Leveraging Analytics for Insurance Profitability and Retention

Profitability and retention form one of the pillars of an Insurance Company’s ability to deal with economic changes, good and bad. When the economy is good, we want to take advantage of it and grow our profitable business. In challenging economic times, we need to stay profitable and focus on retaining good customers. Proactively dealing with challenging economic times helps ensure companies will be in a better position to take advantage of the coming good times.

Data and analytics remain time-tested, key tools for insurance companies in this economic defence. With analytics we can identify, understand and leverage early indicators of risk change, monitor and understand what may be occurring at a macro level, and leverage this data to take appropriate defensive action.

With data and analysis, we can begin to understand early indicators at a risk level that indicate where risk is increasing, and attention is required. For instance, late payments, increased frequency of smaller claims, or requests for reduced coverages or limits are indicators of an insured struggling. However, often these indicators are not correlated to provide an indication that action is necessary. It is a known fact that financial stress can lead to a reduction in maintenance of the insured property, which sets the risk up for larger claims in the future. Leveraging analytics and automation can identify potentially deteriorating risks and provide an opportunity to be proactive with focused loss prevention, product offerings, underwriting and where necessary, shed risk.

Retention is also key in the battle to remain profitable. A known fact in Insurance is that the first few years for a group of new policies will have higher claim costs. Once the policies have “matured” for a few years, claims cost as a group typically normalize. It is during the initial couple of years that the Insurance Company is learning more about their new customers and weeding out bad risks and adjusting other risks with rate, coverage and deductibles. Add in the higher acquisition costs for new policies and a good policy needs to remain on the books for many years before it begins to drive profitability. Therefore, it’s in the company’s best interests to retain these “matured” policies for as long as possible. Keep in mind your competition is also after those good policies. And in this regard, analytics once again is a great tool to monitor retention and watch for indicators that it may be under “competitive” attack. It is not enough to know and monitor the overall level of retention. This needs to be monitored at lower levels such as location, agents/broker, policy types, major coverage, etc. Early identification of potential threats allows for planned actions to defend against them.

Setting aside the above points for a moment, profitability can also be challenged due to shifts in macro conditions that threaten the business and insured risks. Here also, analytics can assist in the early identification of increasing risk. For example, shifts in weather-related claims are in the news regularly. Increasing intensity of storms, shifts in the normal tracks that the storms take, and increasing droughts in certain areas lead to increased wildfire risk. Mapping current exposures against the changing weather data can identify areas to adjust coverage, rates, and areas to avoid completely. Not all macro conditions are weather related. Companies need to leverage analytics of their business against socio-economic changes in neighborhoods, changes in technology and other social trends.

Lastly, as the saying goes, a good defence is often a good offence. So, take heart, there are opportunities for profitable growth during both good and challenging economic times. Creating tailor-made products for your target audience is a great way to differentiate and grow during challenging economic times. By nature, individuals regularly shop for alternatives (or at least for the best product and price comparisons). Once you know which segments represent your most profitable target audience, you can begin focusing on their specific needs. Herein lies one of the best applications for analytics as it empowers users to identify the most profitable business segments and in doing so, target more effectively.

On a parting note, please keep in mind that retention and profitability won’t manage themselves. Rather, effective management of both areas requires data-driven decisions to ensure the organization maintains a profitable course, particularly as internal and external factors change. Consider the possibility that it really is different this time and what was profitable in the past may or may not be profitable in the future.