20 Questions.

Successful online underwriting means getting a few key pieces of information and offering a competitive quote--all within minutes.

Consumers who are serious about buying insurance--or any product--via the Internet typically don't want to spend very long doing it, and they expect what they buy to be top quality "They tend to be younger and more educated, and they have a propensity to be online as well as buy online," said Frank Rohde, vice president of product development for eCoverage. "They also tend to be more critical of the [buying] experience and the product features, as well as the pricing they get."

For insurers, these characteristics can cause unique challenges, because before they can price a product, they have to assess the risk involved. Online underwriting, which is emerging for personal lines, term life and some small commercial policies, requires a new approach to information gathering and processing, all much more quickly The essentials of underwriting haven't changed, but the methods have.

"Successful online underwriting involves three types of information-- external data such as credit scores, internally compiled market data and customer profiles created at the time of the application," said John Flynn, an industry partner and leader of the insurance vertical for Business-Edge Solutions Inc. Each piece of information must be available quickly and accurately, so it is important to have the technology to store data and to sort, filter and distribute data as well.

Asking the Right Questions

Speed is critical to online underwriting. Most online quotes are available in 15 minutes or less. "On the Internet, your competitor is always only a click away," Rohde said. Insurers cannot expect an applicant to answer 40 or 50 questions on an online application, so they have to ask fewer, more creative questions that will provide them with the information they need to underwrite a risk, Flynn said.

For example, to gain a quick perspective on an applicant's tendency toward risk, the insurer might ask if the person sky dives or BASE jumps. Whether an applicant travels to the North Pole or the next state says something about appetite for risk, as well.

Insurers might ask applicants about their credit history and then compare the answer with an outside credit report, Flynn said. "This information can help the insurer assess the applicant's honesty as well as his working knowledge of his financial situation," he said.

Honesty is important, because fraud is one of the greatest pitfalls of online underwriting. It's not the same as having an agent sitting across the table from the applicant. "The key thing [in online underwriting] is understanding who you're insuring," said Edward Hanlon, managing executive-underwriting and operations, Emerging Markets, Wausau Insurance Co. Wausau's Web site, www.ewausau.com, offers online underwriting and quotes for workers' compensation, business owners and commercial auto policies to businesses with up to 100 employees.

One of the ways a company can defraud an insurer is to change its name and apply as a new company to avoid an unfavorable claim history. To protect itself from that kind of fraud, Wausau will pull from its data sources the names of all the companies listed at the applicant's address and all the companies listed at its telephone number. "If you change your name, you're not going to change your phone number, because your client is still going to be calling you on that phone number," Hanlon said.

ECoverage, which provides quotes and binds coverage for personal auto policies from Royal & SunAlliance at its Web site, www.ecoverage.com, protects itself from receiving fraudulent information by avoiding certain questions, Rohde said. For example, an agent or call center might go through a lengthy series of questions with a multicar policy to determine which family member drives which car most of the time. A successful online underwriter can't ask an applicant to answer enough questions to sort all that out, plus those answers will always be suspect, because applicants know they can hit the back button and change the answers they've given to get a lower rate, Rohde said. As an alternative, eCoverage relies on online logic to use answers to other questions to make an educated assignment of drivers to vehicles, he said.

Stay on the Line

Not having to answer too many questions is not necessarily enough to keep a prospective customer online, Rohde said. "Most companies haven't understood that on the Internet you need to provide something of value very early in the process," he said. To that end, eCoverage will ask the applicant to answer about 16 questions anonymously, and then the company will provide a quote. "Not until after you've seen there is a product offering of value that you might be interested in, do we ask you for additional personal information that we use to further underwrite the policy, verify some of the information you've given us, and finally issue the policy," Rohde said.

Safeco Property & Casualty Insurance Co. offers "something of value" early in its online interactions with its "quick quote," which doesn't require an applicant's name to issue a personal auto policy quote. "You can enter 'John Doe' if you want and get an insurance quote," said William Lebo, executive vice president. If applicants like the price and want to continue with the process, they have to give more specific information, Lebo said. "At the end of the process, there's a secure site where they can enter a credit card to pay, and we'll issue a policy," he said.

Safeco underwrites auto policies online through its virtual producer program, which uses "POSUM," a point-of-sale underwriting module, as the business operating system, Lebo said. The company also offers online quotes for term life policies, but medical exams are required for larger face values, and policies cannot be paid for online. Its Web site, www.safeco.com, provides the virtual producer to consumers and agents.

