The Race to Find the Next Insurance Credit Score (or How, Maybe, to Reinvent P/C Insurance Pricing)

The Race to Find the Next Insurance Credit Score (or How, Maybe, to Reinvent P/C Insurance Pricing)

What is an insurance credit score? Basically it is a set of algorithms applied to data from credit reports which provide guidance for pricing and underwriting personal lines insurance. Although it has been a source of political and regulatory controversy over the years, the use of insurance credit scores is now widespread.

Much of the controversy has been over possible disparate impacts on various societal groups. But a root cause of the controversy has been the non-intuitive relationship between a given person’s use or misuse of credit on the one hand—and that person’s probability of incurring insured losses on the other hand. It just doesn’t seem to make much sense. But statistically there are correlations, which in general have passed regulatory review.

Insurance credit score controversies now ancient history (i.e. were settled before most millennials graduated from high school).

But suddenly something interesting is happening.

The race is on to find the next insurance credit score—and the winners (if there are winners) will gain a pricing (and underwriting) edge.

There are only two requirements to enter in this race.

  1. You have to forget about all the kinds of data and information that insurers have been using to price and underwrite risks.
  2. You have to use your digital imagination to find some new data and models which provide the same or better lift as the old data and models which you have just thrown out the window. (Lift is the increase in the ability of a new pricing model to distinguish between good and bad risks when compared to an existing pricing model.)

So what kind of new data might a digital imagination look at?

  • For personal auto, connected cars will provide a rich data set to mine. How about whether a car is serviced at the manufacturer’s suggested intervals (correlated with whether the car is serviced by a dealer or by an independent repair shop)? Or the use of a mobile phone while the car is in motion (correlated with time of day, precipitation, and whether satellite radio is also playing)? Or use of headlights during daylight hours (correlated with the frequency of manually shifting gears in a vehicle with an automatic transmission).
  • For homeowners insurance, connected homes could supply all types of new data. For example, whether Alexa (or other IPA) controls the home’s HVAC systems, correlated with setting security alarms before 11 pm). Or, electricity and gas consumption, correlated with use of video streaming services on week nights. Or the number and type of connected appliances, correlated with the number of functioning smoke, CO, and moisture detectors.
  • For commercial liability insurance, telematics and IoT will be the key data sources. Does a business with 10 or more commercial vehicles use both fleet management and telematics solutions? What mobile payment options are offered (correlated with dynamic pricing capabilities)? The business’ use of social media and messaging apps, correlated with the degree of supply chain digitization.

Of course obtaining a lot of this data will require permission from policyholders—and even with permission these methods may raise social or political issues. But premium discount and loss control incentives for telematics programs have proven effective. And for better or worse, Scott McNealy got it right in 1999.

