If Gail McGiffin is correct, underwriting decisions don't have to swing so dramatically with market cycles. "There's an awful lot of focus now on: 'We're in a hard market. What do we need to do to catch up to compensate for the last 10 years of price erosion and the breakdown of underwriting decisions?'" says McGiffin, associate partner at Bermuda-based Accenture.But "it's not about preparing for the next market cycle," she says. "It's about preparing to transcend cycles long-term, because that's what winners do: They produce consistent results."
C-level executives at insurance companies appreciate this message, according to McGiffin. And, in an effort to establish underwriting consistency, reduce the time it takes to issue policies, improve underwriting efficiency, and produce better results, insurers are implementing tools and technologies to improve their underwriting practices-tools ranging from underwriting knowledge databases to automated rules-based systems.
The payoff is promising, industry experts say. Despite rising insurance rates, premium leakage is still high-20% to 25% on average, according to Accenture. In the personal-auto insurance industry alone, $14 billion was lost last year in premium revenue due to rating errors, reports Daniel Finnegan, Ph.D., and president and founder of Quality Planning Corp., a San Francisco-based firm that has audited more than 12 million auto policies (see "Without Good Data," page 22).
For a $2 billion carrier, Accenture estimates its rules-based underwriting workstation can bring four to six points to the bottom line. "We've had business cases with upward of seven to 10 points of loss ratio improvement on an annualized basis within the first year (of using the technology)-particularly on the commercial side," McGiffin says. "There's huge leakage there."
Easier for agents
Because commercial underwriting risks are more volatile than personal insurance, commercial insurers will become more reliant on automation for the entire policy life cycle, according to Conning Research & Consulting Inc.
In a Conning report, titled "Execu-ting Commercial Underwriting Auto-mation Requirements," the Hartford, Conn.-based research company suggests that a commercial insurer's failure to respond rapidly to agents could cause it to be left out of the marketplace.
"Agents are under tremendous pressures to streamline service to commercial insurance customers," says Michael Weinstein, director of research at Conning. While carriers have had success with underwriting software at the front end, they now need to focus on the speed and quality of their automated response to standardizing the underwriting process, he says.
That's what Occidental Fire and Casualty of North Carolina was trying to do when it developed a Web-based automated underwriting application that enables agents who sell commercial truck insurance to issue a policy immediately-and receive it by e-mail within 24 hours.
"We looked at our situation and said, 'We need to be easier to do business with,'" says Paul Webb, vice president of IT at the Raleigh, N.C.-based commercial auto insurance company.
The underwriting application-developed with Sapiens International Corp., Research Triangle Park, N.C.-is integrated with Occidental's policy administration system. It issues policies automatically if the applicant meets specific underwriting rules and guidelines. Submissions that don't meet the criteria-which are evaluated as agents enter the information on screen-are referred to an underwriter.
Webb expects the tool to process 70% of policies without underwriter intervention. As a result, the company will be able to grow 30% to 40%-as it expects-without the need for additional staff, he says.
The St. Paul Cos. also has implemented automated underwriting within the past year-in its case for small-business real-time quotes and policy issuance.
The St. Paul, Minn.-based carrier developed its N-tier, client/server, Java-based platform in-house. The system functions as a proprietary Internet tool while also serving as a portal for standard ACORD XML transactions.
"In the small-business world, agents are going to choose the path of least resistance," says Jim Snediker, assistant vice president of small commercial underwriting at St. Paul. "Our challenge is to make it easier for them to conduct business with us. So we built this smart underwriting technology."
Equipped with a rules-based engine, St. Paul's system interfaces with outside information providers, such as Dun & Bradstreet, to pre-fill agent screens with a company's name, address, standard industrial classification (SIC), and the year the business started.
The system validates information, makes decisions about the risk, and formulates and presents questions on a screen for customer service representatives to ask the applicant.
The questions pertain to that particular company's business classification. "If the business is a florist, the system is not going to ask questions about office or contracting," says Charlie Coon, vice president of information systems at St. Paul. "It's going to ask: 'Do you have a greenhouse? How many perishable flowers do you have on your premises? Do you deliver?' It's only going to get the information we absolutely need to make the decision."
The producer is notified immediately if a policy passes the underwriting criteria and can be automatically issued. "We've done the MVR checking. We've done the financial risk analysis. We've looked at insurance-to-value. We've looked at our appetite relative to the risk. We've priced the risk. And the policy is ready for issuance," Coon says.
Although the company doesn't have information about how many policies are actually being issued automatically, 80% of new business applications are submitted electronically, Coon says.
In addition, the technology provides data that can be used for predictive modeling to make changes that increase throughput and efficiency for agents.
St. Paul is on the right track by developing a system that accepts standardized transactions, according to industry research.
Commercial insurers with an independent agency distribution model must conform to an industry-standard, single-entry, multi-company interface (SEMCI) to survive, according to Conning. But the greatest opportunity to turn technology into a competitive advantage is by focusing on underwriting effectiveness.
"Product differentiation will no longer live at the front-end of the process," Conning's Weinstein says. Instead, underwriting success will depend on how well a carrier gathers information and performs analyses to develop more sophisticated pricing models, he says.
Bridging the gap between underwriting and claims is a growing area of interest among carriers that see the value of claims information in helping them price risk more accurately.
While investigating a claim, an adjuster might find additional information about the risk, says Accenture's McGiffin. "That information can then be added to the risk data on the account, and the underwriter can be notified that there's a change in that risk attribute, which may affect pricing for the next year's renewal."
In addition, by linking underwriting and claims data, carriers can identify trends and issues that may motivate them to change overall pricing or underwriting criteria-or perhaps even to modify their products, she says.
