Data-Driven Winners: Keynote Address

Breakthroughs in the use of analytic technology are changing the competitive dynamics of the P&C industry, and carriers who 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, Fla.

As an expression of the changing face of the P&C industry, Coyne cited the fate of insurers who failed to meet growth and profitability challenges. "We lost 30 percent of our insurers in the last decade and a half," he said.

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

Insurers should not be lulled into a sense of security by good times, Coyne suggested, giving examples of significant factors that are either misunderstood or under-appreciated. A case in point is the issue of catastrophe (CAT), which Coyne characterized as the "topic du jour."

"We expect CAT losses to double in size every 10 years, but I think you'll be surprised what's driving that," he said.

Much has been said about the influence of warming ocean surface temperatures over the last decade, but that factor's influence 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 surfaces but property values," he said. "And it's not just the amount of property, but the distribution of property as well."

Coyne referred to the auto insurance segment as an area of great change driven by innovation. While perennial giant State Farm (Bloomington, Ill.) has had trouble maintaining market share, technologically innovative Progressive Insurance (Mayfield, Ohio) has seen enormous growth.

"The Progressive story is about innovation and data," Coyne said.

Progressive was one of the first insurers to use credit scoring, and the carrier continues to use predictive data modeling in innovative ways, Coyne related. Companies fail to heed Progressive's example at their peril as the source of competitive advantage in the automobile segment advances, Coyne suggested. "Now, credit is old news, and in many states you can't even use it," he said. "The paradigms are changing and will continue to change."

Instead of five, 10 or 15 variables, models are currently 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.

Innovation of a different sort has powered the similarly explosive growth of Berkshire Hathaway's (Omaha) main auto insurance brand. "The story of GEICO is a story of advertising," Coyne said.

Publicity campaigns by carriers such as GEICO and Allstate have contributed to a staggering $3 billion spent by the industry in advertising during 2005, according to Coyne. While innovative marketing is not technological in itself, Coyne remarked that new predictive models can be used for marketing as well, through identifying profitable customers and growth territories.

Coyne suggested that data-driven application of analytic technology will also play a role in mitigating the cost 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, noting that "all recovered premium drops to the bottom line."

Coyne asserted that more-sophisticated data analysis can also mitigate the ravages of fraud, which he called "a $30 billion catastrophe that affects the industry annually." Beyond simply detecting fraud, better technology will have the added advantage of expediting processing of legitimate claims, he added.

Companies that are mastering state-of-the-art analytics for bottom line improvements are opening a chasm between themselves and their competitors who fail to, according to Coyne. "The bar is always moving," he warned. "Companies have to reinvent themselves."

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