The use of predictive modeling is allowing standard auto marketinsurers to grab more business that previously would have beenhandled by the nonstandard carriers, according to a new study.

The findings were made by Hartford, Conn.-based Conning Researchand Consulting in a report entitled: “The Nonstandard AutoInsurance Market: Evolutionary Challenges.”

Conning said one impact it expects to see as a result isconsolidations in the segment, which it describes as a volatilemarket, characterized by rapid inflows of capital and competitorswhen times are good, indicative of low barriers to marketentry.

However, the report said changing market conditions have limitedthe ability of firms to enter and exit as freely as during thehigh-growth period of the 1990.

There is no clear-cut definition of a nonstandard insured, butConning said they are characterized by higher average premiums,higher claim frequencies, lower claim severities, higherunderwriting expenses, and lower account retention than in thestandard or preferred segments.

“As predictive modeling has become more prevalent in autoinsurance underwriting, the standard auto market has expanded toinclude and price risks that would once have been thought of asnonstandard,” said Alan Dobbins, an analyst at Conning Research& Consulting. “As a result, the new nonstandard market isundergoing a dramatic shift in risk profile.”

Nonstandard insurers, Conning said, account for 20 percent ofprivate passenger auto insurance, and the business is fairlyconcentrated, with 14 insurance groups accounting for 80 percent ofthe premium.

Buyers in the nonstandard segment, Conning reported, are adiverse population with a core element of low-income and recentimmigrant populations. Within this segment, the report said, arebuyers who come into the market with no intention of keeping theircoverage in force–simply intending to get their identificationcards and plates before dropping coverage.

The report said that six important trends will shape thenonstandard segment over the next several years, leading with theinfluence of advanced analytics.

According to Conning, advanced analytics will cause thenonstandard market to contract and develop a higher risk profile,as predictive modeling allows standard market competitors toextract the more profitable portions of this high-risk segment.

Other trends listed were:

o With the shift in risk profile, Conning expects to see achange in the demographic composition of the nonstandard segment,with an increasing importance of the recent immigrantpopulation.

o Direct-response organizations are anticipated to increasetheir presence in this market, due both to their low-cost model(appealing to a price-sensitive segment) and to their ability tooffer a “take-all-comers” message to the market (leveraging thehigh-fixed cost nature of their acquisition platform).

o The ongoing interest of private equity firms highlights theimportance of an active and involved management team in thisvolatile line.

o Predictive modeling and newly emerging claims technologiesshould continue to provide leading insurers with a significantadvantage in the nonstandard segment. Smaller and/or unfocusedcompanies may try to replicate these capabilities, but thencontinue to struggle as more sophisticated models emerge.

o Significant consolidation is a likely near-term outcome forthis segment.

“Management focus and experience has always been critical in thenonstandard auto insurance market due to the higher risk profileinherent in the business,” said Christiansen Stephan Christiansen,director of research at Conning. “Now, however, management willneed a new set of tools to aid in risk management.”

The report–priced at $1,750–is available from Conning Research& Consulting by calling (888) 707-1177, or by visiting thecompany?s Web site at www.conningresearch.com.