Inflation: Real challenges, real opportunities for insurers

It’s been a rough two years for the entire insurance industry. A global pandemic. Supply chain disruptions. And now, rising inflation in the US, UK and European markets makes it difficult to model volatile production costs or the real cost of resolving claims.

For example, consider the automotive industry and how inflation is wreaking havoc as insurance companies seek to update the way they manage entire portfolios of auto policies. It seems like everything in this industry is suddenly much more expensive, from new cars or used vehicles to the cost and availability of replacement parts and services. Additionally, bodily injury in auto insurance has also seen a marked increase in medical remediation costs.

This means that insurers’ existing actuarial cost models – which factor in repair, replacement and injury costs – need to be overhauled to properly include inflationary factors and consequences of longer turnaround times for repairs and medical remediation. This new process is certainly not as simple as putting in an arbitrary inflation percentage assumption.

For example, supply chain and inflation delays now mean auto replacement parts are harder to find and more expensive. This can lead to dissatisfied claimants who blame insurers for not addressing the ongoing challenges as well as higher costs, such as longer use of courtesy cars while repairs are being made. In such a scenario, does this insurer make provisions for additional customer services interaction?

All of this means that insurers need to improve their underwriting performance. This requires insurers to have a better understanding of the total risk that is transferring from the insured to the insurer, updating pricing models to reflect this risk and providing the right coverage for the needs of the insured, including new offerings or bundles.

The customer angle is an important one. When inflation rises ahead of salaries, customer budgets tighten and insurance companies need to do all they can to win new business, in addition to increasing retention and maximising profits for each customer. Inflation clearly affects consumers’ buying habits, too, especially in the areas of total demand and how receptive they may be to new product offers. Consumers are willing to pay a fair price for goods and services – including insurance premiums and add-on bundles – yet they may resist anything they consider to be unnecessary or that doesn’t add additional value.

Inflation can present a number of new challenges for insurers today. Yet for those insurers willing to embrace new technologies, these market conditions can also present a real opportunity.

Personalise and win

Highly personalised insurance is a perfect example of how insurance companies are combining new technologies with new strategies and gaining a competitive edge. In this case, many insurance carriers are using new types of data (e.g. usage-based insurance), modelling it using advanced analytics and applying machine learning and artificial intelligence algorithms to develop and deploy highly personalised offers.

Personalisation helps insurers generate more precise estimates while also offering more attractive prices to consumers. For example, consider the case of usage-based insurance (UBI). UBI for auto insurance can show that a given customer drives mostly on motorways and is therefore offered a different price than a customer who mostly drives in cities.

This type of personalisation strategy can lead to creative new ideas for even better results in the future. Imagine a customer who commutes to and from work several times each week. After modelling the data against other variables, such as weather, traffic and accident reports, the insurance company realises that this route has a higher number of incidents than an alternative route of similar distance and commute time. The company informs the customer of this information and they soon start using this alternative route. All of this is mutually beneficial to both parties but wouldn’t be possible without UBI. This is an example of ‘preventative’ insurance.

Insurers are still looking to collect new types of data for UBI, but there are already enough use cases and ways for them to use it to create highly personalised offers.

Enter enhanced risk modelling

These same powerful data modelling tools can also help insurance companies understand new risk implications caused by rising inflation. This includes powerful predictive capabilities to gain valuable insights into various trends related to claims frequency, severity and cost.

Without these advanced tools, insurers could face too much risk related to inflation-driven cost volatility. As a result, they may subject themselves to an inordinate amount of risk. As the entire insurance industry continues to refine capital reserve strategies and policies, pricing teams must respond accordingly. New shifts will require less focus on the volume of business written and more on the overall quality of business.

Yet if the old saying is true – if every challenge is truly an opportunity in disguise – then the opposite can also be true. Insurance providers who make the best use of the data they have available to them in the insurance pricing process will improve their ability to protect their underlying performance while giving customers a better experience and value for money.

New challenges require new strategies – and technologies

It’s a challenging time. If insurance companies don’t have an effective strategy to harness the impact of inflation as part of their predictive modelling efforts, they stand to incur significant losses, suffer customer turnover and miss new opportunities to generate vital revenues and a stronger bottom line.

It’s an important point. Insurers who don’t take decisive action now by implementing next-generation technology to improve underwriting performance through risk modelling, pricing and personalisation will fall behind. Yet it’s not too late. Embracing insurance solutions that offer all of these capabilities and more can help insurers not only improve their underwriting performance but also gain a new – and sustainable – competitive advantage.

To see how Earnix is helping insurance companies enhance their combined ratios, improve underwriting performance and develop highly effective personalisation programmes, visit earnix.com today.

by Andrew Collins, Head of Business Solutions Insurance, International at Earnix