Insight: Effectiveness In the Margins

• TBA - Writer
• November 2016
• 

In times of narrowing margins, the conventional wisdom suggests tighter belts and in some way squeezing lemonade from financial lemons. Both solutions offer a vision of old-fashioned austerity that may, at least initially, sound reassuring to investors and shareholders, even though past solutions often don't play well in the digital age. "Efficiency is doing things right," noted the management guru Peter Drucker. "Effectiveness is doing the right things."

For insurers, doing the right things in a time of declining profits can mean the difference between success and mere survival. Financial results for 2016 have set the scene for some potentially painful belt-tightening after severe hail in several southern states contributed to the highest first quarter catastrophe losses recorded in the United States since 1994.

A confluence of factors led private U.S. property/casualty insurers to see their net income after taxes fall to $21.7 billion in the first two quarters--a 30.2% decline from results during the same period in 2015. By midyear, net written premium growth slowed to 3.0%, down from 4.1% just a year earlier. Deteriorating results should be a concern across the industry, as insurers' combined ratio reached 99.8% from the 97.6% recorded a year earlier.

Clearly, it may be time to consider new approaches to profitability and seek the "right things." In cutting-edge data and analytics, insurers now have tools that can help derive the most from straitened circumstances.

Some lines of business may be feeling the pinch more than others. One area seemingly ripe for efficiency is auto insurance, where reports show that frequency of claims has returned to pre-recession levels and severity has reached an all-time high. Without question, this registers as a pain point for auto insurers, and some are responding by raising premiums. Yet these conditions could hardly come at a more difficult time, with the auto insurance marketplace facing broader disruptions. Greater competition is creating pressure to elevate customer experience while refining underwriting and rating. That means the simple price-based approach to the frequency-and-severity squeeze may fall short of providing a solution.

Analytics are available to help insurers more accurately determine a vehicle's mileage at point of sale and over time--information that can lead to refinements in rating. Predictive modeling that accounts for frequency and severity by vehicle make and model can further help insurers adjust to costs of repair for expensive contemporary automobile technologies. With more drivers shopping around for new policies, loss-history indicators, telematics technology and driving record data solutions can identify up front if a prospective customer has recent claims, reckless driving behavior or road violations.

Such tools have become available to professionals who have the skill and resolve to use them. The challenge has always been--and surely will continue to be--how best to align risk and premium.

In a period of falling returns, those who aspire to be industry leaders and pursue effective solutions would be wise to pick up the sharpest tools at hand.

(Best's Review columnist Scott G. Stephenson is chairman and chief executive officer of Verisk Analytics. He can be reached at bestreviewcomment@ambest.com.)