the latest in predictive modeling part 1

How Growing Data Availability is Enhancing Actuarial Opportunity

Growing data availability is enhancing actuarial opportunity for property-casualty insurance — especially for actuaries eager to experiment with various predictive models.

My Actuarial Review article, The Quest for Big Data, explains how data is presenting greaterthe latest in predictive modeling part 1 potential and challenges for actuaries. To find data gold, they must shift through available data — whether is buried in text or from the growing number of external sources catering to the insurance industry.

Actuaries have a seemingly insatiable appetite for data. While more data is available than ever in some areas, information voids remain.

This article is part 1 of a series I am writing on the latest in predictive modeling for Actuarial Review.

To explain how growing data availability is enhancing actuarial opportunity, the article discusses:

  • innovative ways insurers are using internal data;
  • data sources for developing potential proxies;
  • why all insurers will soon be able to collect telematics data;
  • differences in data needs for personal compared to commercial lines;
  • tips on selecting data vendors;
  • growing data potential, including digital breadcrumbs and the Internet of Things.

Part II of the series will cover innovations in models. Part III will explore barriers to  predictive modeling innovation, the upcoming disruption in the insurance company business model and more!

Do you agree that growing data availability is enhancing actuarial opportunity in property-casualty insurance? Please share your comments below. Thanks!

Personal Auto Pricing Different Since Great Recession

AR_July-Aug_2016-coverMany changes have taken place since the Great Recession, forever altering the personal auto pricing cycle. My latest Actuarial Review article, which is already attracting positive feedback, takes an in-depth look into what has affected personal auto insurance premiums since 2008.

The article, called, “The New Cycle of Pricing Personal Auto” covers several pertinent factors including:

  • The relationship between frequency and employment.
  • The curious sudden accident uptick in frequency by miles driven in the 4th quarter of 2014.
  • The gradual increase in costs per claim (severity).
  • A marked increase in driver distractions not just from cell phones but infotainment systems.
  • A growth of driving while under the influence of marijuana and accident increase in states where use is legal.
  • Auto manufacturers’ safety features reducing the frequency and severity of accidents.
  • Big data and predictive modeling transitioning from a unique pricing strategy to a common insurance business practice.
  • Low interest rates.

I am unaware of any other article that comprehensively looks into the auto insurance pricing cycle since the Great Recession. I would also like to thank James Lynch from the Insurance Information Institute for his assistance. I hope you enjoy it!

What do you think has most affected the auto insurance pricing cycle?


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Facing the Insurance Quality Content Dilemma (Part 1)

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Insurance marketing and communications executives face a Hobbesian choice when looking for public relations and marketing services. They can either rely on agency counterparts who do not deeply understand the intricacies of insurance or internal subject matter experts who know insurance but are not professional communicators.

The dilemma is the direct result of two primary factors. First, there are few professionals who offer insurance expertise and possess audience-focused communications training and experience.

Second, effective marketing heavily relies on producing magnetic and substantive content. Amidst intensifying online competition, the C-Suite asks their internal marketing and communications departments to become publishers of brand journalism without the additional resources to support the effort.

Often, the C-Suite commonly does not want to accept that publishing is expensive. But it is, which is why so many newspapers and magazines, even those offered online, no longer exist. In a world of free content as a marketing approach, there is no option to sell advertising to underwrite the expense of professional communicators.
Without understanding the audience,
inbound marketing will fail.

Those who appreciate and understand insurance tend to be professionals whose aspirations didn’t include becoming writers. Experts in claims management, underwriting, risk management, actuarial, statistics and other disciplines often despise writing. They began their careers not knowing that branding and digital marketing would introduce the publish-or-perish mentality that academics have struggled with for decades.

Such professionals are being asked to work beyond their skill sets while trying to maintain their core competencies through endless hours of continuing education. So it is not surprising that producing content by writing white papers or blogs becomes a hassle amidst their already busy days.

