Insurers are targeting loss ratio improvements of between 2% and 5% under real trading conditions from their use of advanced data analytics, according to a new report from Swiss Re AG's research arm.
The Swiss Re Institute's latest Sigma report, which examines the use of advanced analytics in nonlife insurance, said the insurance industry has been "slower than many others" in adopting new technologies. It also noted that many insurers are at the early stages of their analytics initiatives as they are still tackling problems with their old technology systems, but the institute added that "many insurers" are planning greater use of data analytics.
Keeping pace
Based on a Gartner forecast that global insurer IT spending would reach $220 billion in 2019 across both life and nonlife, Swiss Re estimated that the industry will spend between $18 billion and $22 billion a year on data and analytics. This accounts for around 3% of the industry's expense base.
The report said analysts expect spending on data and analytics across all industries to grow at a compound annual rate of 13% over the next four years, and urged insurers to keep pace.
Swiss Re said data analytics could support four important business needs for insurers: providing insights into untapped opportunities; helping understand and engage customers more effectively; improving risk selection and pricing by augmenting their own portfolio data with external data sets; and improving efficiency by automating underwriting and claims processing.
But it added that although there are early signs of benefits from data and analytics, most insurance executives interviewed for the study warned against expecting large quantitative benefits in the near term, especially loss ratio improvements. It said that although pilots in several lines of business indicate "healthy" loss ratio improvements, results in real-time trading conditions vary.
The report said the executives surveyed indicated that three to five years was a realistic time frame to expect investments in data analytics to improve profits, but added that they underscored the importance of being patient when waiting for results, especially in complex activities such as underwriting.
'Magic remedy'
Swiss Re's report also highlighted several potential barriers to insurers making greater use of analytics. It noted that executives often come up with "a bloated list of deliverables and requirements" that may derail projects.
It also said heads of analytics had complained that business leaders sometimes see analytics as a "magic remedy," where results are automatically implemented into business processes. It added that implementing analytics can be as difficult as any other technology initiative at a large insurer, with old systems, "organizational inertia" and cost pressures.
Despite the challenges, Swiss Re was upbeat about insurers' greater adoption of analytics, arguing that such capabilities will become an "essential ingredient of competitive advantage" for insurers.
