FICO Canadian Insurance Forum
Drive Growth and Profit with
Predictive Analytics
Kathy Stares
Vice President
FICO Canada
Russ Schreiber
Vice President—Insurance
FICO
Toronto -- January 14, 2011
Confidential. This presentation is provided for the recipient only and cannot
be reproduced or shared without Fair Isaac Corporation's express consent.
1
© 2011 Fair Isaac Corporation.
Kevin Deveau
Client Partner
FICO Canada
Agenda
» About FICO
» Keynote: 2011 Canadian Insurance Outlook and
Analytic-Driven Solutions for Insurance
» Breakout Sessions:
» Underwriting, Pricing, and Product Management
» Claims Processing and Fraud Management
» What Insurance CIO’s Need to know About
Decision Management
» Group Summary/Wrap Up Q&A
2
© 2011 Fair Isaac Corporation. Confidential.
© 2011 Fair Isaac Corporation. Confidential.
About FICO
3
© 2011 Fair Isaac Corporation. Confidential.
FICO delivers superior predictive analytics
solutions that drive smarter decisions.
Thousands of businesses worldwide,
including 9 of the top 10 Fortune 500,
rely on FICO to make every decision count.
4
© 2010
2011 Fair Isaac Corporation. Confidential.
FICO Overview
5
Profile
The leader in predictive analtyics
Founded: 1956
NYSE: FICO
Revenues: $605 million (fiscal 2010)
Products &
Services
Analytics: scores and models
Analytic applications for risk management, fraud,
marketing
Decision management tools
Clients &
Market
5,000+ clients in 80 countries
Primary Industries: banking, insurance, retail,
healthcare
Offices
20+ offices worldwide
HQ in Minneapolis, Minnesota
Regional Hubs: London, Toronto, Madrid, Sao Paulo,
Bangalore, Beijing, Singapore
© 2010
2011 Fair Isaac Corporation. Confidential.
Build Your Analytic Advantage with FICO
Understand your customers at a deeper level with
more precise forecasts of customer behavior
Compete based on a superior understanding of
every customer’s needs, likely behavior and risk
Release the untapped potential in your customer
data to create profitable growth
Rely on the expertise that has helped thousands of
businesses in 80 countries make smarter decisions
6
© 2010
2011 Fair Isaac Corporation. Confidential.
We Work with the Most Successful Businesses
7
Banking
More than half of the
top 100 banks globally
Insurance
Two-thirds of the top
P&C insurers
Retail /
Consumer
Goods
One-third of the top
retailers
Healthcare/
Pharma
8 of the top 10 pharma
companies
Government
100+ government
agencies
© 2010
2011 Fair Isaac Corporation. Confidential.
Solutions for Insurers
» Analytics Development
» Business Rules
Management System
» Simulation
» Optimization
» Insurance Fraud
» Claims Reserving
» Marketing
Decision
Management
ANALYTICS
» Scores
» Expert Models
» Empirical Models
8
© 2011 Fair Isaac Corporation. Confidential.
2011 Canadian Insurance Outlook
9
© 2011 Fair Isaac Corporation. Confidential.
Canadian Insurance Outlook
General Outlook
» OSFI, concerned primarily with the banks’ and insurers’ capital
adequacy, has helped maintain stability in wake of the global
financial crisis.
» The insurance sector is competitive, meaning that the players are
able to deliver high value-added products to their clients and
remain profitable.
» There is clear differentiation between the insurers in terms of
geographic and product focus, emphasis on needs of
stakeholders rather than shareholders, expansion into other
financial services and use of distribution channels.
» In spite of the general move over the last decade towards
demutualization in the Canadian insurance sector as a whole,
mutuals and cooperative insurers remain important.
Source: BMI Canada Insurance Report, Q1 2011
10
© 2011 Fair Isaac Corporation. Confidential.
Canadian Insurance Outlook
P&C
» High losses ratios on personal property and deterioration in
Ontario auto led P&C to net underwriting loss of C$207.4 million
in 2009.
» Combined ratio improved to 100.9; down from 101.2.
» On the investment side, total investment income increased due to
larger invested asset base and strengthening in the equity
markets (despite below average interest rates).
» Pricing pressures remain, given soft market.
» Continued need to maintain strict underwriting guidelines and
refine pricing segmentation for improved returns on risk
allocated capital.
Source: AM Best, Canadian Property/Casualty & Life
11
© 2011 Fair Isaac Corporation. Confidential.
Canadian Insurance Outlook
Auto
» 2009 net loss ratio fell to 76.5 from 76.9.
» Claims cost inflation in Ontario auto personal accident drive
province’s net loss ration to 148.0 from 124.7
» Financial Services Commission of Ontario (FSCO) states
average full year 2009 rate change was 8.8%; First quarter of
2010, average rate increase was 5.5%; Post reforms, FSCO
approved rate decrease of 1.0%, effective in third quarter.
