Past May Not Be Predictive of the Future

“It doesn’t matter if you are wrong, as long as the patterns are consistent.” This is one of the sayings that I heard so many times as a young actuary. The principle is that as long as long-term patterns hold, future projections will take into consideration those deficiencies. What happens when the adage of the past being indicative of the future no longer holds? This is very much the conundrum that Mutual companies are now facing with COVID-19.

We have never seen such a rapid and dramatic impact on the industry, the economy, and people’s psyche before. We believe that Mutual companies that are able to marry the data from the “new normal” with deep industry experience will be the ones that outperform their competitors on both a top-line and bottom-line basis.

Organizations that believe that the data will be all-knowing are destined to make horrible mistakes – data needs to be analyzed within marketplace context. Those that solely utilize intuition and experience will similarly fail – personal biases and experiences are masked by insight available from new data. The industry winners will be those that balance utilizing advanced analytics with deep insight into our dynamic industry in order to make key operational and strategic decisions in a time of rapid change.

 

We are working with Mutual companies to manage the impact of COVID in 4 areas:

1. Exposure changes: Sounds simple, but one of the most important parts of pricing a risk, whether Personal or Commercial Lines, is getting an appropriate view of exposure. With the sudden impact of COVID, this is even more challenging. The most extreme example is Personal Auto – capabilities like telematics will give a decided advantage to those carriers that get real-time data on changes in exposure instead of using a single car-year as the exposure base. On Small Commercial risks, economic changes will undoubtedly change the underlying exposure as these companies adjust their business focus to survive/thrive.

2. Customer retention:  For Mutuals to continue to grow and maintain margins, optimizing renewal retention will be even more critical. Traditional metrics of retention will not be good enough to manage top and bottom-line success in a quickly changing economy – the financial impacts from change in rate vs. exposure vs. coverage are dramatically different. Utilizing predictive analytics to segment the renewal book to project top-performing deciles along with bottom performers will be critical for portfolio management.

3. Digital capabilities:  The expectation for clients and agents to be able to interact with their carrier whenever and wherever they want will be even further heightened. Straight through processing (STP) is a particular area of focus. Before COVID, most carriers were already working on STP in some fashion. We believe that Mutuals will need to double down on these investments or risk losing market-share with competitors that are well ahead. The analytics required to successfully manage ease of doing business while improving combined ratios are available and are no longer going to be optional.

4. Loss Trends: Take aside what could occur if Business Interruption is found to be broadly covered or COVID-impacted employees have the presumption of coverage for WC…these are step changes that will reverberate throughout the industry for years to come. We believe that understanding core drivers of loss trends is going to be even more challenging and critical — what is a blip in results due to COVID vs. new long-term trends? The ability to decompose these trends and then appropriately apply for reserving and pricing implications are key requirements for future success.

 

Analytics + Experience – Competitive Edge in the New Normal

The analytical capabilities required to manage through these changes are already established in larger companies. The opportunity and requirement for the Mutual industry is to create those analytical capabilities and then marry them with their deep relationships and local insight to even more effectively compete in this new world. While there will be national trends, the competitive advantage of understanding the impact on local communities and managing for the long-term will allow the Mutual industry to continue to thrive.