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Why Actuaries are Crucial for Value Creation in Insurance

Rick de Jager and Jurjen

19. July 2021

  • Analytics
Insurers are confronting change and reinventing themselves to meet economic pressures and changing client needs. Customers are expecting the same level of convenience and customer experience as with online shopping. Consumer use of mobile devices is shifting. Initially fed by the need for sustainability and ease of use, it has been sped up by COVID-19. Thanks to transparency, the competitive landscape is heavier than ever before. The market is overflowing with InsurTech. Some are entering as partners to insurers, others as competitors. This activity along with overall technology maturity has generated a goldmine of data. Insurance actuaries recognize the value of data and are looking at how they can utilize it.  

At the core of these changes, there is a theme. A question of what strategy an insurer must utilize to remain successful. These developments are having a massive effect on the product and price positioning of P&C (Property & Casualty) insurers. This article aims to review the most important trends and will subsequently set out the possible strategies for insurers. In the end, we will discuss how the actuary can respond to these developments and which tools are required to make insurers as effective as possible to connect with customer requirements.  

Dramatic Changes in P&C Insurance Trends  

The Deloitte Insurance Industry Outlook examines important trends which are impacting insurers. In turn, the authors of this article take a deeper dive into the trends that are expected to result in pilots for the insurer and the current state of mature offerings. Many of these changes are already impacting the pricing and product offerings of insurers. These trends will develop over the coming years, and it is expected that by the end of 2022 the inflection point of these trends will hit. 

Customers of insurance companies are increasingly expecting greater ease of use, similar to their experience with other sectors. In response, insurers are developing customer propositions with more touchpoints. Examples of these are value-added services alongside insurance policies i.e., roadside assistance, programs to improve health, and home monitoring through IoT (Internet of Things). The pricing and product offering of these more sophisticated service offerings require new actuarial models. As an example, CoolBlue isn’t just offering products that are ordered; they are now offering painless installation solutions for the customer.  

Car ownership is shrinking and being replaced by a sharing economy. This change began as a desire for easy and sustainable solutions. The pandemic accelerated this trend, and now customers are choosing multimodal solutions consistently. Uber has a vision of the future where they are the provider of a complete journey. Via their apps, you can combine cycling, train, and their taxi service for a trip from A to B. Uber’s vision is an example of Everything-as-a-Service (XaaS), whereby ease of use is made available at an acceptable price. Examples of insurance in the sharing economy are on-demand insurance (Trov), Usage-Based Insurance, and peer-to-peer insurance 

More and more devices are being connected via the internet. Kitchen appliances, watches, and cars can share data with insurers, which insurers can use to fine-tune product offering and the risks associated with the policyholder's specific requirements. The Internet of Things is offering new opportunities for insurers to help prevent or reduces claims. Connected homes are being used to reduce fire and water damage. Proactive monitoring is an opportunity for the insurer to create a scenario that is cost effective for both parties and increases the safety of their customer.  

The availability of significant new sources of data is an underlying enabler to all of these trends. Domo estimated that, on average, every person in 2020 is generating 1.7mb of data every second. Thanks to Artificial Intelligence (AI), it is possible to leverage a large amount of this data for use in the insurance industry. Insurers can use the data to improve the customer’s experience, improve processes, or optimize them. Currently, AI is used frequently for text analysis in chatbots, object recognition, and fraud detection. The use of AI in the insurance industry will continue growing through the next decade.  

Efficient Processes Enable Sophisticated Insurance Product Offerings 

Currently, the customer engagement of Dutch insurers is only partially digitized. The policy distribution is often controlled by the insurer (i.e., through direct channels or intermediaries) and possibly partially outsourced externally through brokers. We see two dimensions within which insurers can realize a future vision. The first dimension refers to the degree of digitization. Competitive insurance product offerings require full digitization, seamlessly connecting the customer experience end-to-end. The digital and physical communication are merged to “phygital”. The development is necessary to deliver the ease of consumption to the policyholder which they are accustomed within other sectors. The implementation of a phygital customer experience will reduce costs as it increases customer loyalty and enables timely response to market trends.  

Insurers must pick their spot in the value chain to remain competitive. If core insurers maintain their current position, they will need to reduce their costs and improve their processes. Core insurers will maintain a superior position through agile and scalable processes. Lemonade is a good example of a core insurer that has increased market penetration through technology adoption. Lemonade uses chatbots to personalize and speed up both the quoting and claims process. The company boasts that they can produce a quote in as little as 90 seconds, and 30% of their claims are processed within seconds. Insurers can outsource or even use shared solutions. A good example is the Allianz Business Platform, which is developed by the insurer and is open to other insurers as a tool for policy and claim administration. 

