Data-Driven Winners

Breakthroughs in the use of analytic technology are changing the competitive dynamics of the P&C industry, and carriers that learn to harness large volumes of high-quality data to drive decisions will come up winners, asserted Frank Coyne, CEO of ISO (Jersey City, N.J.), in his keynote address at the 2006 ISOTech conference in Orlando. He then cited the fate of insurers that failed to meet growth and profitability challenges. "We lost 30 percent of our insurers in the last decade and a half," Coyne said, stressing that "the bar is always moving -- companies have to reinvent themselves."

Coyne contrasted the current year with 2005, during which time the industry suffered historic catastrophe losses. Of 2006 he said, "There is good news, [there are] good financials, but there's a hidden message in those financials."

Much has been said about the influence of warming ocean temperatures over the past decade increasing the number and strength of damaging storms, but that factor's influence on catastrophe losses is being overestimated, Coyne argued. He noted that the average size of new homes in Florida has increased by 500 square feet in the same period, and that those houses' contents have become more valuable. "It's not sea surface temperatures but property values [and] the distribution of property" that have increased catastrophe losses.

Coyne went on to refer to the auto insurance segment as an area of great change driven by innovation. While perennial giant State Farm (Bloomington, Ill.) has been challenged in terms of market share, technologically innovative Progressive Insurance (Mayfield, Ohio) has seen enormous growth, he said. Progressive was one of the first insurers to use credit scoring, and continues to use predictive data modeling in innovative ways, Coyne said. Companies fail to heed Progressive's example at their peril as analytics drive greater competitive advantage in the automobile segment, according to Coyne. "The paradigms are changing and will continue to change."

In response to this climate of change, models are being developed that use thousands of variables as predictive factors. "It's going to change the way automobile [insurance] will be underwritten into the future," Coyne said. But he emphasized that a similar transformation is happening in commercial insurance where "the economics are compelling" for the automated application of predictive modeling based on increasingly varied data and increasingly complex models. "You can't afford to have an experienced underwriter go through every policy," he commented.

Coyne suggested that a data-driven application of analytic technology also will play a role in mitigating the costs of errors and fraud. Approximately $16 billion is lost annually due to incorrect information on personal automobile insurance applications and renewal forms, Coyne said. Bringing together data and analytics can help to detect and correct pricing errors, he claimed. --Anthony O'Donnell

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio