A Bet That's Paying Off

From rudimentary automation and reporting to tapping into big data, the return on insurers' data analytics investments is proving a winning proposition.

Insurance Networking News, October 1, 2012

Pat Speer

It's become pretty obvious that you don't have to be a math whiz to appreciate what analytics can do for your organization. No longer a blend of technology and processes employed by elites to perform merely a single function such as thwarting claims fraud, analytics is now a true discipline for insurers aiming to measure, manage and respond to insights that affect both the back and front office. In fact, from enhanced risk management and product development, to fund leakage, to finding niche pockets of new business, analytics has emerged as a number-one priority for insurers, according to Lori Sherer, senior expert in the insurance practice at McKinsey & Company.

"In the past year, several major insurance companies have hired heads of analytics, in effect creating a Czar of Analytics," Sherer says. "We see this as an important trend, because it signifies that insurers are focusing their efforts on this discipline to improve their value in the marketplace."

The growing popularity of analytics is timely, as insurers are called to respond to cost reduction and organic growth mandates. As a result, many insurers see opportunities to apply analytics beyond the traditional underwriting, actuarial and claims areas. And many are placing their focus squarely on a customer-centric business model, which carries with it layers of data, from internal cross-functional areas that touch the customer to external sources such as social media sites.

"We've seen that it's less tied to the economy and more to competitive advantage," notes Stuart Rose, global insurance marketing manager at SAS.

Insurers are currently spending 9 percent of their total IT budget on data and analytics, a collective $10 billion per year, according to results of a survey conducted by research and consulting firm SMA. Further, more than three-quarters of insurer respondents confirmed plans to increase spending on data and analytics over the next three years, notes SMA's "Data and Analytics in Insurance: The Dawn of a New Era" report.

Carriers that view data as a strategic asset are finding that obtaining budget dollars for analytics may be tied to an expected cost of doing business but not necessarily one tied to the IT department. In other areas, the enhancement of data analytics doesn't require any cost justification because the technologies to manage it are already in place. Regardless of where the resources come from, however, investments in analytics are always tied to demonstrable returns.

At RLI, a specialty lines carrier, funds for analytics come from the company's internal audit budget. With $619.17 million in 2011 revenue, RLI is focused on profitable growth and bottom-line results, and requires all departments, including internal audit, to add demonstrable value to the organization.

To do so, the company spends approximately 1,000 hours per year, or roughly 10 percent of its internal audit budget, on a continuous auditing program that has data analytics embedded in the process.

"We might be called 'data cops,' but we consider auditing an essential service component to the business," says Seth Davis, RLI's VP of Internal Audit. Engaging ACL Services to effectively access files, scrub data, develop abstracts and analyze results, RLI uses ACL's computer-assisted audit tool to develop a fraud indicator approach that looks for red flags such as P.O. Box payments and missing tax ID numbers, which may highlight anomalies. To date, the company has developed 115 extracts just on fund leakage, such as duplicate payments, missed subrogation, claims events and procurement. "We identify the anomalies and send those to the appropriate business unit to pursue and collect," says Davis.

The results are impressive. "Early on we calculated a $25,000 spend for our continuous auditing efforts," Davis says. "We spent less than $5,000 for the tool and, because we are a small shop, we leverage interns working on their accounting degrees who spend 700 of the 1,000 hours per year helping us with initial maintenance, enhancement and review of the ACL scripts, further driving down costs. The return on this has been the identification of $100,000 annually in fund leakage."

Four Stages of Competency

Hyoun Park, principal analyst at Boston-based Nucleus Research, agrees that there are significant returns available to insurers that become an analytic enterprise. "ROI is different for each project in each organization," he says. "Direct benefits, reduction in labor, reduction in software and hardware footprint, all can be directly related to a quantitative number."

Park maintains that the more an insurance company spends on analytics, the higher the rate of return, yet insurers can see high ROI on even small, initial deployments. "Beyond report automation, companies can use analytics to drive continuous improvements to business processes and decision making, and as organizations become more analytic, they will earn increasing rates of returns on those investments."

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