Insurance Analytics – Turning Data into Dollars (from Deloitte)

The insurance team at Deloitte has recently published an excellent new report on insurance analytics.

I find this report enlightening because it covers all aspects that make analytics so valuable to insurance organizations.

• Data: We live in the big data era. Insurers that fail to take advantage of the data available to them to make better business decisions are essentially surrendering a huge advantage to their competitors. They are also forfeiting additional value they could provide to their customers.

• Algorithms: Traditional analytics were all about analyzing past data. Advanced analytics are all about using this data to predict future business outcome and help managers make better decisions to optimize these outcomes.

• Integration: No longer are analytics confined to the back office. Today’s competition is not only about making better decisions, but making them quickly enough to stay ahead of the field.

• Organizational culture: Making use of analytics requires managers to trust the data. This is not always easy. The data and analytics sometimes point in a direction that contradicts intuition and current business practice.

The report also does a good job explaining how seemingly small changes can make a sizeable difference in business performance. In highly competitive markets such as property and casualty insurance, these small changes often end up what separate the winners from losers.

Click here to access the report.

Strategy Meets Action: An Interview with SMA Founder Deb Smallwood

Deborah Smallwood is the founder of Strategy Meets Action, a strategic advisory firm offering a unique blend of advisory, research, and consulting services. Insurers and solution providers turn to SMA for insight and guidance on business and IT linkage, IT strategy, and how to make smarter IT investments across the business value chain.

Prior to launching Strategy Meets Action, Deb held a variety of leadership roles as the VP of the TowerGroup Insurance Practice, Chief Transformation Officer at ICW, Partner at KPMG LLC, and Head of Application Development at Liberty Mutual Commercial Lines.

Deb was a guest speaker on our recent webinar on Cloud Pricing Analytics. Following the webinar we sat down with Deb to discuss some of the broader issues facing insurers today.

Q:  Your firm is called “Strategy Meets Action” so we should talk about the strategies and the actions insurers are taking. But before we go there, what are the trends that drive these strategies and actions? What are the challenges insurers are trying to address?

DEB SMALLWOOD:  We have identified a number of major trends that are driving change in the insurance marketplace. These are highlighted in the slide we used in the webinar.

The biggest challenges for insurers stem from a lack of normal growth in the economy. The combination of a down stock market, zero interest, and a soft insurance market is exceptionally dismal. There is very little green-field new business out there, because people aren’t buying new cars and people aren’t buying new houses and aren’t upgrading things. The only way to grow at the top line is to steal business from your competitors.

The only way to grow bottom line is to cut your expenses, which insurers have done over the years. But, this is where pricing precision and matching the right price to the right customer are really key, because that is what enables you to write good business – healthy business that you can make a profit on.

 

Q:  Changes seem to come at a faster pace these days; do you see insurers responding to challenges in a timely manner, or are they mostly late in responding?

DEB SMALLWOOD:  I’ve been in the insurance industry for a long time. The pace of adoption of new approaches and new technologies in this industry is generally slow, but when you have a leader making moves that start impacting competition and profitability, then all the other insurers want to jump in.

What Progressive has done in personal automobile is a good example. Ten years ago, they changed their distribution strategy from just independent agents to go direct. They really pushed the envelope in terms of pricing precision, self-service, and expanding distribution channels beyond the independent agent. They significantly invested in call centers and enabled them to actually do quoting and sales. They were the first to invest in self-service portals. They turned the 3-5 rate tiers that insurers used to have into hundreds of rate segmentations. They were the first to incorporate straight-through processing in personal auto.

Over the last 10 years, these changes pushed other insurers to make significant investments. There are still insurers that aren’t doing straight-through processing or using predictive analytics. But, their book is probably shrinking and unprofitable.

 

Q: How does that impact insurers’ attitude towards technology investment?

DEB SMALLWOOD: Technology is now an integral part of the business processes. It is woven into the fabric of the business. After September 11 and the dot-com bust, the industry froze. It wasn’t until about 2003 that they started to open up the purse strings again.

When the 2008 crisis came, they kept spending. They may have delayed some decisions and more closely scrutinized projects, but they kept spending. That tells me they all recognize that those that stopped spending in 2001 and 2002 fell behind. I was just talking to an insurer the other day and they said, “Oh, we made these huge investments three to five years ago and then we sort of stopped and everyone caught up to us.” They all know that they can’t fall behind – that they have to keep pace.

We see this trend continuing. Our preliminary research from our annual EcoSystem survey indicates that 56 percent of the insurers are increasing their budgets for 2012. Another 37 percent say budgets will remain flat, but even some insurers who go into the year with flat budgets will spend more if the business case and value warrant investments.

 

Q: What do you see as the key areas for these technology investments?

DEB SMALLWOOD: We have identified ten areas that are imperative for insurers in order to compete. You don’t necessarily have to do them all today, but they need to be on your roadmap or you need to acknowledge that you’re not going to do them and clearly understand why.

The number one project last year, this year, and next year is policy admin and rating. These systems have been around for some 30 to 40 years. In today’s flat market and competitive environment, insurers need to connect either to the customer or to their independent agents, make it easy for them to push business so that it flows in, and then make sure they’ve priced it appropriately.

The old policy admin systems are just too old to support new sales and service initiatives. Insurers need to fix these policy admin systems and put modern ones in place so they can hook in predictive analytics models, take rules out of COBOL and assembly code and put them into rule engines, and plug in sophisticated workflows that can connect to different channels to enable straight-through processing – be it through an agent, self-service, or through comparative raters.

The second most common project is around data and analytics. It could be master data management. It could be creating data marts. It could be using analytics in claims, underwriting, pricing, and/or actuarial – but, it’s about data and analytics.

Claims and billing initiatives also rank high on the priority list. There’s also a lot of spending on enterprise content management, customer communication, and customer relationship management.

Q: What, in your mind, are the most exciting opportunities for insurers as they look to leverage new technologies moving forward?

DEB SMALLWOOD: There are five new technologies that we think are the most important for insurers to leverage.

One of them is around data and analytics – using these capabilities and technologies to take underwriting and pricing precision to the next level, using them in claims, using them in marketing.

I think social media is going to have major influence on the way people in interact. We don’t know yet how it’s going to impact insurance, but it will. It’s going to be felt throughout the whole value chain.

The mobile evolution is changing how people are communicating. It’s not going to be sufficient for insurers to just have mobile devices connected to quoting or first notice of loss or billing. They will need to have modern applications in the background.

My new conclusion on the Cloud is that once insurers can get past some of their concerns around security and acknowledge the fact that they already have applications running outside their firewall, once they start getting comfortable with the idea, it will help them bypass the bottleneck in IT. It’s going to offer new options for IT delivery. The IT director or the CIO will become an orchestrator of many options for IT delivery. Their role will shift to managing these options versus actually delivering them. I get pretty excited about all these possibilities – good things will come of them.

Additional Nuggets from the Celent Pricing Optimization Webinar

The recent  pricing optimization webinar with Celent’s senior insurance analyst Nicolas Michellod has generated a great amount of interest among European insurers and others.  Nicolas and Celent have been kind enough to allow us to post here a quick recap of some of the key questions addressed in this webinar.

For a complete coverage of the presentation, a recording of the webinar is now available.

Q: Do you see more of the insurance business going direct across Europe, and if so what do you see as the impact of such a trend on the importance of price optimization?

Nicolas Michellod: I think the adoption of online insurance is just a matter of time in the European markets where it has not really taken off yet.  If you look at Switzerland, for instance, it is one of the countries where the density of access to the Internet is one of the highest, so I think it is just a matter of time before online insurance becomes widely adopted in this country the same way it has been in the Netherlands and UK.

I want to emphasize that the use of price optimization is not limited to online insurance, and there are many companies that use it as a back-office function. But once they adopt online insurance, price optimization becomes a must, so these companies will be forced to invest in real-time price optimization.

In the more competitive markets, price optimization is essentially a must for survival. If we are talking about an online insurance company that wants to quickly capture market share in a less mature market, implementing price optimization would provide a better understanding the market and a clear advantage over the competition.

Q: You are describing price optimization as a revolution in progress.  Can you explain what you mean?

Nicolas Michellod: For decades, insurers have used a cost-centric approach to define insurance product prices.

The question we have here is can insurers do things differently? Are there better ways to do things that will bring more value to the insurance business and also to the clients?

With price optimization, more elements are taken into consideration. We can describe these using the four key steps of price optimization.

The first step is analysis and segmentation. Customer data allows insurers to analyze and identify segments through modeling of customer behavior, claim propensity, and the market environment.

The second step is defining strategies and scenarios that integrate the models to predict volume and prices, identify the best prices, and measure the impact of price changes to find the optimal tradeoff between supply and demand.

Third step is execution, which includes running simulations and comparing the results with the objectives of the scenarios defined.

Finally, and this is a key aspect, is the closed-loop for monitoring and recalibration of the models. Any pricing strategy that is judged to be optimal at some time will sooner or later lose its validity. Based on data collected from the market, new constraints and parameters can be identified to trigger the necessary recalibration.