These experts find the writing process to be quite frustrating. After staring at a blank screen for seemingly hours their material is often unorganized or too complicated, making it difficult to read and understand. As a result, the marketing and communications department must invest in heavy editing and re-writing. It’s a time consuming and difficult process that can breed resentment on both sides.

Further, this approach is likely more expensive. Asking highly-paid professionals to write diverts their time and focus away from meeting client needs or rainmaking. Unfortunately, the C-Suite often does not take all these factors into consideration.

Lacking Insurance Expertise

The other option is to hire public relations, marketing and other communications firms. Usually, these well-intentioned companies lack deep and thorough insurance expertise.

The reality is that it takes years to understand the nuances of insurance. The industry not only has several disciplines, but several functions and a multitude of insurance lines.

Workers’ compensation, for example, involves understanding different subjects including health care, the claims process, return-to-work and disability coverage. Additionally, each state has its own regulations and expectations. Personal auto, the largest property/casualty insurance line, focuses on consumers so the approach is different compared to commercial lines such as general liability or business interruption coverage.

Further, the traditional insurance paradigm is evolving to a data and analytics model. Insurance executives, who tend to be conservative in nature, are still learning to maximize predictive modeling so it extends beyond underwriting and pricing to addresses claims management practices and marketing techniques. Forward-moving insurers are focusing on obtaining business intelligence through predictive modeling, which is quite difficult to understand without insurance expertise.

Other disruptors, including artificial intelligence, changing regulations and policy sales via Internet are also having a great impact on insurance companies and the vendors that serve them. Vendors that want to expand into the insurance industry also struggle with understanding what insurers really need, industry nomenclature or the right point person to contact.

Meanwhile, each insurance line faces its own struggles. Auto insurers are excited about telematics when a great deal of consumers want to maintain privacy. Then there are “preoccupiers” such as Uber and Lyft and driverless cars.

…the C-Suite commonly does not want to accept
that publishing is expensive.

Then there is the problem of truly understanding the needs of each customer type. Insurers are vying for a greater piece of the growing demand for cyber coverage, for example, when policies are inconsistent and buyers – and even their agents – are struggling to know what should be included in their coverage. The market potential for cyber insurance is enormous, but developing the right policy per each specific customer profile remains a challenge.

For business insurance, a smaller company that lacks a risk manager or a really awesome agent or broker will purchase based on price. Larger companies see the value of services and are sophisticated enough to know that price is just one part of the equation. They want to know how an insurer’s services will support risk management, claims processing and other areas. They also need to be sold on the technology designed to better serve them.

Another limitation is that marketing companies often approach digital marketing from a business school rather than a journalism school approach. They lack professionals who understand how to effectively produce materials because they are not trained in first rule of journalism, which is to understand the audience. I often encounter companies that do not want to invest in determining customer needs and pain points. Without understanding the audience, inbound marketing will fail.

So what is the solution? I’ll address this in my next blog. You can follow it by pressing the follow button on the left hand side.

In the meantime, please offer your comments below.



Don’t Underestimate Dodd-Frank’s P/C Insurance Impact

Actuarial Review March April 2016 CoverThe Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced the most far-reaching federal regulation the property/casualty insurance industry has ever seen.

While the regulatory focus of Dodd-Frank has been on a relatively few insurers that either have subsidiary banks or are considered systemically important financial institutions (SIFIs), the act is poised to affect the entire property/casualty industry, according to my recently published Actuarial Review article, Demystifying the Regulatory Web: Dodd-Frank and Its Complex Impact.

My article takes a rare, comprehensive and journalistic look into the ramifications of Dodd-Frank and the resulting regulatory web. During my research, I could not find one article that updates the multiplicity of Dodd-Frank’s impact on insurers.

As I wrote the piece, I became convinced that Dodd-Frank’s impact is greatly underestimated. (Life insurers are also affected.)

And after spending countless hours on the article, I could not put my finger on anything that substantially makes the insurance industry and its customers better off. If anything, federal regulation is onerous and hardly transparent. States, which have been regulating insurance for 150 years, have much more transparent processes as does the National Association of Insurance Commissioners (NAIC).

