratio-improvement-overall-growth/

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 a provider of proprietary data, analytics and predictive modeling 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/


Documents

2017 OUTLOOK - Valen Analyticslearn.valen.com/rs/331-LIT-031/images/2017 Outlook... · 6 2017 Outlook Report: Property & Casualty Insurance 2017 The P/C buying cycle is inefficient