The commercial insurance industry is at a crossroads: the market is consolidating, the competitive and customer landscape is changing, and underwriting and pricing models are increasingly sophisticated. Insurers must adapt, and that calls for advanced, data-driven, predictive analytics, according to a new report released by Valen Analytics, a data and analytics provider for property and casualty insurance companies.

The report, “2015 Outlook: Commercial Lines,” highlights the threats insurers face in advancing their commercial lines and identifies key steps they can take to succeed in a rapidly changing market and is based in part on 1,200 in-depth conversations Valen Analytics have had this year with commercial lines executives about their concerns. Specifically, the report details how profit and success in the changing market—which is facing the consolidation trends and issues P&C lines have faced—will be determined by data-driven decision-making, or what Valen Analytics refers to as D3.

To facilitate D3, insurers must implement advanced data and analytics in conjunction with an overhaul of their decision-making culture. To be data-driven, according to Valen Analtyics, is to commit to going beyond conventional analytics that rely only on heuristics and to instill a curiosity and rigor to find credible patterns in the data. “It’s not just about technology; you have to retool your people so that underwriters don’t feel that data analytics are a threat to their expertise, or actuaries to their tried-and-true pricing models.,” the new report advises.

This guidance is designed to mitigate the three most-pressing challenges commercial lines insurers face today. Underwriting profitability has become a top concern for insurers, especially as insurers who have adopted sophisticated pricing models begin undercutting pricing on the best risks and avoid writing poor performing risks at inadequate prices. This adverse selection, which the report notes is “perhaps the most insidious threat because it’s completely invisible until well after it has infected a portfolio and the damage is done,” occurs when a competitor undercuts the incumbent’s pricing on the best risks and avoids writing poor performing risks at inadequate prices. Insurers without sophisticated pricing models can’t effectively compete, according to Valen Analytics. The reports also points out that the number of market-dominating insurers who have the resources, technology and data to grab market share is getting smaller.

“We’re starting to see a division between the ‘winners’ and ‘losers’ of adverse selection emerge in today’s shifting landscape,” said Valen Analytics CEO and president Dax Craig said in a prepared statement. “It’s an increasing concern within commercial lines because the impact is oftentimes invisible until after the damage has been done to a portfolio. The good news is that the opportunities to compete in today’s fierce market are there for those who prioritize data and analytics.” 

In addition, there are a number of new market entrants, especially technology companies like Google, e-commerce companies like Amazon and Overstock, and big-name retailers like Wal-Mart and Ikea, that are disrupting the market and already well-versed in data-driven strategies. Another changing-and threatening—market dynamic is the fact that 50 percent of the insurance workforce is nearing retirement and will have an increasing influence as both employees and customers.

The report says insurers can no longer do “business as usual,” and instead need to understand and now what they insure, become more adept and efficient at selecting risks that fit their business and price them accordingly, and use data analytics to evaluate options so they can test and learn, select the best approach, and deliver results that make the greatest strategic impact.

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