Dodd-Frank requires its brainchild, the Federal Insurance Office (FIO) and the Federal Reserve System (Fed) to work with the NAIC at the International Association of Insurance Supervisors’ (IAIS). Since then, transparency has dimmed. Formerly open meetings have been closed. In one instance, a presidential appointee told a congressional subcommittee he was barred from attending an IAIS working group meeting.
“…I could not put my finger on anything
that substantially makes the insurance industry
and its customers better off.

To further complicate matters on the international stage, the Fed, FIO and the NAIC, known as “Team USA,” have different missions that sometimes conflict with one another.

The federal rule making process also lacks the kind of transparency states offer. Information access to reporters is also very limited. Federal agencies provided me with plenty of documents to wade through, but subject matter experts were not available for questioning. This disturbs me greatly.

I also wondered how the activity of one large U.S. insurer’s London-based banking subsidiary could justify Dodd-Frank’s introduction of federal insurance regulation and monitoring.

Ironically, both federal agencies depend greatly on the NAIC even as their activities seem to overlap the organization’s historic role. In some cases, the Fed and the NAIC are on separate regulatory tracks to address the same concerns.

Meanwhile, Dodd-Frank directs the FIO to look into coverage discrimination issues, which is old hat for state regulators. For example, the agency choose to evaluate auto insurance discrimination when state regulators and research organizations have been considering the claims of consumer groups for decades.

All parties say they are committed to working together, but communication has been challenging.

The FIO has the primary role of monitoring the industry and one direct regulatory role to develop international cover agreements. Through its monitoring efforts, the FIO identified new regulatory opportunities for insurers.

Meanwhile, it’s been seven years since the enactment of Dodd-Frank and the Fed still has a lot of rule making to do. Besides going through that arduous process, the Fed is also working to appreciate the deep magic of insurance. This includes the role of actuarial opinion, which is part of the special sauce that makes individual companies competitive.

State vs. Federal Regulation

Federal intervention has reintroduced the time-honored question of whether states or the federal government should regulate insurers. Labor groups have long advocated for federal regulation for workers’ compensation. There are pros and cons to both approaches. If the federal government regulates insurance, one benefit would be regulatory consistency across state lines.

Certainly the international community, including Europe, prefers the approach of central governance for the United States. This difference in regulatory approach between central authority and state authority is not merely an academic discussion. The Jeffersonian notion of states rights to prevent the oppression of centralized authority was a direct reaction to the European central authority model that goes back to at least the Roman Empire.

Based on other topics I have covered, the United States needs to be very careful with taking euro-style approaches when the downsides most likely outweigh the benefits. There are fewer insurance companies operating in Europe partly due to regulatory burden.

“The federal rule making process also lacks
the kind of transparency states offer.”

It can be argued that state-based regulation is a key reason why the United States has the largest insurance industry in the world. While imperfect, the state regulatory model allows for greater innovation and flexibility. Under a truly federal regulatory model, for example, could Texas to continue to allow employers to opt out of workers’ compensation?

By digging deeply into the details of Dodd-Frank’s implications for property/casualty insurers, my hope is the article will be informative and thought provoking.

I am grateful to the Casualty Actuarial Society for giving me the opportunity to provide a comprehensive look at Dodd-Frank. The Fed’s media staff provided very useful congressional testimony and the NAIC, the Property Casualty Insurance Association of America and the American Academy of Actuaries all provided the necessary support to complete my article.

How do you think Dodd-Frank is affecting insurers?

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For Actuaries and Underwriters, Times Are a-Changin’

AR_Jan-Feb_2016 CoverThe days of actuaries and underwriters applying their crafts through separate roles and responsibilities are on the way out, as my recent Actuarial Review article, Pricing Adjustment, explains.

To be successful in the future, actuaries need to spend more time learning to appreciate the demands underwriters face. Underwriters also need to embrace predictive modeling to appreciate its potential for pricing and marketing, experts say. Surveys show too that insurers are frustrated when their actuaries and underwriters hold to their traditional roles and work against each other.

