Combination of Actuarial Expertise and Software is the Key to Successful Predictive Modeling, According to Towers Watson

Company’s Flexible Pretium Software Offers Insurers Power, Control and Efficiency in Product Pricing and Risk Selection

NEW YORK and LONDON, March 15, 2010 — As the use of predictive modeling among insurance companies becomes increasingly prevalent, the combination of sophisticated actuarial expertise and advanced predictive modeling software to determine optimum pricing and risk selection strategies, will help insurers realize a competitive advantage, according to global professional services company Towers Watson (NYSE, NASDAQ: TW).

And while the use of predictive modeling techniques is more mature in personal lines, use in commercial lines has rapidly accelerated over the last several years. 

“Just as we saw in personal lines, results for 2009 suggest that first movers in commercial lines are gaining a loss ratio advantage over those who are late to the predictive modeling game,” said Bruce Fell, Towers Watson senior consultant and leader of the company’s property & casualty practice in the Americas. “This advantage is likely to grow as superior risk selection has a compounding effect over time.”

However, a major reason for some insurers’ delay in implementing predictive modeling techniques is the distinct challenge of gathering and interpreting complex data from disparate sources. In fact, according to a 2009 Towers Watson survey conducted with 90 insurance executives from property & casualty insurance carriers, 29% said the challenges associated with data were a major impediment to increasing the sophistication of their pricing or risk selection. Further, 20% said issues related to production systems were primary hindrances.

To help companies address these challenges, Towers Watson’s Pretium software solution is being used by clients around the entire world to generate predictive models on loss cost and customer behavior data to determine targeted pricing structures and risk selection templates. Recognizing the challenges faced by many companies in preparing data for analysis, Pretium has extensive data handling capabilities, which can combine data files, fix data errors and ensure that maximum value can be extracted from the data available. The software also performs geographical pricing analysis and price optimization, a distinct approach to pricing.

“Both personal and commercial lines carriers realize that the benefits of predictive modeling greatly exceed their investment in implementation,” added Mr. Fell. “A growing number of companies are recognizing that predictive modeling is needed to compete and are planning to move forward with implementation. With Towers Watson’s combined capabilities as a result of the recent merger of Towers Perrin and Watson Wyatt, we can now offer clients a powerful solution that marries our significant experience and expertise in predictive modeling with a state-of-the-art software solution that facilitates the data handling and analysis.” 

According to James Tanser, Towers Watson senior consultant, Pretium users can perform generalized linear models, geographical spatial smoothing and “what if” investigations to further refine their pricing and risk selection strategies.

“Critical to any successful predictive modeling initiative is first and foremost the quality of data on which the modeling is based,” said Mr. Tanser. “The bottom line is that advanced predictive modeling techniques are rapidly being adopted to help companies stay competitive. Successful implementation requires both actuarial know-how to build a robust model and an effective software tool that offers end companies the power and flexibility to refine their models on a day-to-day basis.”

Note to editors: Predictive modeling is a discipline that uses advanced statistical modeling techniques, along with critical data related to individual policyholders, competitors, marketplace conditions and customer behavior, to determine optimum pricing levels.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at www.towerswatson.com.