Robert F. Kennedy said, "Progress is a nice word. But change is its motivator, and change has its enemies." In the insurance world, the enemy to change often comes from within. The most resisted change in the automation of insurance processes is the automation of underwriting decisions. Many underwriters still believe that underwriting is more art than science. Some companies, however, have recognized the many advantages to automating processes, including underwriting. These advantages affect both the loss and expense sides of the equation.
Automated underwriting is essential to enable a free-flowing process from customer to risk taker in the insurance transaction. Currently, personal and commercial lines are being transacted on a limited basis on the Internet. To select and price the risks, companies have created underwriting templates to allow customers to qualify for coverage based on their answers. The advantages to the automation of underwriting processes are numerous.
For example, leverage of underwriting knowledge has been limited in the past to the ability of the master underwriter to train and audit the more junior underwriters. The process has been fraught with error and miscommunication since the first fire policy was written. Automated underwriting takes away the potential for "weak links."
Automation of underwriting logic allows risk takers to consistently apply the selection and pricing rules to the segment of the market that they wish to attract. And it allows the underwriter to reach a larger population of risks.
Automation also allows the underwriter to monitor the results more accurately and more quickly and to adjust the underwriting selection and pricing logic immediately. This is in contrast to a traditional underwriting operation, where a change in underwriting selection or pricing strategy must be clearly identified and delineated and then communicated to the underwriting force. Pricing models may require changing as well. Opportunities to avoid a deteriorating market or to take advantage of a good emerging one can be missed.
Refining the Model
As experience comes in, it can be used to refine the template. It is easy to review the important elements, such as the average credit, the mix of business written and ratio of written accounts to quotes by classification, hazard group, state and agency. Management can determine whether the mix is skewed and decide what changes to make in the template to address any perceived problem. It also is important to adapt to changes in the market and profitability by state.
The ability to adapt quickly to change is an important advantage to the automated underwriting approach.
Another benefit of automated underwriting is that third-party data, such as credit and experience ratings can be included in the logic process, eliminating manual processes and reducing costs. New and potential underwriting criteria based on third-party data can be tested, and the underwriting selection and pricing logic can be continually refined. Finally, automation of the underwriting logic allows a process to be presented to the customer directly eliminating double entry and generating better data quality that can be used to further refine the underwriting logic.
The advantages of using an online underwriting model are not limited to improving underwriting efficiency and predicting results. It can facilitate the automation and make the flow of information from consumer to agent to insurer to reinsurer more efficient. Within the insurance operation, having the rating process automated can eliminate the need for other systems and can allow for efficient interface of policy information with claim information, especially if a third-party administrator handles claims. These advantages can simplify bureau and regulatory reporting requirements and allow for ease of access by policyholders, agents and third-party administrators to individual employer experience and coverage information.
Automated underwriting also benefits reinsurers, distributors and customers. By defining the logic, the risk taker allows the distributor to more efficiently distribute the product, the customer sees reduced costs, and the reinsurer is provided a more predictable model.
An automated underwriting approach creates compelling advantages for the reinsurer and, hence, the insurer. Since the underwriting criteria and pricing variables are extremely objective, reinsurers know what they are reinsuring. If the template or its creator has a track record of experience, that track record can be expected to repeat itself subject to adjustment for market and cost changes. When a reinsurer is underwriting the automated underwriting business, it is underwriting--in essence--one underwriter, and it can very carefully review the rules and understand within a narrow range what results the book will generate. When a reinsurer underwrites a nonautomated underwriting business, it is underwriting, at least to some extent, the subjective decisions of many underwriters, albeit within a framework set by management.
Agents benefit from automated underwriting because they understand clearly the underwriter's appetite for risk. This is more efficient and saves the agents time. Also, the agents do not have to concern themselves with the possibility of having to go back to the underwriter a second or third time with more information. Automated underwriting is a one-shot deal. The rules about what information agents must provide are clear and objective and laid out up front. Finally, agents can have their workload reduced and their role simplified by the automation of the underwriting process.
