How deeply should underwriting tasks be automated? As new technologies and standards emerge that make it possible to process underwriting decisions in a more automated fashion—with fewer touches by live human underwriters—debate is heating up across the industry as to whether increased automation may result in missed opportunities for insurance companies. Ultimately, it appears the answer may depend on the degree of complexity and the type of insurance being offered. For personal lines P&C policies, a high degree of automation is feasible; for more complex lines such as workers' compensation, specialty lines and life insurance, human intervention is still needed.
A survey of 146 carriers, conducted in early 2011 by Strategy Meets Action (SMA), finds that automation tools are seen as a way to augment underwriters' many manual tasks, but only about one out of four insurers have any intention of replacing underwriters with workflow, rules engine- and data and analytics-driven systems. About half, 46%, see such automation more as a way to augment and support underwriting processes and decisioning, while another 27% see technology as increasing the turnaround times of underwriters.
Rather than occurring in an all-or-nothing fashion, underwriting automation is evolving along a spectrum, according to Deb Smallwood, founder of SMA. Highly automated "no-touch underwriting," tied to straight-through processing (STP), is suitable for processing of standard personal lines policies and small, simple commercial business. Low-touch underwriting, on the other hand, employs tools to assist in a management and tracking and providing data and insights to help the underwriter make a more informed decision, especially for handling exceptions that are kicked out of STP. In high-touch underwriting, meanwhile, while automation may play a role in the workflow, the underwriter is directly involved in the evaluation, negotiation and pricing of the risk.
Insurance executives agree that while deep automation for underwriting may work for some carriers, it won't work for everybody. Even P&C lines have different thresholds for what can be effectively underwritten in an automation fashion, says Jim Korcykoski, SVP and CIO of Nationwide Insurance. For example, he illustrates, "the most STP that we can implement is in the auto product line, followed by homeowners and third in commercial. We see percentages in the 90% range in the auto side. But on the property side, it's not going to be as high, because the probability that you will need to execute an inspection to get additional information about the property is higher."
Commercial lines are the most difficult to apply underwriting automation due to complexity, Korcykoski continues. "When you're insuring commercial properties, you have a lot of variability that you can run across. There's the 'main street' stuff, such as company autos and storefronts. But underwriting is more complex for high-end properties such as restaurants."
The Insurance Corporation of British Columbia (ICBC), a P&C carrier, has also achieved a high rate of automation with its personal lines. "Our personal lines is about 95% STP," says Kellee Irwin, BBM, FCIP, CRM, VP of personal insurance for ICBC. "It's about having the right products and pricing and eligibility rules and criteria. But we're really focused on STP, taking the approach that we want to manage the exceptions as exceptions, and not let exceptions manage the process."
Irwin adds that ICBC is now focusing on bringing greater automation to its commercial lines as well. "For the policies that are not straight-through processing, we want to improve our exception underwriting to make it more automated. Because right now it's very manual for us. But, we'll always see some more touch in commercial lines than in personal lines."
Other than P&C?
Other types of insurance products, such as workers' comp and life insurance, are more difficult to underwrite. Geoff Banta, president and COO of Amerisafe, says such "template underwriting" may work where underwriting processes are simple, such as some areas of personal lines. "You gather some data, you put it through a scoring system," he explains. But in the case of Amerisafe, which handles workers' compensation for risky professions such as logging, human judgment will always be required in the transaction. "Our business is way too complex for template underwriting," Banta says. "We want an experienced underwriter, and it takes eight to 12 years to become an underwriter in our company. Our underwriters need to make the ultimate decision, not a scoring system."
In some cases, underwriting and IT managers are discovering that too much automation may even hold back business. "You can't program underwriting-it would be impossible to put all the brains and expertise of an underwriter into a system," says Chris Chartrand, SVP for technology solutions at Genworth. "We really need to have somebody who could take a much more holistic look at an individual, and be able to take into all the factors." For example, Chartrand relates, a potential policyholder with a high cholesterol level—who would be pigeonholed into a higher-risk bracket by an automated system—may have other healthy lifestyle factors, such as being an avid runner.
Nationwide's Korcykoski even has a name for this value-added element: "underwriter curiosity." It takes trained professionals to examine data from numerous sources-both internal as well as external-to assess a policyholder's risk.
"Five or six years ago, a goal of carriers was to increase productivity, and reduce cycle times for issuing policies," Chartrand says. "But many realized that when you automate, you have to define some pretty tight rules. And those tight rules almost inevitably make you more conservative. So as a carrier, you will be more conservative in your underwriting."
Still, there is impetus to increase automation where possible, especially at a time when markets remain soft and competition intense. A new generation of underwriting systems promises greater capabilities to link to third-party data sources, as well as employ analytics to gain an edge in competitive markets. Analytics can be employed to prompt underwriters to ask more questions and seek additional information.