Embracing a new approach is always easier said than done. It’s only human nature to resist change. Companies like Liberty Mutual, however, are learning that having actuaries and underwriters work more closely together boosts return on investment

Liberty’s national insurance specialty section integrates underwriters and actuaries into functional teams. The results so far have been positive, placing the insurer in a better position to address underwriting challenges while encouraging communication and understanding.

Underwriting is not the only area where actuaries should become more familiar. Past articles I have written also explain how actuaries and statisticians can complement each other and why actuaries and information technology professionals need each other.

The bottom line is the actuarial role is a-changin’. Successful actuaries will embrace new ways to work with other professions to deliver better results.

Happy reading!

Driverless Cars: Beyond the Hype

Not long after I submitted my Actuarial Review article about driverless cars, “60 Minutes” presented a segment, “Hands off the Wheel” on the same subject.AR_Nov-Dec_2015 Cover

Since I had intensely researched the topic, I could not wait to hear what the reporter would tell the general public. Instead of investigative journalism, the segment gave the driverless car industry a boost with little mention of the many unresolved issues and potential unintended consequences.

At its beginning, the reporter said “almost all” car accidents are caused by driver error, noting the safety potential of driverless cars. The truth is, nobody really knows how safe driverless cars will be.

The often-quoted statistic by driverless car advocates is that 93 percent of car accidents are caused by human error. The logic is that by reducing the opportunities for driver mistakes, automated vehicles will be safer.

The statistic and its assumptions, which were also presented as testimony before the U.S. Congress, are very important because they guide the assumptions and expectations of driverless cars. Google also boasts that all of the accidents involving its cars were due to human error.

But when the rubber hits the road, it’s the insurance industry’s opinion that counts. Its actuaries not only have the most experience looking at the factors that lead to accidents, but the industry will be responsible for covering them.

My article, Destination Driverless: Will Vehicles – Not Drivers – Become the Center of Risk?, sets the record straight about the all-important 93 percent statistic thanks to actuarial analysis provided by the Casualty Actuarial Society’s Automated Vehicles Task Force.

The task force concluded that automated technology could only address 78, not 93 percent of accidents if it cannot overcome factors such as weather, vehicle errors and inoperable traffic control devices. Using the 93 percent statistic, the task force also asserts, is problematic for other reasons.

Stemming from a National Highway Transportation Safety Administration (NHTSA) study, the statistic had nothing to do with driverless cars. And, due to its age, the study could not anticipate the latest safety improvements to conventional vehicles.

So what do actuaries need to have a better idea of the potential costs of insuring driverless vehicles? Access to proprietary data that developers and manufacturers naturally are not quick to share.

My article also details other factors that should be considered – especially when human drivers must take the wheel of automatic vehicles. It also covers the challenges that developers must overcome to make them viable in the real world.

What does this mean to the average consumer? Driverless car excitement abounds, but nobody sees significant population of driverless cars for another 20 years.

In the meantime, drivers can expect automated vehicles to gradually join the traffic jam. That transition, in and of itself, could also lead to unintended consequences.

Auto Insurance Price Optimization A Reminder to Shop Around

 © Copyright Lewis Clarke and licensed for reuse under this Creative Commons License.

© Copyright Lewis Clarke and licensed for reuse under this Creative Commons License.

Price optimization in automobile insurance has been getting a lot of attention lately, especially since it is controversial.

Some consumer advocates say price optimization can be unfair to auto insurance customers. Insurers, however, believe using all the data possible for pricing premiums is good business.

Determining how insurers can acceptably develop rates – the basis of premiums — ultimately falls on state insurance commissioners. Before they can decide on if or how to regulate price optimization, they need a reliable definition. 

As I cover in my recent Actuarial Review article, Descending Confusion, some state insurance departments have already begun limiting price optimization using definitions that could disqualify decades-long actuarial practices. Most commissioners, however, want to further investigate price optimization first.

The challenge is that there are several definitions of price optimization.


….for consumers to really get the best price for insurance,
they really should shop around on a regular basis.

