Workers’ Compensation Insurance and The Average
In the first millennium BC, small vessels plied the Mediterranean with valuable cargo and at times encountered dangers from unforeseen storms sent by the gods. The dire prospect of capsizing in a violent storm sometimes forced captains consider cutting away their mast or even throwing cargo overboard to save their ship. You can imagine the contentious discussions by the dock on whom would bear the loss when the ship finally made it safely to port.
Around 700 BC, merchants and shippers agreed that damage to the ship and loss of cargo should be shared equally among themselves. Merchants or shippers agreed to pay a “contribution” to cover losses. These early contributions, calculated using averages of damage, represent one of the first documented forms of insurance.
The Mediterranean Sea of Workers’ Compensation
Today, Workers’ Compensation insurers face no less danger than these early sea captains. Some examples:
- Constant pressure to make an underwriting profit and reduce operating expenses
- Operational disruption and resource challenges due to COVID have upended the idea of a traditional workplace
- Hyper competition from both traditional and non-traditional entrants
- Increasing customer expectations for digital experiences and products that are tailored to their needs
While the use of averages still has a place today in insurance, “average” is not the measure of a successful Workers’ Compensation insurer. In this market, Workers’ Compensation insurers cannot simply commit to “exceed the average”. They need to excel.
One significant way Workers’ Compensation insurers can excel is through technology that enables augmented decisioning for pricing risks.
Artificial Intelligence for Pricing Risks
Artificial Intelligence (AI) powered augmented decisioning uses data and analytics, with real-time scoring to deliver more accurately priced risks. AI identifies lower-risk applications and prices them competitively. Done consistently, insurers can gain long-term profitability that’s sustainable without significant premium increases in subsequent years. AI can also identify higher-risk applications allowing insurers to price them appropriately. This ensures insurers are not trading topline premium at the expense of the entire book’s profitability.
So why isn’t AI Powered Pricing The Average?
If AI-powered pricing for both new business and renewals improves underwriting profit and reduces operating expense, why is it not “average” for all Worker’s Compensation insurers?
The truth is that many Workers’ Compensation insurers have deployed or attempted to deploy predictive pricing models, in one way or another. Some insurers have deployed static pricing models, refreshed annually or even bi-annually. Others have deployed predictive pricing capabilities, but pricing indications have been inconsistently applied due to lack of underwriter acceptance or concerns over agent relationships. As one could expect, the results in improved profitability and reduced expense for these insurers have been less than satisfying.
Beyond complex modeling and lack of buy in, more than a few Workers’ Compensation insurers have been unable to take advantage of AI because of limitations in their legacy systems. Access to data and business logic to deploy augmented decisioning is just not available.
The good news is that today, AI platforms can be leveraged even if your organization is still using older underwriting systems. Leading AI providers deliver predictive solutions that insurers can leverage regardless of internal systems, providing underwriters of all skill levels with the new insights needed to improve their results.
Exceeding the Average
AI-powered pricing for both new business and renewals can improve underwriting profit and reduce operating expense. AI-powered price indications provide better risk pricing and free up precious underwriting capacity. With AI-powered pricing you can:
- Focus critical resources on higher-value relationship interactions and more complex transactions
- Grow and scale your operational automation without adding hard-to-find resources
- Improve the effectiveness and efficiency of your current insurance operations
Like implementing any other process or technology, the organization must adapt to change to achieve success. AI-powered pricing needs to be inculcated into the culture of the organization and consistently applied to produce results.
In fact, data suggests that rapid adoption of AI technologies into business operations can generate results more quickly. In a recent survey, PWC reported that nearly 50% of insurance companies that have adopted AI are already experiencing improved decision making. The same survey reported that nearly two-thirds of those companies are achieving better customer experiences too. Another industry wide survey of over 1000 C-suite executives reported that the “Lack of AI implementation may have cost enterprises $4.26T.” That’s big.
Now is the time to consider AI pricing for renewals. Unlike the ancient mariners who lacked the technology to make their voyages less risky, todays Workers’ Compensation insurers have ready access to AI that can optimize risk-based pricing. Adoption of AI-powered pricing will enable Workers’ Compensation insurers to maintain relevance and finally exceed the average.
This blog post was jointly authored by Shawn O’Rourke, and Austin Smith, Director of Strategic Partnerships at Gradient AI, a leading provider of risk based pricing solutions for Workers’ Comp underwriting.
For additional information on risk-based pricing for renewals, visit Gradient AI.
For additional information about Sapiens Workers’ Compensation Solutions for State funds, click here.
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Shawn O'Rourke Shawn O’Rourke Insurance Executive. 35 years serving the insurance industry through technology. 20 years of CIO leadership providing strategic and operational results in Workers Compensation and Commercial Insurance. Providing industry perspective and expertise to Sapiens and our current and prospective partners.