Predictive Modeling Is Here to Stay

Credit: Brian Casey

Credit: Brian Casey

Last week’s blog covered how workers’ compensation predictive modeling will affect premiums. But there is much more employers need to know.

2) Predictive modeling is here to stay. Predictive modeling is well on its way to becoming an insurer best practice. According to a study released by Towers Watson last year, 72 percent of the comp carriers surveyed said they are either engaging in predictive modeling or soon will be. (For more info on the survey, please see my workers’ compensation predictive modeling article.

You can’t blame them really. Insurers engaging in predictive modeling are becoming more profitable more accurate rates, lower losses and better customer retention. Those not yet applying predictive models will have to follow suit to stay competitive. The latest Towers Watson survey is coming out soon and I expect it will show more insurers are pursuing predictive modeling in workers’ compensation. (I’ll let you know when it comes out.

… insurers engaged in predictive modeling are looking for that “secret sauce”…

3) Auditing parameters will change. In a perfect world, employers would be completely truthful when applying for insurance and understand the comp classification system to avoid misreporting. But the world is not perfect. The insurance industry estimates that 15 to 20 percent of employers are not paying their fair share for workers’ comp.

Traditionally, larger risks – those paying more than $10,000 in annual premium — got more attention from auditors. Insurers are using predictive modeling to locate employers more likely to need auditing. Using government sources, for example, insurers are looking at wages and employment information to reveal payroll information discrepancies.

Predictive modeling can also reduce the shell game played by shadier employers who change their company name to get a clean experience modifier or switch insurers to hide high-risk jobs under other classification codes.

4) There is a lot of experimenting going on.  Predictive modeling is relatively new to commercial lines. Insurers engaged in predictive modeling are looking for that “secret sauce” that will enable profitability.

This means there is a lot of experimenting going on. Insurers are experimenting by using new types of data as factor proxies.  They are also learning how much weight to give factors, the best combination of factors, and other considerations.

(Note: This is part II of my blog series on What Employers Should Know About Workers’ Compensation Predictive Modeling. To learn how predictive modeling will more accurately reflect an employer’s specific experience, click here.)

Next week’s blog : Predictive Modeling and Your Insurance Agent

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