Predictive analytics is creating powerful and sophisticated newpricing models in personal and small commercial lines and is widelyviewed as critical for intelligent growth. Collaboration andcross-selling increasingly are seen by middle market and largercommercial lines writers as a means to improve account managementand retention. But many carriers are falling short in theirunderwriting operations, leaving them at a clear disadvantage in anintense competition for profitable growth.

Landmark events such as 9/11, Katrina, and Enron have sparkeddemand for greater precision in location intelligence and analysisof enterprise risk management abilities. In addition, customers aredemanding their insurance companies be easier to do business withwhile company executives look to their underwriting departments tomake faster and more accurate underwriting decisions and pricerisks more precisely.

Insurers no longer can regard the use of location intelligencein underwriting solely as a means of managing catastrophes orprotecting their surplus. It has become a necessary ingredient forbuilding better rules, developing innovative products, achievingstraight-through processing, and driving growth.

Evolving Nature of Disasters

Understanding the changing nature of catastrophes is the firststep toward enhancing underwriting performance. The 1990s markedthe onset of several industry wake-up calls, prompting increaseduse of geographic information system (GIS) technologies for bettermanagement of portfolio exposures to protect surplus and improvereinsurance strategies. Hurricane Andrew, for example, was theimpetus for many insurers to start using modeling and mappingtechnologies, as well as address scrubbing and geo-coding, whichprovided a more accurate and timely view of aggregate exposuresacross personal and commercial lines.

Following the 2001 terrorist attacks, it became clear attainingprecision down to the level of a four-walled structure wasnecessary, not just the aggregate exposure within a particularcounty or ZIP Code. On top of that, insurers realized the need toaggregate exposures beyond property lines–across virtually allinsurance products.

The financial disasters of Enron, WorldCom, and others earlierin this decade involved reputational risk with implications forenterprise risk management, fiscal accountability, and theinsurability of such man-made acts. Hurricane Katrina challengedinsurers in 2006 to distinguish multiple perils (wind and flood),again raising the need to become much more sophisticated inmanaging underwriting operations. Inevitably, each new wake-up callprompts the need for greater precision in the use of locationintelligence to manage risk exposures across multiple lines ofbusiness.

Enhancing the underwriting operation is an imperative remarkablywell understood on Wall Street. To gain insight into how insurerscan earn superior financial ratings, Accenture recentlycommissioned Institutional Investor Market Research to survey morethan 100 leading insurance equity analysts.

Property/casualty analysts cited pricing and underwriting,collectively, as the most important area of technology investmentin order for P&C insurers to improve their businessperformance. These analysts ranked environmental issues, such asclimate change, as the top industry challenge for insurers over thenext three years, followed closely by aging technology systems.Terrorism and geopolitical instability also were cited by themajority of analysts as a key challenge going forward.

Shortsighted Tactics

In recent years, on the heels of major hurricanes and floods inFlorida, Louisiana, and elsewhere, many carriers responded inknee-jerk fashion by pulling out of those markets. Similarly,post-9/11, others stopped covering high-rise buildings in New YorkCity.

Avoiding major markets, however, is not a winning strategy. Intoday's highly competitive environment, insurers must find moreintelligent means of writing the best risks in the best buildingswithin tough geographies. Through greater precision and moreaccurate data, insurers can do a better job of selecting, pricing,and servicing risks, thereby improving their market sustainabilityand shareholder results.

Many carriers fail to make strong underwriting decisions becausethey don't have sufficient access to timely and accurate data.Further, they are not integrating assessments of perils, such asearthquakes, tornadoes, floods, wind, and other hazards, into theautomated flow of their underwriting process.

Too often, the acquisition and storage of data involves multipleentries into multiple systems that are unconnected–an inefficient,burdensome process that hinders carriers' ability to obtain neededinsight. One large multiline insurance company, for example,manually enters location data into nine different systems for itscommercial lines risks, frequently leading to inaccurate or missinginformation. Large submissions take up to four days for the carrierto complete, creating voids of data and an unnecessary drag onservice and underwriting quality.

For this carrier and many others like it, the problem isn't theavailability of data or the technology to map and cleanse it. Theweak links are data capture and process automation, which preventthem from fully harnessing the power of their own underwritinginsight.

Historically, personal lines carriers have struggled with howmuch information to request from an applicant upfront. Discoveringafter a policy has been initially quoted that the applicant'sCalifornia home, for example, is in a severe brush zone may requirea substantial hike in the initial quote or even a decision todecline coverage, resulting in an unhappy potential customer.

Today, with carriers asking more and more questions abouthazards (e.g., Do you own a pit bull? Do you have a trampoline?),the challenge is: How can they leverage external sources and GIStools to acquire additional data earlier so they can giveapplicants a more accurate quote without slowing down the process?Carriers that can determine quickly whether, for instance, aparticular dwelling is in a brush zone and whether they have theappetite to write the policy and how to price that risk have acompetitive edge because they will:

o Enjoy higher profit potential by accurately aligningunderwriting and pricing decisions with the quality of therisk;

o Be easier to do business with because they can acquireinformation quickly without having to burden their customers withextensive questions; and

o Develop unique insights into the most important data tocapture and improve the customer quotation experience.

