Predictive analytics valuable to brokers if they can explain benefits: insurance CEOs

Insurance brokers need to make more use of predictive analytics computer software to offer better rates to lower-risk customers but the industry hasn’t done a good job of explaining the benefits to customers and policymakers, according to the heads of several major insurance firms.

“If analytics are used properly, I think they’re useful as an aid to support an underwriting decision,” Alister Campbell, CEO of The Guarantee Company of North America, said during a panel discussion Oct. 18 at the annual Insurance Brokers Association of Ontario (IBAO) convention in Toronto.

“That’s always been the case, but the tools are getting more powerful, the databases are getting bigger and the analytic tools give you these statistical correlations that are harder to explain to a broker and a customer,” he said. 

“There are lots of industries out there, whether it be automotive, whether it be the music industry, whether it be the online retail distribution industry, that are using analytics way more advanced than what we’re using,” Maurice Tulloch, president and CEO of Aviva Canada noted. “I want everyone in this room to better compete. It allows us to get proper pricing so that people actually get the right price for the right risk.”

Tulloch and Campbell made their remarks before hundreds of brokers who attended the three-day convention.

Campbell noted analytics software is nothing new but brokers need to look at firms with different risk selection criteria. “If you force us to use fewer variables, you end up with a narrower ranges of prices,” he said. “If you get us down to five questions, you don’t need a broker. The machines can do it and the customers can do it themselves.”

Tulloch said one of the reasons prices are higher in certain territories is fraud. When asked about the pushback from some politicians on higher auto insurance premiums in the Greater Toronto Area (GTA), Economical Insurance president and CEO Karen Gavan noted territory is a “very strong” predictor of risk.

“We have done a very poor job as an industry in articulating the benefits of predictive analytics,” she said. “It’s benefiting a whole lot of consumers.”

She added that risk selection and pricing are core to the insurance business but the federal government is “continually upping the bar” on the industry’s ability to manage risk.

“We have to do a much better job as an industry, and as brokers, in supporting and pointing out the benefits of using predictive analytics, and postal code isn’t necessarily the best indicator but we are so limited in what we can use, it forces us down those paths.”

Jean Francois Blais, president of the Intact Insurance Company, brought the house down with his prediction of what could happen if regulators introduce more limits.

“If we cannot ask a customer where they live in order to insure them, I don’t know where we’re going and if we continue down that road, we will insure people that have no age and no sex.”

But in all seriousness, Campbell warned that the analytical tools “are moving ahead of strategy” and the industry is at risk of being “on the wrong side” of public policy.

“What it comes down to is, if I only have five variables and one is postal code, I will use it whether that’s smart or not and that could get the industry into issues around the politics of that,” he said.

“If we’re allowed to use lots of variables, we will be able to nuance and select within those codes. And it comes down to whether the brokerage industry is on the right side of that thought process.”

George Cooke, president and CEO of The Dominion also noted brokers who do not use analytics “will be left behind” so they need to do it well.

“The one thing you don’t ever want to do is to put the person selling your insurance for you in a position where (they) can’t explain fully, completely and in an understandable and acceptable way to their customer, why it is they’re paying what they’re paying,” he said. “Unfortunately in the world we live in today, that isn’t  always the case.”