By Tom Warden, Chief Insurance and Science Officer, CLARA Analytics
2022 is off to an exciting start. COVID-19 is waning, but the pandemic’s hangover looks to be long and fraught with surprises. Inflation has hit levels not seen since the 1980s. Individuals and businesses saved much of the money given to them during the pandemic. Pent-up demand for goods and services is driving prices for almost everything higher. Actual and perceived shortages of commodities, made more impactful by the war in Ukraine, have contributed too. Investors reevaluate sky-high equity valuations as interest rates rise, and some markets have corrected more than 25%. Corrections of this magnitude can become self-sustaining as highly leveraged investors sell more to meet margin calls. Time alone will tell how extensive the damage becomes.
Recent inflation, tight labor markets, and economic volatility create a perfect storm for chief claims officers. Inflation is detrimental to insurance carrier profits as policy rate increases lag the costs of doing business, especially for settling claims. While some unprofitable commercial lines made progress with rate increases before COVID, combined ratios for commercial auto and general liability are still above 100. Workers’ compensation has experienced several years of good profitability, but that has led state regulators to authorize base rate decreases over the last few years. Inflation and a challenging regulatory mindset could be a lethal combination for carriers in this line.
The “Great Resignation” that disrupted the supply of experienced workers across most industries has become the “Great Engagement,” adding fuel to the economy’s fire. Unemployment rates that pushed above 10% in some demographic groups are now under 3% in others. Employers in all industries are competing for workers by increasing incentives. Many workers have switched industries and perform jobs with little experience. If your waitperson in a restaurant has not done the job before, the result might be poor service. But a truck driver who has never driven an 18-wheeler poses a significant hazard to himself and others. As a result, we will likely see accident frequencies in workers’ comp and commercial auto increase beyond expectations over the next few years.
Claims leaders are always looked to for help when anything challenges the combined ratio of an insurance carrier. Pricing and underwriting functions may have contributed to these challenges, but once a policy is written, it’s up to claims departments to rein in loss costs and adjustment expenses. Concerning the future performance of claims after the accident year, the NCCI expects that 2021’s accident year combined ratio of 102 will fall by 10 points once these claims are settled and closed over the coming years. Experience implies this is feasible, but inflation and economic volatility decrease this outcome’s probability.
Where should you turn to pull a fresh rabbit out of the hat when the CFO asks for “your share” of profitability improvement? Claims organizations operate leaner than ever today. Increasing the workload of already stretched-thin adjusters isn’t very feasible. Automation can be an answer, but building and implementing the systems needed to make it work can take years to install and test before they become useful.
A solution to this problem is advanced analytics. Forty to 50 percent of commercial carriers use advanced analytics today, and half of those not using them say they will within two years. Personal lines carriers have shown the way, significantly improving financial performance by leveraging advanced analytics in pricing, underwriting and claims. In claims, assessing severity, triage, finding fraud, and determining litigation potential are the leading applications of advanced analytics.
Unfortunately, many companies that experimented in these areas failed initially. But cloud computing and improvements in artificial intelligence accuracy significantly improve the odds of success today. Some vendors of claims intelligence can implement their products with very little involvement from the carrier’s IT department. Increased cost-effectiveness of massive computing resources has made very advanced artificial intelligence methods feasible and cost-efficient. Finally, some vendors put a great deal of effort into looking at their products and services through the eyes of the claim adjuster, the front-line worker whose engagement with advanced analytics is critical to its successful deployment.
Advanced analytics are improving the performance of claims departments in many insurance carriers today. Advancements in cloud technologies and artificial intelligence enhance their performance and make analytics easier and quicker to implement. The future looks challenging for chief claims officers. Now is the time to harness the advanced analytics advantage to survive the perfect storm.
About Tom Warden
Tom Warden, Chief Insurance and Science Officer of CLARA Analytics, is an experienced leader in using data, analytics and AI to solve complex business problems. He oversees the company’s scientific, technological and research operations to ensure that CLARA continues to bring innovative products to market that address the greatest needs of the insurance industry. As a Chartered Financial Analyst with experience in securities analysis and portfolio management, Warden focuses on identifying and optimizing what creates value and what destroys it within companies.