"Insurers are under increasing pressure to leverage both existing customer relationships and the corresponding business intelligence and analytics needed to create new markets for their products and services," says Frank Petersmark, CIO advocate with X by 2, a software architecture consulting firm specializing in the insurance industry, in Farmington Hills, Mich. "This will lead to the necessary development and automation of more sophisticated and responsive underwriting platforms and tools. The long-held concept of the underwriter desktop—a full-service information and automation station for the underwriter that enhances productivity and decision making—will no longer be a nice to have, but rather a competitive necessity."
Smallwood agrees that insurers need to invest in underwriting workstations that provide a common desktop platform for the underwriter to easily process underwriting tasks by having access to all information required to underwrite, manage their portfolios and allow for collaboration internally and externally. "The workstation needs to go beyond a front-end of a policy admin system," she adds. "Underwriters need a set of tools and solutions that help tie all of the capabilities required to augment or automate underwriting. There are maybe one or two full underwriting automation solutions in the marketplace. The concept of an underwriting workstation and/or underwriting tools and solutions do not replace a policy admin system, but complement it."
Petersmark says the industry needs to pay attention to the efficiencies automated underwriting affords, especially for younger, more tech-savvy potential policyholders. "These emerging consumer segments, such as the Millennials, have different expectations about how they want to be sold to, and more often than not, that expectation no longer includes a face-to-face visit with an insurance agent," he points out. Petersmark says these new expectations include the ability to access everything they need online, including research and cost comparisons-when buying securities and managing their financial portfolio. "These emerging market realities all have implications for the underwriting process at most carriers, many of whom have been slow to embrace updated best practices for underwriting driven by the sorts of automation and efficiencies that at once enable modified business processes, and threaten entrenched underwriting practices."
Quick turnaround time also helps brokers and agents with their customer engagements as well. That's one of the primary advantages cited by ICBC's Irwin. "Most policies can be issued by our brokers on the spot, and have binding authority for 98% of the business," she says. "We have a lot of strong quality control and monitoring with our brokers. So we have the right governance structure in place, and customers walk into a broker's office and walk out with a policy."
Delivering enhanced underwriting capabilities will not occur overnight. First and foremost, bringing agents into an online world is a major part of the challenge, akin to herding cats, industry experts agree. "The challenge is the workflow from agents and brokers, since many use old agency management systems or do not use agency management systems for quotes or to capture large complex applications. On the flip side, insurers are pushing out their solutions to agents and brokers. The entire connectivity between agents/brokers and insurers has become complex, cumbersome and challenging—with no clear solution in sight. For some of these lines of business, it is just easier for agents/brokers to enter data into an ACORD app PDF and e-mail it."
Amerisafe has been addressing issues with agents through a common agent portal, called GEAUX (pronounced "go"), built on FirstBest UMS technology from FirstBest Systems Inc. "We have an independent agent channel, and there's a reason they're called independent," says Banta. "They have minds of their own, and every agency is different, and they won't change if they can't see if it's to their benefit. Who can blame them?" The challenge was selling these agencies on adopting the portal-based application system, which started out at a disappointing 25% utilization rate. "It was very slow going at first to get that ratio up," he relates. "There were some agencies that embraced it right away and wanted everyone in their office who could submit an application to use it. And there were agencies who said 'no way, we're not ready for this, it sounds complicated, it sounds like a tough integration process, deal with applications the way we've always sent them to you.' And all variations in between."
The portal's utilization rate "is now headed toward 60%," Banta adds. "The ones who use it love it, and we probably couldn't tear it away from them. But some agencies are just not structured to take full advantage of the tool."
Along with internal resistance, existing technology platforms pose obstacles to effective underwriting automation deployments, the SMA survey finds. Many insurers blame the existing legacy generation of policy management systems, Smallwood says. "The policy admin systems, the ones with a modern architecture, have workflows, rules engines, can plug in analytics and can automate the quote transaction via STP for standard personal lines and simple, small commercial risks," she says. "Very few system can automate the entire underwriting process. Insurers beginning to shift IT spending beyond STP for simple risks and focus on automating more complex lines of business. This is becoming a hot area and insurers are starting to understand what is possible."
Genworth's Chartrand agrees, observing that the input of a human underwriter may always be required to deliver the best decisions. "We really want to take a look at policyholders' health and lifestyles, and do that balance. When you get down to something like putting it in a computer program, you get 'yes' or 'no' answers, and it makes you more conservative. And you will decline more, and you will probably get higher ratings more often."
Ultimately, the ability to effectively balance automation against the need for human input is critical, as Nationwide's Korcykoski points out. "Underwriting excellence-your capability to evaluate risk, place that risk in appropriate coverages and pricing levels is proven to be a key indicator to a carrier's long-term health and success."
Joe McKendrick is a Doylestown, Pa.-based author and consultant specializing in IT, and a regular blogger for insurancenetworking.com
