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2013 Vermont Captive Insurance Association (VCIA) Special Section

"The carriers now have much more sophisticated models than what experience rating could provide, and the underwriting decision is made rapidly and sometimes without human intervention." —Tim Coomer CEO SIGMA Actuarial Consulting

Beyond mods—Better pricing through innovative analytics

Agents have access to data analysis tools used by carriers

By Michael J. Moody, MBA, ARM

After significant property losses over the past 18 months, the long rumored hardening of the market appears to be underway. As a result, many agents and brokers are beginning to develop strategies to help their clients with upcoming renewals. However, there are some recent changes that the broker needs to be aware of.

One of the frequently discussed issues surrounding these changes involves advancements in pricing and the most appropriate method to utilize analytics. While the insurance industry has used analytics in one form or another for years, it's the innovative use of these processes in conjunction with the massive amount of available data that is currently getting the attention.

Analytics 2.0

Without question, analytics has, for the most part, been at the heart of the underwriting process. But, as Tim Coomer, CEO of SIGMA Actuarial Consulting Group, points out, "We are rapidly moving more towards a world of data-driven leadership" that makes decisions based on large amounts of timely information. And he notes, "Insurance companies are catching on to these new approaches quickly." He points to an insurance industry staple—the workers comp mod—as a case in point. Historically, "The mod was 'the' analytical measure for the potential for loss." As a broker, the more you could understand the mod, and understand how the numbers going into the calculations might affect the mod, the better you could help your client.

Both the broker and the insurer relied heavily on the mod, both during the underwriting process and the pricing of the product. "Over time, the mod became the analytical measure for the potential loss of the account." So the broker and the insurer both knew exactly what the mod was, since it was promulgated by NCCI or the state insurance department. Typically, "When the client had a high-mod, the broker would indicate that the client had implemented some new loss control measures." In essence, Coomer says, "he would plead his case that the mod was not fair and, as such, an unjustifiable measurement of potential loss."

However, over the past few years, "the situation has changed dramatically," Coomer says. "Experience mods are losing their value, and will ultimately become less and less important." Insurance carriers were quick to jump on the analytical bandwagon regarding workers compensation. As a result, Coomer says, "the carriers now have much more sophisticated models than what experience rating could provide and the underwriting decision is made rapidly and sometimes without human intervention."

Obviously, the playing field is no longer level, so when a broker walks into the local underwriter to plead his case regarding a high mod, today that "story is no longer going to fly." The broker may hear something like, "Not only does this account have a high mod, but our model says it's going to get worse than the mod indicates."

Coomer states, "It's important for the broker to recognize where the carriers are going with this." He believes that their "black box" models are providing a competitive advantage that is heavily weighted in favor of the carrier. And he says, "What's interesting is that carriers are now offering free analytics of a broker's book of business." For the most part, "the carrier will come and analyze the broker's book of business, and then provide them with an amazing analytical feedback on their book of business." Accordingly, he says, "The purpose of this exercise is really to see the accounts that the broker has on his books and identify the ones they would like to be invited to bid on.

"What makes this so interesting is that frequently the client's CFO already understands the advantages of using data-driven decision-making tools." The whole topic of analytics has also been evolving in many other industry segments already, Coomer states. "More and more, other market segments are beginning to utilize data and analytics to enhance their competitive position and differentiate themselves from their competitors." As a result, many CFOs are up to speed on the advantages of the new models.

The carriers have been in the forefront of this movement. They realize that they need a better mousetrap because by using a more analytic solution, they can better match premiums that reflect the actual risk. Besides placing less importance on workers comp mods, they are finding more sophisticated ways to rate other lines as well. Take for example the use of telematics. By using this innovative software, carriers can target those accounts with the superior loss characteristics of low mileage and more conservative driving habits to establish a more appropriate rate.

However, Coomer says, "It's not only the carriers that are progressing; it's the regulators as well. Let's face it," he says, "regulation is going more analytical all the time." Take the EU for example, "Pillar one of Solvency II is very analytical." U.S. regulators as well are moving to more analytics. The regulations governing insurance carriers are going to get tougher and tougher. "In total," he believes, "worldwide regulations will become much more complicated, which will further push carriers to maximize the benefit of their own underwriting analytical processes."

The future is today

Given this rapid transition, how can the brokerage community take maximum advantage of the situation? While the "big-box brokers" already have a staff of actuaries who can provide models similar to those of the carriers, mid-market brokers, in all likelihood, will lack internal resources necessary to provide these types of analytics. That being the case, where does the broker go and what resources does he utilize to level the playing field?

At this point, mid-sized brokers have several choices. They can take the carrier up on its complimentary analysis, or they can partner with an independent consultant that has current capabilities to provide a similar model. Coomer says that despite the carrier's willingness to provide this free service, brokers need to realize it will be difficult for the carrier to provide an unbiased analysis. "There is a built-in conflict of interest. In the long run, the broker may be better served by finding someone on an independent basis that's able to provide those capabilities."

For workers compensation accounts, Coomer adds, "the broker must realize that trying to put together a 'traditional mod analysis package' is no longer going to cut it. The opportunity to avoid the automatic analytical driven underwriting that occurs with small to mid-sized accounts is to pursue accounts that require alternative loss financing. A client that is considering a large deductible plan has more opportunity to negotiate terms when backed up by a knowledgeable broker and an independent actuarial consulting firm. That is where the opportunity is right now to level the playing field and to deliver value-added services to the account.

Conclusion

 For years, the insurance industry depended on workers comp mod as a starting point for pricing. "They frequently used it as an analytical benchmark, but no longer," says Coomer. The carriers have begun to develop and use their own "black box" models and, for the most part, mid-sized brokers are not at that point yet. In order to provide the client with the best level of value-added services, the broker should consider retaining an independent source to provide the state-of-art analytics that are necessary today. Then they can develop a strategy that combines analytics with their own deeper understanding of the account to help level the playing field.

This is needed "to be able to go toe-to-toe with the carriers," Coomer says.

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