(Image credit: Dollar Photo Club.)
When I started my career in the insurance industry as a loss control engineer, it was often said that loss control was the eyes and ears of the underwriter—implying that the underwriter was the brain of the company. Underwriting was an art, and a science. A company could differentiate itself through its underwriters. Every policy had to be individually underwritten, and so top underwriters were sought out for their knowledge, expertise, and their relationships with agents.
Although that model worked for years, it had its challenges. Expertise wasn’t scalable. It only came after years on the job. This meant that the costs of underwriting were high, in terms of both the years of investment in an underwriter to build that expertise, and the cost per policy of having such an expert devoting time to the decision-making process.
But over time, the job of the underwriter has changed:
- Increasingly, carriers are using business rules to support or even replace the underwriting decision. The expertise of the top underwriters has been embedded in the rules. The consistency of these rules across underwriters has generally led to better decisions which show up in the form of reduced loss ratios.
- Beyond business rules, more carriers are using sophisticated analytics and predictive models to drive more precise underwriting decisions. Valen recently produced a report showing that those using their predictive models have outperformed the industry in both loss ratio and growth.
- Straight-through processing, ubiquitous in some lines and growing in others, is reducing the number of policies that need to have an actual human being touch them. I recently was chatting with an agent and asked him what he thought of his underwriter. He paused for a moment, looking puzzled. “I don’t have an underwriter,” he said. Then he thought some more and a smile crossed his face. “Yes. I do. It’s the machine and I love it.”
- Product management is more focused on managing the rules than looking at individual accounts.
And so insurers have changed the process and role of underwriting to rely more on technology and sophisticated analytics, often provided by third party vendors. Why not take this further and outsource underwriting altogether?
Last week QBE North America made an interesting announcement that Arrowhead, an MGA in Southern California, will become program administrator for QBE North America’s small commercial insurance portfolio, consisting of property and casualty business accounts under $100,000 in premium. While QBE will continue to create the products and manage the portfolio, the day-to-day process of underwriting will be handled by Arrowhead.
And so when underwriting can be handled by outside vendors, the actual art of underwriting is less important than the science of underwriting—and when that happens, underwriting becomes less of a differentiator.
That leaves insurers with customer experience—heavily driven by digital—as the new differentiator. InsurTech companies are better at this than traditional insurers. InsurTechs started with a digital platform and don’t have legacy technology dragging them down. Insurers see this and are nervously watching.
While some carriers think that the magic of their underwriting will continue to differentiate them, others are beginning to realize the importance of customer experience. In a recent survey I conducted, more than 40 percent of insurers said they were watching InsurTechs and were worried about their impact. And 76 percent of carriers said they were focused on digital transformation initiatives in 2017.
When we help insurers with their digital strategy, we see it as a series of steps:
- One: Create your vision. What are you trying to accomplish with a digital strategy? Is it about making the experience better for the customer/agent? To reduce costs? To make better decisions? To compress the cycle? And what sort of results do you need to achieve to assure success?
- Two: Design the target state. What will it look like for the customer? Customer journey mapping is a great exercise, but there are a variety of other issues to address. Which distribution channels will you use? What will the role of analytics be? How much self-service do your customers value?
- Three: Inventory your current capabilities and identify the new capabilities needed. These may include new technologies but may also include new skill sets, new channels, new brands, and a changed culture.
- Four: Identify the strategic options for obtaining those new capabilities. Will you build them? Assemble them across a variety of vendors? Partner with third parties or even other insurers? Will you create a new brand? Define your options, compare them, lay out the business case for each, and syndicate with senior leadership.
- Five: Design the technology blueprint and the sales and servicing operating model. Prioritization of capabilities will drive the overall implementation roadmap and the investments required for a successful launch.
This sounds like a long process, and it can be. But as one CIO put it, “If I’m building a house, I’m better off knowing it’s going to be a two story house even if I can only build the first story today. Knowing that it will be two stories allows me to put in a foundation that will eventually support that second story.”
In a world where the art of underwriting—the core process that most insurers have designed themselves around—is becoming less important, finding a way to move beyond legacy processes, practices, and technologies to create a unique customer experience may prove to be the key to future success.