Data is the insurance gold mine hiding in plain sight

Data has become the world’s most valuable resource. And the hunt is on.

Companies across all industries compete for information in order to gain an edge in the way they conduct business. Five of the most valuable companies in the world — Apple, Alphabet, Microsoft, Amazon, and Facebook — are largely entrenched in the data industry.

This influx of data across sectors has led to firms seeking new ways of receiving information to gain an advantage. On Wall Street, this is highlighted by the phenomenon of alternative data.

Hedge funds, investment banks, and asset managers have always sought an information edge to better their investment strategies. The difference is that they are now scouring nonfinancial data in order to do so. And while sophisticated quantitative hedge funds originally led the pack, alternative data has made its way to the mainstream. Experts now predict that alternative data will be a $7 billion industry by next year, with over $1 billion expected to be spent on data this year alone.

Ironically, Wall Street and other industries are only now catching up to what the insurance industry has known and practiced for decades.

Related: Data was king at CES2019… But how will that affect insurance?

Flipping data use on its head

Insurance companies have always used a mix of internal and external data sources to make underwriting decisions. Internal data can include information collected when writing policies, historical claim and payout statistics, and actuarial tables built over time. External data can include everything from traffic patterns to demographic profiles to inflation and other macroeconomic variables.

But by flipping data use on its head, insurance companies can now add directly to their own bottom-line revenue by monetizing their own data assets. After all, more and more Wall Street investors are waiting in line to pay for exactly that type of anonymized data.

Here’s a prime example of how this works. Investors and analysts focused on the auto sector normally have to wait for a company’s earnings call to find out how the previous quarter went. But now, investors are building auto company revenue from the bottom-up by tracking real-time sales, as estimated through insurance policies. That’s because when a consumer buys a car, they must also buy the corresponding insurance policy. That “leftover” data from the insurance companies — once aggregated and anonymized — is actually gold to the investor.

At its core, this is innovative research for the investor and bottom-line revenue generation for the insurer. Insurance agencies do not disclose sensitive information regarding who is actually buying the cars. What is most valuable is the simple number of policies per model and manufacturer.

This is just one way that insurance companies can add to their bottom lines by monetizing existing data.

The housing market is another key indicator for investors and analysts. Like car purchases, insurers have knowledge of activity in the housing market because every house that is bought is eventually insured. And that information can indicate economic growth and population trends in any given area.

In addition, with insurance agencies providing flood policies or natural catastrophe protection, the number of policies will show areas that are more susceptible to these types of events. This may provide key economic information since it highlights the likelihood of potential losses for not only homes, but for local businesses.

Likewise, insurers hold onto data regarding luxury goods, which can provide a glimpse into not only sales, but also purchase frequency and customer demographics. And with commercial shipping, this can provide valuable information on the import and export of goods. Analysts would also be able to monitor the shipment activity of different countries.

Related: How data-driven marketing insights help sell insurance

The data gold mine

The list goes on since all businesses protect their most valuable assets using insurance. Everything can be insured, from data and reputation via cyberattack protections to physical assets, such as mining equipment, and future revenue streams, such as crops. Are miners investing in new equipment? Are companies increasingly worried about the threat of a cyberattack? These are questions investors care about. Where is growth happening? Where is there contraction? And what are the risks that might not have been thought of yet?

In the coming years, dozens of similar examples will be put into use every day by investors. With current Wall Street professionals willing to spend up to $1 million per year for single datasets, data has truly become the next gold mine.

Related: Embracing a new way to see data

Bill Dague (bill.dague@nasdaq.com) is the vice president of alternative data research at Quandl. The views expressed here are the author’s own.