Customers are the ultimate beneficiaries of an automated underwriting approach. The operating efficiencies and increased predictability of loss and expense results that are gained by implementing an automated underwriting approach will be reflected in lower prices for the customer. Customers also benefit from the immediate turnaround time for obtaining a quote and binding coverage.
Aversion to Change
Traditional risk takers often are nervous about implementing automated underwriting strategies for a number of other reasons. As may be expected, it is hard for management to believe that every underwriting parameter can be coded. They may feel that they are losing valuable experience and judgment by eliminating underwriters. Many risk takers believe the distributors, or agents, may feel threatened by the automation of the underwriting process and the presentation of applications to the customer.
Management also may be threatened by automation of processes as they see the downsizing that becomes logical as a result of the improved efficiencies. The potential downsizing can be viewed as both a challenge to implement and a loss of power and sphere of control within the corporation.
Furthermore, the implementation of an automated underwriting business within a corporation with other businesses in the same market segments creates potential challenges that need to be considered and managed by senior management. Different expense structures and reinsurance deals--as well as different underwriting criteria and value associated with the underwriting criteria--can create legitimate differences in pricing levels. It is important to create an understanding between senior management and actuaries that these legitimate differences can exist, and that it benefits the corporation to take advantage of them.
One concern within the corporation in this case can be the impact of the growth of an automated underwriting business on sales within traditional profit centers. The ability to balance the viability and growth of the automated operation and the existing ones is a major challenge in this situation.
Of course, using automated underwriting independently for a start-up insurance entity or within an existing noninsurance entity--such as a bank-- avoids these issues and conflicts. There are many ways in which automated underwriting can and will come into play in the broader financial-services context. It is very feasible to automate the underwriting process for commercial insurance and business loans, for example, simultaneously. Also, an underwriting template has great potential for improving the efficiency and underwriting results for the growing professional employment organization market. Or, it may enable agencies to skip the intermediate insurance company and obtain insurance or reinsurance directly from reinsurers.
The creation of automated underwriting rules for cross products like group health and workers' compensation insurance also has the potential to greatly improve the efficiency of the distribution of financial services by or through banks, professional employment organizations, insurers and reinsurers alike. Automated underwriting also has great potential for use with affinity groups through portals or otherwise. Automated underwriting has the potential to allow the efficient development of cross products by both traditional and nontraditional underwriters in commercial lines insurance.
Quoting and Binding
For personal lines, there are many Web sites where consumers can go to obtain quotes for automobile insurance and homeowners insurance. Geico Direct, Nationwide and State Farm are companies that offer this service. There also are Web sites like InsWeb and InsureOne, where consumers can compare or access quotes from a number of carriers. Progressive and eCoverage are examples of companies with Web sites where consumers also can bind coverage online.
For commercial lines, there are fewer examples to cite, but business-to-business examples of automated underwriting exist. AIG Direct, eWausau and AtYour all offer the consumer the ability to get quotes or rate indications or submit an application electronically for certain small-business coverages, such as workers' compensation and business owners policies. While there appear to be underwriting templates in place, none of these currently allows for binding of coverage online.
Two examples of fully automated underwriting templates exist for workers' comp insurance. Reliance National's CyberComb division and Kemper's eSource division both have applications where agents can obtain quotes and bind coverage over the Internet.
Automated underwriting is likely to expand and be a comerstone of growth of insurance and financial-services products. Online underwriting allows for greater control and more careful management of price levels. Significant expense savings can be achieved and maintained. At the same time, greater predictability of both loss and expense ratios is achievable Automated underwriting has great potential to attract agents because of the ease of use and efficiencies such as direct billing. Finally, it will be used to develop and refine underwriting criteria and pricing rules for not only multiple lines but also combinations of property/casualty and life and health coverages.
Bill Miller is a consulting actuary in Tillinhast-Towers Perrin's Irvine, Calif., office with a specialty in workers'compensation business and actuarial consulting. Becky Adriaenssens is the founder and president of San Clemente, Calif. -based InsBytes, a company that provides automated underwriting products and consulting services.