The process of classifying, rating and selecting risks that conform to an insurer's risk appetite is a simplified way of describing the bare bones of an underwriter's job. If you asked an underwriter to provide their own job description, you may hear words such as statistician, investigator, psychic, tightrope walker and even politician. No doubt the stakes are higher than ever, as underwriters scramble to "get it right," protecting his/her company against adverse selection and associated financial reckoning in one of the worst economic climates in history.

By line of business, the underwriting function is both distinct and similar. Distinctive differences exist between medical underwriting and virtually any other type, especially as the industry faces health care reforms that will create a retail selling environment for many carriers. Further differences exist in underwriting between life or personal lines property/casualty and commercial lines, largely tied to complexity, exposure and pricing.

Similarities exist in the call for organic growth, which has become the watchword of the entire industry and in the intensely competitive environment where growth related opportunities are hiding. And for all lines of business, similarities exist with the technologies, tools and processes that simplify and streamline the underwriting process to a successful end.

In a perfect world, the technologies insurers would rely on would include centralized, cleansed data-a single point of real-time access to all historic underwriting, policy admin, claims and loss exposure information.

Further, underwriters would respect automated workflow processes, use the Web and secure Web portals to access, verify and transmit risk management information, and conduct underwriting in as close to straight-through-processing mode as possible. This perfect world of technologies and processes extends the underwriter's view of specific books of business, making reporting easier and more transparent.

In the real world, however, insurers still rely on multiple platforms hosting disparate systems, largely the result of legacy modernization polarization. These systems keep very imperfect data siloed, sending underwriters scrambling as patchworked user interfaces slow the process under increasing demands. Yet across all lines of business, the argument for that perfect world has never been more compelling, and several insurers are well on their way to the ideal. We can learn from them.

Insurance Networking News is pleased to provide a look at the "state of underwriting" in four major lines of business: personal lines health, life, personal property/casualty and reinsurance.

Health: Underwriting Prepares to Enter New Arena

To say that the health insurance industry, and the health care universe, are in a state of flux is analogous to saying that if you get sick enough you'll die.

Along with its providers, partners and stakeholders, insurers are scrambling to meet the requirements of history-making health care reforms, and as a result, medical underwriting, as we've known it, is about to go away. Yet even as the industry rethinks its underwriting practices, it must continue to do business with the industry it serves; from health care providers trying to keep up with a merry-go-round of mandates and reforms, to consumers who will soon be faced with more health insurance options than they may be able process.

Obviously, insurers have skin in the game, affected by health care providers' responses to issues such as graduated criteria for meaningful use standards, electronic health records incentives, and other technology and patient quality-related issues that have hovered over providers of all sizes and shapes for the past several years.

Hitting closer to home is the U.S. Department of Health and Human Services' rules for medical loss ratio (MLR) rebates and requirements, part of the Affordable Care Act's Section 1001. As of press time, the rules require large group plans spending less than 85 percent of premium revenue on clinical services and small group and individual market plans spending less than 80 percent to provide rebates to enrollees starting in 2012 before August of each year.

Meanwhile, the volatility surrounding a reform-based retail-fashioned health insurance business model continues to grow as state health insurance exchanges pop up ahead of the government's 2014 deadline, (29 states have made progress and at least four states have either returned federal dollars for building exchanges or have said they do not plan to participate (resulting in the feds taking ownership of the effort).

To many, this volatility is the result of a splintered universe trying to function as a unified state. "Health care is arguably inefficient due to its fragmentation-5,800 hospitals, two-thirds operated independently; 700,000 physicians, 90 percent operating in single-specialty settings; 4,500 bio-pharma companies competing for the next breakthrough in therapeutics; 6,000 device companies, 80 percent with fewer than 200 employees; 400 companies selling electronic health records (EHR) systems; 1,300 health plans; and so on," notes Paul Keckley, Ph.D., executive director of the Deloitte Center for Health Solutions.

