A Winning Wager – How Predictive Analytics is Transforming Risk Management

Apr 22, 2019

Insurance, as we know it today, started around the tables of Lloyd’s Coffee House on Tower Street in London back in 1686. It was there where sailors, merchants, and shipowners would gather because the owner, Edward Lloyd, always had reliable shipping news to share and would supply his patrons with routine ledgers of intelligence on ships, cargo, and overseas events. The gathering of men and maritime gossip, over a cup of coffee, eventually led to wagers on which ships would arrive safely to port. It wasn’t long before shipowners were collecting money on bets placed against their own cargo when their profits were lost at sea. Thus, the concept of insurance was born.

Much like its gambling roots, underwriting insurance is based on gathering intelligence, assessing the risks based on current conditions and historical data, and predicting which risks will produce the most profit and incur the least amount of loss. Insurance is a profit-driven business that has a commitment to its clients to remain solvent. There must be enough reserved funds to meet the financial obligations for any claims made against it.That is why it is imperative that insurers build a business model with long-term financial goals where the odds are ever in favor of the house so that there is always a reserve of money to pay out in the event of adverse loss.

In order to ensure financial stability, insurers should build a business model that incorporates predictive analytics. Early users of predictive analytics in Property and Casualty insurance noticed a significant competitive advantage as it helped their strategies for marketing and pricing, as well as streamlined processes, such as underwriting, claims, and reserves. Predictive analytics is also a proven and highly effective method to identify and stop fraud.

Although insurers are used to taking on new risks, there are some Regulators that have voiced concern that Big Data may harm consumers. However, a 2017 report to the National Association of Insurance Commissioners, addresses these concerns and outlines the ways consumers can benefit from the use of Big Data.

The advantage doesn’t come from the data alone. It is the combination of using that data and building a unique strategic model that utilizes company-specific goals along with in-house intelligence and expertise. Predictive analytics is just one of the tools used towards building a winning data-based business strategy.