Economic conditions for 2012 do not look particularly promising, challenging companies to find unique ways to generate sustainable growth and profitability. Continued high unemployment, near zero interest rates, limited growth in the economy, increased consumer diversity, extended low investment returns, intensified service expectations, expanded competition, and a probability of additional natural disasters converge to create yet another challenging year for the insurance industry in general.
Constrained by the combination of these profit-compressing variables with little room to maneuver, earnings are likely to remain low throughout 2012. Despite the low profit projections, strategic plans and a longer-term horizon demand that leadership take action now to be positioned for growth and viability in the future.
Despite these challenges, sufficient awareness of the need and willingness to invest in moving to the next level exists, even in these difficult times. In fact, from a technological perspective—the foundation for near term innovative solutions—four different year-end 2011 surveys by reputable firms regarding IT investments in 2012 indicated a likely increase in expenditure in the two to five percent range, with the top priority focusing on replacing policy administration, or core processing, systems.
More specifically, according to a well-known industry analyst, the level of activity directed at installing modern, flexible systems has never before been as high as it is currently running, validating recognition of the critically important competitive advantage that will be provided by those who successfully navigate the complex renovation and replacement path.
At the core of each of these advantages is an understanding of the market and customer as opposed to the more traditional focus on process improvement or efficiency. Brand name, product features, even pricing differences within a given margin, no longer provide the differentiation needed to successfully gain market share. Instead, competitiveness and differentiation are based on finely-priced products, an effective pairing of distribution with target market, and an intimate knowledge of both prospects and customers.
Whichever method is selected, the end goal has to be to take a holistic look at the data across systems, not only at a point-in-time basis, but also over periods of time within the context of what is occurring to best inform the model. The key takeaway is that analytics will only provide complete value when data is no longer segmented into discrete silos within a company; it must be viewed as a complete dataset, which will require cultural, technological, and intellectual changes from the current mindsets.
After surmounting these obstacles, expertise will have to be established and formal roles assigned at the enterprise level in order to maintain consistent data use definitions (how many different ways can “premium” be interpreted within a company), ensure effective data management across the silos, sustain persistent consistency of data etymology via formalized governance over new applications and developed systems, and monitor the tools, techniques, and practices used by various departments in modeling actionable strategies from the analysis of the now-common data.
Looking beyond P&C business, at a recent life insurance product development conference, the discussion centered on the use of predictive analytics for pricing purposes. Here, the variable set would be expanded beyond the typical age, sex, risk class, face, and duration to incorporate additional variables like marital status, geographic location, occupation, income, type of car, type of housing, and even number of children.
The economy is not going to provide a windfall break to the industry; survivability and profitability rests with leadership to find near-term solutions. Given the rapid rate of change in diversity, globalization, technological advances, and competitive landscape, time is of the essence for those wishing to achieve competitive advantage. Neither analysis paralysis, a patient “wait it out” perspective, nor a continued focus on expense reduction at the staff level—that front line of talent that represents your most critical customer touch points—will provide the necessary solution to sustainable growth and profit. Sustainable profitability will come directly from: