Insurance Networking News recently interviewed Marcus Ryu, vice president of consulting services, at Guidewire Software Inc., a San Mateo, Calif.-based firm that provides software to the P&C and workers' compensation industries. Ryu plays a central role in developing and implementing leading solutions for the insurance industry.INN: In the white paper titled, "Achieving Underwriting Excellence with Guidewire PolicyCenter," you cite a study by McKinsey & Co. What did that study reveal?

RYU: Using publicly available data, the study evaluated underwriting performance (measured by loss ratio), investment margins and correlation of return on equity (ROE) over a 15-year period with three different premium surpluses. It found that underwriting performance was very highly correlated with ROE, while investment margins and surplus were negligibly related. The study also found that underwriting best practices translated into long-term corporate success: Of those carriers in the bottom two quintiles of underwriting performance in the 1980s and early 1990s, three out of four had been acquired or went out of business by 2005, while virtually all top quintile carriers during that period remained industry leaders.

INN: You say underwriting discipline is important, but it overlooks other aspects of underwriting improvement. What do you mean by this?

RYU: Underwriting discipline is careful risk selection. Underwriting excellence considers the entire underwriting and policy processing operation, including producer relationships, product and pricing adaptation and policy processing efficiency. Increasing the volume of business through captive or independent agents by reducing the frictional costs of sales collaboration¸ reducing the expense ratio through automation of new business and maintenance transactions (such as out-of-sequence endorsements), and applying exception-based automated decision-making where appropriate are key improvement opportunities.

INN: Guidewire estimates that policy administration-related constraints are the root cause of at least five points of combined ratio underperformance for the great majority of P&C carriers. How did you come up with this assessment?

RYU: The composition of this "performance tax" varies by line of business. For instance, personal lines operations suffer more from inadequate transaction automation, while lack of agent support imposes a heavier cost on commercial lines. But the same themes apply across the industry. According to the Insurance Information Institute, the U.S. P&C industry has suffered a 6.5 percentage point gap in ROE versus other U.S. business sectors over the past 15 years-a span of time longer than the insurance cycle of hard and soft markets. According to public industry data, top quintile carriers by ROE lead median performers by five to 15 points in combined ratio. Hence, we believe that the great majority of the performance gap can be closed by achieving underwriting excellence.

INN: In your white paper, you also talk about the "optimized underwriting process." What does that term mean?

RYU: The optimized underwriting process achieves precisely the right division of labor between automation and human judgment. Doing equal justice to the "automated" and "human judgment" dimensions of underwriting requires both a comprehensive business rules framework that represents the required automation logic, as well as an empowering data and workflow environment in which human underwriters can do their thinking, evaluating and communicating.

INN: Why is it important to bring the producer into the underwriting process, and how can technology help to do that?

RYU: Competition at the new business phase rewards the carrier that provides agents instant information. However, in many underwriting operations, producers essentially work in a parallel universe from underwriters. Focused on their own agency management systems, agents communicate with underwriters in a highly inefficient, paper-intensive, and error-prone way. Lack of workflow and the redundancy of data in producer and underwriting systems inhibit the process of submitting, verifying and iterating key data. Our approach is to engage producers on their own terms: First, by leveraging integration between agency management systems to eliminate re-keying; second, by orchestrating the quoting and submission process as a "funnel" to provide feedback on appetite, eligibility and acceptability of each account; third, by providing agents tools for inquiring into account, policy, claims and billing status, as well as generation of key documents; and finally, by communicating status and open items through a combination of activities and e-mail notification.

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