For personal lines carriers, the era of stability is over. A 15-year period of relatively steady claims costs has given way to decades-high and persistent levels of inflation. Losses have become more frequent and more severe, while unprecedented volatility is challenging the limits of historical models. The only certainty for the future is further—and faster—change.
In the face of this uncertainty, many insurers are struggling to keep pace with a rapidly changing environment. Since 2021, 18 of the 20 largest personal lines carriers in North America have seen their combined ratios rise above 100.
Inflation is only part of the problem. Supply chain disruptions and severe labor shortages are causing significant delays in claims processing, leading to extended turnaround times. The rise of electric vehicles (EVs) and scarcity of historic data have made it difficult for insurers to develop accurate loss forecasts and pricing models. Since the beginning of the COVID-19 pandemic, driving behaviors appear to have changed, with carriers seeing severity increase beyond pure inflationary effects. Meanwhile, actuarial models cannot adequately predict new and rapidly emerging loss trends, such as the rise in thefts of catalytic converters. Additionally, social inflation continues to drive severity in litigated claims, a cost that is further exacerbated by third-party-funded litigation.
This confluence of adverse factors has not only raised the stakes but also changed the game altogether: what worked during “peacetime” no longer works today. In an age of volatility, the winners will be those that can respond faster than others. This, in turn, requires a systematic and cross-functional approach to quickly detect and adapt to market shifts—and to avoid getting caught in a reactive, firefighting mode of response.
Personal lines carriers need to solve deep challenges to get this right. At the foundation, insurers need to have the right data with the right level of granularity and recency. Teams need the knowledge and capabilities to translate this data into insights. Traditionally siloed teams (such as product, claims, and distribution) will have to learn how to work cross-functionally by adopting new mindsets and behaviors. And insurance carriers will need the right mechanisms and processes to enable rapid interventions, especially those that call for cross-functional collaboration. Last, product decision makers (such as state managers) need to be empowered to take decisive action and deploy cross-functional levers, even with imperfect information.
A better loss ratio management system
An effective loss ratio management system allows insurers to move faster and with greater confidence. In a rapidly changing external landscape, insurers need to detect and intervene against emerging loss trends on a monthly cadence, as opposed to a quarterly or annual cycle. In other words, they need a system that can detect tremors and warning signs—not just earthquakes—and take preventive action. To act with such frequency, actions need to go beyond the blunt instrument of base-rate changes to include segmented rate and nonrate actions. Otherwise, insurers risk pricing out profitable business and driving an adverse selection spiral that erodes both loss ratio performance and premium growth.
To put this into practice, personal lines carriers need to bring together claims, pricing, actuarial, product, underwriting, distribution, and reserving functions to run a top-down diagnostic that can pinpoint where and why the organization struggles to identify and quantify emerging issues and prospective trends (for example, anticipated labor effects or changes in the legal environment) even before they materialize in actuarial indications. Ideally, such cross-functional teams are formed at the overall line-of-business level as well as the state level. While those teams must bring together diverse perspectives, they also need to be small enough to allow for speed, engagement, and accountability. Each team should operate within a clearly defined “sandbox” of levers: for example, base rates may be decided at the state level (subject to certain guardrails) and marketing spend decided at the overall line-of-business level. The allocation of decision rights over levers has to balance the benefits of scale for country-wide solutions with the ability to respond to unique situations with local solutions.
Monthly sprint cadence: Detect, intervene, and track
Teams should operate on a monthly sprint cycle to detect, intervene, and track outcomes.
Detect. Personal lines carriers must first ask themselves how they are currently performing. Too often, loss ratio performance insights lag with quarterly or longer latency, causing even longer delays in action and course correction. Effective detection should also be forward-looking, helping to determine carriers’ trajectory. To ascertain this, the product team needs to combine insights across multiple functions, including pricing, actuarial, underwriting, distribution (sales and marketing), and claims. Leading carriers will bring these insights together to build a perspective on possible future scenarios—even if this requires making assumptions that are yet unproven. At the line-of-business level, this analysis should occur monthly, while the frequency of state market deep dives will depend on planned rate filings and performance variance.