One of those health plans, Pittsburgh-based not-for-profit Highmark Blue Cross Blue Shield, is intimately familiar with those challenges. The company, which employs 19,500 and services 4.8 million members in Pennsylvania and West Virginia, is one of the largest Blue plans in the nation. Like many health insurers, Highmark's underwriting practices are evolving to meet the future.

"Health care reform is going to completely change the way we do business," says Fred Shugars, Highmark's VP of product management and development. The company, which relies on a group design model in which employers usually self-insure their risk, has taken a proactive approach to underwriting for companies of all sizes, as well as for individuals seeking health insurance.

Highmark applies specific rules to its evaluation of any given risk, and combines that data with claims and trend information.

"The smaller groups are trickier," says Shugars. "The owner or family is making the decision; they may be the only ones working, and obviously group rates don't apply."

Ahead of the reform's call for insurance for every individual, Highmark's biggest market is employers.

"Employers are paying the freight now, so they look to insurers to help them reduce care costs," he says. "We negotiate contracts that result in good reimbursement, but it's also more about wellness and prevention...making sure members get follow-up care, screening tests, etc."

Highmark invites its members to complete health risk assessments, and uses data and predictive analytics to better understand the risks each group faces. The insurer shares that information with providers, thereby helping those at high risk get quality medical care.

"We also use this data to make providers aware that the costs for certain diagnostic tests are higher than the norm, as we are tracking it," he says.

Decisions around upgrading technology or any changes in medical underwriting practices may not be reform-related, but more wellness-related. "Highmark uses analytics to help employers and their members take a more proactive approach to driving wellness, which, in turn, allows us to build competitive health plan products," Shugars says.

As the mandates loom that will change underwriting from a group focus to one that embraces the consumer, Highmark is ready. Since 2009 when the first Highmark Direct location opened, more than 63,000 people have visited their stores, getting personalized service from licensed personnel who offer information on wellness and health plan options.

And, in spite of the challenges before it, the insurance industry appears well-positioned to weather the incoming storm, according to Standard & Poor's Ratings Services, which asserts that health insurers seem well positioned to withstand moderate strain and manage against unanticipated developments in the next six to 12 months.

"With health care reform promising major changes to the industry in just a couple of years, insurers are increasingly focused on assessing risks and opportunities while establishing capabilities to meet the challenge," says Standard & Poor's credit analyst Joseph Marinucci.

Life: Fermented Technologies Finally Provide Flexibility

Traditionally speaking, costly, lengthy underwriting cycles have been the norm for the life insurance industry, and extra hurdles provided by clumsy business processes have served to magnify the onerous process.

Those traditional business conditions, in the past, have not been enough to incite action among most life insurers contemplating an underwriting upgrade-not even while insurers overseas bought into the promising gamut of technology offered. But the ongoing struggles of the economy, competitive pressures, rising claims costs and the maturation of the technology appear to have finally prompted decision makers to act within the U.S. life industry.

"It appears that underwriting and new business applications are growing, both in major enhancements and in insurers buying software," says Deb Smallwood, founder, Strategy Meets Action. "On the life side, there are more options, so rather than taking on a significant project and the risks associated with a large policy admin replacement, life insurers are consuming some software that is sold in more components or smaller modules that would work in concert with a policy admin system."

There have never been any doubts about the potential benefits of technologically advanced underwriting systems. Automated solutions can eliminate excessive manual processes and circumvent the struggles of building up underwriting talent, and new, innovative business processes (online e-applications, tele-underwriting, e-signature, etc.) only stand to further quicken and cheapen what is a notoriously laborious process.

What insurers have been waiting for is flexibility-first and foremost, to be selective about the software they choose in order to make sure it fits their unique underwriting systems.

"Specific underwriting solutions, that's the big change in the industry," says Smallwood. "The life companies are encouraged by this. They're increasing their spend from the last couple years."

Companies also want the flexibility required to incorporate automation slowly into the decision-making process, so as to build up trust with the integrity of the computer's decisions over time. Woodmen of the World recently experienced this first-hand when purchasing underwriting software from StoneRiver.

