Better use of analytics can make insurers quick off the mark

Insurance is traditionally thought of as being a retrospective business, using the events of the past to determine future levels of risk. Some more cynical commentators might also say the industry is stuck in the past upon which it bases its decisions. Whether true or not, what is becoming increasingly clear is that insurers cannot only rely on past events to guide future decisions as much as they once could. Instead, those insurers that are making the best decisions are the ones using real time data and insight to forecast risk and guide pricing decisions in an increasingly uncertain world. 

Climate risk is just one area in which understanding the here and now is increasingly crucial. In the words of Katherine Hayhoe, a climate scientist at Texas Tech University and chief scientist at Nature Conservancy, “We have built a civilisation based on a world that doesn’t exist anymore.” In a similar vein, the IPCC recently warned that the “scale of recent changes across the climate system as a whole and the present state of many aspects of the climate system are unprecedented over many centuries to many thousands of years.”

These unprecedented changes are giving rise to the more regular occurrence of what were once very rare events. Devastating wildfires, hurricanes, and flooding have all made significant dents in the finances of the insurance industry in the last 18 months, and all the evidence suggests they will continue to do so until human society manages to get global temperatures under control.

Of course, climate change is not the only systemic risk currently uprooting insurers’ models. Technological change, changing societal behaviours, new business practices, and the power of social media to spread information faster than ever are all disrupting the way the world works and, thus, the facts that insurers need to account for when making decisions.

Some insurers are making use of advanced analytics to develop a competitive edge. However, given the rate of change taking place around insurers, there is concern that the pace of change taking place inside them is not fast enough. One potential reason for this is the way innovation takes place in the insurance industry: the tried-and-true waterfall method. 

The waterfall method is a favourite of many organisations because it is risk averse. The problem, particularly when applied to data analytics projects, is that it is very drawn out. Each phase can take months, and the sequential nature of the process means that it works best when you have a desired outcome in mind. This is at odds with what insurers need when testing a new pricing model or product, because this method of testing is developmental by nature and so you need to be able to explore different outcomes.

Those insurers that have progressed further with their analytics journeys have abandoned the waterfall method in favour of an agile methodology. Whilst the agile methodology is widely used across many core software projects in insurance businesses, it is yet to be fully accepted in analytics. Siloed departments and cultural reticence have slowed down such a transition.

A further issue has been technological. The legacy systems employed by many insurers prevent the curating of the vast data lakes needed to build analytics models. This is preventing insurers from both unlocking the value of their own data and augmenting it with insights from third-party and social data. Without an integrated platform that allows data to be pulled together and updated from across the organisation constantly, insurers are finding that their efforts to build data analytics capabilities delayed to the point of being worthless. As a result, the models will not reflect the facts on the ground by the time they are put to use.

All things considered, the insurance industry has done an admirable job of managing the turmoil caused by the pandemic. Yet at the same time it has become painfully clear that the industry does not have the systems and processes in place to respond to rapidly changing customer needs. When timeframes for updating pricing strategy are defined in years instead of months, there is a clear acceptance that insurance cannot keep up with the world around us. As the industry grapples with known and yet-to-be known risks of the future, we need more of those who are willing to show the agility and dynamism necessary to build models capable of keeping pace with a world in a constant state of flux.