Automated Underwriting: How Far Can it Go?
As analytics and automation become increasingly prevalent in the process, carriers look to strike a balance with traditional underwriting practices.
Insurance Networking News, August 1, 2011
How deeply should underwriting tasks be automated? As new technologies and standards emerge that make it possible to process underwriting decisions in a more automated fashion—with fewer touches by live human underwriters—debate is heating up across the industry as to whether increased automation may result in missed opportunities for insurance companies. Ultimately, it appears the answer may depend on the degree of complexity and the type of insurance being offered. For personal lines P&C policies, a high degree of automation is feasible; for more complex lines such as workers' compensation, specialty lines and life insurance, human intervention is still needed.
A survey of 146 carriers, conducted in early 2011 by Strategy Meets Action (SMA), finds that automation tools are seen as a way to augment underwriters' many manual tasks, but only about one out of four insurers have any intention of replacing underwriters with workflow, rules engine- and data and analytics-driven systems. About half, 46%, see such automation more as a way to augment and support underwriting processes and decisioning, while another 27% see technology as increasing the turnaround times of underwriters.
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Rather than occurring in an all-or-nothing fashion, underwriting automation is evolving along a spectrum, according to Deb Smallwood, founder of SMA. Highly automated "no-touch underwriting," tied to straight-through processing (STP), is suitable for processing of standard personal lines policies and small, simple commercial business. Low-touch underwriting, on the other hand, employs tools to assist in a management and tracking and providing data and insights to help the underwriter make a more informed decision, especially for handling exceptions that are kicked out of STP. In high-touch underwriting, meanwhile, while automation may play a role in the workflow, the underwriter is directly involved in the evaluation, negotiation and pricing of the risk.
Insurance executives agree that while deep automation for underwriting may work for some carriers, it won't work for everybody. Even P&C lines have different thresholds for what can be effectively underwritten in an automation fashion, says Jim Korcykoski, SVP and CIO of Nationwide Insurance. For example, he illustrates, "the most STP that we can implement is in the auto product line, followed by homeowners and third in commercial. We see percentages in the 90% range in the auto side. But on the property side, it's not going to be as high, because the probability that you will need to execute an inspection to get additional information about the property is higher."
Commercial lines are the most difficult to apply underwriting automation due to complexity, Korcykoski continues. "When you're insuring commercial properties, you have a lot of variability that you can run across. There's the 'main street' stuff, such as company autos and storefronts. But underwriting is more complex for high-end properties such as restaurants."
The Insurance Corporation of British Columbia (ICBC), a P&C carrier, has also achieved a high rate of automation with its personal lines. "Our personal lines is about 95% STP," says Kellee Irwin, BBM, FCIP, CRM, VP of personal insurance for ICBC. "It's about having the right products and pricing and eligibility rules and criteria. But we're really focused on STP, taking the approach that we want to manage the exceptions as exceptions, and not let exceptions manage the process."
Irwin adds that ICBC is now focusing on bringing greater automation to its commercial lines as well. "For the policies that are not straight-through processing, we want to improve our exception underwriting to make it more automated. Because right now it's very manual for us. But, we'll always see some more touch in commercial lines than in personal lines."
Other than P&C?
Other types of insurance products, such as workers' comp and life insurance, are more difficult to underwrite. Geoff Banta, president and COO of Amerisafe, says such "template underwriting" may work where underwriting processes are simple, such as some areas of personal lines. "You gather some data, you put it through a scoring system," he explains. But in the case of Amerisafe, which handles workers' compensation for risky professions such as logging, human judgment will always be required in the transaction. "Our business is way too complex for template underwriting," Banta says. "We want an experienced underwriter, and it takes eight to 12 years to become an underwriter in our company. Our underwriters need to make the ultimate decision, not a scoring system."
In some cases, underwriting and IT managers are discovering that too much automation may even hold back business. "You can't program underwriting-it would be impossible to put all the brains and expertise of an underwriter into a system," says Chris Chartrand, SVP for technology solutions at Genworth. "We really need to have somebody who could take a much more holistic look at an individual, and be able to take into all the factors." For example, Chartrand relates, a potential policyholder with a high cholesterol level—who would be pigeonholed into a higher-risk bracket by an automated system—may have other healthy lifestyle factors, such as being an avid runner.
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