I think it’s very important to understand that this is a big change from what insurance companies have been doing in the past, which is why we call it a revolution in progress.

Insurers can actually join this revolution in two steps. The first step is implementing price optimization techniques within the back-office systems, while the second steps is a real-time approach that automatically gathers data from the front-end system and optimizing online prices.

Q: How can companies gain competitive advantage by using price optimization?

Nicolas Michellod: I think it is very important for an insurance company to understand the benefits of price optimization.

The first benefit is shorter time to implement new tariffs.  The closed-loop process of testing and price optimization enables new pricing models to be generated within hours.  There is no need to rework the price scheme as long as the parameters influencing the models do not change.

The use of sophisticated techniques to optimize pricing is a second great benefit.  Price optimization leverages sophisticated methods such as strategy models and scenario simulation to improve underwriting results. Using these methods helps insurers refine their pricing techniques and better comprehend the logic behind parameters and factors influencing price calculation.

Thirdly, with price optimization, insurers can make full use of their data.  The insurance industry is well-known for having a broad set of quantitative data, but sometimes fails to use it efficiently.  Price optimization helps insurers maximize the use of data to refine pricing models and strategies.

Finally, price optimization helps capture the market behavior at no additional cost.  Through live field testing, insurers are able to capture useful information about customers’ behavior directly from the market.  Price optimization tools allow insurance companies to obtain free of charge what in the past they had to pay marketing and research agencies to provide.  And I work for a research firm, so I know that

Q: What are some of the key success factors for companies that implement price optimization?

Nicolas Michellod: I think there are key factors for price optimization success in terms of project and staffing.

The first key to success is the team working on the price optimization project within the insurance firm. Price optimization is new to most insurers. It represents an important business enabler, especially during these times of crisis where insurers have to find growth opportunities in a soft and difficult market. I believe it is essential that insurers build a dedicated team working exclusively on this subject. The goal of such a team would be to review how pricing can be improved and how the company could leverage existing technologies to apply more sophisticated pricing models.

The second aspect is mixing multi-functional and multi-skilled resources. Each function has unique background and interests. Having a multi-disciplinary team helps the insurer avoid outcomes that are biased by such considerations.

A third and very important aspect is IT expertise. Some IT vendors specialize in predictive analytics and price optimization. They have acquired the knowledge and expertise to understand all the factors that can make a price optimization program successful. They combine IT and business capabilities that help support not only the insurer’s IT staff but also its business team and specifically the mathematicians and actuaries.

Last but not least is promoting the spirit of innovation. I see the implementation of price optimization as a matter of innovation within the company, because talking about price optimization is re-thinking the whole business. With the emergence of business and IT tools, insurers have been able to refine their analysis and the enumeration of certain risk elements. But the biggest value these tools have brought to the industry is the democratization of risk evaluation principles. We are now in an era where specific teams are built within insurance companies to ask questions that have never been asked before and then build models that include dynamic parameters to improve pricing. That’s why it’s very important to understand that implementing price optimization should be done with a spirit of innovation and with tight cooperation among different types of people within the organization.

Questions & Answers from the Pricing Optimization Webinar with Celent

The recent pricing optimization webinar with Celent’s senior insurance analyst Nicolas Michellod drew a crowd of pricing professional from leading insurers in Europe and all over the world.  If you missed it, a recording is now available.

Since we ran out of time to answer all the questions at the end of the webinar, we are posting a few of the remaining questions and the responses from Nicolas Michellod.

Q: Does price optimisation always drive rates down? What evidence is there for increasing rates?

Nicolas Michellod: Price optimization does not always drive rates down. Actually price optimization’s goal is to find the optimal trade off between supply and demand at a given time taking into consideration multiple parameters including market environment and claims information with relation to a segment of clients, a type of products or other elements. Strategies defined by the insurance company in the frame of the price optimization process allows the company to determine models each of them applying certain approaches. For instance, a specific insurer can decide to adopt an aggressive approach to pricing a certain type of product for a specific segment because it thinks that with high volume the overall profit will be positive while preferring to adopt a more careful approach in pricing another segment of customers because of particular market conditions or even recognition of specifc weaknesses in this segment that would require not to enter into a price war in this category of business. Overall, price optimization does not necessarily drive rates down, I would say it gives more granularity and parameters to play with than the historical way of pricing which was essentially based on risk assessment per line of business. In terms of evidence for increasing rates, as already mentioned above, this depends on the strategy of the insurance company. In my example above I mentioned two different pricing approaches based on a clear definition of where the company desires to focus its effort versus being more selective in another line of business and/or segment of customers. In other words what is true for one insurer is not necessarily good for another one but we can assume that an insurer focusing on standard car insurance sold exclusively online will try to do its best to appear in the upper level of ranking on aggregators’ websites. On the other hand if this same online insurer decides to launch a new product, whose market is perceived to be emerging with high future potential and for which the insurance firm does not really have detailed information (let’s say online pet insurance) then the company will prioritize a moderate pricing and even increase its rates progressively if the price elasticity of demand is not that high in comparison to a very mature market where many players are competing.

