Although P&C insurers say they are comfortable with predictive modeling, they also state that its implementation is uneven, lacks uniformity and differs by line of business and carrier size, according to Towers Watson's Predictive Modeling Survey.
Nearly all (97%) of the 34 personal auto insurers surveyed use predictive modeling (PM) and say it remains essential for risk selection and rating. On the homeowners' side, 73% of the 33 carriers surveyed currently use PM. In both of these segments, this represents an increase from the previous year, in which 80% and 60%, respectively, incorporated PM in risk selection and rating.
However, on the commercial side, fewer carriers incorporate PM into their lines of business: Just 61% in workers' compensation, 51% in commercial property, 47% in commercial auto, 44% in specialty and 43% in general liability.
PM use also varies by carrier size: Less than half (44%) of standard small to mid-market commercial lines insurers agree that PM drives performance success for risk selection and rating, while 56% of large commercial and specialty lines insurers say it is essential or very important. "Beyond national carriers, insurers are only starting to understand the potential of a comprehensive program that applies data-rich analytics to a wider range of insurance functions," says Brian Stoll, director, P&C practice, Towers Watson.
Towers Watson predicts that PM will grow by 33 percentage points during the next two years. The long-term growth trend for modeling techniques is consistent across all areas of an insurer's business, with carriers planning to use it for fraud identification (36%), evaluation of litigation potential (46%), loss control (49%) and ordering credit and motor vehicle reports (48%) in the next two years.
Of carrier respondents who agree that their companies are data-driven, just more than half (56%) use PM for other functions beyond pricing, compared with the 12% of respondents who say they are not data-driven. These functions include performance dashboards and indicators, data warehousing, Six Sigma and cost-benefit analysis. "Now that almost two-thirds (65%) of insurers have advanced to where they consider their companies data-driven, these companies are more likely to gain a competitive edge in the marketplace, putting the remaining third of carriers at considerable risk," Stoll says.
Towers Watson provided two infographics highlighting key points from its Predictive Modeling Survey. Click to expand.
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