The goal of my article is to present facts and opinions about price optimization while avoiding political pitfalls. I can assure you it was no easy task.

I do thank the Casualty Actuarial Society (CAS), which represents the actuaries who price auto insurance, for giving me the opportunity to tackle this controversial subject. I have had the opportunity to work with countless CAS actuaries in my career and their personal and professional standards should be emulated by every profession.

While this is all fine and good, my mother is going to ask me what I think of price optimization.

Here’s what I’ll tell her. There is nothing wrong with insurers making a profit. It helps ensure that insurance is available to consumers.

And since insurance is such a highly regulated industry, insurers really can’t gouge customers as some would suggest. At the same time, for consumers to really get the best price for insurance, they really should shop around on a regular basis. 

But hey, even Flo would tell you that!

The Actuarial Cyber Coverage Conundrum

Are insurance companies collecting enough money to cover future cyber events?

Nobody really knows, but there is reason for concern.

Insurance companies are offering more cyber coverage to gain market share. At the same time, data hackers too often elude cyber security experts. In fact, the amount of cyber incidents, including data breaches, continue to climb just as insurers fear a cyber hurricane that could wipe out major systems practically at the same time.

These are just some of the topics covered in my article, “Cyber Insurance: The Actuarial Conundrum, which was published today in Actuarial Review, the magazine of the Casualty Actuarial Society

My article defines the conundrum that actuaries face and also examines topics that should interest the non-actuary including the insurance market and the challenges of cyber security.

Here’s the conundrum: how can actuaries appropriately price ever-changing cyber risk when data is scarce and models remain under development?

Besides digging into the conundrum’s implications, my article also offers ways actuaries can, as they do with other insurance lines, get more deeply involved in the underwriting process. The article also offers alternative ways actuaries can gain potentially relevant data and develop models.

I hope you find the piece to be both enlightening and helpful.

To read my other articles on cyber insurance, click here

Workers’ Comp Costs Slowly Rising

By warszawianka via

By warszawianka via

Workers’ compensation costs are slowly rising, according to the most recent Workers’ Compensation Resources Research Report (WCRRR).

The cost of workers’ compensation per $100 of payroll is $1.32 for 2012, the most recent numbers available, up from the historical low of $1.25 in 2010, according to issue 9 of the report released Wednesday.

While there are several ways to measure workers’ compensation costs, cost per $100 of payroll is my favorite because it gives a direct measure of average costs without entanglements such as the insurance market. It also takes account that wages have increased much more rapidly than employer expenditures on WC.

(John Burton, publisher of WCRRR, actually saved this information from extinction by encouraging the National Academy of Social Insurance [NASI] to take over the task in the late 1990s.) NASI released these figures last August

Employers are forever complaining about the costs of workers’ compensation. But the truth is, WC is far less expensive than it used to be. When I began writing about workers’ compensation in 1990, the cost of workers’ compensation per $100 of payroll was the highest in history at $2.18, which means the cost now is $0.76 less than 25 years ago.


Employers are forever complaining about the costs of workers’ compensation.
But …WC is far less expensive than it used to be.

Burton has been actively engaged in the workers’ comp system before I was born. He might be best known for being the chairman of the only National Commission on State Workmen’s Compensation Laws this nation ever had, which stemmed from the Occupational Safety and Health Act of 1970.

Historical Perspective

Insurance advocates have long argued that workers’ compensation costs rose beginning in the 1970s because of the higher benefit costs recommended by the National Commission. Rising benefits, along with massive system inefficiencies, rising medical costs and other factors, led to rising workers’ comp costs in the mid 1980s.

By 1990, employers, who in most cases are required to provide workers’ comp coverage to its employees, were clamoring for relief. This lead to significant changes.

From a legislative perspective, employers and insurer advocates did contain benefit costs by curbing maximum weekly benefits. As shown in the report, cash plus medical benefit costs were $ 0.98 per $100 of payroll in 2012, which is only two cents more than 1980, when it was $0.96. Reform also curbed allowable benefits for permanent partial disability and other types of cash benefits.