Source: AM Best, Canadian Property/Casualty & Life.
12
© 2011 Fair Isaac Corporation. Confidential.
Non-Life Segment
Premiums Growth in 2010
e=estimate.
Source: BMI.
13
© 2011 Fair Isaac Corporation. Confidential.
Canadian Insurance Outlook
Life
» Premium Income for Canadian Life Insurers fell in 2009, driven by
reduced sales of universal life, group life and creditor insurance,
attributed to the lingering effects of the economic downturn.
» Sales of protection products (whole life and term life) were up;
Canadians shied away from investment-type products due
to the lingering effects of market volatility and low interest
rate environment.
» Canadian life insurance market still dominated by the “Big Three”
(Sun Life Financial, Manulife Financial and group operating under
Great-West Lifeco), generating nearly two-thirds of premium Income.
» New growth opportunities lie with innovative solutions to the
retirement and financial security needs of baby boomers
(opportunities for insurers to grow via wealth management sectors).
Source: AM Best, Canadian Property/Casualty & Life.
14
© 2011 Fair Isaac Corporation. Confidential.
Canadian Insurance Outlook
Health
» Total healthcare spending in Canada has risen from 7% of GDP
in the mid-1970s to about 10% of GDP. (On current trends, the
figure will rise to 13% by 2015 and 17% by 2025).
» Canada’s health insurers could develop their businesses as a
result of government initiatives to limit the escalation in
healthcare costs through partnerships with the private sector.
This is something that the Canadian Life and Health Insurance
Association (CLHIA) has advocated.
» Over the medium term, the health insurance companies could be
significant beneficiaries of healthcare reform in Canada.
» However…Rising healthcare costs may have an adverse impact
on the claims expenses of health insurers.
Source: BMI Canada Insurance Report, Q1 2011.
15
© 2011 Fair Isaac Corporation. Confidential.
Life Segment
Premiums Growth in 2010
e=estimate.
Source: BMI.
16
© 2011 Fair Isaac Corporation. Confidential.
Canadian Private P&C Insurance
Market Share by Line of Business (2009)
Auto
9.5%
Commerical Property
12.7%
Personal Property
45.6%
Other
17.7%
14.5%
Source: AM Best.
17
© 2011 Fair Isaac Corporation. Confidential.
Liability
Canadian P&C
Combined Ratio Components (2005–2009)
NPW
(C$ Billions)
NPW
Growth (%)
Loss
Ratio
LossAdjustment
Expense Ratio
Underwriting
Expense
Ratio
Combined
Ratio
2005
31.0
0.7
54.0
9.5
28.9
92.4
2006
32.5
5.0
53.0
9.1
29.5
91.6
2007
33.8
3.8
54.1
9.3
29.8
93.2
2008
33.5
(0.8)
61.0
9.7
30.5
101.2
2009
34.5
2.9
60.5
10.2
30.2
100.9
Source: AM Best.
18
© 2011 Fair Isaac Corporation. Confidential.
Canadian Private Auto Insurers
Net Loss Ratio Trend (2005–2009)
160
Net Loss Ratio
140
Liability
Personal Accident
Other
Total
120
100
80
60
40
20
0
2005
Source: AM Best.
Excludes Lloyd’s CAB and ICBC.
19
© 2011 Fair Isaac Corporation. Confidential.
2006
2007
2008
2009
Impacts of Insurance Fraud
Auto Fraud/Theft:
» Auto theft costs insurers $542 million a year (2007) = $35 per policy; approximately 13.5%
of all property crime
» BC, Quebec, Manitoba, Saskatchewan, Alberta and the remainder of Western Region
have highest rate of auto theft
» The “demographics” of stolen vehicles in Canada is different than the US; Escalade,
Hummer, Land Rover—send to foreign countries that want luxury vehicles for rough
terrain.
» Ontario has the highest number of upscale stolen vehicles
(Source: TowerGroup, 2011)
Property:
» Theft = 14% of all homeowners claims
» Canadian national property crime rate dropped 27.3% since 1999 but only 19.4% in auto
» In 2007, 950 identified criminal organizations; 800 in 2006
(Source: TowerGroup, 2011)
Health Care Fraud:
» Various estimates indicate that from 2 to 10% of every health care dollar in North America
is lost to fraud. In Canada, over $120 billion is spent annually on health care.
» …Health care fraud could surpass $12 billion each year.
(Source: Canadian Health Care Anti-Fraud Association, “What is the cost of health care fraud?”, 2011)
20
© 2011 Fair Isaac Corporation. Confidential.
Market Characteristics and Associated Impacts
Canadian Markets—
weathered economic crisis
better than most
Transition to IFRS on 01/01/2011
Federal Authority (OFSI),
Provincial Authorities +
IBC, CCIR
Provincial Differences
21
© 2011 Fair Isaac Corporation. Confidential.