Q: Does price optimisation assume a totally commodity product?  What is the impact of different product features?

Nicolas Michellod: No, price optimization is not only a technology for commodity product. As mentioned in my presentation there are insurers taking advantage to review their pricing methodology and investing in price optimization in the frame of a more global project consisting in promoting automation. Actually price optimization is also a good opportunity to automate the underwriting process for instance. I know a large insurer who has decided to implement Business Rules Management System (BRMS) and SOA in order to increase the Straight-Through-Process proportion of its underwriting process even in lines of businesses where automation has always been difficult to achieve (e.g. car fleet or working compensation insurance for small corporations). Doing so implies an investment in back office price optimization technology. In terms of impact of different product features it is important to say that defining rate models and pricing strategies is easier when dealing with commodity products. However a product remains an addition of covers, which are themselves an addition of benefits an insurer proposes to underwrite. Here again what is key is to get to the optimal granularity to be able to apply different rating models and then simulate strategies at the different levels of the insurance product (cover, list of benefits and then single benefit level).

Q: For a company with back-office optimisation, how much it will cost to build the live opt model, and how long it will take?

Nicolas Michellod: I do not typically have the price of such a project. I would receommend not to neglect the analyisis phase which consists in identifying the gaps between the pricing capabilities and the desired pricing capabilities. Some insurers will not have the same objectives when deciding to implement real time price optimization but assuming the company already uses back-office price optimization the cultural change has already been made and therefore the change management program linked to such a project is something that can be avoided. In terms of IT investments in IT tools and data integration I think Earnix is certainly better placed to answer the question.

Two New Opportunities to Learn about the State of Pricing Practices in General Insurance

European insurance executives and pricing professionals are offered two new opportunities to get up-to-speed on the latest trends and developments in pricing practices in General Insurance.

Pricing Practices Survey

Earnix is conducting a survey on pricing practices in European General Insurance.  Insurance executives and pricing professionals that respond to the survey will receive a summary of the results, allowing them to find out how their industry peers have responded to questions such as:

• What are the top challenges in the pricing process?
• What are the external and internal drivers for price changes?
• How often are rates updated?
• How are prices calculated?
• And many more

The survey is accessible online at www.earnix.com/survey.

Pricing Optimisation Webinar with Celent Analyst

Celent senior insurance analyst Nicolas Michellod will be the speaker at a webinar on “Keys to Success in Pricing Optimisation.”  The webinar will take place Tuesday, 17 May 2011 (1600 CET/1500 GMT), and will address the following topics:

• Trends and winning strategies in European general insurance
• Capturing customer value with pricing optimisation
• Real-time pricing: a competitive weapon
• Keys to success in implementing pricing optimisation

Attending the webinar is free but requires registration at www.earnix.com/webinar.

Trends in US Auto Insurance: An Interview with Meryl Golden

With over 20 years of property & casualty insurance management experience, Meryl Golden has a proven track record of operational excellence leading to consistent revenue and profit gains for top US insurers.

Back in the insurance industry after taking a hiatus to join a hedge fund, Meryl is at a unique vantage point to observe the latest developments in the US insurance market.

Insurance for a Smarter Planet: An Interview with IBM’s Mark Lewis

Mark Lewis is the general manager of IBM’s Global Insurance Industry. He is responsible for IBM business with insurance clients as well as worldwide strategy, development of skills, assets, and capabilities to better serve IBM’s Insurance clients in all parts of the world.

Q: What are some of the key trends you are seeing in the insurance industry?

 

The Impact of Customer Behavior on the European Auto Insurance Market: An Interview with CSC’s Emmanuel Geli

Emmanuel Geli oversees the insurance practice for CSC throughout the southwestern region of Europe.  With over eleven years of service with the company, he is responsible for the delivery of strategic business consulting to insurance company clients throughout Belgium, France, Italy, Luxemburg, Portugal, and Spain.

Q: Over the last few years, have you seen any shifts in the needs of the insurance companies you are working with?

New research about Online Insurance and Price Optimization

I came across two very interesting new research papers by Nicolas Michellod from Celent – both relevant to our discussions on Customer Value and Price Optimization for non-life Insurance.

