Inflation Presents Challenges and Opportunities for Insurers

Earnix is a Business Reporter client.

Inflation poses real risks to insurers today. Yet effective insurance technology not only mitigates these challenges, but also adds a competitive edge.

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 the auto industry is suddenly much more expensive, from new cars and 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 the consequences of longer turnaround times for repairs and medical remediation. This new process is not quite as simple as inputting an arbitrary inflation percentage assumption.

For example, supply chain and inflation delays now mean that auto replacement parts are harder to find and more expensive. This may lead to an increase in 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, should insurers make provisions for additional customer service 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, and updated pricing models to accurately reflect this risk and provide the right coverage for the insured, including new offerings or bundles.

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 maximizing profits for each customer. Inflation clearly affects consumers’ buying habits, especially in 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—but they may resist anything that they consider unnecessary or that doesn’t add apparent value.

Today’s inflation presents new challenges for insurers. Yet for insurers willing to embrace new technologies, these market conditions can also present a real opportunity.

Personalize and win

Highly personalized 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), modeling it using advanced analytics and applying machine learning and artificial intelligence algorithms to develop and deploy highly personalized offers.

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

This type of personalization 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 modeling the data against other variables, such as weather, traffic and accident reports, the insurance company realizes that this route has a higher number of incidents than an alternative route of similar distance and commute time. The company informs the customer, who soon starts using this alternative route. This example of “preventive” insurance is mutually beneficial to both parties and wouldn’t be possible without UBI.

Insurers are still looking to collect new types of data for UBI, but there are already enough use cases to create highly personalized offers.

Enhanced risk modeling

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

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

Every challenge is an opportunity in disguise—and providers that make the best use of the data available to them in the insurance pricing process will improve their ability to protect their underlying performance while giving customers a better experience and greater value.

New challenges require new strategies and technologies

It’s a challenging time, and insurance companies that don’t have an effective strategy to harness inflation as part of their predictive modeling efforts stand to incur significant losses, suffer customer turnover and miss new opportunities to generate vital revenues and strengthen the bottom line. Insurers who don’t take decisive action now by implementing next-generation technology to improve underwriting performance through risk modeling, pricing and personalization will fall behind. Embracing insurance solutions that offer all 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 personalization programs, visit earnix.com today.

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