The opportunity for automated underwriting of complex risks is growing, as the technology has matured and insurers realize their dissatisfaction with the underwriting support offered by their policy administration systems, according to Strategy Meets Action. Results of the insurance advisory firm’s survey and report, “State of Commercial Markets Underwriting Automation,” shows more than half of insurers with commercial lines are spending as much as 10 percent of their IT budgets on underwriting.

“The projections for technology spending on underwriting automation are healthy,” said Deb Smallwood, SMA Founder. “Technologies are maturing, and insurance company requirements for underwriting automation are expanding.”

Underwriting systems ranked third on IT project budgets, behind policy administration and agent portals, according to SMA’s “2014 Ecosystem,” a separate report on insurers’ technology priorities and spending plans. But, there is a gap between what business and IT professionals view as pressing problem areas in the automation of underwriting capabilities, SMA said.

Insurance business professionals see efficiency and productivity as needing the most improvement, drawing a link between data and processing, SMA said. However, IT professionals do not view data for decision-making as a priority. “IT professionals do not view data for decision-making as a priority. By and large, IT does not concur with business on the need to prioritize data-driven decisions and improve effectiveness in complex risk underwriting,” SMA said.

“The biggest challenge for insurers will be to determine how to meet the underwriting automation requirements in ways that go beyond the traditional approaches,” Smallwood said. “There is still some misunderstanding around the role of the policy administration system with complex risks, but the stage is set for complementary technologies and solutions with the policy administration system.”  

Definitions of simple and complex risk vary significantly, SMA said, but those with premiums less than $10,000, including small market commercial, including business owners’ policies, workers’ compensation and auto; and simple specialty and excess and surplus generally fall into the simple category. Complex risks represent the majority of commercial lines and involve premium ranging from $10,000 to a million dollars and always require underwriting. Middle market commercial, large national commercial and complex specialty fall under the complex risk headers.

Read more about underwriting as a budget priority here. 

Definitions of automated underwriting also vary significantly; 47 percent of participants defined underwriting automation as straight-through processing; 33 percent defined it as automated processes intended to make workflow more efficient.

“For complex risk, the majority of respondents think of varied levels of augmentation to the underwriting process that are dependent on size of risk and lines of business. Interestingly, underwriting automation is defined as straight-through processing by the majority for simple risk and a significant minority for complex risk,” SMA said.

Most insurers said they need workstations for both simple and complex risks that would support the entire underwriting process, which indicates the need extends beyond the front end of the policy administration system, SMA said. “Interestingly, the front end of a policy administration systems is defined as an underwriting workstation by 37 percent for simple and 23 percent for complex risk. This signifies the recognition across the industry that most insurers understand that underwriting needs the support of a solution or a set of technologies separate from the policy administration system,” SMA said.

The most important financial metrics for underwriting simple and complex risks are combined ratio, underwriting profit and loss ratio, SMA said. “Regardless of the level of size or type of risk, most insurers view profit and loss financial metrics as the most important financial metrics for underwriting.”

The report covers all commercial lines segments, ranging from simple, highly automated risks to highly-complex and specialty risks.

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