Towers Watson Survey Reveals Predictive Modeling Progression

UntitledAfter Towers Watson published its annual predictive modeling survey results a couple weeks ago, I assumed it was well covered.

My assumption was wrong. I realized that the “coverage” was mostly cutting and pasting the firm’s news release. Being familiar with the past studies, my goal here is to give this important survey the deeper coverage it deserves. The study, called, “2012 Predictive Modeling Benchmarking Survey: Advances in Implementation,” can be found here.

Previous studies revealed the benefits of predictive modeling and its use by insurance line. The new study places personal lines and commercial lines into their own buckets. My focus is on commercial lines.

Being a certifiable comp nerd, I had to know how it is progressing in workers’ compensation. To find out, I contacted Brian Stoll, one of the study’s authors, who is a source I have relied on for my predictive modeling articles. He was kind enough to supply the information shown in the chart above.

______________

Ninety percent of the property/casualty insurers surveyed said
bottom-line performance improvements were the motivation
for applying predictive modeling.
______________

The graph above shows that insurer use and/or interest in using predictive modeling for workers’ compensation continues. Keep in mind that the study’s mix and amount of responders changes for each study. This year’s results include smaller insurers who are likely not yet in a position to apply predictive modeling.

Ninety percent of the property/casualty insurers surveyed said that bottom-line performance improvements were the motivation for applying predictive modeling.

This confirms the assertions I make in my blog, Predictive Modeling Is Here to Stay, which was published one day before Towers Watson’s results were released.

Most carriers report bottom line profitability from predictive modeling.  Commercial lines carriers have seen positive effects in: rate accuracy (83 percent), loss ratio improvement (72 percent) and profitability (61 percent.)

Bottom line positive impacts for commercial lines carriers are: renewal retention (39 percent), market share improvement (33 percent), and expansion of underwriting appetite (22 percent). The report says that given trends, standard commercial lines will likely achieve benefit levels even more over the next few years. I agree. Commercial lines insurance has been following the lead of personal lines all along, so as efforts mature, so will results.

Another important point: midsize and larger employers report more favorable bottom line results, particularly in loss ratio improvement and profitability. “This is likely a result of first-move advantage,” the study says.

Other significant tidbits are:

  • Commercial lines carriers focus more on loss ratios than the frequency/severity models used by personal lines.
  • Predictive modeling continues to have barriers including access and cleanliness of data, IT limitations and “people/cultural issues.”
  • It appears that carriers of all the p/c lines surveyed have not yet taken advantage of reducing manual renewal costs or focused their manual underwriting activities on higher-premium or more complex accounts.

The study was based on 63 insurance executives from the U.S. and Canada. Responding companies represent a significant share of the U.S. P&C insurance market for both commercial lines insurers (21 percent) and personal lines carriers (17 percent).

(Note: This is part V of my blog series on What Employers Should Know About Workers’ Compensation Predictive Modeling.)

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2 thoughts on “Towers Watson Survey Reveals Predictive Modeling Progression

  1. Bill Cobb says:

    Just so we’re clear – ‘here in the real world’ – yes, insurers DO predictive analysis, but they don’t USE predictive analysis. Think about this for a moment – the overall cost of ‘losses’ have declined over the past decade. Yet, carriers AL&E and Expenses have increased by double digit figures. How is this possible when computers and automation have brought down the transaction costs of every other industry?

    How is this possible – simple: Work comp insurance, unlike any other, is a ‘closed system’. In order to ensure the participation of private carriers, each state manipulates the ‘base rates’ to make sure the carriers make a profit – else they would exit the system. Thus, over the long term (not one or two years isolated), the carriers are guaranteed a profit – a return on the capital invested. What determines the ‘capital invested’ – it is the ‘Surplus Ratio’ that carriers must have as a function of their losses. The more capital deployed, the higher the ‘return on capital’ must be to ensure the carriers participate.

    In a world where the ‘risk free return’ (RFR = 10 Year US Treasury Bonds) is less than 1%, the work comp carriers (according to the NCCI) are whining about a 5.6% return (down from 14.2%). So, the goal of the carriers is to deploy more capital. How do they do that – by showing ever increasing losses. The losses aren’t increasing because of benefits paid to injured workers – they have to come form LA&E. At a 5/2% ROI, capital is flooding into the work comp carriers from all parts of the world. Their only problem is how to deploy it.

    Carriers will never use analytics to reduce costs – it is not in their interest or to their benefit. There is a Chinese saying, ‘When a human points at the moon, the dog looks at the finger.’ Please, stop looking at the finger.

    • annmariecommunicatesinsurance says:

      Bill,

      It’s true that workers’ compensation cost as a percentage of payroll has declined dramatically since the early-to-mid reforms in the 1990s. I intend to write a blog about that.

      Your points about the industry’s ROI are right on. I recently covered this in a blog due to an article by John Burton called, “The Twists and Turns of Workers’ Compensation Profitability.”

      Automation itself has a limit to how much money it can save. Automation supports predictive modeling for obtaining data, but, as you know, is not the same as the models or the modeling processs. Most workers’ compensation insurers are using predictive modeling to locate, attract and retain the most desirable markets.

      Applying predictive models to the claims process, however, does help reduce losses. I discussed this in last week’s blog on predictive modeling for self-insurers. Some workers’ compensation carriers and TPAs are getting on board with this and seeing ROIs of 1 to 4 percent. How it will affect the rising frequency trend will be interesting to see.

      Please check out Workers’ Compensation Predictive Modeling Comes of Age article under the “work samples” tag. It should provide you with more information.

      Thanks for your comments.
      Annmarie

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