Leveraging a Big Data Approach
Insurance companies will be able to capitalize new market opportunities and avoid costly exposures when they can better analyze and act on lessons from Big Data.
That’s one of the main findings from two recent industry reports highlighting the need for enterprisewide management of big data, including unstructured data from social media and mobile devices.
Very few insurers have an enterprisewide data and analytics approach. Most focus on targeted business functions such as pricing, underwriting and financial management, according to a survey of 72 P&C insurance professionals by Strategy Meets Action, an insurance strategic advisory firm in Boston.
“But [a siloed approach] is not going to be enough to differentiate and compete in this fast-changing marketplace,” said SMA partner Denise Garth. “Data analytics needs to take an enterprisewide approach that includes external telematics, [and] social and mobile data, so they can really leverage the power of analytics.”
Only about half of P&C insurers report that they have advanced reporting (12 percent enterprisewide and 36 percent in key areas).
Social Media and Mobile
Leveraging unstructured data from social and mobile is particularly important in designing products that customers want, according to a study by IBM’s Institute of Business Value.
Senior executives from 80 insurers surveyed by IBM said they are leveraging the cloud, big data, analytics and social technologies to “leapfrog the competition” in this way.
And nearly three-fourths (72 percent) of the insurers identified by IBM as market leaders in the study said they use social media to communicate with customers “to a considerable degree” — almost twice as much as non-leaders.
“Structures don’t make a lot of sense if insurers are building them in a vacuum — they need to reflect how insurers are targeting certain customer sets.” — Christian Bieck, global insurance leader, IBM Institute of Business Value
Big data analytics should incorporate four dimensions — customers, interactions, services and structure, said Christian Bieck, IBM Institute’s global insurance leader who is based in Stuttgart, Germany.
“The combination of those dimensions is very important, because insurers can only build new products and services in a sensible way if they have insight into what the customer actually wants,” he said.
“Structures don’t make a lot of sense if insurers are building them in a vacuum — they need to reflect how insurers are targeting certain customer sets,” Bieck said.
Strategies like these enable insurers to transition from the more traditional “organization-centric,” product-driven model to one that reflects the emerging “everyone-to-everyone (E2E) economy,” based on higher levels of collaboration between companies and their customers, Bieck said.
Insurers need to bring their historically strong analytical capabilities for predicting exposures to the marketing arena, particularly to cross-sell and up-sell to existing customers, said Sharad Sachdev, a managing director at Accenture in New York.
As part of this, insurers should follow the lead of the banking industry and analyze internal data of past marketing successes as well as competitor data and unstructured data from social and mobile to develop “propensity scores” — to determine which customers are more likely than others to accept certain offers.
“Consumers have many choices, so insurers can’t make offers in a vacuum, and that’s where social media comes into play,” Sachdev said.
Focus on Core Business
John Lucker a principal at Deloitte Consulting LLP in Hartford, Conn., who is the firm’s global advanced analytics and modeling market leader, said that most insurers are still struggling with how to best gain insights from past and current events, and are just beginning to adequately use predictive analytics for future events.
However, he said, “I think emerging technologies and analytics should be more R&D and exploratory, while companies should spend the bulk of their time getting good at the core of their business.”
If an insurer’s underlying organizational structure is not profitable, going after more customers isn’t going to make them more profitable; in fact, it might actually raise their expense ratio and make them less profitable, he said.
“They need to first be really good at pricing and understanding exposures, before they focus on getting more customers,” Lucker said. “I would suggest once an insurer has a combined ratio well below 100, maybe that’s something to talk about.”
The SMA report indicated that P/C insurers will spend more on predictive analytics, with nearly two in five (38 percent) planning budget increases of at least 6 percent per year over the next three years.
But, the bulk of the spend will be on claims recovery, and fraud prevention and detection, with almost half of the respondents piloting projects or planning future investments.
Insurers are beginning to evolve analytics for marketing and distributions, with survey respondents reporting new projects in customer segmentation, “single view” of the customer, and customer “lifetime value.”
Customer segmentation is the top area for new projects over the next three years, with 43 percent of insurers planning efforts in that area, and another 10 percent piloting or evaluating today, according to SMA.
PE Firms Target P&C Insurers
Experts are predicting a continued uptick in merger and acquisition activity within the property and casualty insurance marketplace, particularly by private equity firms and alternative asset managers. But it’s unclear whether more PE firms entering the sector will impact risk managers.
Nearly three-quarters (71 percent) of surveyed insurers, reinsurers and bankers that have worked on insurance M&A transactions said that alternative asset managers and/or private equity firms will be among the most active buyers within the P&C sector over the next 12 months, according to a report published this spring by the Mayer Brown global law firm, and published in association with Mergermarket.
Within the P&C sector, prices are generally based on supply and demand, typically rising after a large catastrophic event, said Edward Best, a partner at Mayer Brown and co-leader of the firm’s capital markets and financial institutions groups.
