Breaking Free from Traditional Underwriting

Most of you who know me or read this blog, know by now that I am not a big fan of Legacy Thinking in Property and Casualty Insurance. While it is wonderful that new technology allows so many things that couldn’t even be imagined 5 years ago, until we break free from traditional underwriting methodology, don’t spend another dollar on chasing new technology investments to improve underwriting performance (improve premium volume, broker satisfaction, hit ratio or loss ratio).

P&C underwriting has done very little to re-invent itself since the dawn of insurance; Someone fills in an application for insurance, that application for insurance gets sent to underwriter(s), hopefully the person submitting that application for insurance receives back a quote(s) and ultimately a risk is bound by an underwriter.

Today that application can be on-line, it can be instantly quoted and even instantly issued and paid for, but fundamentally, it is still done the same old way. Underwriters (be it software or actual people) assess the risk through a set of questions to:

  1. Determine risk acceptability
  2. Determine risk pricing
  3. Determine correct coverages and forms
  4. Give quotes and ultimately issue insurance policies.

In order to truly break free from traditional underwriting you have to view the underwriting process from the completely opposite direction. Instead of an entirely traditional risk based view; where underwriters want to ask all of the questions for the sake of “correct” risk based pricing. We have to view the process from the client view who wants to go through the process as easily and painlessly as possible.

From the consumer’s perspective, Insurance is not a candy bar or a new car, tangible things that when they are purchased, give the purchaser a certain amount of satisfaction. Insurance is an intangible thing that offers to pay you when something really REALLY bad happens. Think about that, as inevitable as death, taxes and insurance.

I absolutely agree with proper underwriting and risk based pricing, but I am suggesting that keeping the client in mind when underwriting, an underwriter would:

  1. Reduce the number of questions asked through
    • Reducing redundant questions
    • Smarter questions get more information from fewer questions
    • Use outside data sources
    • Get rid of all questions that do not:
      • Qualify the risk
      • Rate the risk
  2. Remove any ambiguity
  3. Understand the absolute value of a question. There is a cost to complexity and keeping the insurance quote transaction as short as possible may be more valuable than asking 3 questions to determine a 2% discount
  4. Ask enough questions in relation to the expected premium size. Often underwriters still underwrite small accounts with exactly the same questions and process as the larger premium accounts
  5. Keep the rating uncomplicated. Complex rating comes with a host of issues including a much greater chance of error. As well, a lot more arduous task for the end user

For example, I recently reviewed the rating of a relatively simple product. There were 27 rate classes for one particular coverage, which equals 27 questions on the original paper application (needed a revenue value for each one to get the rate).

A lot of the rate classes were less than 2% apart which means on a $2,500 to $5,000 account (with several more coverages) the premium difference on that coverage was about $1.50 or less. On a $2,500 total premium policy that is 0.06%! This was a point of contention for the sake of  “that is how it is always done”.

We were able to easily reduce the number of questions to 5 without losing any significant rating integrity but greatly improving the end user experience.

If anyone is simply taking their paper world to the digital world, which can certainly be done (and unfortunately is), then the improvement would only be incremental in the best case scenario, rather than an astounding leap in profitability and growth.

I have heard many times that it is the lack of broker/agent technology adoption that causes the failure of insurer’s projects to leverage technology.  This is completely false, Brokers/Agents are desperately seeking new technology solutions!Just not technology solutions that don’t work for them.

The failure, in fact is that the project was most likely given to underwriters to give the technology consultants/analysts all of the paper processes to recreate digitally and that is what causes the lack of success of what was supposed to be enabling technology. Your technology people can only do what they do… technology.

Technology consultants/analysts won’t re-engineer your insurance process.