Growth (slow), but highly
competitive
Diversion of internal resource
focus/attention
Complex set of
regulations to implement
Operational complications
Analyst Perspective
The Role of Analytics
» Insurers are increasing their focus on improving how data is used
and the value derived from past investments in data
warehousing. Expanded use of data mining and analytics will
assist insurers in obtaining:
»
»
»
»
More-granular insight into customers
Greater operational performance
Better claims performance
Reduced losses, leakage and underwriting risks
Gartner Research: Top 10 Technologies With the Greatest Impact for the Property and Casualty Insurance Industry, 2010,
Kimberly Harris-Ferrante.
22
© 2011 Fair Isaac Corporation. Confidential.
Analytic-Driven Solutions for Insurance
23
© 2011 Fair Isaac Corporation. Confidential.
Business Goals—Insurance Providers
» Higher Productivity, Lower Staff Expenses
» Increased Revenue or Market Share
» Faster Cycle Times and More Consistent Processes
» Better Decisions, More Accurate Pricing, Reduced Losses
» Decreased Time to Market
» Decreased Fraud
» Improve Reserve Position
» Improved Agent/Customer Satisfaction and Adoption
» Compliance and Reduction of Market Conduct Penalties
24
© 2011 Fair Isaac Corporation. Confidential.
Decision Management Vision
Fueled by Analytics
25
© 2011 Fair Isaac Corporation. Confidential.
Analytic Technology Evolution
Meets Insurance Needs
HIGH
Existing
Products
Percent of Converters
Customer
Behaviour
Expected Gain in Conversion
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Percent of Offers
Random
Current/Former
Conversion Model
Prospect Policyholder
Conversion Model
Expected Gain in Conversion
Expected Gain in Conversion
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Percent of Offers
Percent of Offers
Random
Random
Current/Former
Conversion Model
Current/Former
Conversion
Model Policyholder
Prospect
Conversion Model
Prospect Policyholder
Conversion Model
HIGH
» Establishes
broad
segments
based on
customer
profile data
26
© 2011 Fair Isaac Corporation. Confidential.
Decision
Analytics
MED
Take up
Revenue
Prepayment
Loan
Amount
Profit
Affordability
Percent of Converters
X X X
X X
X X X
X X X
X
X X
X X X
X XX X
X X
X
X
X X XX XXX
X
X
X X X XXXXXX
X
X X
XX
X X XXX
X XX
X XXXX X X
X
X
X
XX
X
MultiDimensional
Trade-Off
Assessment
Percent of Converters
Profiling &
Segmentation
Predictive
Models
or “Scores”
Expenses
Risk Score
Risk
LOW
» Rank-orders
» Creates micro
prospects on a
segments by
single dimension
matrixing 2 or 3
predictive
models
» Brings all predictive
analytics into a single
decision framework
» Assigns the optimal
action for each
outcome given
specific business
constraints
Analytics in Underwriting Process
Completeness Data
& Accuracy Access
Rules
Rules
KnockOut
Rules
Program
& Pricing
Rules
Referral
Rules
Acceptance
Rules
Fulfillment Rules
Paper
“Back End”
Administration System
Business Transaction Workflow Manager
Phone
Web
Portal
Credit
Score
Claim
History
MVR
Data
Underwriting Workbench Tools
Analytics Workflow
Rules
Analytic
Models
UI Workflow
Manager
Distributor
Rating
Underwriting
Workstation
Source: TowerGroup.
27
© 2011 Fair Isaac Corporation. Confidential.
Rating
Billing
Policy
Production
Stat
Reporting
Analytics for Claims Workflow
Contact carrier
Straight-through processing
(Examples: Replacement glass, towing)
Value/Negotiate
FAST TRACK
Insurer
Pay
Claim
P
P
Verify
coverage
Obtain
information
P
Initiate services
Value/Negotiate
Evaluate
Insurer’s
claim
operations
Salvage/
Subro
P
Settle Claim
Initiate services
SIU
Source: TowerGroup.
28
© 2011 Fair Isaac Corporation. Confidential.
Litigation
Close
Claim
Health Insurance Fraud Detection
Operational View
Module 1
Detection
Module 2
Review
Module 3
Investigation
Claims Operations
Environment
Update
Adjudication
Update
Adjudication
Review Workstation
Customer
Claim In
Score
Through
Processing
System
LOB
Health Care
Triage
Medical
Reports
Dental
Predictive
Analytics
Effective
Detection
© 2011 Fair Isaac Corporation. Confidential.
Client System
What actions are taken
once detected?
