Data analytics: The survival tool for insurers

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Published: May 15, 2018 3:14:09 AM

Insurance companies have been slow to respond to changed market realities though they are sitting on mountains of data that can direct them to the needs of customers.

insurance, insurance firms, insurance companies, insurance policy, data analysisThe industry may face a backlash from customers if it does not wake up.

Insurance companies cater to a very large number of customers and every time they enter into a contract they collect plethora of data from customers. Collectively the sector has grown into a huge repository of data. In the current era when all businesses are looking at mining data for creating new business opportunities, insurers are in a more comfortable position because a lot of relevant data is already in their possession. They can analyse data in their possession for designing products for specific segments of customers with more attractive pricing.

Rationalising the premium rate

Currently, life insurance underwriters impose extra premium on customers who are smokers or habitual drinkers. However, they do not have the discretion to reduce premium below the standard rate even if a proposer does not smoke or drink at all and stays in a pollution-free locality. This aspect of underwriting should be subjected to rigorous data analysis and the findings may be the basis for rationalising premiums.

Similarly, data emanating from the healthcare industry can be a game changer for life as well non-life insurers in respect of term, endowment and health insurance. The number of traditional buckets in which insurers segment their customers can be increased by using modern tools of data analysis for more precise and predicted analysis which may influence pricing substantially. The actuaries who evaluate risk for the insurers need to be receptive to the new possibilities of gathering and analysing data for making more precise forecasts.

The theory of probability which has been the basis of actuarial assumptions is open to fine-tuning today for designing more attractive and even economical products for specific customer segments. Today, insurers need not hesitate to adopt a transformational approach outside the framework of traditional risk assessment methods. Such initiatives may lead to higher revenue generation for the insurers and a more satisfying experience for the customers. The scenario points to the fact that the insurers have been trying to serve the customers of the digital era with tools not capable of generating value for the customers as well as for themselves by ignoring insights that data analytics can provide.

Persistency of policy sold

On the other hand, insurers face a big challenge in respect of persistency of policy sold every year. Persistency is the continuation of the policy into the second year after 13 months of its commencement. For some companies, the rate of persistency is as poor as 30-35% by the end of five years. Such poor conservation of business is a result of several factors, including mis-selling and poor customer engagement. Again, such data vary on the basis of channel of distribution. A policy sold through the bancassurance channel has short shelf life compared to policies sold through professionals in the agency channel. There could be many more factors influencing persistency of policy such as rate of bonus, redundancy of the very purpose of taking a policy following changes in the tax laws or in life stage.

The data available with life insurers can generate very interesting information on customer’s choice, habits and aspirations. However, very few companies have made serious efforts to study its own data for expanding business or benefiting the customers. The Insurance Information Bureau, the data management arm of Irdai, has not undertaken any serious steps towards data analytics. Unfortunately, every study of data is meant for determining the potentiality in the market or for identifying the underserved or unserved population segment.

Rate of bonus is low

No benefit accrues to those who earlier contributed to the growth of the industry through their hard earned money. In spite of much better experience in respect of rate of mortality compared to the scenario existing 25-30 years back, the rate of bonus being declared for participating policies is awfully low. During 80’s and 90’s, LIC used to declare bonus ranging from Rs 60 to Rs 80 per thousand sum assured for endowment policies but today leading life insurers declare Rs 30-40 per thousand sum assured.

The industry may face a backlash from customers if it does not wake up. Objective data analysis has become important. The vast potentiality available in the market may not guarantee growth forever. Any disruptive development in the financial sector may rob insurers of their business, perhaps without insights about the future scenario.

The writer is former MD & CEO, Star Union Dai-ichi Life Insurance.

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