09:15 AM
Mark Breading
Mark Breading

Insurance: Ahead or Behind in Analytics?

Is the industry behind the curve, needing to learn lessons from outside the industry and catch up? Or are insurers actually on the vanguard of this new movement?

It almost seems like every action, reaction, event, and trend in the world is being analyzed today. Businesses and governments are pouring over data to gain new insights on traffic patterns, buying behavior, energy usage, weather events, money flows, and even terrorist activity. Millions of sophisticated algorithms and models are being used around the world in every industry every day to improve products, sales, services, finances, and operational efficiencies -- and to ultimately gain an edge on the competition. The question is, Where is the insurance industry in this new age of analytics? Is the industry behind the curve, needing to learn lessons from outside the industry and catch up? Or are insurers actually in the vanguard of this new movement? As it turns out, the answer is a little bit of both.

Tapping into industry expertise
The insurance industry should not be accused of being laggards in the analytics space. The entire industry, from very its origins, has been built on gathering and analyzing data. Whether it is life insurance, auto, commercial, property, annuities, or any other line, the products and profitability depend on a sophisticated understanding of risks and customer needs. The actuarial and underwriting professions are centered on data and analytics. SMA research consistently shows that insurers invest substantial amounts of money and resources in analytics -- amounts that are continuing to increase. In the fundamental business of insurance – creating, pricing, and servicing products to address risks and manage wealth -- insurers have strong expertise that others outside the industry can learn from. However, the customer domain is a different story. Insurers are increasingly moving to customer-centric orientations and focusing on the customer experience, but the analytics initiatives in the customer area are in earlier stages.

Leveraging outside-in thinking
Insurance was once an insular industry. The need to take the long-term view, act conservatively, and operate in a complex regulatory framework resulted in a mostly inward-looking industry. Now, a variety of external forces are forcing insurers to rethink their businesses. Innovation has become a mandate, and insurers recognize the necessity of looking for ideas, expertise, and new approaches outside of the industry. In particular, certain other industries are further advanced in leveraging analytics and, more recently, big data to understand customer needs, behaviors, purchasing patterns, brand perceptions, and satisfaction levels.

[Insurers Ready to Ask for More Telematics Data]

In my view there are two main reasons that retail, banking, travel, and other industries have amassed more experience in this area. First, the interaction level is often much higher. Insurance companies clearly have lots of data and transactions, but the transaction volumes are dwarfed by industries that touch their customers many times during the year. It is easier to mine customer data when a company conducts 50, 100, or even more transactions with its customers each year. Second, the nature of the interactions for insurance are different from those in many other industries. Buying a grande Chai Tea at Starbucks, binge watching Breaking Bad on Netflix, or ordering paper for a small business from Staples online are short, quick transactions. When they are done, they are done (barring a product or service defect). On the other hand, many insurance transactions are complex and linked to a string of other transactions. Quoting a price, going through underwriting, and handling claims are all very complicated interactions. The volume may not be the same as it is in retail, but the richness of the interactions tends to be greater. Still, insurers do collect lots of data from these transactions and should be keeping a close watch on the expertise, technologies, and processes that other industries are using to mine their customer data.

Opportunities beyond big data
But everything is about to change. Big data is here, and the insurance industry will have just as many possibilities, opportunities, and challenges as other industries. The vast world of unstructured data is waiting to be analyzed. While some insurers have made progress in text mining (for example by sifting through underwriter notes or images), the industry has just begun to scratch the surface. And the instrumentation of the world is opening up many new opportunities for insurers to better understand customers and risks. If you think the industry already has big data, wait until real-time data is streaming in from cars, properties, machines, roads, wearable devices, and everything else that the industry insures. Soon customer interactions will be increasing by orders of magnitude, and the amounts of incoming data will be unfathomable. The next decade is going to be pretty exciting for insurers -- and perhaps scary for those that do not embrace and prepare for the change. Ultimately, the important question is not whether insurers are ahead or behind other industries. The real question is how individual companies will capitalize on analytics to innovate and fuel their success.

Mark Breading, SMA partner, is a recognized expert in advanced technologies and their implications for the insurance industry. He has exceptional knowledge of data and analytics, customer communications in insurance, enterprise content management, and advanced technologies ... View Full Bio

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Nathan Golia
Nathan Golia,
User Rank: Author
9/12/2014 | 3:59:55 PM
Re: Good advice
That's right, Doug, and the two companies you mentioned are not exactly fresh startups. The biggest, most venerable companies in the industry are often leading the way in effective use of analytics and data.
D. Henschen
D. Henschen,
User Rank: Apprentice
9/11/2014 | 12:00:19 PM
Good advice
Yes, insurance has been founded on deep analytics, but this is good advice to not rest on your laurels and not look beyond the kinds of analyses and methods that have been in use for generations. Allstate's work with Kaggle and MetLife's exploration of big data platforms are two examples that show that the industry doesn't have its head burried in the sand. Join the club of explorers and innovators.
User Rank: Author
9/10/2014 | 10:22:43 AM
Re: Looking towards the future
Exactly - and the massive amounts of data that are already starting to stream in real-time from telematics, embedded chips, sensors etc. presents a tremendous opportunity... although many insurers are just collecting but not analyzing too much just yet.
User Rank: Author
9/10/2014 | 10:12:37 AM
Looking towards the future
It'll be interesting to see how insurers leverage the influx of data that will emerge from the cars, wearables, machines, etc. of the future. Those who are prepared to handle it will have plenty of insight to improve their customer experiences, but those who fail to acknowledge the changes are sure to fall behind. 
User Rank: Author
9/10/2014 | 10:10:42 AM
Like banks and retailers, insurers have a wealth of data on their customers. As you say, mining the massive amount of unstructuired data is the next generation of analytics.
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