Unleashing the Value of Advanced Analytics in Insurance
Advanced analytics can transform how insurers do business, but realizing its potential requires complex, large-scale organizational changes.
October 2015 | by Robert Harris
Actuaries using advanced math and financial theory to analyze and understand the costs of risks have been the stalwarts of the insurance business forever. Indeed, the analytics performed by actuaries are critically important to an insurer’s continued existence and profitability. Over the past 15 years, however, revolutionary advances in computing technology and the explosion of new digital data sources have expanded and reinvented the core disciplines of insurers. Today’s advanced analytics in insurance push far beyond the boundaries of traditional actuarial science.
Consider how this has affected underwriting in personal auto insurance. Instead of relying only on internal data sources such as loss histories, which was the norm, auto insurers started to incorporate behavior-based credit scores from credit bureaus into their analysis when they became aware of empirical evidence that people who pay their bills on time are also safer drivers. While the use of credit scores in private-auto-insurance underwriting has been a contentious issue for the industry with consumer groups, the addition of behavioral and third-party sources was a significant leap forward from the claims histories, demographics, and physical data that insurers analyzed in the past.
Now a new wave of innovation and applications of advanced analytics is emerging in all types of product lines and business functions. Life insurers and property-and-casualty insurers have lagged behind other financial-services sectors, but they are now catching up in their adoption of predictive and optimization models in business processes such as sales, marketing, and service. The overall effect of these developments will be greater depth and breadth of analytics talent throughout organizations, significant improvements in management processes, and new products that deliver greater value to customers.
While the impetus to invest in analytics has never been greater for insurance companies, the challenges of capturing business value should not be underestimated. Technology, as everyone knows, changes much faster than people. Historically, competitors achieved significant performance differentiation mainly by combining scale of exposures and underwriting expertise. We are entering a period when this picture will change. In the future, the creative sourcing of data and the distinctiveness of analytics methods will be much greater sources of competitive advantage in insurance. New sources of external data, new tools for underwriting risk, and behavior-influencing data monitoring are the key developments that are shaping up as game changers.