Introduction
Property & Casualty (P&C) insurance industry was highly impacted by large catastrophic losses and soft market in 2012. P&C insurers struggled to improve their Combined Ratio (highest in three decades; Combined Ratio (CR) of 106.4% in 2011, and CR of 100% in Q3, 2012, before Sandy losses), amidst record low interest rates and intense competition. Underwriting profitability remains a cause of concern due to higher claims frequency across lines of business.
Large underwriting losses are not sustainable in the present environment where the returns from investments are lower. One of the key challenges facing commercial lines business is the cost and effort involved in underwriting. Insurers are increasingly feeling the need to automate underwriting, especially high volume, low value, simple risks and leverage, underwriter’s bandwidth effectively to review complex, high value risks, cross sell/ upsell to ensure topline growth.
Challenges in automating the commercial underwriting processes
The path to automation is filled with challenges, such as frequent changes to underwriting rules, complex pricing, products and risk selection. Insurers across the world encounter the following questions before embarking on automating commercial insurance underwriting process:
Business What types of risks and products should be considered for automated underwriting?
What level of complexity is involved in determining the premiums?
What level of automation should be incorporated into underwriting decisions?
What level of delegated authority that I am comfortable with?
Should I implement process improvement across new business, underwriting (rating, business rules), claims and distribution channels before automating underwriting process?
Are the distribution partners comfortable with automated underwriting?
IT What IT (systems, technology) and people investments are needed for automation?
Will existing systems (e.g. front end, CRM, claims,policy administration, underwriting systems) lend themselves for Straight- Through- Processing (STP) based underwriting?
Organization What would be the impact on underwriters and underwriting support teams resulting from Change automated underwriting?
Management What level of training should be imparted to stakeholders (internal and external)before implementing automated underwriting ?
The case for underwriting automation
Insurers have limited ways to grow profitably in this market. In scenario, where growth is directly tied to insurer’s ability to underwrite profitably, and react quickly to market demands, automation of underwriting process through IT and business process re-engineering is gaining importance.
Pioneers are now taking advantage of improvement across the following areas to automate underwriting processes:
Business processes ( Simple, fewer processing steps/screens and absence of multiple hand offs from application,quote to policy production)
Product innovation ( less complex, packaged commercial insurance products, products tailor made for businesses (e.g. hospitals, retailers etc))
Technology- business rules, rating engine, business process management etc
STP based automated underwriting has proven to be an effective approach to enhance business across dimensions.Some of the value enhancers of automated underwriting are –
LeversValue delivered through automation of underwriting process
Top line and bottom line Reduces turnaround time for quote and policy issuance
Profitable underwriting ( due to tighter controls across rating / business rules based underwriting)
Operational cost Reduces underwriter’s manual effort involved in assessing simple risks; which in turn can be utilized to assess complex risks and activities that increase top line
Leaner back office and lower application maintenance effort
Reduction in cost of acquiring customer
Innovation and Ability to quickly configure/clone and introduce products, rates and business rules
Transformation based on the type of brokers, seasonality and market condition
Be competitive in terms of pricing (e.g. Independent rating systems)
Agility Helps insurers to
Reduce time to market for quote and policy issuance
Quickly react to market conditions ( e.g. pricing) , regulatory changes or business rule changes
Adaptability/ease of Increased broker/MGA/customer satisfaction due to
doing business Higher placement due to short cycle time
Quicker realization of premium
Less effort on administration
Employee/Broker Ability to attract
retention Underwriters and intermediaries resulting from superior service
Ability to retain current staff
Quality and Constancy Tighter control on underwriting process, rates, pricing, discounts and approval authorities
Service standards above industry average
Outsourcing/Offshoring Enables ease of outsourcing/offshoring as the process has less hand offs
Dynamics of automated underwriting
Though there is a strong case for automation of underwriting processes, the vagaries of commercial insurance ensures that insurers adopt automated underwriting based on the type of risks, products, markets and maturity of end users.
a. Risk and products
Less complex business rules, rating and homogeneous nature of risks across personal, motor, travel baggage and personal accident insurance make them more amenable for automated underwriting. In fact, over the past few years several insurers have accomplished the task of automating the underwriting processes across these simple risks.
On the other hand, insurers are well aware of the challenges involved in automating the underwriting process, across middle market and large, complex commercial insurance risks. These segments present unique challenges that require analysis and judgment by underwriters, risk assessors and involve processing steps that are more complicated and hence do not lend to STP based underwriting process.
b. End users
Besides the risk type and products, the maturity of end users (For e.g. intermediaries/insurer’ front office desk) iscritical to determining the success or failure of automated underwriting. It is equally important, for the insurer to invest significant efforts in educating and training end users on automated underwriting processes to achieve the objectives.
c. Market
Most importantly, the market has to be mature and vibrant to accept products that involves minimal amount of manual underwriting.
Impact of business rules engine, rating engine and business process management (bpm) on automating commercial underwriting practices
Today’s underwriters face an onerous task of making the right risk selection and pricing,amidst pressure from competition. Underwriting automation with the help of business rules engine, rating and BPM tools has proved to be a blessing in disguise, to make real time decisions, prevent unauthorized approvals and ensure compliance with corporate and industry mandated practices. Rules engines are being widely adopted and proving to be effective in reducing underwriter’s effort, make quick informed/insightful decisions and improve business performance.
Insurers are increasingly opting for a standalone business rules and rating engine, that can be accessed by internal and external applications, instead of tying them to an application (For example, embedding business rules and rating engine in policy administration system). Modern day,business rule engines (both commercial and open source) provide a host of features that allow users to efficiently create, clone, manage and execute business rules.
Apart from improving the financial results and Turn Around Time (TAT) to provide quote, automated underwriting has enormously helped the insurers to reduce the operational cost of supporting new business and policy administration services, through effective offshoring/outsourcing of the processes.
However, the implementation of business rules engine and integration with applications is not without challenges. It is very critical to maintain business rules discipline; simple rules set and rules architecture to allow for easy maintenance and fast response.
The way forward
Commercial insurers need to take advantage of the technology innovation and improvement in business process to simplify and automate underwriting across small and medium complex risks. To attain the next level of sophistication in automated underwriting processes, insurers should be able to
I. Identify and eliminate common set of referrals/exceptions in an underwriting process and incorporate them into the business rules to increase the percentage of STP based processing /achieve improved pass through results. For example, If there are higher number of claims in commercial motor risk across a particular model/make, that insight (loss history) needs to be incorporated into rules and rating engine for proper risk selection and adequate pricing ( rate up/rate down/reject the case)
II. View their entire risk exposure across lines of business to make informed decisions. For example, based on the amount of risk insured in a particular zone/area, the business rules engine should be able to prompt the underwriter on the total exposure in that particular zone/area before issuing the policy.
III. Apply intelligence to underwriting process by inculcating the insights derived from underwriting to improve the processes involved in risk selection, underwriting, creating products and rate making
Reference: Various Sources.
Author-Muthukrishnan Nagarajan
