Insurers Turn to Predictive Modeling for Pricing: Towers Perrin

More insurers are turning to predictive modeling tools –and moving away from more traditional cost-based approaches—to determine pricing.

Personal lines carriers use the tools more than their other insurance industry counterparts
but other carriers are following suit, marking “a dramatic evolution in insurers’ pricing strategies,” according to the findings of a Towers Perrin predictive modeling survey. Though insurers have traditionally used a cost-based pricing approach, “robust modeling techniques are helping carriers reflect an ever-changing competitive landscape and customer behavior in their pricing structures,” the survey report states. Towers Perrin released the results November 11.

Over three quarters—76%– of personal lines insurers called modeling tools “essential,” with 68% of auto insurers and 42% of homeowners insurers currently using them. Over half– 56%– of commercial lines carriers described them as “important,” and several commercial lines carriers– including commercial auto (44%), workers compensation (43%) and commercial property (36%)–acknowledge investing in them, the survey found.

The carriers gave varying reasons for using the tools: 51% pointed to profitability, while 22% cited competitive pressure. Other reasons include growth considerations, good business practices and regulatory changes. Many plan to use them beyond rating and pricing, for areas like claims (65%), catastrophe exposure (62%) and marketing (51%).

Although personal lines carriers are the current leaders, “we believe commercial lines will move faster and with more effectiveness, given the lessons learned and the current environment,” said Klayton Southwood, survey co-author and Towers Perrin senior consultant. “The predictive modeling trends we’ve seen in property & casualty are consistent with those beyond insurance.”

The insurers’ experienced a few bumps with the tools—among the challenges they note in using modeling to increase rating or underwriting sophistication, they cite data (29%), production systems (20%) and cultural issues (15%).

Over 80 P&C carriers took part in the survey, which was conducted online earlier this year.

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