"Let's say you have an institutional business, and you start identifying trends and find that slips and falls generally occur with children under 10 and adults over 60, and they happen during these particular hours, in these particular staircases. That's the type of insight you can get," McGiffin says.
Providing insight to underwriters is the impetus behind a Web-based underwriting application called "Lessons Learned" at Chubb Group of Insurance Cos., Warren, N.J.
Working with knowledge management consultants at AT&T Solutions, Basking Ridge, N.J., and content management provider NextPage Inc., Draper, Utah, Chubb is in the process of developing a catalog of best underwriting practices within its financial institutions business.
"Typically, underwriters find themselves faced with a circumstance that is new to them," says Rick Cantor, knowledge management unit manager at Chubb. With the Lessons Learned database at their fingertips, underwriters can navigate by categories or by keywords to call up lessons that pertain to a particular risk they're assessing.
Better use of time
Lessons Learned grew out of a project involving an underwriter who offered to relinquish some production duties to spend time researching information that could be shared with other underwriters. "If you've got 10 underwriters all doing the same research, is that a good use of their time?" Cantor asks.
Underwriters are not using their time efficiently if they're buried in paper, gathering information and finding data in multiple systems, says Accenture's McGiffin.
To reduce this burden and increase efficiency, Accenture's underwriting workstation automates routine tasks to enable underwriters to focus on assessing risk, negotiating and proposing policies, she says. "Those are the value-add activities that you want them focused on."
Based on the same architecture as Accenture's claims workstation, which eight carriers currently are using, the underwriting workstation provides rules-based, scenario-driven, automated workflow and document management. It enables underwriters to capture data, take notes, interact on accounts, keep track of their activities, have tasks served up to them, pass data back and forth from the policy administration system and order information from outside third parties.
"It keeps underwriters focused on the right risk. It keeps them focused on the right questions to ask. It helps them produce better decisions-which will produce better loss ratios on a consistent basis," McGiffin says.
Indeed, consistency is a recurring theme when talking to carriers about implementing new underwriting tools.
For instance, consistency is a primary benefit of a rules-based automated underwriting system that Alfa Insurance uses to issue personal auto policies. "We wanted to reduce the number of errors we were receiving on auto applications coming into our home office from our field offices," says David Seay, systems manager at the Montgomery, Ala.-based regional insurance company.
"We wanted to give the field offices a consistent tool to complete applications and speed up turnaround time."
Based on rules technology from Computer Associates International Inc., Islandia, N.Y., Alfa's system was implemented in 2000 and is currently used by 1,400 agents and customer service representatives in the home office and 400 field offices.
The point-of-sale automated underwriting system guides customer service representatives' questions, orders motor-vehicle and claims reports, determines whether or not to accept the risk and assign a premium, decline it, or refer it to an underwriter.
When an application is referred to an underwriter, the underwriter receives the application-in paper and electronically-with the reason why it was referred. This directs underwriters to the area of the application they need to focus on, rather than having to look it over from top to bottom, notes Gaye Dorman, support line supervisor at Alfa.
The system has delivered many efficiencies, she says, including fewer calls to the customer and fewer returned applications to the service center.
In addition, approximately 40% of Alfa's applications are automatically approved, and less than 1% are declined. As a result, half the number of underwriters (three full-time and one part-time versus seven before) are more productive, Gaye says. The average size of an underwriting district is now 38,017 policies; before implementing the system, the average size was 26,985-a 41% increase.
The typical life insurance carrier using rules-based risk assessment achieves automatic approvals between 20% and 40%, as well as other underwriting efficiencies, which translate into reduced underwriter costs of about 40%, according to Celent Communi-cations, a Boston-based research and advisory firm.
In a report, "The Evolution of Rule-Based Underwriting Systems," Celent suggests that rules-based underwriting systems can deliver impressive savings to life carriers, particularly in situations with high application volumes and low face amounts (see "Hard-Dollar Savings," page 21).
The Baltimore Life Insurance Co. is one life insurer highlighted in the Celent report. The Owings Mills, Md.-based insurer is using a rules-based underwriting system to sell its direct-response, final-expense product called Silver Guard, which typically has face amounts from $5,000 to $20,000.
Based on technology from Edison, N.J.-based NaviSys Inc., Baltimore Life's system provides reflexive questions to CSRs who are collecting information over the phone.
In real-time, the system retrieves additional information electronically, including MIB data over the Web through e-Nable Corp., Westwood, Mass., and credit-card authorizations for initial premium payments through The SurePay Gateway.
The system interacts with Baltimore Life's policy administration system to generate a next-available policy number, perform a license check on the agent, and determine if the applicant has any existing insurance with the company.
The policy is either automatically approved or sent to underwriting for further review or declination. If approved, the applicant's signature is obtained using voice recognition technology. Then, the policy is printed at the home office for storage and delivery to the insured.
Currently, Baltimore Life is able to make an "outcome decision" 60% of the time, which means the policy is approved, declined, or can be issued on a graded-benefit basis, says Garry Voith, assistant vice president and director of distribution technology and marketing. When a new application based on yes/no questioning is implemented, Voith expects the outcome decision rate to increase to 90%.
Although the company didn't receive the volume of direct-response business it had expected for its Silver Guard product, the full benefits of the technology will unfold when the system is rolled out to captive and independent agents for fully underwritten business, perhaps next year, Voith says.
"We're convinced the technology we've built will improve our efficiencies over time," he says. "It's a differentiator in the marketplace. We truly feel that agents are looking for companies with this kind of technology."
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