Many actuarial teams are still dealing with information siloes within their insurance tech stack that require navigating. Engineering more efficient processes which integrate pricing, reserving, and capital modelling into a seamless process is essential. Doing so makes the impact of changing inflow and outflow directly visible, including the reserving and capital position which the insurer needs to maintain. Effective and continuous monitoring of the portfolio is crucial to maximize the opportunities and manage risk.  

Almost two-thirds of the 200 EMEA executives interviewed by Deloitte are considering offering non-core insurance products to improve customer retention. Some insurers will expand their offering by incorporating other products and services that complement existing insurance products. For many insurers this will require collaboration with other parties to improve the relationship with the customer. This strategy requires insurers to compete on more than just price. It means creating models that also reward customer loyalty.  

Dynamic Commercial Models Deliver Ultrafast ROI 

Actuaries have an important position within insurance organizations as a value-focused business adviser. Skilled actuaries can respond to the identified trends. But to do so, the goals and strategies need to be clear, and the organization needs to possess the right skills. The decision process and controls take place before the rate-making process. A unified approach reduces delays in implementing new pricing models and ensures knowledge of which risks exist and are accepted.  

Key elements are required in data, models, and IT to enable the pricing actuary to utilize new data sources and a large volume of data. The most critical elements are the integration of the data and software environments, fast IT infrastructure, and the ability to quickly change product specifications and pricing. Without these core capabilities,dynamic underwriting software is not possible.  

The resourceful pricing actuary will use a diverse array of software applications, which need to work together seamlessly. They will design and develop new applications, which will subsequently be built, tested, and implemented into the software. Integrating the architecture of software and data will reduce costs, increase the speed of processes, and enable the actuary to deploy his skill and experience in the most optimal manner. To meet the demands of rapidly changing markets and customer requirements, actuaries cannot spend large portions of time preparing data and applications. In the event pricing actuaries aren’t able to work efficiently it's important to self-reflect. Competitive insurers with sustained value and loyal customers must engage actuaries who advise the organization based upon deep analysis of the product and pricing scenarios.  

The existing IT infrastructure of today’s insurers often falls short. The manner within which pricing models are taken live is typically slow and complicated by legacy systems. The future-proof insurer has an integrated architecture where IT processes are automated. This allows the pricing actuary to translate their work into value for the insurer quickly.  

Dynamic underwriting will personalize the price, product configuration, and quoting of the insurance policy to the most optimum offering. Rating and pricing software needs to deliver more than price, elasticity, competition, and strategy. The actuary will demand that the software they use, enhance the complete customer experience. This also means reflecting on the product offering and potentially offering additional products.  

The above requirements will need to be integrated into the existing infrastructure. It would be easy to conclude that one requires substantial changes to core systems to achieve the future vision of pricing. However, insurers will look for software that can deliver this through native integrations that deliver speed and scalability. Such large change projects can be inherently costly and risky and therefore, must demonstrate quick ROI that will continue to scale for years to come. 

Embrace New Data Sources for Valuable Insights 

Customers are searching for complete solutions, where ease of use and an acceptable price are at the core. They want seamless access to solutions via the web, mobile apps, and in-person communications with their preferred carrier. Delivering such a solution will require insurers to digitize further, strategically selecting their position in the value chain, often engaging in third-party partnerships. To gain maximum benefit, pricing actuaries will leverage new types of data to create product offerings that enhance the insurer-customer relationship. This change in how insurers do business represents an enormous amount of data that will need to be incorporated and analysed. Data and software will need to integrate natively, without technical or business handoffs, to achieve an optimal customer proposition that is also economically sustainable.  

The successful pricing actuary will stay ahead of these developments. They will combine insurance technical and quantitative knowledge with data, IT and risk management to take a clear position in the complex field of pricing. Actuaries with these skills will be critical to the carrier’s success due to their persistence in adopting innovation that strengthens customer loyalty while ensuring bottom-line business objectives for the organization. 


NOTE: This article originally appeared in the Dutch Royal Actuarial Society (AG) publication De Actuaris. While  dvds the original audience was Dutch, the discussion points provide valuable insights for insurers across the globe. The original article is available in Dutch at https://www.ag-ai.nl/view/47935-DA-28-4-art-Boog%2BdeJager.pdf  


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Rick de Jager and Jurjen