XL’s Hendrick: Insurance should utilise big data better
Most standard lines of commercial insurance business will eventually be commoditised, a leading underwriter has told delegates at the just concluded Insurance Day Bermuda Summit at the Fairmont Hamilton Princess Hotel.
But Greg Hendrick, chief executive, Insurance Operations at XL Group plc declared: “We need to embrace this reality rather than shrink away from it or try to prevent it.
“The real winners in the market will be able to adapt to the commoditised product and start to work on solving the next big risk — cyber, supply chain or nanotechnology — by offering innovative products based on analytics and underwriting judgment. This kind of innovation is only achievable through curiosity and analytics.”
But because the insurance business is relationship-based, the advent of new data and technical capabilities should be used to engage the client more, not less.
Those relationships can be improved if companies build a strong analytic foundation; expect commoditisation, but don't stand for it; and, be innovative in using the data and analytics to help clients.
The commercial insurance underwriter said there were three themes for thriving in this environment: underwriting judgment utilising an analytical foundation; expectation of commodization; and, innovation, which is critical given the environment and diminishing relevance of insurance.
He said underwriting has to be much more in tune with available information to allow for better risk insight.
“It is not solely about building the perfect predictive model. Rather it is about building an analytical foundation which allows underwriters to make better decisions on the business that really makes a difference.
“Second, we should have an expectation of commoditisation — and we should prepare for it in more lines of business. Capacity is plentiful and prices seem to be staying in a fairly narrow range, regardless of which direction they are moving.
“The ever increasing data is going to be harnessed and modelled and as it does the inefficiencies in a market will be removed, either by traditional players adapting or entirely new organisations from outside the industry disrupting whole markets.
“We need to embrace that fact and differentiate ourselves as a market — through our analytics, our client relationships, how we work, and creativity.
“Because of commoditisation we have to innovate to stay ahead. The relevance of insurance seems to have slid, or diminished.
“Innovation is our best opportunity to reverse that decline. We can talk all we want about pricing and modelling, but how we engage with our customers and bring value to their risk management efforts, their business overall, is our ultimate goal.”
Mr Hendrick said today's “information age” offers a wealth of data — the amount of which is growing at a dizzying rate.
Identifying and quantifying the relevant data for a risk would allow underwriters to make wiser and more profitable underwriting decisions, harnessing analytics to create business value from data.
He said: “Traditional underwriting uses only a small fraction of the relevant available data. Our aim is to use more. But how do we figure out what's important?
More tools are available, including reporting databases, enterprise data warehouses, operation data stores, business intelligence platforms, analysis and modelling tools and dashboards.
But as underwriters try to get better, it is ironic that the Boston Consulting Group reports that over the last 15 years global loss ratios have inched up more than two percent — even though there has been an explosion in data analytics capabilities and computing horsepower.
But the insurance industry has been slow to embrace high-end analytics. But now there is more interest in finding tools that can build greater efficiencies.
One example is an award-winning global claims system installed at XL which made five legacy systems obsolete. Claims data is now being observed from a new perspective, such as aggregating specific data fields and identifying trends.
And it is claims data, Mr Hendrick said, where future product solutions are found.
He said: “Giving our underwriters the right tools and information to perform — that's going to impact profitability and future performance.
“Up to this point, the vast majority of the industry's analytical analysis and tool development efforts are focused on the enhancement of only one pillar — the underwriting analytic capability.
“We need to be equally focused on developing effective pricing models and predictive modelling tools to give our underwriters a solid foundation to stand on.”