The need for business analytics at insurance companies

//The need for business analytics at insurance companies

The need for business analytics at insurance companies

Written by Uri Taiber, CEO, InsFocus Systems

All insurance companies have IT systems which they use to issue policies, manage claims, and other internal processes. Intuitively insurance executives and professionals know they must have “reports” to manage their business however that understanding is not formalized. In this short article I will highlight the reasons insurance companies require performance analytics systems and what are the functionalities they should look for.

The basics of insurance business profitability

Competition – Insurance companies in almost every market in the world face strong internal competition. The reason for such competition is in the insurance products themselves which are hard to differentiate. From the end customer’s point of view a motor policy is a motor policy, so insurance companies’ can only gain market share by price competition. In a free tariff market this can drive insurers’ prices down to uneconomical levels, eating into their capital and reserves and undermining their financial stability.

Segmentation – An insurance company’s portfolio is made up of a large number of segments, and can each have different levels of profitability. These segments can be defined by product, distribution channel, individual agent or intermediary, geographical location, characteristic of the insured personality or characteristic of the insured object. While the business in some segments can be positive, the business in other segments can be negative or even very negative, offsetting the gains from the positive segments.

Fluctuations – Profitability of insurance business is largely a result of claims experience which is a stochastic process. Thus an agent’s portfolio which may be negative one year can be positive the next year, all due to fluctuation in claims. Thus to determine an insurance portfolio’s profitability, measurements have to be taken over a large data sample or over a longer period of time.

Time delay – An insurance policy is usually issued for one year. A claim can happen any time during the policy’s coverage period, even on the last day of the policy. Claim reporting is not always on time, and handling also takes time, in extreme cases finalization of a claim can be years after notification. This process makes measuring profitability quite complex, as claims paid in a specific month can relate to different polices issued many months or even years before.

Claims reserves – Due to the above time delays, insurance companies are required to hold in their financial accounts reserves for future liabilities. These reserves are made of:

  • Estimates for the cost of claims which have been notified and not yet settled. These are usually done on claim by claim basis.
  • Estimations for claims which probably occurred but have not yet been notified (so called IBNR – Incurred But Not Reported). These estimates are done on overall portfolio basis.

If claims reserves are too low, claims paid in the future will create a deficit in the company’s results, whereas if they are too high they will create a surplus.

Cost ratios – Other than claims, insurance companies also have other costs. Broadly speaking they are divided into two:

  • Acquisition costs – Agent commissions and other costs directly associated with obtaining insurance business.
  • Administration costs – Costs associated with the ongoing maintenance of the insurance company’s operation.

Both type of costs need to be controlled, mainly in relation to the company’s volume of premium income.

Premium income – Last but not least, premium income is where it all begins. Insurance companies need to maintain a reasonably sized portfolio to be able to support costs and minimize fluctuation effects. To maintain premium volume companies need to acquire new business as well as not lose the business they already have.

What does an insurance company need to monitor to control the above factors?

An insurance business intelligence software must enable the following capabilities to support the necessary business analytics;

Monitor KPI’s – Insurers need to monitor their key performance indicators (KPI’s) in different views. The main KPI’s for insurance companies are:

  • Loss ratio – the ratio of incurred claims (paid +outstanding) to earned premiums (premiums less unearned premium reserve).
  • Loss frequency – the ratio between number of claims to number of exposed policies.
  • Cost ratio – the ratio of agent commissions and company expenses to premium.

The company should be able to monitor KPI’s by all segments as defined above taking into consideration catastrophe costs which should be separated from premiums for the calculations.

It should be able to see these KPI’s on financial year basis or underwriting year basis, to detect any negative trends in the KPI’s and take corrective actions.

The same information when viewed by product rating factors should be used to indicate to the company any changes that need to be introduced into their pricing structure. Separating loss ratios and loss frequencies for each product by type of claim is also a useful tool for pricing calculations.

Control claims – A company should have reports showing claims trends by type of claim, to be able to spot as early as possible any changes in claims behavior.

Payments to claim service providers such as motor repair shops or hospitals and clinics, should be monitored on regular basis by claims department and costs should be compared between providers.

Claim payment information should be captured before and after deductibles (excess) so that the company can use this information to evaluate what would be the effect of changes to deductibles.

Reserves control – An insurer should control claims reserves by being able to see the relationship between reserves posted and ultimate settlements made (run-off). Such reports should be available both on global basis as well as on claim itemized basis.

Sales and Marketing – Insurers should obviously have reports for premiums in comparison to previous periods or to sales targets, however in addition they need to check two other measurements – new sales (separate from renewals), and renewal / lapse ratios – the rate of policies coming up for renewal that have been actually renewed.

Financial pro-forma reports on ongoing basis – Financial reports are compiled by insurers on quarterly basis. During the course of the quarter the captains of the company have little indication of where these are headed, and are unaware of any corrective action that needs to be taken. Reporting systems should be able to provide insurers with a daily report showing pro-forma profit and loss statement at the end of day compared with same day previous period. Such reports should be available both on Gross (before reinsurance) and on Net (after reinsurance) basis.


An insurer having the reporting and analysis tools described above, should be able to control profitability, better calculate pricing, verify that reserves are sufficient, sales performance and business retention are in place and ultimately improve profitability.