Data Center
29
Case Management
Pharmacy
Claims Fraud Data
Efficient
Review
Creating Models/Scores for Health Care Payment
Integrity and Fraud Detection
The models simultaneously blend and
combine profile variables/features to produce a fraud-score
Providers
Ratio of X-rays
to exams
Members
$ billed vs. peers
Claims
Derive
Powerful
Variables
Dental
Pharmacy
30
© 2011 Fair Isaac Corporation. Confidential.
Procedure mix vs.
peers
Max single-day
activity
Profile Variable N
Predictive
Models
Scores and
Reasons
Solving for Complex Insurance Issues
Business Challenge
Automation and Integration
Achieving pricing accuracy
Preventing fraud losses
Improving time-to-market
31
© 2011 Fair Isaac Corporation. Confidential.
Decisive Underwriting and Accurate Pricing
Client: Kemper Auto and Home, a leading provider of
personal lines property and casualty insurance
Challenge: Replace paper-based, manual underwriting
system with an efficient, streamlined and consistent
underwriting process
Solution
» FICOTM Blaze Advisor® business
rules management system
» FICO analytic models
Results
» Real-time underwriting of new business
» Lowered combined ratio by 8 points
» Increased pricing tiers from 6 to 24 to identify
profitable risk—and offer these customers the
right products before competitors do.
» Business users manage rules; don’t compete for
IT resources
32
© 2011 Fair Isaac Corporation. Confidential.
Improved Time-to-Market
Client: One of the largest P&C insurers in the US; seller of commercial and personal lines
insurance through the agency channel
Challenge: Change product development from a reactive to a proactive process to
support business growth
Solution
» FICOTM Blaze Advisor® business
rules management system
Results
» 30,000 hour savings annually with increased
pricing and rate change efficiency
» Saved 1,000 hours during annual recalibration of
the underwriting model
» 9,000 hour savings annually for new product
introductions
» Doubled product refresh rates
33
© 2011 Fair Isaac Corporation. Confidential.
Transforming a Business
Client: Aviva, the world’s 5th largest insurance group; the
biggest in the UK, serving 50 million customers worldwide
Challenge: Double the volume of business without increasing
operational costs
Solution
» FICOTM Blaze Advisor® business
rules management system
Results
» IT costs reduced by 20%, a game-changing
cultural impact for the organization by
empowering the business team
» Policy enrollment time reduced from 22 days to
6 minutes
» Improved customer service with real-time policy
changes and claims service
34
© 2011 Fair Isaac Corporation. Confidential.
Protect Against Fraud, Abuse and Waste
Highmark is one of the largest health insurers in the
United States with 28 million members, and processes over
200 million health, dental, vision, Medicare, and
pharmacy claims.
Highmark needed to target fraud more aggressively,
to combine prepayment claims scoring with retrospective
provider analysis.
Results
» Highmark identified substantial savings in their initial month long review and validation of
claim level scores:
» $1.8M savings identified upon reviewing <0.01% of claims
» $21.7M projected annual savings
» Over $2M additional annual savings estimated for each additional claim review FTE
added to work force.
» Also, realized in excess of $2M in savings in the first few months through identification of
systemic errors, which are also detected by the fraud system
35
© 2011 Fair Isaac Corporation. Confidential.
Impactful Fraud Detection
Client: Admiral, a leader in auto insurance sales in the UK
Challenge: Improve the identification of fraudulent claims given the scale and increasing
complexity of insurance fraud
Solution
» FICOTM Blaze Advisor® business
rules management system
» FICO analytic models
» FICO link analysis
36
© 2011 Fair Isaac Corporation. Confidential.
Results
» Found 65% more fraud
» Below 1.0 false positive rate, or for every two
high-scoring claim, one was referred for
further investigation
Leveraging Analytics for Business Advantage
» Ability for business users to easily and rapidly make changes to
and implement business policies across the enterprise
» Ability for business users to assess impact of these changes
» Ability to continuously improve decisions using
advanced analytics
» Ability to understand and incorporate customer behavior changes
into decision processes
» Ability to incorporate external data sources into your decisions
37
© 2011 Fair Isaac Corporation. Confidential.
Insurance
The Role of Analytics
“Probably the most
important technology
for insurance is
analytics and models.”
TowerGroup, 2011
38
© 2011 Fair Isaac Corporation. Confidential.
Q&A
Thank You and Join Your Breakout Session:
» Underwriting, Pricing, and Product Management
» Claims Processing and Fraud Management
» What Insurance CIO’s Need to know about Decision Management
January 14, 2011
Confidential. This presentation is provided for the recipient only and cannot
be reproduced or shared without Fair Isaac Corporation's express consent.
39
© 2011 Fair Isaac Corporation.
THANK YOU
Russ Schreiber
Vice President—Insurance
FICO
January 12, 2011
Confidential. This presentation is provided for the recipient only and cannot
be reproduced or shared without Fair Isaac Corporation's express consent.
40
© 2011 Fair Isaac Corporation.