Earnix Blog > Transformation
Adopting Intelligent Insurance Operations to Combat Inflation
Earnix Team
August 2, 2022
- Transformation
Inflation has proven one of the most difficult economic parameters to predict. Nearly two full business generations have elapsed without inflation being a dominant topic of conversation, as it was earlier, driven by two major 20th-century wars and the oil shocks of the 1970’s:
As seen in the chart, since the mid-1980’s, inflation in the United States has remained within a relatively narrow band, predictable and tame enough to allow business forecasting and operations to focus on other planning parameters.
That has all changed in just a few short months.
Recent statistics indicate that those efforts have yet to yield significant results, and that US inflation remains stubbornly high, at annual rates of increase in the consumer price index (CPI) not seen since late 1981:
While somewhat less pronounced, annual inflation currently exceeds 7 percent p.a. in the UK and Eurozone as well, and the majority of countries around the world are seeing inflation in excess of 5 percent p.a. Economies the world over are grappling with post-pandemic effects, but also the energy, agricultural, and supply chain shocks of the Russian invasion of Ukraine.
The bottom line: Insurers have no choice but to factor inflation into their strategies and tactics, no matter where they operate. According to a recent report by McKinsey, they also need to plan for it to be persistent, not transitory, running at 1.5 to 2 percent higher annually than the baseline inflation of the last decade or more.
While day-to-day conversations about the economy tend to focus on runaway consumer prices (gasoline, food, housing, transportation), insurance executives in their conference room conversations must weigh the business impacts of inflation and its knock-on effects and how to mitigate them.
Some policies, such automobile and homeowners, can be repriced relatively quickly, mitigating the possible effects of inflation.
Even before the current bout of generalized inflation, repair and replacement costs for automobiles and their components have risen consistently, as the technological sophistication and the cost of the specialized labor required to repair and replace those vehicles have escalated.
Note that homeowner’s insurance claims were also on the upslope prior to the current general inflationary environment, tracking rising home prices and reflecting supply chain issues for materials such as roofing:
Inflation also makes pricing and repricing other, longer-horizon lines, such as long-term disability, professional liability, healthcare, and workers’ compensation, much more difficult, placing additional pressure on reserves for future payouts and forcing reconsideration of insurers’ loss ratios.
With interest rates also on the rise, insurers are likely to see a slowdown in new business written for home construction and home buying, automobile purchases, and other high-ticket items that require financing.
This in turn results in increased competitive pressure, demands for increased sales and marketing expenditures, requirements for building delightful online experiences, and redoubling efforts in customer support and account servicing, all drags on the bottom line.
According to P&C Specialist, the Motor Vehicle Insurance CPI for May increased 4.5% from a year earlier, while auto repair outlays rose 6.1% in the same time period, indicating that insurers are “behind the eight-ball” and lagging in their reaction to market realities.
The time lag imposed by legacy pricing methodologies is too great to capture the dynamic and unpredictable conditions brought on by higher inflation. Lags in decision-making also lead to dissatisfaction among end-customers and prospects, risking permanently losing their business to more nimble competitors.
For example, consumers may not drive as much or as far as previously, seeking jobs with expanded work-from-home (WFH) options, carpooling, taking “staycations”, or otherwise cutting down their mileage in the face of rising gas prices. As a result, claims may be reduced in both number and payout amounts.
On the “flip side”, with some insurers imposing rate hikes that are in excess of the rate of inflation, end-customers are likely to shop around for the best insurance rates possible, exhibit reduced brand loyalty, or downsize away from their gas-guzzling SUVs, all of which could potentially lower insurers’ premium income and spiking sales and marketing expenses.
The crucial first step of corralling and integrating internal and external datasets removes the data nightmare that all organizations face, paving the way for full exploitation of advanced analytics and decisioning capabilities.
When dynamic decisioning and analytics are infused into every application across the organization, insurers can identify, implement, and monitor strategic initiatives more confidently, while reducing the manual effort needed to manage performance.
The entire organization needs to “own” a revamped and more responsive customer experience (CX). Every function across the organization, including claims, underwriting, investments, finance, marketing, and customer operations, must be involved.
With inflation a factor for the foreseeable future, it’s time to adopt a roadmap and get to work. Discover more by reading the eBook now.
As seen in the chart, since the mid-1980’s, inflation in the United States has remained within a relatively narrow band, predictable and tame enough to allow business forecasting and operations to focus on other planning parameters.
That has all changed in just a few short months.
Today’s Price Pressures – Not Transitory After All
To combat the current round of price increases, the US Federal Reserve and other central banks have tightened the money supply and sharply raised interest rates in an attempt to bring inflation under control.Recent statistics indicate that those efforts have yet to yield significant results, and that US inflation remains stubbornly high, at annual rates of increase in the consumer price index (CPI) not seen since late 1981:
While somewhat less pronounced, annual inflation currently exceeds 7 percent p.a. in the UK and Eurozone as well, and the majority of countries around the world are seeing inflation in excess of 5 percent p.a. Economies the world over are grappling with post-pandemic effects, but also the energy, agricultural, and supply chain shocks of the Russian invasion of Ukraine.
The bottom line: Insurers have no choice but to factor inflation into their strategies and tactics, no matter where they operate. According to a recent report by McKinsey, they also need to plan for it to be persistent, not transitory, running at 1.5 to 2 percent higher annually than the baseline inflation of the last decade or more.
