3 things to know about adapting to new market dynamics in commercial lines

Starting in 2015, insurance saw signs of the innovation economy creeping into an already complex market.

While other industries might be familiar with the pervasiveness of disruption, it's just the tip of the iceberg for insurance, and innovators in the field are not going to wait around for the rest of the industry to catch up.

In fact, a study from Silicon Valley Bank shows that tech innovators are often bullish on a business climate they see as ripe for growth, and that means insurance. So while it may be tempting to dismiss disruptors because of recent setbacks — for example, Google Compare's shutdown or Zenefits' recent troubles — the persistence of this economy defines how we will see the market change in the rest of 2016 and over the next few years.

While this is happening, insurers are simultaneously dealing with market share consolidation in the property and casualty industry as data-driven insurers grab more market share and mergers and acquisitions activity increases.

In order to compete with the changing landscape, insurers must adopt a sustainable long-term data strategy and internally prepare their organizations to embrace the changes necessary to compete.

Here are three things that insurers need to know about adapting to the new market dynamics for commercial lines:

1. Market share consolidation is happening

Last year, Denver-based insurance data company Valen Analytics discussed how the personal lines market became so consolidated and predicted that commercial lines will be next.

Now it's here.

It's no coincidence that the historically troubled line of Workers' Compensation only became profitable for the first time since 2006, while significant shifts in market share appear among the top 10 insurers.

Companies such as Travelers and Berkshire Hathaway are known to have a well-established holistic analytics strategy driving their businesses and have developed a more targeted and sophisticated customer acquisition strategy in order to locate the best risks and price them competitively.

Adding to the consolidation issue is the continued growth of mergers and acquisitions on a global scale, with the U.S. showing the most activity at a 61% year-over-year increase. Commercial insurers need to arm themselves with more data so they can compete with companies targeting niche markets and leveraging more granular segmentation of mainstream business.

Having the tools needed to compete for this business is crucial to staying ahead of the pack during a tumultuous period of change in the industry.

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2. Combining human instinct and analytics

Aside from the external factors that are instigating change in insurance, insurers also face damaging internal struggles when it comes to innovation.

An organization-wide data strategy necessary to compete in this market can be developed for longevity only if all members are aligned with expectations and goals.

A recent study Valen conducted found that this is not the case among many insurers today. In fact, 77% of insurers surveyed found underwriters and actuaries at odds over how to price policies, with 43% believing that underwriters dismiss data for judgment. A good portion of this resistance is due to a misrepresentation and unclear explanation of how analytics should be implemented. It is not a replacement for underwriters, but a tool to make their jobs easier and more efficient.

The chart shows results from a study Valen did with a regional property and casualty insurer to prove that while technology is an enabler, humans still generate the necessary results to drive success.

The different risk scores seen in the chart are categorized on a risk quality scale from 1 to 10, with 1 being indicative of the best risks in the data set and 10 being indicative of the worst risks.

The green line on the chart represents the underwriters' predictions of the risks — or how much debit or credit they selected — and the red line indicates the predictive model. The blue line represents the average of the underwriters' prediction and the predictive model, which shows much better lift than the other two lines — with 75% better than average, all the way up to 120% worse than average. This study showcases a consistent pattern we see across accounts: The combination of human expertise and analytics is the best way to stay competitive with pricing.

Source: Valen Analytics

3. The difference between a reactive and a proactive insurance company

Making decisions in hindsight used to be a necessary evil for insurers.

But now it's a key differentiating factor between data-driven insurers and traditional ones. Insurers no longer need to solely react to the market cycles and past performance of an account.

If you're not using data analytics to empower underwriting, you're relegated to gaining insights through the rearview mirror, making it tough to compete with others who are more equipped to stay competitive and obtain the best risks at adequate prices.

But how important is a more targeted acquisition strategy? The following chart indicates just how much the rules are changing in commercial lines insurance:

Discovering that just 10% of a book of business contributes to more than 50% of expected profit is a clear indication that the insurers who are able to identify the best 10% of the market are going to be able to compete on and win this business.

In order to compete in this new commercial lines market, insurers must be prepared with a long-term and sustainable innovation strategy that allows them to stay protected amid the disruption. That means aligning your organization based on a clear set of goals, and success metrics that are agreed upon by everyone involved. As the market dynamics continue to change, the insurers who aren't able to become smarter and more efficient about the risks they go after will be unable to effectively compete.

Dax Craig is CEO and president of Denver-based insurance data company Valen Analytics.

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