New technology must be used to develop a better understanding of customers' needs, says Mike Brockman
Motor insurers in the UK have reached new heights of professionalism - and they have needed to. Whether from the perspective of pricing, reserving, claims handling or marketing, the techniques and software being used now seem years ahead of what we had just 10 years ago.
This has not, however, made the industry any more profitable. We predict that the total combined ratio for 2003 will be 102% - exactly the same as in the previous year. And 2004 is likely to see it rising to around 105%. In other words, the market has peaked even before it has started to make an underwriting profit.
Some companies, including Direct Line and Fortis, have been highly profitable.
Others, however, are producing poor results. There are many factors differentiating the consistently successful from those that make losses but the quality of risk selection is uppermost. Insurers who get this right will always have a competitive advantage.
Looking to the future, one of the few guarantees is that today's state-of-the-art underwriting techniques will soon be dated. Insurers will have to embrace new ones if they are to stay - or become - ahead of the game.
Pricing and reserving software, for example, will be ever more powerful and functional, making it possible to store, retrieve and analyse data at a level of detail and speed not currently available to underwriters.
The real difference, however, will be in the way this additional capability is put to work. In five years' time, leading motor insurers will have a far greater understanding of their customer metrics, and the underwriting horizon will have to broaden.
Unlike in many other industries, motor insurers pay little attention to the value of customers, or whether potential customers are likely to be a good risk over a long period of time - this will change.
An obvious comparison is with banking, where luring students with free accounts and gifts is seen as a good long-term investment. Combining new software capabilities with the customer metrics available in other industries means insurers will be able to take a longer view of the best and most valuable customers.
Sceptics will point out, quite rightly, that insurance and banking are different - people are much more likely to change insurers than banks.
However, no one is suggesting giving away the product, and the long-term value of different customer groups can be factored into the price.
Whether or not it will make the market more profitable, this kind of technique is likely to provide an important tool for more accurate and, therefore, more competitive underwriting.
Customers will be underwritten for their potential value, not for today's profit. Underwriters will need to learn and understand more about their customers' needs and attitudes, and build them into their pricing.
- Mike Brockman is partner at the consulting actuaries EMB.
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