Towers Watson: Predictive Modeling Gains Momentum

NU Online News Service, Feb. 1, 3:11 p.m. EST

Nearly 90 percent of U.S. insurance companies said the use of predictive modeling enhanced rate accuracy in 2010, according to the results of a survey conducted by Towers Watson.

The global professional services company reported that 70 percent of companies said the same in 2009. The use of predictive modeling in the U.S. is up about 10 percent across all lines of business except commercial property/business owners packages.

The survey indicates the use of predictive modeling continues to gain momentum. For example, 76 percent of the companies surveyed said they realized an improvement in loss ratio compared to 57 percent the previous year, and 68 percent said it improved profitability compared to 55 percent in 2009.

"Effective implementation of predictive modeling enhances risk selection and pricing, leading to greater insurer profitability and the potential for growth in market share," said Brian Stoll, Towers Watson senior consultant and one of the survey's authors.

Forty-two percent said the use of predictive modeling expanded the company's underwriting appetite.

Furthermore, 83 percent of auto insurers and 61 percent of homeowners insurers said they have put predictive modeling into practice compared to 76 percent and 44 percent, respectively, in 2009.

The use of the tool increased to 32 percent of workers' compensation companies compared to 18 percent the prior year.

"Personal lines and commercial lines carriers are seeing that predictive modeling benefits greatly exceed the costs and, overall, their plans clearly indicate a desire to move forward," said Klayton Southwood, senior consultant and the other author of the survey.

The survey also revealed that carriers are planning more analyses, enhancements and an extension of use to more product lines.