No one would argue against the fact that the insurance industry has been engulfed in a perfect storm over the past few years. Consolidations, monumental loss experiences, economic turmoil and investment declines have conspired together as never before.Faced with a hard market, staff and training reductions, and stagnant capital and IT budgets, insurers are under greater pressure than ever to work smarter, faster and more efficiently.
Yet despite these challenges, carriers' underwriting organizations haven't undergone any major transformation in the past two decades. Most underwriting environments, particularly commercial lines, are still highly paper-intensive and do not provide insurers with the data and performance information needed to analyze and manage risk on a transaction or portfolio basis.
Without this insight into the causes of profits and losses, it is difficult for insurers to tailor appetites, prices, products and service levels as risks change and new risks arise. Dramatic market swings compel the underwriting organization to react to adverse market conditions, compromising growth and customer service.
The ideal situation is a sustainable, balanced process that requires only fine-tuning with changing market conditions and underwriting strategy adjustments.
Window of opportunity
Many insurance executives view today's hard market as a window of opportunity to recover from years of price erosion and liberal underwriting practices. However, in reality, they need to focus on how they can effectively position themselves to transcend market cycles.
There are proven "best practices" from insurance industry leaders, as well as several innovative knowledge management, human performance and customer management technology examples from the consumer and industrial sectors. When implemented in a cohesive manner, these technologies can help insurers generate greater predictability of underwriting behavior at the front line, which can help generate more predictable results that transcend market cycles.
A dearth of experience
Advancements in data management, rules management, work management, document management and human performance systems hold the potential to revamp and enhance the underwriting process and bring performance and skill improvements to life in real time.
This is accomplished by coalescing the experience of underwriters and operations staff in an organization into a knowledge-based process (an underwriting desktop) that guides the underwriting team through all activities of account management.
This new cohesive underwriting environment is especially required to streamline the underwriting process and compensate for gaps or diversity in experience or skill, while extending the optimal underwriting decision practices to even the most junior staff.
On average, front-line underwriters today have less than five years of experience with their current carrier, and many are experiencing the first hard market of their careers. Consequently, this has created peaks and valleys in underwriter performance, with risk decision rules and underwriting practices applied inconsistently within and across offices.
Not surprisingly, an organization's inability to establish, apply and sustain risk appetites and process best practices creates performance leaks resulting in 25% to 30% loss-cost erosion, and more than 50% of underwriting time spent on non-core tasks.
Technology brings greater structure, discipline and efficiency to the underwriting process and enables underwriters to simultaneously pursue profitable growth and control risk exposure. The combination of greater efficiency and effectiveness built into the process represents an opportunity to reduce the loss ratio by as much as two to three points and two to three on expense ratio, and sustain those savings regardless of the market. (Editor's note: These metrics are based on a $2 billion commercial line premium book.)
A more efficient underwriting organization will have fewer routine, disruptive tasks to perform, providing underwriters with more time for risk analysis and production. And a more effective underwriting organization, better equipped with tools and guidance for risk decisions, will be in a better position to keep risk exposure in line with the company's risk appetite, helping to control loss costs.
With greater efficiency and effectiveness built into an underwriter's daily activities, this new level of performance is sustainable across all markets. Underwriters are able to pursue selective growth in hard markets and mitigate discipline erosion in soft markets.
To help achieve a transformation in underwriting and sustain the strategy and process benefits, six key capabilities provide the underpinnings for successful underwriting behaviors. They are:
* A common, integrated electronic account file. Everyone on the underwriting team has instant and simultaneous access to a structured folder, which becomes the repository for all information and activity relevant to an account. This file provides a common metaphor across the underwriting team, making it easier for them to find the information they need as they process accounts.
* Risk segmentation. The ability to finely segment underwriting appetites within industry SIC codes, lines of business and regions makes it possible to more closely-and profitably-align coverage, pricing, terms and conditions, and servicing to specific risks.
* Rules-based, scenario-driven workflow and document management. A rules-based process interrogates an account and generates tasks according to dynamic changes in account status and information-not according to inflexible sets of linear process rules.
* External data aggregation and report ordering. A rules-driven process establishes the information that is needed, when it is needed. This, in turn, drives the automated collection of internal and external data and the ordering of reports, ensuring the consistency and completeness of information that underwriters for decisions.
* Customer and producer collaboration and service. Creating portal access through extranets that connect customers and producers to appropriate portions of the account file enables self-service and collaboration, and frees the underwriting team from duplicate data collection and data entry.
* Performance management reporting. Performance results available in real-time make it possible to act on current behaviors, not last year's. Performance can be analyzed by account, portfolio, underwriter, producer and risk segments, creating a feedback loop for continually refining risk appetites and best practice underwriting processing.
The role of an underwriter today needs to shift from a reactive transaction processor to an informed and proactive account manager.
In addition to formal training, organizations must use technology that enables just-in-time learning through underwriting-specific solutions that infuse knowledge, integrate process and provide data-driven insights through a cohesive framework.
These solutions will not only bring discipline and structure for corrective underwriting action, but will also position carriers with capabilities that sustain results through market cycles, and, importantly, position the organization for competitive differentiation.
Gail E. McGiffin is an associate partner with Bermuda-based Accenture.
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