Article discussing the potential for realignment of insurance strategies to focus on differentiating factors that may or may not include legacy systems replacement. Should legacy systems be outsourced and insurance resources reapplied to strategically unique areas?
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201302 Tech Decisions: Changing the Rules
1. Property Casualty 360
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FROM THE FEBRUARY 2013 ISSUE OF TECH DECISIONS âąÂ SUBSCRIBE!
Changing the Rules
Once insurers began ditching their legacy systems, the game changed for all
insurance carriers. As competitive advantage threatens nearly every business in the
industry, the policy administration system remains the system where all eyes should
be focused.
Uncertainty over election results, the fiscal cliff,
and economic direction appear to have been
addressed, allowing industry leaders to focus on
a return to competitive advantage and
sustainable profitability. Even with gradual
improvements in the economy, companies
remain faced with increasingly costly
catastrophe losses and near-term minimal
investment returns.
Profitability and rate competitiveness remain
hard earned, as noted by the Insurance
Information Institute findings that show
reaching a combined ratio of 100 no longer
delivers the same returns as before. In 1979, a
combined ratio of 100 led to a roughly 16
percent ROEÍŸÂ this dropped to 10 percent inÂ
2005ÍŸÂ 7.5 percent in 2009/2010ÍŸÂ and anÂ
estimated 7.0 percent in 2012. As a corollary,
the industry has not delivered an ROE above its
cost of capital since 2007, implying that
insurance is not a profitable industry for new
money.
Further complicating the challenges leadership
faces are continued increases in consumer expectations for products and service, an increasingly diversified
market, distribution challenges, and nonstop technological advances. Bottom line, the insurance industry
requires game changers to improve performance in any meaningful manner.
BY STEVEN M. CALLAHAN
February 1, 2013 âąÂ Reprints
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3. If Not LegacyâŠ
Memorable messaging. Variable benefit customizable products. Effective distribution. Informed risk
assessment. Enhanced claims handling. Engaged service staff. Efficient operations. These are the capabilities
that will drive tomorrowâs leaders. Unfortunately the often decade-long legacy system projects, with their
associated start and stops, vendor changes, and conversion flip-flops consume massive resources.
Addressing the above needs involves optimizing the use and understanding all available data, from what is
internally stored on policy admin systems to externally acquired supplemental data. Tools and solutions
have advanced to the stage where application is much less of an effort than it was a few years ago, and
vendors have matured in both their service offerings and business understanding to help companies
accelerate implementations with real paybacks.
Analyticsâ solutions have progressed beyond mining policy admin systems to the concept of âbig dataâÂ
encompassing tremendous amounts of information coming from multiple sources in a variety of formats.
Finding small pockets of rate reductions that provide a competitive advantage with profitable customers, the
uncovering of a multistate âthree degrees of separation,â organized fraud, refocusing retention efforts on the
most likely to stay/highest profit customers only, generating a top producer profile from a blend of internal
historical data and proven seemingly unrelated external data, these all represent the positive impacts from
applying analytics to data and big data.
Layering a strong analytics solution on top of policy admin data and other data sources allows carriers to
focus on four areas where analytics can bring significantly amplified results. In priority order based on
potential impact, they are:
Risk assessment (underwriting), including rate assignment, achieved by modeling at a more discrete level
based on deeper individual and categorical risk data. ISO has introduced a tool that allows companies to
move from a territory-based average rate, say at $812.50, to loss-based rating with specific policies at $1,187
and some at $438 (averages to $812.50). Homeowner rates are integrating a magnified view of the
neighborhood along with supplementation by external vendors with community and additional individual
information collected across a variety of modes from rewards programs to purchasing patterns.
Claims handling (claims) incorporates analytics in fraud detection, litigation management, subrogation,
salvage and recovery, repair coordination as well as work distribution across staff expertise of specific claims
traits, concurrent triggering of requirements, and automated escalation. Fraud referrals would come at the
time of assigning claims or updating it, looking broadly at organized multi-state fraudâwhich is hard to
catch manuallyâwhile using data to minimize claim padding and reducing false positives. This also is where
fast-track claims can be identified, routed, and paid with minimal intervention, reserves set more accurately,
litigation probability estimated and, if needed, reserved.
Agent effectiveness can be addressed by looking at saturation levels of agents to prospects within a discrete
geography. Predictive analytics also works with prospect identification and customer retention. An
increasing use of analytics looks at propensity to lapse based on historical as well as current data. Post-
purchase activity is mapped for a specific client, includingâwhere possibleâintegrating the performance of
other similarly situated individuals. This is incremented by time-of-purchase demographic information.
Mapping propensity against LEV indicates where to put the most time.
Customer awareness, which looks at the lifetime economic value (LEV) of a customer across product lines
and distribution channels, while adding in spouse, child, business and ancillary line revenue to give a big
picture. John Smith has homeowners, auto and liability policies along with his wife. He also has three kids
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4. with auto, one with rental, and one with specialty. One child is in medical school and one is in law school.
Typical claims analysis looks at the given policies performanceÍŸÂ LEV looks across all current policies as wellÂ
as âpredictsâ future possible profit from the children.
Are You Listening?
Two relatively new fields of analytics that have been growing rapidly in importance and useâespecially with
the rapid adoption of social mediaâare sentiment tracking and social intelligence. In both cases, solution
providers have rapidly moved to fill the need with advanced technologies targeted specifically at the social
media world.
Sentiment tracking involves the development of a dashboard of indicators to show what the general
âsentimentâ is toward a company based on monitoring what is being said across a variety of social media
platforms including Twitter, Facebook, blogs, LinkedIn, and other publicly-available information.
There are measurements of mention counts as a trend͟ red-yellow-green lights for whether comments are
neutral, complimentary or critical͟ historical perspectives to provide context͟ and reply or escalation
mechanisms to allow rapid interventionâa critically important aspect of participating in the social media
world.
The social intelligence analytics are a bit controversial as they provide a means for acquiring and using non-
domain, publicly-available personally-specific information for hiring, claims or underwriting purposes. The
information includes atypical data, for insurance, such as shopping habits, rewards programs, magazine
subscriptions, travel habits, hobbies, and anything else legitimately acquired electronically.
Individual investigations might include looking for proof of health on workersâ compensation claims,
validating non-smoking status, trying to find out if a person has any dangerous habits that might cause a
benefit to be rated, and other similar reviews of publicly-available data. The analytics portion involves the
addition of the acquired data into models being built to determine if they have any indicative value that
would enhance the modelsâ accuracy.
Companies not leveraging the sentiment tracking are ignoring a strong source of brand commentary.
Whether or not a given company has a social media strategy or presence is irrelevantÍŸÂ they are being talkedÂ
about in the social media space, and as a result should at least be listening. This one is almost a given,
especially given the amplification that social media brings.
Unlike the across-the-fence or over-coffee complaints, social media gives individuals the power to talk to
thousands of people about a service experience or problem. Companies not monitoring those exchanges at a
sentiment level at the least are letting mini train wrecks damage their brand. The social intelligence end is
more discretionary, although the number of fraudulent claims being discovered by these types of techniques
is significant and profit-impacting.
Tying It All Together
Legacy policy admin system replacement is, for many companies, fast becoming more of an ongoing
enhancement project than a single major push. To best realize the full potential of new or enhanced systems,
and to stay on top of an increasingly complex and competitive business, wrapping the policy admin systems
with a feature-rich analytics solution is necessary.
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