The changes in state programs also narrowed the definition of what types of injuries; illnesses and deaths were compensable, which Burton covers at length in the report.

Narrowing compensability does lower costs, but because it also removes the non-fault premise of workers’ comp from some work-related incidents, it’s potentially dangerous. From the employer’s point of view, the whole point of workers’ compensation, as Burton also describes in his report, was to remove such cases out of the tort system. Without workers’ compensation protection, employers risk lawsuits that are much easier to file than in the early 1900s and before.

Turning the attention back to the overall cost of workers’ comp per payroll, it is important to note that legislative action alone does not fully explain why workers’ compensation has become less expensive.

Before the workers’ comp crisis that began in the late 1980s, employers viewed paying premiums as a cost of doing business. Once it got expensive, employers had the incentive to become more educated on how to save workers’ comp dollars and ultimately take better care of their employees.


The employer-employee relationship has a greater impact
on a workers’ compensation claim than anything else.

I clearly remember those “ah ha” moments when employers realized their actions could lower WC costs. Enough employers “got religion” on accident prevention, safety, improving the claims process, rehabilitation and return to work that overall costs began to decline. What was considered innovative in the 1990s has become best practice.

The financial incentive to contain workers’ compensation costs also led to greater research on several topics from workplace safety to return to work outcomes and claim process inefficiencies. As a result, those involved in workers’ comp are more enlightened than ever.

That is not to say that workers’ comp is free from complication. The system is still beset by its political twists and turns, court decisions and other factors.

And while there are so many stakeholders in comp ranging from medical providers to insurers, lawyers, unions and regulators, one simple truth remains. The employer-employee relationship has a greater impact on a workers’ compensation claim than anything else. Many injured workers still suffer from uncaring employers just as employers see injured workers who are just not motivated to return to work.

Burton’s report also covers other important inflation, including WC coverage issues. To get your hands on the report, simply fill out an order form at PDF downloads cost $20 and printed versions are $25.

To see more workers’ compensation blogs, click here.

Tips For a Successful Actuarial Career

The actuarial profession is the best career choice, according to a recent ranking by

To make this determination, the job placement website looks at work environment, including emotional and physical factors; income, such as employment and salary growth; 11 stress factors and other considerations to develop their ranking. The average income for actuaries is about $94,000, according to CareerCast, but I can assure you that actuarial consultants make much more.

I have been working with actuaries in various capacities for nearly 25 years. With only about 6,000 actuaries in the country, members of this elite group are fantastic to work with, which is why I proposed a “hug an actuary day.

Tips for Success

Becoming a successful actuary, however, is not as easy as it was in the past when actuarial work was primarily number crunching. Based on several articles I’ve written, I believe that for actuaries to be successful in the future, they need to pursue three additional disciplines that go beyond the multi-year exam process. They are:

Solid Communication Skills. The actuary that can clearly communicate to the C-Suite and customers will be welcome at the decision-making table. Having helped actuaries with everything from publicity to editing articles for publication and reports for customers, I can attest that actuaries who invest in quality communication to effectively build eminence and have more satisfied customers. To learn more, check out my article on the future of the actuarial profession.

Statistical Background. Predictive modeling has taken the insurance industry by storm, but more actuaries need the statistical background to do it. As I cover in my article, “Professional Jealousy,” statisticians are gaining ground in areas that were once the domain of actuaries. (Statisticians are ranked #4 by CareerCast.) To learn more, check out the “Predictive Modeling” blog tab.

Technological Expertise. Actuaries that can offer technological expertise will be able to offer innovative solutions to the challenges being faced by insurance companies. Besides exploring programming languages such as F#, actuaries must harness technological innovation to be successful. 

Ranking of Other Professions

Two of the professions in CareerCast’s top ten ranking require skill sets similar to actuarial work including mathematician and statistician while three others require technological expertise including data scientist, software engineer and computer systems analyst. The other three in the top ten ranking are: audiologist, biomedical engineer and occupational therapist.

So what is the worst job in CareerCast’s ranking of 200 professions? Newspaper reporting. It figures!