Price Optimization in Insurance – A Revolution in Progress provides an in depth discussion on what price optimization is (also sometimes referred to as “demand driven pricing” or “market pricing”), how it is applied in the Insurance industry, and key factors to its success. It touches on subjects like real time price optimization and dynamic pricing, competitive pricing and even notes different vendors of price optimization software, including Earnix.

I found Celent’s description of the different levels of sophistication in demand based pricing to be very concise and accurate: Reactional analysis defines what has been performed, using Reports and Dashboards; Strategic analysis defines what lessons can we draw from the Reactional analysis, using Analytics; Scenario simulation answers what-if questions, using Predictive analytics; and finally Scenario comparison (and selection) defines what is the optimal approach (i.e. action to take), and requires Pricing Optimization.

Another trend Celent deeply analyzes for the first time (that I have seen) is the benefit for real time price optimization, or as they put it comparing “Back Office vs. Front Office” approaches. Rightfully the report focuses on online and European markets as the current segment leading this advancement, but we at Earnix are already starting to see other segments that are moving into the “Front Office” world of Price Optimization.

Celent also reviews some success stories in this area such as Progressive in the USA and Lloyds TSB Insurance in the UK (See related article about Lloyds TSB).

The Perils of Success – Rethinking the Maturing Online Insurance Landscape in Europe discusses the state of online insurance and its foreseeable future, and the evolution of online insurance IT architecture.

In the report Celent notes the reasons for the growth of Internet based Insurance purchase. The growth trend is indeed clear, and there are many good reasons for it. However for me, the most difficult question to “crack” on this topic is why some countries are taking significantly longer than others in developing a significant internet insurance markets. It is no secret that the USA and UK have taken off quite a few years ago, whereas countries like Germany, Italy and France are yet to achieve any significant internet market share. Celent is confident the “lagging” counties will follow this trend soon, but I would like to know “how soon?” and “if it hasn’t happened until now, why would it happen any time soon?”

I enjoyed very much reading these papers as they provide important insights on what we believe are key trends around Pricing and general performance in the insurance market. These research papers can be purchased on the Celent web site.

If you’ve had a chance to read these or other relevant research papers – please join the discussion and let us know your thoughts.

Many ways to say Customer Value & Price Optimization

Ever since starting this blog in 2007, not long after I joined Earnix we have been trying to find the most appropriate phrase to define the topic of our discussion. At Earnix we use the same phrases all the time and understand each other – Customer Value & Price Optimization for Insurance companies and Banks, so we expect the world to understand us also, easy – right? Well, not really…

As is often the case when new market categories are formed, different phrases are used to describe the same thing, and sometimes we are not sure what that “thing” is. As the market develops, that “thing” becomes clearer and a new terminology is established. For example, who really knew what ERP or CRM meant in the early 1990s? Now these terms are well understood and have a unique meaning. We at Earnix believe this is happening right now in the Insurance and Banking industry around Customer Value & Price Optimization.

So let’s discuss some of the different ways of saying “Customer Value & Price Optimization for Insurance companies and Banks”.

Let’s start with “Price Optimization.” Is it the analytical components of pricing such as demand modeling and pricing analytics, dynamic pricing, price elasticity, and price sensitivity? Or is it the business part – competitive pricing, pricing management, revenue management, profit management, or good old value based pricing, price execution, and revenue optimization?

Continuing on this point, the mathematical term of “optimization” is sometimes misused in this context. “Profit Optimization” is not a technically-correct term because what is actually implied is “profit maximization”. That is, pricing is the means while profit/revenue/value are the goals, therefore you optimize price to maximize these goals under constraints.

And what about the “Customer Value Optimization” part? Do we mean customer lifetime value, or maybe customer centric, or maybe a combination – customer centric lifetime value?

Or maybe we are talking about the predictive analytics technology we use, or putting it all into a software solution – i.e. pricing software? Or customer lifetime value software?

Well as you are probably aware, I have no answers here except that we are in a fascinating market that is developing as we speak, and so is the terminology around it.

What is clear is that “Customer Value and Price Optimization” software is providing exceptional benefits to our customers – including many of the world’s leading Insurance companies and Banks – some of which have been made public, and many more which have not. Last year, Insurance & Technology featured a number of insightful articles about customer retention and acquisition – here is one of many interesting quotes from one of these articles – “carriers that get to know their customers well — by effectively leveraging collected data and by simply listening to what they say — have a huge advantage in a tough insurance market.” You can find additional relevant articles and discussions from Insurance companies and Banks using Customer Value & Price Optimization solutions on our website.

Please join the discussion – and let me know what Customer Value and Price Optimization means to you.