Mind the (analytical perception) gap
According to this recent Willis Towers Watson/Insurance Insider survey, many commercial insurers are generally feeling satisfied and confident about their use of analytics in their pricing, underwriting and portfolio management activities. But are they collectively over-egging just how well prepared they are for the inevitable continuing encroachment of digital trading models?
Click here to download the survey results
As context, recent research, notably from Lloyd’s, has shown active portfolio management to be a key area of focus for commercial insurers and that, done well, it can be a material performance differentiator.
This focus has taken many forms, from more explicit and detailed financial planning and volatility management to better controlling exposure mix and providing portfolio context and impact analysis as ‘decision support’ inputs for case underwriters.
Investment in portfolio management can and often does have a positive knock-on effect on pricing and underwriting sophistication, and through our many consulting engagements we have seen a wide range of maturity and capability in these business-critical areas.
A small number of highly sophisticated players, with modern, integrated pricing, underwriting and portfolio management approaches demonstrate how this ‘virtuous circle’ can benefit the entire operation.
On the other hand, in our experience, the impressive examples are considerably fewer in number than those carriers still working with (some or many) comparatively basic, unconnected and manual systems, processes and data.
The survey was commissioned to build on what we have observed to try and build a more complete picture of the maturity of pricing, underwriting and portfolio management practice across the marketplace. We had a pretty clear idea of what to expect – a few relatively sophisticated outliers leading a ‘pack’ with a lot to do.
Differing perceptions
As such, some of the results diverged from our own experience, with the market largely assessing itself to be well on the way to embedding analytics in business as usual.
As an example, more than 83% of survey participants stated they were able to measure, manage and control the quality and consistency of pricing and underwriting decisions ‘well’ or ‘very well’, with comparatively few respondents rating themselves as ‘poor’. This suggests that some respondents’ benchmarks of what is going to provide competitive advantage markedly differ from those we would suggest represent developing best practice. This apparent difference of perspective warrants further analysis and explanation.
Two possible explanations are as follows:
The market really has made a significant jump forward with rapid and wide progress in integrating advanced analytics into pricing and underwriting.
Many insurers that feel comfortable with how they are cutting their analytics cloth now risk being exposed to digital shortcomings in the not too distant future if they rest on their laurels, effectively leaving a gap between expectation and reality.
From a purely objective point of view, Option (1) is a viable conclusion, although it is somewhat at odds with previous surveys. If that is indeed the situation for the market as a whole, the key will be to capitalise on established momentum to push commercial lines pricing and underwriting to new heights. But subjectively, we have to question what companies that responded to the survey are benchmarking themselves against.
Option (2), whilst viable in the light of contradictory evidence, is difficult to validate against these survey findings. Yet, given our assertion of ‘what good looks like’, we think this option merits further investigation to inform a personal judgement on the viability of that conclusion. Is there a divide between perception and reality?
What does ‘good’ look like?
From where we sit, effective pricing manifests itself within an insurance business as confident, accurate, data-led and timely decisions as part of the wider strategy and business plans.
In order to describe effective pricing, it’s important to recognise the close links between pricing, underwriting and active portfolio management and consider the capabilities required to be greater than the sum of their parts.
At a case level, this cohesion results in a transparent, justified and logical calculation of a premium attached to a specific component of cover; aligned to the corresponding contract terms; underpinned by robust analytical insight; and, benchmarked against the wider portfolio.
At a portfolio level, efficient and effective mix management and planning actions across multiple dimensions (e.g. line of business, region, industry, channel) are underpinned by robust analytical insight with a clear link between portfolio objectives and case actions.
We see that, in high-performing businesses, emphasis has been placed on the areas of overlap between these three functional areas and the data and technology capabilities that support them. For example, such overlaps offer:
Consistency: Portfolio segmentation is supported by robust rate strength metrics and the ability to compare core coverage and extension/restrictions provided like-for-like
Decision support: Case underwriters have access to portfolio data benchmark cover and terms from similar risks in the wider portfolio
Appropriate sophistication: Technical pricing pools exposure and claims information from across the whole enterprise (e.g. broad property insight from multiple ‘products’ that offer property coverage). This information is enhanced by external data enrichment to form robust statistical models that underwriting experts then infuse with their domain knowledge
Efficiency, agility and pace: Data from internal and external sources are seamlessly integrated into a systems environment, removing the need for re-keying and leveraging the enterprise data asset
Consequently, a strategic outlook in respect of the enterprise data asset, a robust enterprise data strategy and technology applications that support analytical operations are part and parcel of making progress in these areas.
And as a point of reference, more than 70% of survey respondents said they are confident they have a clear, defined and deliverable data strategy to support the objectives of pricing, underwriting and portfolio management. This again strikes us overly optimistic.
Reconciling the results
So, back to the survey results.
We passionately believe that data and analytics effectively deployed to connect underwriting, pricing and portfolio management are key differentiators. Evidence from the recent joint Lloyd’s and Willis Towers Watson survey of portfolio management backs this up, as it showed a meaningful gap in results between the best and worst.
These Insurance Insider/Willis Towers Watson survey results alone suggest that the market has made more progress here than is evident, certainly to us, on the surface. As advocates and devotees of the use of data in insurance, we have to accept that as a possibility.
But we have to nail our flag firmly to option (2) above. Instinctively, and from our wide exposure to current market practices, we believe some commercial insurers may be creating a gap between perception and reality in what they are ready and able to do with advanced analytics as more business goes digital.
Click here to download the survey results