"Because StoneRiver's system is so rules-based, we felt we had a lot of flexibility to customize those rules to address changes that we will make to products, underwriting rules, whatever the situation might be," says Lee Janecek, senior director and chief underwriter, Woodmen Life. Customizability aside, decision-makers remain cautious when presented with the idea of trusting a computer to assess submissions.

"We'll start out very slowly and we'll do a lot of testing and analysis of the decisions we get from our system to make sure that they're accurate, that they reflect our underwriting philosophy and that they're in the best interest of the company," Janecek says. "As we presented this to our executive team, they asked us to take that cautious approach. For example, we will never let the system, at least right now, decline a case without an underwriter looking at it. That's the way we'll start, and at this point in time, we don't have any intention of ever letting the system decline a case without somebody reviewing it. I'm sure we can get there, but that's the type of approach we're taking."

Woodmen's implementation involved laying out a trial and error process that coddles the technology until it has proven itself to be reliable. Yet the mere fact that an insurer can be that selective about the software and its implementation suggests that underwriting technology has fermented long enough to satisfy both ROI-concerned business executives and chief underwriters alike.

Based on steadily climbing sales, U.S. life insurers appear to have satisfactorily waited out the hiccups that come with the premature purchasing of software. Now only time will tell if that wait was worth it.

Personal P&C: Anticipation as an Avenue for Success

Underwriting in the personal property/casualty industry, particularly in terms of auto insurance, has experienced improvements in technology for some time now. As 2011's battered balance sheets are refreshed, an insurer's approach to maintaining the effectiveness of technology is highly dependent on the status of a company's business infrastructure.

Driven mostly by natural catastrophes, property/casualty insurers net losses from underwriting soared to $34.9 billion through the first nine months of 2011, according to the Insurance Information Institute. This represents a 554-percent increase from the $6.3 billion posted for the same period in 2010, to 109.9 percent a year later.

With improved underwriting an obvious priority for property/casualty insurers, the ability of IT units to furnish underwriters with better tools and cleaner data is paramount.

"Many organizations continue to focus on needed back-end core system replacement, with critical technical resources tied up in long-term, resource-intensive projects," says Mark Gorman, founder and CEO of The Gorman Group. "In others, the historic issues with data quality, with inconsistency in data management and with limitations on data governance have meant that business units are unsure or unclear on where to begin and how to proceed."

Yet in a sector where automated decision-making and straight-through processing are necessities for both serious growth and competitive advantage, the efficiency and accuracy of an updated underwriting system can prove itself to be worth the toil.

John Foster, VP of personal lines, Penn National Insurance, understands this first-hand. Penn upgraded its auto underwriting system in 2009, and in early 2011 finished implementation on the homeowners side. The purchase rendered them prepared for 2011's slew of natural catastrophes and the resulting influx of claims.

"Early adopters of new underwriting systems will see positive returns for both premium growth and loss ratio improvement, while laggards are forced to upgrade systems simply to avoid adverse selection and be able to continue to profitably compete," says Foster. In hindsight, Penn National's proactive actions allowed them to avoid hasty reactive measures once the storm hit, but that doesn't mean they don't continue to monitor performance and consider adjustments.

Once accuracy and efficiency have been improved via predictive analytics, precision pricing and decreased manual intervention, competitive differentiation lies in competing priorities.

When it comes to working with agents, insurers understand the need for "ease of use" systems that also provide optimal precision. As a result, insurers need to develop models that anticipate a high volume of renewals and adapt as well to pre-existing policies as they do for new business. Insurers need to maintain system simplicity-a point of strife for organizations transferring software and developing new models for the homeowners' side of business, which has been dealt with cautiously by early implementers on the auto side.

Lastly, while the goal of property/casualty insurers utilizing underwriting technology has always been to implement more consistent, efficient and faster systems, the transition to more automated decision-making puts the onus on insurers to create a system that can easily adapt to shifting business perspectives. According to Gorman, that's the challenge facing insurers going forward.

