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Best's News Service via Bestwire - July 22, 2015 11:00 AM

A.M. Best Briefing: U.S. Homeowners Insurance Pricing Sophistication Continues to Evolve

Oldwick - Pricing sophistication in the U.S. homeowners insurance line of business has intensified in recent years as predictive analytics has been increasingly adopted by insurers seeking more accurate pricing and better risk selection. According to a new A.M. Best briefing, the homeowners insurance line of business posted its second consecutive year of profitable underwriting results in 2014 amid carriers continued efforts to better understand the risk profile of the properties they write.

The U.S. homeowners insurance industry recorded a combined ratio of 92.4 in 2014, a deterioration of two percentage points from the previous year. From an underwriting perspective, since 1992, the combined ratio in the homeowners insurance line has fluctuated from a low of 89.0 in 2006 to a high of 158.4 in 1992. Volatility in the homeowners insurance line has been attributed to several factors, including pricing adequacy, weather-related events, reinsurance costs and adverse selection. The Best's Briefing, titled, "Homeowners Pricing Sophistication Continues to Evolve," states that as pricing sophistication continues to evolve, property writers that do not incorporate greater pricing sophistication into their rating plans run the risk of being adversely selected against or may potentially lose market share, further pressuring their expense position.

Predictive analytics is the practice of extracting information from existing data sets in order to determine patterns and predict future outcomes and trends. However, predictive analytics does not tell you what will happen in the future. Most models generate a score that indicates the likelihood that a given scenario will occur in the future. Mining data trends is pivotal when carriers are trying to identify patterns or relationships.

Several insurers have used predictive analytics in the homeowners insurance line for making rates, assigning rate plans and qualifying price discounts for many years. Also, carriers are starting to adopt predictive models for claims-handling to predict trends in severity, early fraud identification and litigation risk. As is often the case with transformative change, some carriers are much farther along than others. However, the competitive edge to be gained from the use of advanced data analytics will likely allow a company to better compete through more refined pricing and possibly outperform its peers.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.

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