I love a challenging business problem and finding the most efficient solution – and often it comes down to data and analytics. Granted, the human element is why we're all here and doing what we do, but it tends to get messy and blurry around the edges. With numbers, you know exactly where you stand.
Numbers are also one of the main reasons I am in the business of developing contents claim solutions for the insurance industry. Making the contents claim process more efficient is work. I understand the effort. Currently, everyone is losing out due to a lack of accurate content data. This includes carriers, brokers and agents, adjusters, and insureds. The problem stems from the fact that most insurance carriers do not know the value of what they insure when it comes to contents.
Coverage C insures all of the contents of a home that are not a permanent part of the structure, such as furniture, clothing, appliances, electronics, and books. Traditionally, carriers have simply set contents coverage as a percentage of structural value, ranging from 40 to 70 percent. In fact, when looking at the relationship between structural values versus contents values, we find they are inversely correlated. Figure 1 on page 48 illustrates how home values (a proxy for the replacement cost value) and the Price Index for Consumer Durables actually move in opposite directions.
This makes sense intuitively when you consider how the features, processing power, and speed of computers continue growing exponentially while prices keep dropping. The U.S. has been in a very low inflation environment for a decade because of both innovation and the China effect. However, carriers price contents as a percentage of home values, which history has shown to appreciate in value over time. (This holds true for home values over the long term despite recent declines spurred by the bursting real estate bubble.) Tying contents pricing and home values together like this doesn't make sense and doesn't add up.
Additionally, whereas building costs are much more easily understood with a variety of available tools, contents can be quite complex, both in volume and variety for each insured, which may be why carriers adopted such a blunt instrument for pricing contents.
The Science of Contents
The good news is that companies are now taking advantage of innovative software and services to improve their contents claim processes. Claim data is being collected at a granular level that has never been possible before. These cutting-edge contents claim solutions process millions of detailed transactions worth billions of dollars across every type of carrier, geography, peril, and consumer demographic so that the industry finally has a contents data warehouse to begin solving the pricing and coverage dilemma.
The technologies and methodologies driving contents claim innovations include software-as-service (SaaS) solutions that combine search, business rules, workflow and analytics engines — all optimized and tuned for contents. Search engines can gain access to real-time prices for millions of products from thousands of sources. Business rules include handling depreciation, taxes, and limits that can be customized by carrier and workgroup. Workflow logic manages the environment by carrier, workgroup, and individual and routes work by numerous variables, including personal/commercial line, size of loss, domain expertise, capacity, and overflow. Finally, a reporting and analytics overlay provides managers and individuals with detailed insight into the quality, cycle time, and loss characteristics of each claim.
Needless to say, the resources that are required to manage this level of data and automation are considerable. As a result, many carriers have historically under-managed and misallocated resources to the Coverage C portion of their property book of business. However, those carriers who are adopting cutting-edge contents claim solutions quickly see the return on investment. Carriers that have this capability at their fingertips can establish and maintain a baseline of accuracy that can be leveraged to improve processes that span the insurance organization from actuarial, underwriting, claims, procurement, and customer loyalty. Companies and careers are made by harvesting these kinds of opportunities.
Underwriting Accuracy
In a business like insurance, it seems that no piece of data is too mundane to collect. Good actuarial practice starts with using as many variables as possible to model risk. One never knows what piece of data will turn out to be valuable. Fifteen years ago, who knew that credit scores would have been so predictive for claim risk? The goal is to create efficient business transaction systems — claims, agency, underwriting, procurement, financial — that are tuned to capture many variables with sufficient detail to feed the data warehouse. Armed with this granular level of claim intelligence, carriers can create low-friction pipelines to feed their policy manufacturing processes. The following scenarios provide insights into companies with opposing views on the strategic importance of Coverage C.
In the first scenario, the insured purchases a homeowner's policy that follows the standard practice of tying contents coverage to a percentage of the structural value. Based on this calculation, the carrier determines that $50,000 of contents coverage is sufficient for the insured. The insured accepts the underwriter's assessment without question and now has a policy he thinks is adequate for covering his home. The carrier has a new customer. Everyone is happy. End of story, right?
Unfortunately for the insured, the carrier, adjusters, and all other parties involved, the story doesn't end there. A major loss occurs and, as expected, the insured relies on the carrier to guide him through the crisis to get a fair and fast claim settlement so he can move on with his life. But in the post-loss inventory and valuation process, it's determined that the sum total of the insured's contents, which included some high-end electronics and appliances as well as specialty items and collectibles, is actually worth $150,000. Now we have opened a Pandora's box of complications and potential delays.
The insured will fight to get the coverage he feels he deserves and may question the integrity of the broker, agent, and carrier that sold him a policy that underinsured his contents. In the end, the insured will get the settlement he paid for — $50,000 of contents coverage. But this comes at a high cost to the carrier that has yet another customer with good cause to harbor resentment at "big insurance," adding to the negative impact such experiences have on customer satisfaction and retention.
In the second example, the carrier has invested in contents claim services, technology, and analytics. The carrier's claim process captures a wealth of data feeding directly into its actuarial and underwriting process. The carrier has insight and discovery capabilities to identify and flag where contents risk exceeds coverage within its book of business, enabling the carrier to adjust premiums accordingly. Likewise, the carrier also sees where contents risk is significantly lower than coverage, which provides important pricing leverage in local markets. Over time, our model carrier is able to develop new capabilities to price risk that allow it to offer more innovative and value-oriented renters' and homeowners' policies to capture a larger share of the market.
Get Smart on Data
Contents claim solutions have already proven their value. Leading carriers that have adopted them have dramatically increased the accuracy of contents claim settlements while accelerating the settlement process by several orders of magnitude. Carriers and adjusters are saving time and money while also improving customer satisfaction with insureds who get swift settlements and the peace of mind that they are adequately insured. Risks and unpleasant surprises are reduced when all parties can look to the data and know exactly where they stand. The next step is for carriers to apply data solutions to the underwriting process, creating a friction-free circle of data that informs the entire process, from underwriting through contents claim settlements.
Getting there can seem like a daunting task, but understanding the problem and accepting that it exists is the first step. Then gather the data junkies and analytics fiends in your organization and start creating a plan for bringing the science into contents.
Jim Fini is president and founder of Enservio. He may be reached at jfini@enservio.com, or at www.enservio.com.
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