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  • Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets

    October 21, 2009

    Underwriting Transformation

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    2Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    Zurich

    Global footprint

    – Five continents – 170+ countries

    3rd largest commercial insurer

    26 straight quarters of profitability

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    3Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    What is the Value Proposition related to Predictive Analytics?

     Design risk based pricing structure

     Focus retention effort on profitable risks

     Identify potential premium leakage

     Implement straight through processing

     Optimize audit procedures, loss control, service offerings

     Enhance our ability to detect fraud

     Focus sales on profitable niches

     Target new business

     Identify highly profitable agencies

     Reduce application information collection

     Increase our Cross-selling / Product Density

    Loss Ratio

    Improvement

    Expense

    Reduction

    Profitable Growth

    Value Drivers: Implementation Methods:

    Customer

    Centricity

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    4Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    Purpose

    Why are we here?

    – Bigger wins

    – Broader capabilities

    What are the takeaways?

    A. Analytical Transformation

    B. Business Fundamentals

    C. Communicate

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    5Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    A – Analytical Transformation

    Strategic Evolution of a Predictive Analytics Practice

    Plant the seeds

    Condition the soil

    Pull the weeds

    Reap what you sow

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    6Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    A – Analytical Transformation

    Industry Specific Considerations - Commercial insurance

    Market Cycles

    – Right price for the risk vs. what the market will bear – Competition – Marketing insight

    Underwriting Actions

    – Directional – Continuum of actions – Renewal strategies

    Frequency vs. Severity

    – Frequency based = more stable; more credible – Severity based = less stable; less credible

    Market Forces

    – Expense reduction – Customer expectations – Loss inflation trend

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    7Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    Average Complete Market Cycle lasts 5-10 Years

    * Rate Response Triggers

    1) ISO Rate changes and/or 2) Annual pricing projections

    0 1 2 3 4 5 6 7 8 9 10

    Market Softening

    Average soft market lasts 2 – 6 years

    Market Hardening

    Average hard market lasts 3 – 4 years

    Typical Duration of Rate Response = 21+ Months

    (17%-35% of the market cycle)

    Filing Process

    6 Months

    Premium change

    15 Months

    *Trigger

    N Months

    A – Analytical Transformation

    Commercial insurance Market Cycles

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    8Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    A – Analytical Transformation

    Expense Reduction

    Current Future

    Review of deductibles

    Collection of Financials

    Calculation of Quick ratios

    Providing the Financial Ranking

    Lowering costs and Increasing Premiums Audited

    Non-

    Value

    Added

    Non-

    Value

    Added

    Putting Predictive Analytics in the Underwriting Process

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    9Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    A – Analytical Transformation

    Commercial insurance Underwriting Actions

    Under-priced

    Significant

    Rate

    Increase

    Great

    Potential

    Credit

    Moderate

    Potential

    Debit

    Good

    Renew

    Risk

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    10Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    Potential for Adverse Development

    64.5%

    65.0%

    66.0%

    67.0%

    64.0%

    0%

    25%

    50%

    75%

    100%

    125%

    K ee

    p al l

    Lo se

    b es

    t 5 %

    Lo se

    b es

    t 1 5%

    Lo se

    b es

    t 2 5%

    V ar

    y R et

    en tio

    n

    Scenario Description

    D e c il e R

    e te

    n ti

    o n

    *

    62.0%

    63.0%

    64.0%

    65.0%

    66.0%

    67.0%

    68.0%

    P ro

    je c te

    d L

    o s s R

    a ti

    o

    Best 30%

    Middle 50%

    Worst 20%

    Projected LR

    A – Analytical Transformation Commercial insurance - Avoiding Adverse Selection

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    11Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    Commercial Lines Predictive Modeling, Thomas R. Bayley, Emphasis magazine

    A – Analytical Transformation

    Commercial insurance – Frequency vs. Severity

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    12Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    Discover unexpected insights

    – customer segments

    – products

    – processes and workflows

    Reuse model output

    – refine segmentation

    – one or more models working together

    A – Analytical Transformation Reuse insight where you can

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    13Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    Level 6

    Level 5

    Level 4

    Level 3

    Level 2

    Level 1

    E n

    te rp

    ri s e S

    tr a te

    g y

    P e o

    p le

    D a ta

    M o

    d e li

    n g

    T o

    o ls

    B u

    s in

    e s s P

    ro c e s s e s

    R e s u

    lt s M

    e a s u

    re m

    e n

    t

    Predictive Product Cross Sell Capabilities

    Straight Through Processing Enabled by Analytics

    Reuse of Data and Output Tools for Other Models

    Alignment with Rate Monitoring

    Creation of an Analytics Strategic Roadmap

    Tactical Solution Development

    Value Generation

    runs in tandem with

    Capabilities Maturity

    which runs in tandem with

    Building Block Development

    B u

    ild in

    g B

    lo c k s

    C a

    p a

    b ili

    ti e

    s B – Business Fundamentals

    Capabilities Maturity

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    14Top 10 Ways to be Successful Implementing Predictive Modeling in Insurance Commercial Markets9/16/2009

    To achieve the goal of developing sustainable competitive advantage through profitable growth, the model must be fully

    integrated across the organization.

    Each piece of the puzzle must be enabled in order for the full benefits to be achieved.

     Internal and External Communication

     Roles and Responsibilities

     Performance Management

     Training People

     Applications

     Architecture

     Interfaces

     Infrastructure

    Technology  Product Management

     Underwriting Processes

     Customer Services

     Marketing &

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