"Insurers have learned that they can rely on a machine to be much more consistent-not right, but more consistent," says Gorman. "What the machine doesn't have is the business acumen that the human has. So most organizations are asking: 'How do we capture and maintain all of the business acumen we've developed, while gaining the processing efficiency and the decision consistency we can get from an automated process? How do we balance the two?'"

While those questions and the aforementioned competing priorities involved in automation pose unique challenges to each insurer, Penn National's example of acting early and staying ahead of the curve appears to be working-delivering the true solution to the daunting task of keeping its underwriting technology up to task.

Reinsurance: Facing Up to the (Competitive) Facts

The commercial lines insurance space is complex and multi-tiered. In fact, risk complexity has become the accepted norm, having a material impact on business drivers, technology enhancements and strategic pricing responses.

The business climate in which commercial lines' underwriters operate is much to blame for the challenges facing this segment, as insurers fight forward against a host of economic ups and downs (mostly downs) striving for a disciplined approach fueled by improved technology and processes.

Some insurers are shifting their focus frompricing to product enhancements and expanded distribution as a way to win the game. But many, notes Karen Pauli, Research Director, Tower Group, are unrealistically waiting for circumstances to normalize so that traditional tactics such as rate increases and tightened underwriting can be employed.

"Commercial lines carriers have resisted automation, but a complex set of market conditions is now making this an impossible stance to maintain," Pauli says.

Insurers, regardless of product mix or account size appetite, may be adversely affected by the current soft market cycle, yet of all the commercial lines' market segments, none is more complex than that of reinsurance, which is challenged in various additional ways to improve revenue growth.

Agents and brokers control 69.1 percent of commercial lines business, notes the Insurance Information Institute, choosing where they place business, and driving demands for technology that supports new business acquisition with services that are prompt, seamless and accurate.

Further, similar economic strains have plagued this sector. Thanks to a blip in 2010 that could be categorized as a "CAT-light" period, reinsurers were caught short in 2011 with frequency and severity of U.S. and non-U.S. natural catastrophes, which make obvious the need for underwriting transformation.

For Dublin, Ireland-based XL Group plc, that transformation couldn't happen at a more opportune time. The $6.4 billion global insurance and reinsurance company, through its subsidiaries across 60 locations in 20 countries, provides property, casualty and specialty products to industrial, commercial and professional firms, insurance companies, and other enterprises throughout the world.

"We continue to operate in a very competitive environment," says Seraina Maag, CEO of XL Group's North America property & casualty business unit. "Soft or hard market-XL adheres to a strict underwriting discipline, and we continue to endure market conditions by implementing greater efficiency throughout the organization."

Maag says that the company strives to compete on service and expertise, but admits that rates are generally flat, showing some improvement in lines such as energy and property.

"Underwriting excellence is the single greatest driver for XL's strategic and profitable growth," says Maag. "Our goal is to free up capacity for growth and expansion. One way to do this is to help each underwriter be able to handle more business."

To accomplish this, the company is evolving its global technology scheme to a single scalable platform that leverages disparate back-end systems and provides consistency, efficiencies and quality the enterprise.

XL Group's global underwriting platform foundation, powered by a Web-based Underwriting Management System (UMS) from FirstBest, Bedford, Mass., represents part of this transformation, and includes an aggressive agenda to roll out core global underwriting capabilities to all business units, beginning with most classes in North America General Liability and Workers' Compensation in 2012, followed later by most classes in Global Property.

As part of a larger process, the system will be integrated with multiple enterprise back-office systems, including policy admin, pricing spreadsheets, document management, and comprehensive risk analysis data-as well as CRM and broker management systems. Although too early to measure its returns, the goal of the global platform, says Maag, is to give underwriters a dynamic and uniform user experience globally, regardless of underlying systems.

"An integrated technology stack is imperative to take commercial lines from pure policy administration to underwriting excellence," says Pauli. "Although tempestuous conditions may be with commercial lines executives forever, the options for addressing the problems with technology solutions are at hand."

Pat Speer is editor-in-cheif of Insurance Networking News and can be reached at

Justin Stephani is an associate editor for Insurance Networking News and can be reached at


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