Inflation’s Effects on Insurers
While day-to-day conversations about the economy tend to focus on runaway consumer prices (gasoline, food, housing, transportation), insurance executives in their conference room conversations must weigh the business impacts of inflation and its knock-on effects and how to mitigate them.
Increases in Insurers’ Liabilities
In the world of property and casualty (P&C) insurance, higher-than-planned inflation drives up liabilities, as the value of protected property and claims settlements increase, and losses must be reimbursed at higher levels than previously modeled.Some policies, such automobile and homeowners, can be repriced relatively quickly, mitigating the possible effects of inflation.
Even before the current bout of generalized inflation, repair and replacement costs for automobiles and their components have risen consistently, as the technological sophistication and the cost of the specialized labor required to repair and replace those vehicles have escalated.
Note that homeowner’s insurance claims were also on the upslope prior to the current general inflationary environment, tracking rising home prices and reflecting supply chain issues for materials such as roofing:
Inflation also makes pricing and repricing other, longer-horizon lines, such as long-term disability, professional liability, healthcare, and workers’ compensation, much more difficult, placing additional pressure on reserves for future payouts and forcing reconsideration of insurers’ loss ratios.
Risks to Top-Line Revenue
With raging inflation and flagging consumer confidence, end-customers can become averse to new purchases and to taking on the risks that come with them.With interest rates also on the rise, insurers are likely to see a slowdown in new business written for home construction and home buying, automobile purchases, and other high-ticket items that require financing.
This in turn results in increased competitive pressure, demands for increased sales and marketing expenditures, requirements for building delightful online experiences, and redoubling efforts in customer support and account servicing, all drags on the bottom line.
Added Pressure on Pricing and Repricing
In periods of high inflation and increased market volatility, pricing needs to change on a real-time basis. Every delay, no matter how short, runs the risk of significant financial exposure for insurers.According to P&C Specialist, the Motor Vehicle Insurance CPI for May increased 4.5% from a year earlier, while auto repair outlays rose 6.1% in the same time period, indicating that insurers are “behind the eight-ball” and lagging in their reaction to market realities.
The time lag imposed by legacy pricing methodologies is too great to capture the dynamic and unpredictable conditions brought on by higher inflation. Lags in decision-making also lead to dissatisfaction among end-customers and prospects, risking permanently losing their business to more nimble competitors.
Unpredictable Fluctuations in Consumer Behavior
Inflation can cause behaviors that may have countervailing effects on insurers.For example, consumers may not drive as much or as far as previously, seeking jobs with expanded work-from-home (WFH) options, carpooling, taking “staycations”, or otherwise cutting down their mileage in the face of rising gas prices. As a result, claims may be reduced in both number and payout amounts.
On the “flip side”, with some insurers imposing rate hikes that are in excess of the rate of inflation, end-customers are likely to shop around for the best insurance rates possible, exhibit reduced brand loyalty, or downsize away from their gas-guzzling SUVs, all of which could potentially lower insurers’ premium income and spiking sales and marketing expenses.
An Increasingly Mobile and Demanding Workforce
It’s not always one of the first considerations, but inflation also drives up people costs, especially in markets where there are many more open positions than potential employees. This in turn drives up operating costs faster than expected, increasing overhead and weakening the bottom line.Inflation & Insurance: What’s Next?
With the complexities of inflation, there are no “magic bullets”. Mitigation will involve efforts on many fronts.An Eight-Point Action Plan
In order to survive and thrive in this environment, Earnix recommends the following action plan, a practical mix of outwardly-focused and internally-directed enablement efforts, be implemented now:- Beef up market monitoring capabilities to enable real-time reactions
- Build strong simulation skills and technologies
- Enable machine learning (ML) models
- Build technology and infrastructure software that enables quick deployment of pricing changes
- Control the rising cost of claims through increased prevention efforts and quick claims processing
- Invest heavily in customer retention and customer engagement
- Deploy telematics and other personalized pricing tools
- Prioritize high-ROI projects over infrastructure investments
Get the Data House in Order
Every insurance organization wrestles with multiple data issues. These maladies stand in the way of sound analysis and decision-making, including the implementation of artificial intelligence (AI) and machine learning (ML), cornerstones of modern business.The crucial first step of corralling and integrating internal and external datasets removes the data nightmare that all organizations face, paving the way for full exploitation of advanced analytics and decisioning capabilities.
Employ Leading-Edge Software Technology
With the data house in order, leading-edge technology for dynamic decisioning and analytics can be brought to bear to make informed decision-making and quick reactions a reality.When dynamic decisioning and analytics are infused into every application across the organization, insurers can identify, implement, and monitor strategic initiatives more confidently, while reducing the manual effort needed to manage performance.
Act Across the Entire Organization
As inflation appears to be settling in for a long run, it’s time to engage the entire organization in mitigating its effects.The entire organization needs to “own” a revamped and more responsive customer experience (CX). Every function across the organization, including claims, underwriting, investments, finance, marketing, and customer operations, must be involved.
Attract the Best and Brightest
When employees feel that the data they are working with is accurate, when they are equipped with the best tools and technology, and when they feel connected to their colleagues across the organization, their job satisfaction rises, their decision-making confidence in increased, and they feel empowered to act quickly and decisively for the benefit of the entire organization.With inflation a factor for the foreseeable future, it’s time to adopt a roadmap and get to work. Discover more by reading the eBook now.
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