The greater the consolidation, the lower the supply and — theoretically — prices could get lower, he said.
“But the P&C market is so large, that the opportunity for private equity firms to consolidate the market could be very tough,” Best said.
With that said, however, PE firms do try to push efficiencies into the companies they buy, which could help the P&C industry drive down costs, he said.
Robert Hartwig, president of the Insurance Information Institute in New York, agreed that longer-term pricing could theoretically improve if PE firms created large insurance companies by consolidating disparate operations and realizing efficiencies through economies of scale.
“I would suspect that could happen within three to five years, but it would take a while to piece together an insurer of that magnitude,” Hartwig said.
PE firms have been investing in the P&C business for many years, but that activity was interrupted by the financial crisis in 2008, said Sean McDermott, a director at Towers Watson in Philadelphia.
“Now, a lot of PE firms are sitting on a pile of money that they have to either invest or return to investors,” McDermott said.
Uptick in Severity of Claims
Law firm malpractice claims may be down, but the sting in them is spiking.
In its fourth annual survey of lawyers’ professional liability claims, insurance broker Ames & Gough found that the severity of claims has increased over the past year for eight of the insurers that provide such coverage.
Four insurers either paid or participated in paying a claim of $100 million or greater; two others had a payment between $50 million and $100 million. Moreover, six of the eight insurers surveyed reported having more claims with reserves of $500,000 or greater in 2013 than 2012.
The carriers participating in the Ames & Gough survey were AIG/Lexington Insurance, AXIS Capital Holdings, BRIT Insurance, CNA Financial, Catlin Group, Ironshore, Markel Corp., and Swiss Re.
While the frequency of claims has begun to level off, the significant uptick in severity is due to the “double-whammy” of the longer development pattern of post-recession claims coupled with soaring defense costs, said Eileen Garczynski, partner and senior vice president of Ames & Gough in Washington, D.C.
On top of that, attorneys are switching firms now more than ever before, which has led to more conflict of interest claims, she said.
Six of the eight insurers surveyed cite conflicts of interest as the leading cause of malpractice claims. Such claims may arise when hiring firms don’t thoroughly determine if newly hired attorneys represented any client competitors or other adversarial parties of clients at their previous firms, Garczynski said.
“The obvious example of a conflict is when someone represents Exxon but also Greenpeace, but conflicts can be more complicated than that,” she said.
For example, an attorney could have represented a subsidiary of a pharmaceutical company and is now representing a competitor of the parent company, Garczynski said. The parent could sue the new firm, claiming the attorney is now divulging product secrets to its competitor.
There are many “gray areas” of representation that can lead to conflicts of interest, said Todd Hampton, vice president of claims for both Monitor Liability Managers and Berkley Select in Chicago.
For example, when a deal sours, the two parties involved in the relationship may become adversarial, Hampton said. If a law firm is representing both parties at the outset of the deal, it would be prudent to get them to sign a conflict of interest waiver.
“Or just get out altogether,” he said.
Michael Furlong, vice president, underwriting at CNA Insurance in Kansas City, Mo., said that most small law firms do not adequately protect themselves.
In the majority of malpractice claims, CNA found that most small law firms did not use “engagement letters” to spell out the limits of representation or thought that a letter explaining their fee structure to clients would suffice, Furlong said.
“Not so,” he said. “A well-documented letter is very important when trying to defend the claim.”
Engagement letters should include the identity of the client, the scope of representations and limits to that scope, fees and billing statements, expenses and file retention procedures. Clients should sign the letter, agreeing to such terms, at the outset of representation, as well as when any documented changes occur in the scope of the work, he said.
Law firms should also take extra precautions when agreeing to represent unknown new clients, particularly for commercial transactions, Furlong said.
If those clients have engaged in illegal or fraudulent activities, their attorneys could be sued for malpractice. A glaring red flag would be if the potential client has switched law firms multiple times within a short span of time.
Law firms also need to establish a “risk management culture” that includes letting the attorneys on the front lines know that they won’t get into trouble if they spot signs of trouble and immediately communicate it to the supervising partners, general counsel or other risk management staff, said Uri Gutfreund, a professional liability broker at Singer Nelson Charlmers in New York.
If they are faced with a malpractice claim, law firms should thoroughly document what happened and what they’ve subsequently done to minimize such occurrences in the future, including any risk management procedures they’ve since put in place, Gutfreund said. Such documentation can help law firms avoid being severely penalized during their subsequent renewals.
Law firms should also report to their carriers any claims they pay, even well before they exceed their retentions, he said.
“Even if they think that they may be able to make a claim go away for less than their retention, it’s really important to report it, so if the claim blows up, they won’t be fighting for coverage later with the carrier,” Gutfreund said.
As severity of claims rise, so do insurance premiums, Garczynski said.
“In order to keep premiums low, firms have to conduct appropriate due diligence to make sure they have the right risk management steps in place,” she said.