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Analytics: Fast becoming THE competitive battleground for insurers

The Analytics Revolution: Are Life Insurers in Canada Engaged in the Battle?
By Mark Breading, SMA Partner

The insurance industry is in the midst of an analytics revolution. In fact, analytics are fast becoming THE competitive battleground for insurers. However, life and annuity insurers in Canada are not yet visible on the front lines. Evidence is mounting that they are arming for the battle, but the real questions are: How rapidly and aggressively will life and annuity insurers in Canada engage in the battle? Will they play an active role in the revolution that is sweeping the insurance industry and many other industries? Are they using the more advanced analytical tools and leveraging new capabilities outside of the traditional actuarial arena? SMA recently completed a survey of insurers in North America regarding the current state of and future plans for data and analytics. This is the first in a series of blogs that will address these questions by evaluating what Canadian life insurers are planning in the area of analytics and the data required to support analytics, and how they fare relative to insurers across the rest of North America.

Analytics Assessment: In the past, life and annuity providers in Canada have been slightly less aggressive in leveraging analytics than the North American industry as a whole. The recent SMA survey revealed that Canadian life and annuity (L&A) insurers spend an average of 7.0% of their IT budget on data and analytics initiatives, compared to 8.5% for L&A insurers across North America. In addition, insurers’ business units often spend significant amounts of money on data and analytics initiatives that fall outside of the IT budget. SMA research shows that Canadian life insurers tend to spend less outside of the IT budgets than their North American counterparts do. Now, we see evidence that Canadian companies are increasing their spending and attacking new areas of the business via analytics initiatives. Canadian L&A insurers are stepping up the pace, with 70% saying they plan to increase overall spending on data and analytics and many already initiating new projects.

Analytics Approaches: While the property and casualty sector has been using analytics in areas such as marketing, underwriting, and claims for some time, analytics in L&A has largely been restricted to use in the actuarial department and for financial planning. Now a significant shift is underway as Canadian L&A insurers ramp up spending in new areas. Many new projects are underway at the front end of the value chain in marketing, distribution, and underwriting. Seventy percent of Canadian L&A insurers are investing in IT projects in these areas in 2012. Yet, for many Canadian insurers, the critical issue for capitalizing on analytics is the ability to find and train the people needed to build, maintain, and interpret analytical models. As insurers seek to expand analytics projects, many are currently relying on third party expertise from IT solution providers and specialists in analytics.

Analytics Applications: The important factor is not just how analytics are applied, but what specific insurance business problems are being addressed and solved. The two spaces that L&A insurers are focusing on in the near term are marketing and underwriting. Vast amounts of data and new analytical approaches are available to refine market segmentation, gain new insights into customer needs, improve campaign targeting and effectiveness, and identify cross-sell and up-sell opportunities. Many L&A insurers are seeking to automate underwriting decisions, building rules engines to streamline the processing of simple, low face value life policies. These rules engines are in their infancy for the life insurance industry in general, but over time they will result in an increase in the percentage of policies that will be handled via straight through processing techniques. The winning formula for L&A insurers will be the ability to balance the knowledge and experience of human specialists with computer based models.

The potential business value for analytics is huge, and Canadian L&A insurers recognize the opportunities. The industry at-large is just scratching the surface in terms of the types of applications and business insights that will drive competitive differentiation. The revolution is just beginning and it appears that Canadian L&A insurers are suiting up to join the battle.

Strategy Meets Action (SMA) is a research and advisory firm exclusively focused on the insurance industry.

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One comment on “Analytics: Fast becoming THE competitive battleground for insurers

  1. Christine Haeberlin
    August 24, 2012

    According to SMA, 70% plan to increase spending on data and analytics. What is the potential for the life and annuity industry beyond its historical focus on actuarial and financial planning? How are you creating experience? What landmark area are you targeting for a new project to get started and build from there?

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