By Dax Craig, CEO, Valen Analytics
The tension between actuaries and underwriters is hardly a new issue, but the ramifications in today’s competitive environment create a renewed urgency to resolve the age-old conflict. Disruption in insurance is here to stay, and companies that continue to operate traditionally will fall behind insurers embracing innovation. But how prevalent is the conflict today? To answer this question, we conducted a survey this summer of over 200 insurance professionals, which found that a resounding 77% are aware of a conflict between the two in their organizations.
An Age-old Conflict with New Implications
According to a recent KPMG survey (PDF), 40% of companies stated they will face increased competition from known competitors over the next two years and 48% admitted to already facing competition from newer, more nimble competitors. When combined with declines in investment income due to the low interest rate environment, it comes as no surprise that underwriters feel pressure to improve profitability. Underwriters have two primary levers to boost performance: risk selection and pricing.
Just like there’s a need for greater precision in underwriting, there’s also a demand for faster response times. A study conducted by work comp carrier, FirstComp, found that when an insurer provides a quote to an agent within an hour, the quote-to-bind ratio is 52%. When an additional 24 hours goes by – it drops to 30%. This market pressure can be at odds with taking enough time to align price-to-risk, and explains why many actuaries feel ‘undermined’ by underwriters who ‘mess up’ the rates they set based on an aggregated view of the data. In fact, the number one cause cited for the underwriter-actuary conflict in our survey was that underwriters dismiss data for their own judgement. This is also consistent with a separate survey conducted with P/C carriers at our annual summit, that shared 82% of participants are concerned about underwriter adoption when implementing predictive analytics. The predominant reason: underwriters are fearful that the technology will replace their positions.
And yet, underwriters add a tremendous amount of value when they combine analytics with their expertise. The chart below is a Valen study of a work comp insurer, and it shows that the combination of underwriter expertise and a predictive model adds the most significant improvement to profitability over underwriter judgment or predictive analytics alone. Actuaries, who rightly point to the need for data-driven decision making, should also value the expertise and market knowledge that underwriters bring to the table.
With the increased adoption of predictive modeling, improved profitability, and recent market share shifts in work comp discussed in our article last week, the internal conflicts over pricing have more significant repercussions. If your competition is increasingly more sophisticated, you need to pull together as a team to acquire and retain the risks that fit your appetite and price them accurately.
What About the Ones Who Don’t Cite Conflict?
What’s special about the other 23% of insurers who aren’t at odds internally about how they price policies? Are they better able to innovate and keep up with changing market dynamics as a result? We certainly see success stories in the industry – some insurers are being credited for initiating change and making waves. They aren’t letting internal conflict get in the way of progress.
What happens when underwriters don’t have access to data and analytics? One possible consequence is adverse selection, which can happen when the pricing flexibility most underwriters have is used to compete against insurers who do a much better job of aligning price-to-risk. How are underwriters supposed to make more accurate decisions with less time if they don’t have better tools and information at their disposal?
Addressing the concerns underwriters have about advanced data analytics and their job security is important. It’s interesting that so many underwriters are actually afraid of predictive analytics. This is a serious issue in messaging, and companies should be more clear that predictive analytics isn’t going to be – and can’t be – a replacement for sound underwriting. For most insurers, predictive analytics is best employed as an underwriting tool, it’s a piece of data that assists the underwriter in pricing and risk selection.
Presenting tangible proof of the benefits of combining predictive analytics and underwriter expertise will help all parties recognize that success is largely dependent on working together. The whole organization must see precisely why applying data-driven approaches to decision making is critical in today’s competitive environment.
About Dax Craig
Dax Craig is the co-founder, president, and chief executive officer of Valen Analytics. Based in Denver, Colorado, Valen is an advanced data and analytics provider for the property and casualty insurance industry. The company leverages its large consortium data assets to help carriers price insurance policies more accurately and achieve lower loss ratios.
Prior to founding Valen in 2004, Dax was founder and CEO of Xertex Technologies, which was acquired by global leader in the wireless antenna industry, Centurion Wireless. Dax proceeded to serve as vice president of global business development at Centurion, where he was directly responsible for global business development including sales, market definition, market segmentation, market research, strategic planning, and market development.
Dax graduated from the University of Tulsa with a bachelor’s degree in business administration and marketing. He earned his MBA in finance from the University of Colorado at Boulder.
About Valen Analytics
Valen Analytics is an advanced data and analytics provider for property and casualty insurance companies. We work with insurers who are actively looking to improve underwriting profits by driving growth and/or lowering their loss ratio. Our customers are focused on increasing competitive pressures, fighting adverse selection with innovative solutions, and raising awareness for the impending “experience gap” in underwriting with initiatives such as Tomorrow’s Talent Challenge. Our customers span many lines of business including Homeowners, Workers’ Compensation, Commercial Auto and Telematics, Commercial Package, Commercial Property, and BOP. Learn more about Valen at www.valen.com.