NU Online News Service
The use of predictive modeling is allowing standard auto market insurers to grab more business that previously would have been handled by the nonstandard carriers, according to a new study.
The findings were made by Hartford, Conn.-based Conning Research and Consulting in a report entitled: "The Nonstandard Auto Insurance Market: Evolutionary Challenges."
Conning said one impact it expects to see as a result is consolidations in the segment, which it describes as a volatile market, characterized by rapid inflows of capital and competitors when times are good, indicative of low barriers to market entry.
However, the report said changing market conditions have limited the ability of firms to enter and exit as freely as during the high-growth period of the 1990.
There is no clear-cut definition of a nonstandard insured, but Conning said they are characterized by higher average premiums, higher claim frequencies, lower claim severities, higher underwriting expenses, and lower account retention than in the standard or preferred segments.
"As predictive modeling has become more prevalent in auto insurance underwriting, the standard auto market has expanded to include and price risks that would once have been thought of as nonstandard," said Alan Dobbins, an analyst at Conning Research & Consulting. "As a result, the new nonstandard market is undergoing a dramatic shift in risk profile."
Nonstandard insurers, Conning said, account for 20 percent of private passenger auto insurance, and the business is fairly concentrated, with 14 insurance groups accounting for 80 percent of the premium.
Buyers in the nonstandard segment, Conning reported, are a diverse population with a core element of low-income and recent immigrant populations. Within this segment, the report said, are buyers who come into the market with no intention of keeping their coverage in force–simply intending to get their identification cards and plates before dropping coverage.
The report said that six important trends will shape the nonstandard segment over the next several years, leading with the influence of advanced analytics.
According to Conning, advanced analytics will cause the nonstandard market to contract and develop a higher risk profile, as predictive modeling allows standard market competitors to extract the more profitable portions of this high-risk segment.
Other trends listed were:
o With the shift in risk profile, Conning expects to see a change in the demographic composition of the nonstandard segment, with an increasing importance of the recent immigrant population.
o Direct-response organizations are anticipated to increase their presence in this market, due both to their low-cost model (appealing to a price-sensitive segment) and to their ability to offer a "take-all-comers" message to the market (leveraging the high-fixed cost nature of their acquisition platform).
o The ongoing interest of private equity firms highlights the importance of an active and involved management team in this volatile line.
o Predictive modeling and newly emerging claims technologies should continue to provide leading insurers with a significant advantage in the nonstandard segment. Smaller and/or unfocused companies may try to replicate these capabilities, but then continue to struggle as more sophisticated models emerge.
o Significant consolidation is a likely near-term outcome for this segment.
"Management focus and experience has always been critical in the nonstandard auto insurance market due to the higher risk profile inherent in the business," said Christiansen Stephan Christiansen, director of research at Conning. "Now, however, management will need a new set of tools to aid in risk management."
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