Data-enabled insurers are poised to transform insurance
Insurers that fail to cook up the right recipe for applying data and analytics to their business will find themselves playing catchup.
Do you have a favorite sauce/?
One of mine is a sweet chili sauce that I use on salmon and cucumber salad. Most everyone has a favorite sauce or a dip, be it marinara, tzatziki, tahini, soy, Sriracha, béchamel, béarnaise or barbecue.
The strange thing about sauces, though, is that they are food, but they aren’t a meal. They aren’t soup. They aren’t appealing on their own. They are simply meant to be “food support.” They complement and enhance. Sauces aren’t the thing. They get added to the thing to make it better. Everything tastes a little better with the right kind of sauce.
It is the same with data. Data isn’t the thing. It is crucial and can make or break your insurance operation. But data is a key supporting player, an integral part of the products, services, and experiences it enhances.
Data is the lifeblood of insurance and the key to unlocking the power and potential in much of what insurers do. Data is the key to underwriting established products properly. It’s the key to developing new products based on new markets and newly available data sources. It’s the key to winning the profit game. It’s the key to identify fraud. There is almost nowhere in insurance that won’t improve if you know how to apply data in the right manner. In insurance, everything goes better with data.
The problem is, many insurers are having trouble getting the sauce out of the kitchen. They have some of the right ingredients. They have some inspiration. They have a few recipes in their box. But they are stymied by the challenge of making something magnificent out of the bits and pieces that seem like they might go well together.
It used to be, with data, the time it took to figure it out didn’t matter so much. Insurers could take their time, create their models, and run some numbers. Insurers could spend years and years turning data into development, but that’s not possible today. Property insurers, especially, are in a spot where they must get their data and analytics working for them quickly, or their recipe could fail altogether.
The real solution to the data game comes from figuring out where the data may be applied and where it will have the most impact.
Why rush the recipe?
The state of the property insurance business is increasingly challenging. It needs a change of operations and technology that uses data intelligently to remain viable and profitable.
The rising number of extreme weather events and natural disasters has had a substantial effect on people and businesses. With rising property prices, materials and repair costs, many insureds lack sufficient insurance coverage, resulting in a gap and increased financial risk.
The impact of this is that property catastrophe reinsurance rates are rising. January 2023 renewals reflected 20-year highs, continuing a trajectory that began in catastrophe-exposed property versus non-catastrophe exposed property, leading to wide price differences.
Demand for coverage has grown as natural disasters continue to impact customers and insurers alike. And other factors such as inflation, supply chain challenges, dramatic property price increases and financial market losses also are driving the industry further into a hard market.
What is the solution?
Insurance losses are resulting in higher premiums for customers, higher premiums for reinsurance for insurers, and a refocus on the underwriting discipline, new products, and value-added services that focus on risk resiliency with prevention and mitigation.
So, where can any insurer find opportunity in the light of an environment that begs for adaptation and innovation? Data.
Commercial property buildings, for example, are increasingly becoming “smart” and delivering vast amounts of data through real-time connected devices integrated with Building Management Systems (BMS) that can be used to monitor, predict and prevent loss. In addition to protecting the building environment from risks such as water leaks, fire or machinery wear, sensors can assess external risks such as weather, to provide a 360-degree view of risk in real-time.
And there are loss control measures employed either by adjusters or the use of digital capabilities like video and self-surveys to capture pictures and other key information about properties and then assess that data for risk.
The adage of “control what you can control” is now front and center for insurers as they look at new risk management strategies as a crucial component of their customer strategy and their property lines of business. Insurers must increasingly focus their time and resources on how they can better assess risk for a broader set of properties and prevent losses to improve underwriting profitability and customer experiences. The solution will involve data, advanced analytics and other tools that harness data’s power. But the solution will only be viable for insurers that are willing to catch up, right now. Data will stretch insurers and their capabilities in the right direction, preparing them for a much more efficient and profitable future.
Enhanced property pricing and underwriting
P&C underwriting is at the heart of the insurance business. From evaluating individual risks and the exposures in an entire portfolio to assessing the risk, risk appetite, and ultimately profitability, underwriting is increasingly crucial in the face of rapidly changing risk factors. At the core of underwriting is data.
Insurance has always been a data-driven business, but access to new data sources for properties and the use of artificial intelligence and machine learning (AI/ML) is redefining and revolutionizing the industry. Risk management, underwriting, and loss control all involve gathering and using data needed for AI/ML models to accurately assess and identify risk, and manage and reduce risks.
Remember when the industry’s excuse for not using data was that customers didn’t want to give up their key bits of relevant information, even if it meant it would save them money? Now, the issue has flipped, especially in the commercial market. Overwhelmingly, small and midsize businesses are willing to share data to price and underwrite their commercial property insurance.
What’s more, the growth of smart devices and sensors throughout homes and businesses is accelerating. In addition to sensors (temperature, water, infrared, sound, etc.), we are witnessing tremendous growth in video surveillance (with mobile capabilities), particularly given the rise in crime due to societal risk. In fact, businesses are taking advantage of smart technologies to streamline processes, increase efficiency and safety, and provide security.
Insurers’ ability to create customer value from the Internet of Things (IoT) and all of its connected devices will depend on their willingness to dive in and start experimenting with new technology and data. Leaders are doing this and will outpace those who follow, putting them at risk of keeping their customers. Insurers that wish to remain viable, must catch up in their use of data in the commercial market.
Don’t forget personal lines consumers
Similar to SMBs, consumers are overwhelmingly interested in using their data for pricing and underwriting of their property insurance. According to CoreLogic’s Residential Cost Handbook, nearly 64% of homeowners don’t have enough insurance coverage.
This is not surprising, given the rise in property values. In November 2021, it was reported that the median price of single-family existing homes rose in 99% of the 183 markets tracked by the National Association of Realtors in the third quarter, with double-digit price increases seen in 78% of the markets.
]Over the last couple of years, prices have risen from 15% to over 30% on average, with some markets even higher. Imagine doing a digital loss control survey via self-survey or video on your entire book of business to better assess each property risk, but also to better assess reinsurance needs.
Adding fuel to the change, it is anticipated that smart home devices will continue to grow in popularity. More than 800 million smart home devices were shipped in 2020, and that figure is predicted to exceed 1.4 billion by 2025.
This growth in adoption offers insurers a significant opportunity to meet customer expectations by capturing and using the data for personalized risk assessments and underwriting. With the increased valuations and the growth of the adoption of smart home devices, customers are increasingly interested in personalized pricing and underwriting based on their own location and property details. Insurers must begin to address this need and expectation to acquire and retain customers. Customer loyalty is in jeopardy once personalized pricing takes over the market. Only insurers that are meeting expectations can expect to hang on to and expand their business and portfolio of customers.
But more than that, only insurers that truly understand their business and use data as their guide will know which business they want and which they don’t want. The data-smart insurer will benefit from the data-vetted portfolio.
This is an abridged version of a blog post that first published at majesco.com and is republished here with permission.
Denise Garth (denise.garth@majesco.com) is chief strategy officer at Majesco, where she is responsible for leading marketing, industry relations and innovation initiatives. Any opinions expressed here are the author’s own.
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