September 14th, 2011

The Power of Predictive Modeling

Posted at 1:00 AM ET

tedeschi_john_gcciJohn Tedeschi, Head of GC Analytics - Americas
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Reinsurance intermediaries - including Guy Carpenter - have long focused on helping their clients quantify catastrophe and other “long tail” risks (in other words, events that have very low frequency yet very high financial impact). But the bulk of companies’ overall risk exposure - high-frequency, low-impact events that represent 50 percent to 60 percent of premium income - is an area where intermediaries have been able to provide limited tools and advice.

That is changing with the formation of a new collaboration between Guy Carpenter and EagleEye Analytics, the global leader in predictive analytical solutions for insurance companies. EagleEye’s proprietary data analytics and modeling process enable carriers to segment, select and price insurance risks more effectively. The strategic relationship allows Guy Carpenter to provide EagleEye software and expertise within its overall client offering - and to deliver assistance and advice on a much higher proportion of risk exposure than ever before.

The EagleEye approach is an enhancement over the predictive modeling methodology that insurance companies have adopted in recent years. Current methodology typically focuses on analyzing pre-defined parameters and isolating the analysis of those parameters from others. While this allows insurers to improve underwriting performance, it is a very slow process that does not respond to changing market conditions.

In contrast, EagleEye’s process is not rigid about which - or how many - parameters are analyzed, and it does not fixate on pre-defined parameters. Rather, it mines through all exposure and claim data to uncover the signals that yield better or worse risks - a dramatic improvement over the traditional approach.

EagleEye’s system is built upon non-linear machine learning algorithms and allows for a rapid review of parameters that can be monitored over time. An insurer can typically receive indications of key portfolio drivers within 60-90 days, compared to the costly processes prescribed by large consulting firms that can take more than a year. Companies using EagleEye have seen a 2 percent to 10 percent reduction in loss ratios while better focusing their marketing, claims and loss control efforts to help reduce expenses.

Guy Carpenter is rolling out its predictive modeling capabilities through EagleEye immediately in many regions where historical claim and policy level detail exists. Early success has already been seen in the United States, Canada, the United Kingdom, portions of Europe, Australia and areas of Asia. Guy Carpenter provides this exclusive service to its clients at reduced fees compared with those charged by alternative predictive analytical consultants.

Click here to read additional stories about modeling in GC Capital Ideas »

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