Innovative Technology

High-performance insurance companies are achieving a competitiveadvantage with innovative underwriting technology that creates anintelligent user experience for information gathering and arules-based approach to risk selection and pricing. "Locationintelligent underwriting solutions" provide:

o Automated workflow to achieve consistent and straight-throughor low-touch processing;

o Integration with external data services and GIS utilities tostandardize, cleanse, and validate data needed in the underwritingand quoting process;

o Automatic execution of business rules to reach the fastest andbest decision and price; and

o Externalization of rules for business user maintenance, whichaccelerates the introduction of new products, new pricing models,expanded underwriting appetite guidelines, and workflowadjustments.

Winners Have the Best Rules

Using a location intelligent underwriting solution, carriers canleverage greater volumes of data from external sources and capturemore results on the loss ratio performance and retention metrics oftheir customers and policies, enabling them to improve the accuracyof their business rules.

The solution provides a feedback loop from the captured data asto whether certain risk attributes are more or less indicative ofloss potential. And it monitors the totality of a carrier's riskdecisions, maps them to product performance, and provides theanalytics to build better business rules. Finally, the solutionenables rapid rule creation and modification so that refined rulescan be applied immediately to the business process.

Simply put, insurers with the most sophisticated, insight-drivenrules will outperform their competitors. These insurers know moreabout how to profit on the risks they choose to underwrite and arebetter at aligning price and risk quality–not only to avoid adverseselection but optimize price elasticity. These insurers are betterequipped to take advantage of market cycles and windows of growthopportunity. With the unique insights gained from having superiordata access, they can build and refine first-class rules andincrease the speed of the underwriting process. In fact, even withgreater volumes of data, carriers can reduce transactional processtimes significantly through more automated systems.

Consider the example of a commercial lines carrier receiving asubmission from a broker with a location schedule containing 50locations. Over three days, the underwriter manually enters thedata into eight different systems to determine whether thebuildings are potential terrorist targets, whether capacity toinsure the risk fully already has been exceeded, and other factors.Unfortunately, since the systems aren't integrated, it's difficultto verify the accuracy of the address and other data or understandthe aggregate exposure in a particular building. The carrierinadvertently inputs different data on the same building andunderwrites above the known exposure level.

Now, consider the carrier's response using location intelligentunderwriting technology upon receiving the same submission. Thedata is uploaded automatically from the broker's spreadsheet intothe underwriting solution location repository. As part of thisprocess, the data is standardized, cleansed, geo-coded, matched,and verified–using external data services–against the carrier'scentralized location database. Matching data is automaticallypulled into the risk.

The data services not only verify building addresses, they feedin additional data the application omitted or stated inaccurately,such as proximity to flood zone, earthquake fault lines and brushzones, and elevation and slope. Total time elapsed: fiveminutes.

It is critical to have a common, consistent address cleansing,matching, and geo-coding process as part of the solution to ensurethe external data is aligned with the latitude and longitude of therisk. The solution also brings risk visualization to theunderwriter's desktop, enabling a more sophisticated assessment ofgeophysical hazards and other risk potential.

Growth Across Market Cycles

Having a more automated, streamlined underwriting processenables carriers to incorporate quickly and accurately the datanecessary for smarter underwriting and pricing decisions that helpdrive profitability. Armed with better insight into location risks,carriers also can optimize the use of their loss controlunits–dispatching representatives to consult with insureds onbetter management and safety practices, rather than merelyverifying application data. Rich location intelligence across theportfolio enables innovation of product coverages, pricing, andservices to fuel highly differentiated growth strategies.

Beside improving underwriting, location intelligence technologyhelps insurers sell with greater precision by enabling carriers andtheir agents to evaluate a wide range of risk factors–includingstreet location, dwelling, and customer attributes–and bring inexternal data to triangulate against those attributes to targetprospects that are likely to be most profitable.

The industry's management of location-based risk has progressedgreatly in recent years. But it must continue to evolve locationinsights from a necessary "back office" capability, designed toprotect surplus and reinsurance treaties, into a powerful source ofstrategic underwriting and transformational growth.

A new set of challenges involving location intelligence isundoubtedly looming in the future in the form of naturalcatastrophes, man-made risks, and event-based risks. And in aneconomic climate where growth has become a battle of inches,insurers equipped with sophisticated location intelligentunderwriting solutions will be best positioned to outperform theircompetitors well into the future.

Gail McGiffin is a senior executive in Accenture's insurancepractice and head of the firm's global underwriting solutions andservices.

The content of "Inside Track" is the responsibility of eachcolumn's author. The views and opinions are those of the author anddo not necessarily represent those of Tech Decisions.