Insights from the trenches – west coast CIO roundtable

Insights from the trenches – west coast CIO roundtable
On March 22 and 23, Celent hosted a CIO roundtable in San Francisco that brought together CIOs from a variety of Property Casualty carriers. Sessions included presentations by CIOs and discussions on innovation, core systems in the cloud, transforming the customer experience, digital strategies, dealing with millennials and gender balance in the workplace, and optimizing the agent experience to drive growth. Some of Celent’s recent research was presented to stimulate discussion as well. The discussion highlighted the similar challenges that carriers face, regardless of size, lines of business, or geography, as they look at transformation.   Innovation Celent research shows that the population of highly digital individuals is growing and that a firm’s ability to innovate has a high impact on a highly digital agent or consumer’s willingness to work with them. Yet there are often barriers to progress as not all leaders within an organization are seen as supporting a company’s innovation efforts. While carriers see that innovation is critical to meeting customer expectations, innovation is not always seen as important to a firm’s strategy.   Carriers discussed the distinction between driving innovation processes and culture within an organization, and implementing specific innovation ideas. It was noted that employee engagement is key to innovation.   One carrier presented the program they initiated to drive innovation within their own organization with the results of improving employee engagement, driving improved financial results, and improving the speed to market of idea deployment. The CIOs discussed a variety of best practices for stimulating new ideas, capturing and triaging these ideas and rewarding employees for their contribution while moving towards implementation.   Core systems in the Cloud Activity in core system replacement continues to occur at record levels with well over half of the carriers in the industry either currently engaged in system replacement projects, or planning a future project. But these projects often take years to complete and deploy. As vendors look for ways to speed up these deployments, one option is a cloud deployment. Software vendors clearly recognize the importance of the cloud to drive their businesses forward – 50% of policy admin vendors surveyed in Celent’s recent report on cloud capabilities tell us that cloud is mission critical, and 50% tell us they offer a cloud solution.   But carrier take-up has been relatively nascent with few carriers choosing to make the leap. Almost 60% are waiting and watching while 20% are sure it’s not for them Typical concerns include data security lack of visibility into the infrastructure, concerns about difficulty moving data off the cloud, and how a cloud deployment will change the IT organization. One carrier spoke about their journey of replacing their core suite with a full cloud deployment. Specific issues the carrier faced were echoed by other carriers as core system replacements are often accompanied by a process redesign and often include a greater use of analytics to improve decisions and streamline processes.   The cultural issues can be significant and change management is key to a successful implementation. Moving solutions to the cloud also raises new terms and condition in the contract with the vendor that carriers need to understand and think through carefully before signing. But a cloud deployment can potentially result in a faster implementation and can allow a carrier to deploy their scarce IT resources on the aspects of maintenance that are strategic to the insurance business rather than using staff on infrastructure management.   A changing workforce 2015 was the year that millennials became the majority in the US workforce and millennials have very different expectations of their career and the role they can and will play. But there is a perception disconnect between what managers and millennials view as the most important factors that indicate career success. Millennials are most interested in meaningful work, flexible working hours and high pay. Managing millennials can require a shift in a leader’s traditional practices. Gender diversity is also a gap in the industry with few women in executive level roles in the financial service industry. Men and women have different views of the opportunities available to them.   CIOs exchanged a number of ways they’ve been successful at attracting and motivating millennials including gamification efforts and opportunities to reward and recognize millennials for their contributions while providing them with expanding learning opportunities. Various sources of unconscious gender bias were discussed and ways of helping women become better at networking and building relationships within an organization were seen as tools to help women progress in an organization   Going Digital Digital is a buzzword in the industry and CIO’s don’t all have a common set of terminology or definition for what digital really is. Some define digital as automation of work processes and some define it as automation of decisions. Celent described four digital goals that are typically the results of a carrier’s digital strategy – getting leaner by reducing expenses or increasing productivity; getting smarter by making better decisions and getting the right content to the policyholder at the right time; getting faster with shorter cycle times for policy issuance claims and product changes; and making the experience better for a customer.   One carrier described their journey towards digital and transforming the customer experience. When every business unit owns the customer experience, it’s difficult to provide a consistent customer experience across the entire relationship without a true owner of customer experience. A discussion of who is the customer resulted with most carriers recognizing the role that the agent plays and the need to optimize the agent experience.   CIOs then discussed some of the cultural issues faced as long-term employees work to absorb the change. It was clear that implementing the technology was not the roadblock to moving forward –but that finding staff that are skilled in understanding the business and also understand the ways to digitize is hard. Combine that with the cultural challenges of massive changes in how the work is being done creates barriers to moving forward quickly. All agreed that aligning their digital initiatives with the company strategy is key to finding the right projects. An interesting question arose around is there a place where it’s too much? How do you know when to stop? CIO’s agreed that this is a constantly evolving world and processes need to be in place to regularly assess, screen and prioritize new initiatives.   Optimizing the agent experience Celent presented some recent primary research around agent needs and drivers when it comes to placing business. Agents clearly state that they place business with carriers that make it easy to do so. While a carrier must have a good product, a solid price, and excellent claims, in a tie, the agent with the easiest process for placing and servicing business wins the deal. CSRs have significant influence in the placement decision and the CSR community, like other roles in the industry is in the process of undergoing a generational shift with older CSRs looking at retirement and younger millennials entering. This generational shift means that carriers are looking at how to provide additional tools and support such as gamifying the training process, providing additional help text and supplying more documentation as transactions occur.   CIOs described their own efforts in prioritizing connectivity with the agency management solutions and discussed the high priority that portals take when it comes to making IT investments.   Overall This event gave CIOs an opportunity to share ideas with their peers and the mix of research and the CIO discussion of the practical applications was seen as extremely valuable by the participants. Additional events will occur over the summer in the Midwest and in the fall in the Northeast.