POSUM requires fewer online questions because it gathers relevant information from the customer and from external sources and checks the relationships much faster than a human staff would, Lebo said. An important external data source is insurance scoring, he said.

Before the advent of insurance scoring, an insurer had to ask a lot of questions to make sure a customer was stable--that is, "somebody you really want to insure," Lebo said.

In addition to insurance scoring, other external databases that online underwriting technology may need to access--preferably in real time--include motor vehicles reports, information on prior claims from the Comprehensive Loss Underwriting Exchange and geological data from the Insurance Services Office Inc. about areas such as flood zones and brush-fire zones. Databases are necessary for effective underwriting and cut down on the amount of time an applicant needs to spend online. "A prospective customer will be less likely to stay online if he has to fill out an extensive history," said BusinessEdge Solutions' Flynn.

Rather than ask applicants to provide a lot of information about their cars' airbags, anti-lock brakes and other features that would warrant a premium discount, eCoverage uses the car's make, model and year to retrieve that data from another source, Rohde said.

The internal databases that online underwriting technology may access include profiles of prospective customers, Flynn said. So much information is available for free or for purchase over the Internet that insurers can research behavior patterns and associated risks. "In the past, insurers built business by reacting to market needs," Flynn said. Today, technology enables carriers to develop databases and research potentially rewarding market segments (for example, mature drivers) to define premiums for acceptable risks. By comparing the resulting standard to a new applicant's characteristics, they can determine if the risk is worth the business Flynn said.

Making the Decision

Once the right information is gathered, decisions must be made. Applying rules and models to make those decisions is a critical function of online underwriting technology. "The industry is dealing with the question of whether you can do successful online underwriting by simply automating your old rules," said Mark Gorman, vice president and general manager of the insurance market for Fair, Isaac & Co. "The answer is probably no."

In their simplest form, underwriting rules are designed to objectively screen an applicant in or out. For example, if applicants live in a state where the insurer isn't licensed or if they drive types of cars that the insurer doesn't cover, they're automatically out, Gorman said. The next step is to apply the rules in an automated decision-tree way. For example, a company may cover a red sports car in certain circumstances. A rule may say that if the car is in Arizona, insure it, but if it's in Minnesota, don't insure it because the ice creates too much risk. Another rule would probably say if the driver of he sports car is a 25-year-old male, don't insure it, but if the driver is over 50, insure it.

Some rules apply in an either/or way, but Fair Isaac believes some rules need to be applied on an if/then basis in order to be useful, Gorman said. That logic might say the company should insure the sports car in Minnesota if the driver is over 50 because that driver will probably only drive it in the summer. Statistical models, which balance the underwriting value of many pieces of information, tell the company that that is a good way to apply the rules. By using statistical models in their online underwriting technology, companies can enhance their business rather than just automate what they already do, Gorman said.

Safeco's online underwriting module was developed in conjunction with Fair, Isaac and uses the if/then approach. "We've tried to tailor to the individual risk characteristics that we want to insure," Lebo said. The technology allows the company to analyze subgroups within a category of individuals with high insurance scores to find out what characteristics sort good from average performance within the group and then price accordingly, he said.

Companies can have more than one model and decision tree in their online underwriting logic. They may have one system for people who are submitting an initial application and another for people who are coming back with a second, more serious application, Gorman said. For example, a set of rules could tell the technology to skip the external data and save that expense during an initial application.

A final step that online underwriting technology should have is the ability to store and analyze transaction data, Gorman said. This is important from an errors-and-omissions standpoint to confirm that the customer actually requested information, was given a quote and acted on it. "You don't want them coming back later and saying, 'I did this on the Internet and was supposed to get coverage, but I never did,'" Gorman said. The data needs to be stored in a way that allows tracking and analysis by actuaries, he said.

Why Do It?

Efficiency and consistency are two of the advantages insurers cite for online underwriting. (See "Automation Advantage," page 113.) "We do a better job underwriting this way than we would in a traditional human environment, because every risk, every application, receives the same level of underwriting diligence--there's no bad Monday or bad Friday," Wausau's Hanlon said. It also allows the company to adjust standards of underwriting systematically, he said.

"The advantage of the virtual producer, as we pitch it to agents, is it doesn't have to go on vacation, it doesn't get sick or take days off for family leave. It just produces all the time," said Safeco's Lebo. It also gives agents the ability to expand their service and their selling reach well beyond what they can do by hiring more people, he said.

There are advantages, but there also may be disadvantages. "It's a double-edged sword, because if you don't venture out, you'll lose the business to those who do. If you do venture out, you may lose customers because the process takes too long or you rate the risks wrong," Flynn said.