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Mind the gap: active portfolio management is creating an insurance performance divide

Insurance Consulting and Technology
Insurer Solutions

June 24, 2020

Following on from our article on the benefits of being an ‘analytical insurer’, this article looks further at the first of three key attributes we suggested are needed – the use of data and analytics in active portfolio management and scenario building.

The potential for portfolio management, but more precisely active portfolio management - that not only looks back but projects portfolio outcomes forward using modelled scenarios - to have a significant impact on insurers’ business performance is becoming increasingly apparent.

Recent evidence from a 2020 survey that Willis Towers Watson undertook with The Corporation of Lloyd’s of portfolio management practices and outcomes within Lloyd’s syndicates and the wider London market only confirms that. Based on an evaluation of 72 factors in three groupings (granularity; agility; coherence) that we and Lloyd’s identified as contributors to active portfolio management, overlaid with publicly available profit data, the survey showed top quartile performers in portfolio management achieved an eight percentage points lower average combined operating ratio (COR) than the bottom quartile performers, and a nine percentage points lower average loss ratio.

These are significant differences. So what distinguishes ‘good’ portfolio management?

What does ‘good’ look like?

First, there’s what it enables an insurer to do. Done well, it helps insurers, managing general agents and syndicates to build and maintain a balanced portfolio, driving long-term, sustainable, profitability and underpinning effective pricing, underwriting, reserving and capital management.

Then, there’s the capabilities needed. Here, the survey showed that at a high level the ability to dynamically slice the portfolio with the right technology, with the right people to interpret the results and to have suitable infrastructure in place to move quickly, are qualities most closely associated with successful active portfolio management. The robust testing of plans is also an essential factor.

Drilling down in to these capabilities, dynamically slicing portfolios leads us to the issue of data granularity. Often, insurers define risks by some simple one-dimensional metric. Yet, how well insurers can define and monitor business mix has a strong correlation to the ability to do more sophisticated segmentation by factors such as peril, trade, geography, customer and channel. In the survey, the level of granularity stood out as a key differentiator between higher and lower performing companies.

Achieving these higher levels of granularity involves identifying and using more of the right data, getting more to grips with unstructured data and then having the tools, techniques and connected systems infrastructure in place to do value-adding analysis and provide meaningful, timely information with that data.

This is very difficult without a consistent, coherent data strategy and a consolidated data source. And equally, in the same way that data-fed predictive models and demand and propensity models have become central to dynamic pricing and management information, strong active portfolio management relies on being able to develop scenario models that support quick and agile action in relation to emerging risks and opportunities. Speed to agree and implement responses to deviations from the portfolio plan is key.

For all that, effective technology and decision support tools still need people with the skills to manage and execute portfolio strategy, including at the senior level. Models can help insurers map out a range of possible future scenarios but underwriters and claim specialists who can complement them with expertise and knowledge of market nuances and trends will always be needed. Our survey with Lloyd’s showed the level of portfolio management skills available to be a key differentiator between top and lower performers.

Driving factors

As important and enticing as the operational and profitability benefits of active portfolio management should be in their own right, they are not the only reason driving its uptake.

A key emerging driver is that regulators’, reinsurers’ and other capital providers’ expectations in this area are rising. Capital providers are employing comparable approaches in their own business decision making. Inevitably, they will be more inclined to work with similarly minded organisations that they feel have a strong sense of portfolio strategy. Beyond that, simple data-driven portfolio management is already used to steer today’s insurers, so innovation and enhanced strategies in this area represent a source of competitive advantage.

Indeed, the direction of travel means we would expect some insurers in the (near) future to have a highly integrated platform where:

  • The pricing environment is fully integrated with the portfolio management tool to allow instant impact analysis on, for example, the effect of writing a given risk or the likely impact of a scenario model.
  • The pricing engine has been extensively parameterised to execute a range of decisions, dynamically setting risk appetite, triaging risk and determine the routing/level of expert intervention for a given case.
  • There are artificial intelligence and machine learning components that continuously suggest improvements and refinements to models and decision engines.
  • The information is presented to underwriters intuitively to augment the decision-making process, and to make calculations on the risk under consideration and its impact on the portfolio
  • Behind the scenes, this integrated platform is also feeding into capital models. A feedback loop that shares the information helps portfolio managers make refinements.
  • The platform informs the claims process and feeds reserve movements and claims trend data into the portfolio decision-making process.
  • The platform has an API (application programming interface) that facilitates digital trading directly with brokers and other carriers.
  • This level of data integration means the platform could eventually fully automate companies’ reporting responsibilities.

Seizing the opportunity

While this may be a somewhat utopian view of the future, there is no doubting that there is currently a significant amount of investment in a wider range of capability in this space. Those that are at the front of the pack and looking to push on are clearly already seeing financial advantages based on our survey findings. They also look to be in pole position to generate competitive advantages.

Increasingly then, active portfolio management isn’t an optional strategy for improving an insurance company’s results; rather it’s a necessary investment for those insurers who want to survive and grow profitably. As forward-looking insurers continue to invest in areas such as systems integration, automation, machine learning and electronic trading and digital platforms, pressures are only likely to increase on slower adopters.

But almost regardless of where insurers have got to with active portfolio management, probably the biggest strides come from having a deep belief in the power of data.

Fundamentally, this is a question of the business culture. A revealing figure in our survey was that none of the lowest quartile performers believed that active portfolio management could have a significant impact on their COR – a notion dispelled by actual performance figures of those in the top quartile. With the right culture, led from the top, the investments in data and analytics, technology and portfolio management skills are more likely to flow.

And if the industry needed a further acid test of the benefits of active portfolio management, the COVID-19 outbreak and economic impacts clearly demonstrate the benefit of portfolio grip and scenario modelling. Aside from the devastating immediate impact of the crisis on some areas of business, the potential ‘new normal’ it will create is likely to alter the business fundamentals of insured and insurer alike.


Dave Ovenden
Global Lead of Pricing, Product, Claims and Underwriting (PPCU)

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