February 2, 2022
The YDC Data Monetization Index (DMI) for major Property & Casualty (P&C) insurers is in the range of 69% to 116%. For example, American International Group (AIG) has a YDC DMI of 69.31% while Allstate has a YDC DMI of 115.71%. A higher YDC DMI is generally preferable across companies and industries. By way of reference, Google’s DMI is 93 percent as we will discuss in a separate blog.
The valuation of data and the calculation of YDC DMI present a unique challenge in the P&C Insurance industry. Data is the lifeblood of this industry, which needs information to price policies, to underwrite risk and to market to new and existing customers. Indeed, actuaries have been referred to as the “original data scientists.”
We used the following formulas in our calculation:
- Data Valuation = Market Capitalization x DMI
- YDC DMI = (Earned Premiums / Total Revenues) / Underlying Combined Ratio
- Underlying Combined Ratio = Combined Ratio – Catastrophic Losses – Prior Year Reserve Development
- Combined Ratio = Loss Ratio + Expense Ratio
- Loss Ratio = (Incurred Losses including Loss Adjustment Expense) / Earned Premiums
- Expense Ratio – Incurred Underwriting Expense / Earned Premiums
Importance of Underlying Combined Ratio
Our methodology starts with the premise that a carrier with a lower Underlying Combined Ratio should have a higher YDC DMI. An Underlying Combined Ratio of less than 100% indicates an underwriting profit. Anything over 100% indicates an underwriting loss. With an Underlying Combined Ratio of 79.40%, Allstate ended up with a YDC DMI in excess of 100%. Conversely, AIG ended up with a lower YDC DMI due to an Underlying Combined Ratio of 94.10%.
Importance of Earned Premiums and Total Revenues
As highlighted by Warren Buffet, insurance companies generate significant investment income through “float.” The float is due to the lag between when premiums are paid up by customers and when claims are paid out on policies. From an insurance perspective, investments are a much less data-intensive exercise compared to underwriting. Hence, the calculation for the YDC DMI is based on Earned Premiums as a percentage of Total Revenues. A carrier with a higher percentage of earned premiums versus total revenues will have a higher YDC DMI.
AIG’s DMI of 69.31% based on the following:
(Earned Prem. $28,523M / Total Rev. $43,736M) / Underlying Comb. Ratio 94.10%
AIG’s Data Valuation of $34,670M is based on the following:
Market Capitalization on 2/2/22 $50,025M x DMI 69.31%
All financial data is as of 3Q21. AIG’s Underlying Combined Ratio is based on General Insurance.
Decomposition of Data Valuation
The Data Valuation needs to be decomposed into constituent datasets including the following: