As analytical tools and technology become more popular and easier to use, we’re beginning to see organizations model everything—from sales forecasts to which Netflix show you’re most likely to watch. Analytics is not new to the insurance industry. 

Insurers have been using big data for years to select their underwriting risk appetite, even helping to price major catastrophes such as earthquakes and wind exposures.

But in today’s new era of insurance-driven data, middle market and larger businesses can use their own analytical data—coupled with industry trends—to make sound business decisions on the potential risks to their organization. Too few organizations are effectively harnessing their data, and many brokers continue to sell on price alone, especially in the middle market and large account space. 

In an ideal scenario, you and your clients should work together using their own data on a micro-focused basis to develop their corporate risk management and insurance program. The data can help confirm many earlier decisions and develop a well-thought-out map to navigate your way through other complex risk management issues. The data will highlight deficiencies in such things as insurance placement and carrier programs, collateral programs, claims programs, risk control programs or a combination of these.

The keys to effectively using an analytics process to navigate an individual company are:

  • Keep it simple and allow the data to talk.
  • Accept that the data will pinpoint issues that may require a change in risk management fundamentals.
  • Establish a corporate commitment to a continuous risk management improvement process.

We use four simple insurance analytics tools that break information down into small parts to enable us to examine the roots of each factor. This lets you better understand the bigger picture. Each tool peels back another layer of information to identify trends and a root cause (or multiple root causes).

Total Cost of Risk (TCOR) is the first and easiest of the four insurance analytics reports to run. Simply, it is a process of taking your annual insurance spend and breaking it down into its individual components. Whether your insurance program is written on a first-dollar, guaranteed-cost, program, or deductible or retention basis, the TCOR report will direct you to where you need to focus your attention—insurance premiums, actual losses, administrative expense and/or collateral.

For instance, if 62% of the insurance spend is in losses, that is a good place to begin to peel back the layers of information to determine the cause. Solving the loss equation in this instance will have multiple positive effects on improving risk, reducing collateral and creating better underwriting terms.

Historical loss data and related information are increasingly being used by financial and insurance professionals to identify macro- and micro-level trends and patterns to help make strategic decisions regarding pre-loss (risk control) and post-loss (claims) programs. Taking the time to look at the various aspects of qualitative loss data allows us to take a deeper dive into historical information to find trends and to determine the root of a problem. The more years of loss history data you use, the better trend and root cause analysis you will obtain.

Charting out trends in data provides the opportunity to sort information into many meaningful ways that align with an organization’s strategic goals. For example, you can chart by types of losses, by division, by location, by state, etc. These charts later become dashboard reports for tracking progress against a baseline or correcting an issue. They help identify and create priorities for initiatives. And they guide you and your clients as you develop goals to support risk management and internal key performance objectives.

Financial analytics take a different snapshot of the same information to project losses into ultimate loss costs—meaning predicting the value of a loss that occurred today by the time the loss is finally paid in the future. This involves examining four different points of information:

  • Retention analysis and loss forecast
  •  Accrual and loss reserve
  • Program comparison and cash flow modeling
  • Collateral requirements.

Understanding the financial implications to your company of any risk retention or deductible program is critical to selecting the most appropriate solution.

Property analytics are an equally important bridge to a comprehensive look at the entire risk management and insurance program. A top-down analysis of a property program begins with proper valuation of assets to ensure the organization has the appropriate insurance limits. This entails a look at the valuation and also a careful look at the construction, occupancy, protection and exposure (COPE), such as the following:

  • Appropriate replacement cost values
  • Construction of the building as well as the building materials used to construct a property
  •  Occupancy of the property (office, industrial, retail or residential)
  •  Protection(s) in place to prevent or mitigate loss
  •  Exposure to the types of risks the property is susceptible to. 

Due to the unique characteristics of each property, it’s important that an organization understand the value of this information to not only help control potential hazards of loss but also to showcase the portfolio in the most favorable light to the underwriting community. There are also many advanced technology systems today that can help in this analysis.

Importance of Risk Assessment

While the use of analytics in risk management and insurance will point your clients in the right direction, it’s important to follow up each analysis with a general risk assessment. The risk assessment process takes the what and how of an event one step further to understand the reason why the event occurred, identifying opportunities to further reduce exposure and costs associated with a claim. Completing this process will allow your clients to take corrective action and change behavior to prevent the loss from occurring again—getting your clients back in line with their organization’s commitment to a continuous risk management improvement process.

Meder is Wells Fargo Insurance’s EVP and head of its Risk Advisory Practice. 
john.meder@wellsfargo.com