Underwriting Evolution or Revolution?
Information technology is driving rapid changes in insurance underwriting across the property/casualty and life/annuity segments. But while most insurers are embracing more efficient underwriting processes, few are aggressively exploring the revolutionary possibilities that new data sources and analytical capabilities herald.
Over the past decade, insurers have dramatically improved their underwriting processes. Novarica's recent report on the growth of IT-enabled business capabilities in insurance, based on a survey of more than 70 insurer CIOs, shows the following changes in rates of deployment, from 2004 to 2011, of key underwriting technologies for at least one line of business:
* Insurers with paperless underwriting processes more than doubled to 85 percent from 38 percent
* Insurers using automated data calls for underwriting requirements increased to 77 percent from 42 percent
* Insurers with automated underwriting decision-making grew to 77 percent from 30 percent
* More than 90 percent of insurers now support remote employees, including underwriters, compared to only 60 percent in 2004.
Insurers continue to invest in new policy administration systems, which streamline the underwriting process and support improved product flexibility. In Novarica's "2013 Budgets and Projects," report, based on a survey of more than 100 insurer CIOs, we found 30 percent are replacing, or making major enhancements, to underwriter workbench systems; and more than half are replacing, or making major enhancements, to their policy administration systems.
Today's state-of-the-art underwriting means:
* Fully electronic workflow
* Extensive use of third-party data
* Predictive modeling and scoring
* Collaboration capabilities within underwriting teams and distribution channels, when appropriate
* Use of automated decision making where possible.
Insurers are embracing this rapid evolution for several reasons. Early on, the primary benefits were the ability to support a greater volume of business without increasing underwriting and underwriting-support staff. The greater efficiencies helped reduce cycle times, which increased distributor satisfaction. Insurers also came to value the improved consistency resulting from greater automation. By capturing more process knowledge in systems, insurers reduced variability of performance between their best and worst underwriters.
Greater knowledge retention is another highly valued result of the evolution of underwriting processes and capabilities. Many insurers have significant portions of underwriting staff nearing retirement and risk losing significant institutional knowledge.
But while insurers aggressively embrace underwriting evolution, few are prepared for the revolution that could result from the unprecedented availability of third-party data and analytical capabilities. The new data and analytics environment could fundamentally transform underwriting, as I wrote in "Data, Analytics and Transformation in Insurance."
For example, using only third-party data, a major consultancy at a U.S. life insurer was able to build a predictive underwriting model for a block of 60,000 policies that achieved the same result as the company's traditional underwriting process, as reported in the Wall Street Journal on Nov. 19, 2010. While no major insurer has embraced this methodology yet, the potential cost savings and customer-experience benefits are enormous.
In an environment of rich third-party data, insurers could underwrite risk before engaging with prospective insureds, meaning risk selection could move from underwriting to marketing, as it has in consumer credit. This would have the additional potential benefit of moving customer acquisition to a much less-regulated part of the value chain from underwriting, which is a highly-regulated process.
The industry today is poised on the innovator's dilemma. No established company wants to risk the transition costs, but it is quite possible a well-funded new entrant could disrupt major portions of the market by introducing a process that, through extensive use of third-party data and sophisticated analytics, is significantly faster and cheaper than even today's most technologically-streamlined underwriting process.
No one knows when this revolution is coming, but early indicators are visible. While regulatory and cultural inertia will protect the industry from change for a while, this won't last forever. Insurers must consider their short-term strategies and a pace of change that's appropriate for their organizations, but also must recognize that a massive shift is approaching. The evolutionary steps of streamlining and automating processes, leveraging external data and predictive models, and increasing the agility of core product systems are critical for insurers in the short-term and in preparing for a possible revolutionary future.
Editor's Note: This column first appeared in our June "INN Focus Report: Underwriting," at insurancenetworking.com.
INNSight is exclusive commentary from Novarica.
Matthew Josefowicz is a managing director at Novarica, a research and advisory firm focused on business and technology strategy for insurers.