To remain competitive, insurers need to find new ways to harness flows of data from external sources such as government and third party databases, social media and the Internet of Things.

Insurers have been pioneers in utilizing data and analytics to make underwriting decisions, price risks, predict losses and manage claims payouts. Traditionally, carriers have relied on their own data, and upon structured information from various bureaus and agencies to make decisions. The game has recently changed, however, and the pace of change is rapid.  Insurers are finding that they must creatively explore, mine and harness external data to remain competitive, to convert new opportunities for growth and to achieve improvements in the loss ratio.

The flood of external data is transforming not only the way insurers evaluate and price risk, but the way they interact with customers, transact business, and design products and services.  New data is coming from sources such as:

  • Government and third-party databases that have been digitized and made available to the public;
  • Comments, product reviews and discussion on social media;
  • The Internet of Things, in the form of telematics information from automobiles, input from connected homes and visual information from new devices such as drones; and
  • Contact information from call centers and company websites.

These vast new data streams create opportunities for insurers to identify and act upon the insights hidden within this sea of information, but they also open the door for new business models and competitors.

External Data is Changing Everything for Insurers - 16-21 percentage points in insurance profit can be captured by analytics leaders

Insurers can expect to undergo dramatic changes in the way they market, price and deliver products.  We estimate that astute insurers can increase profitability by between 16 and 21 combined ratio points by using analytics to more precisely measure risk in underwriting; to anticipate and prevent losses with real-time monitoring; and to increase sales via more targeted distribution strategies.  Insurers that are unwilling or slow to act, however, will be unable to identify and pursue the best risks because they simply will not know where to look.

Some insurers are already harnessing external data to increase efficiency and generate new revenue.  For example, Google’s Nest business has teamed with Liberty Mutual and American Family Insurance to help customers offset the cost of a Nest Protect smoke detector and provide a monthly discount on homeowner insurance.  Liberty Mutual offers additional discounts for customers who choose to electronically share information demonstrating that their smart devices are functioning properly.

In the life insurance sector, policyholders of U.S. insurer John Hancock can earn discounts of up to 15 percent on their life insurance policy if they agree to share data from Internet-connected Fitbit devices.  The fitness tracking service is part of John Hancock’s partnership with Vitality, a service provider integrating wellness benefits with life insurance.

In the next blog in this series, I will look at the key sources of value for insurers as they use data and analytics to fend off competitors from inside and outside the industry.

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