Intervene. With these insights in hand, insurance carriers must then decide how they can change their trajectory. Considerations should include the full spectrum of interventions beyond base-rate actions (such as new-business growth, tier placement, and the handling of renewal underwriting exceptions). To assess the best course of action, the impact of different levers should be modeled across plausible scenarios, assessed for feasibility, and then prioritized for intervention. To progress toward action, it is important that the team decides how to proceed after a fixed period (typically three weeks).
Track. To understand the results of the intervention, the team must continually track outcomes against their projections from after the decision to intervene. This involves updating rolling forecasts of growth and profitability to reflect planned interventions, including overall and incremental timing and impact, at both the overall line-of-business level and the state level. The intent should be to set clear expectations, create transparency, and provide a baseline to assess outcomes and performance, which can then serve as valuable knowledge to inform future sprints.
Enabling a push, pull, and flow of insights
In a well-functioning loss ratio management system, a push, pull, and flow pattern emerges: teams proactively provide and request insights from other teams (push and pull), and relevant data can be efficiently shared across functional boundaries (flow). This feedback loop enables data and insights to travel through the organization, which facilitates early trend detection and surfaces opportunities for rapid intervention. The following are some examples of these dynamics:
Push. When the claims organization makes changes to processes or strategy (such as reducing claims handling times and adjuster caseloads), it should inform the actuarial, product, and underwriting teams to help them accurately interpret loss trends and make better pricing and reserving decisions.
Pull. When underwriting and distribution partners identify a developing trend (such as an increase in theft or higher severity in a specific geography), they should solicit input from claims and actuarial teams to understand the underlying drivers and take swift corrective action—for example, by adjusting policy wording or risk selection factors.
Flow. The entire organization can benefit from efficient data sharing through standardized dashboards that flag unexpected developments—such as swings in operational claims metrics or unusually fast growth in segments and products, which may indicate adverse selection.
Insights generated from this process can have material impact and help teams separate the signal from the noise. For example, timely input from claims can help the actuarial team determine whether a change in claims handling times reflects a significant market shift (with implications on loss development and rate adequacy) or is due to operational factors (such as staffing shortfalls or higher digital first notice of loss adoption) that don’t require rate action.
Why it’s hard: Common roadblocks for insurers
Insurance carriers must overcome several challenges to implement an effective loss ratio management system—including a lack of granular data, a lack of mechanisms to drive action, and functional silos that impede knowledge sharing across the organization.
Granular data that can translate into insights
Insurers often do not have access to the right data, at the right granularity, at the right time—nor the ability to translate that data into insights. Loss data is table stakes. Actuarially processed data, such as indications, should be updated monthly, with no more than a one-week latency between the snap data and published data. In addition, product teams need cross-functional visibility into new-business flows (from distribution) and operational and productivity claims metrics (which typically exist but are often not widely shared or used). Even with access to the right data, teams may face analysis paralysis without the support of data systems and tools that automatically flag changes in loss trends at the subsegment level—or without the cross-functional knowledge that allows leaders to prioritize actionable insights.
Systems to accelerate decision making and move to action
An effective loss ratio management system requires insurers to replace slow, infrequent, countrywide decision making with fast, incremental, local solutions that reduce risk and maximize speed. However, even if the insights are available, many insurance carriers do not have the mechanisms to drive rapid interventions, especially when intervention requires coordination across existing functional silos.
To move quickly, product decision makers need to be empowered to take decisive action when deploying cross-functional levers, even with imperfect information. Functional leaders must be able to work across boundaries to align on setting targets and designing interventions (for example, driving growth in areas with more favorable loss ratio outlooks and dialing back growth in underperforming segments).
Cross-functional capabilities, collaboration, and communication
Insurance carriers have historically focused on building capabilities at the functional level, which was sufficient in more stable times. Certain foundational building blocks remain critical—including pricing agility, claims accuracy, and agile marketing-and-sales capabilities.
However, these capabilities are no longer sufficient in today’s fast-changing environment. Personal lines carriers often find a mismatch in the organizational structure that makes it difficult to work cross-functionally. For example, while claims organizations have mostly consolidated at the national level to drive efficiency, the product organization is managed at the state level for regulatory reasons. As a result, insurance carriers need to design cross-functional working teams to connect key decision makers, such as product state managers, to their counterparts in claims and distribution. These connections must go deeper than the national-leadership level. Insurers win—or lose—at the local level, where cross-functional collaboration can facilitate truly actionable insights and accelerate speed and responsiveness on the ground.
Different organizations (such as claims, actuarial, underwriting, and distribution) often speak different “languages” that can create barriers to effective cross-functional communication and collaboration. Insurance carriers must build the muscle to translate insights across traditionally siloed teams. This involves taking a broader view of the end-to-end value chain and understanding how other teams make decisions. Only then can teams proactively ask the right questions and share the insights that matter.
How to do it: Five actions to prioritize
The time to act is now. Insurers need to solve deeply technical problems and mobilize the organization to respond to a collective action problem—an investment that is transformative in scale and cannot be made in one functional area alone. Personal lines carriers do not have the luxury of time to design and implement a perfect loss ratio management system. Teams will need to learn and build capabilities as they lean into new ways of working.
Moving from current to ideal state
As a first step, insurance leaders must identify gaps in their current system’s data and tools (see sidebar, “How effective is your current loss ratio management system?”).
Next, leaders must map out an ideal state to detect real loss-trend diagnostics and translate data and insights into near-term interventions. Five actions should be prioritized:
- Set the ‘gold standard’ operating procedure for loss ratio management. The monthly sprint cadence—detect, intervene, and track—needs to be understood and embraced by cross-functional teams and continuously executed at the right speed (every four weeks, from detection to intervention).
- Pursue more granular data and synthesis. Actuarial and claims teams need to dig into underlying trends (such as litigation and direct repair networks) to better understand what is driving the changes and to make more informed decisions.
- Make strategic investments in automation and analytics. Insurers should make every effort to maximize data recency and granularity without letting perfection become the enemy of near-term progress. Teams should bootstrap when starting off but quickly move toward automating standard analyses to materially increase the speed and consistency of execution (which is linked to the standard operating procedure). Rapid advances in generative AI can enable teams to move from data to insight even more quickly—for example, by summarizing information from competitors’ rate filings.
- Build capabilities and empower teams to act quickly on insights. To translate insight into action, teams must have the autonomy to make judgment-based decisions—even with imperfect information—at the appropriate level. For example, state product managers should be empowered to act on state-level pricing, underwriting, and marketing (within certain guardrails) and be held accountable to a profit and growth plan. Transparent, target-based performance tracking can help build the trust needed to empower such local decision making.
- Align incentives for cross-functional collaboration. Collective success depends on teams working together to solve and identify problems. Therefore, incentives should be aligned to reward cross-functional collaboration: all team members should have loss ratio management as a shared enterprise goal, with clear accountability for specific interventions by function (such as shifting the marketing mix and improving claims accuracy).
Finally, successful implementation requires rigorous performance management and a strong culture of accountability. Best-in-class insurance carriers use both retrospective diagnostics and prospective forecasts to better track, manage, and improve performance for the future. This will not only drive near-term profitability but also surface the highest-priority opportunities for improvement across all areas—including claims, data, and actuarial.
Personal lines carriers are facing unexpected losses and unprecedented volatility. There is no quick and easy solution. Insurers will need to adopt a rigorous system for managing loss ratios that will require more data and technology, new decision-making and accountability processes, and close cross-functional collaboration. By embracing a more effective loss ratio management system, insurers will be able to act faster—and smarter—in the face of change.
