Busting insurance underwriting transformation myths

Making underwriting more efficient is an area often overlooked by insurers. On average, they pay out 60–70% of premium revenue on the cost of claims and a further 20–25% on winning business through marketing and broker commissions. The premium balance funds operating costs (including underwriting expenses), provides profit for shareholders, and maintains critical access to capital.

So why is underwriting efficiency not higher up on the transformation agenda? In my opinion, even though these efforts represent only a small percentage of total operating costs, there are big gains to make through better underwriting decisions that would then lower the cost of claims.

Let's consider some of the big myths surrounding making underwriting more efficient.

Legacy systems need to be replaced: Some insurance companies still use policy systems developed before the turn of the century. These platforms, while dated, are critical databases that contain important risk, premium, earnings, reinsurance, and finance information. It's a common misconception that an insurer must replace these systems in order to start its underwriting transformation journey, and these systems are often blamed as inhibitors of operational efficiency.

Technical skills are more important than processes: Insurers rely on their underwriters' technical skills, product knowledge, and access to decision makers to deliver results by balancing risk and pricing. This focus on product knowledge, pricing, and distribution is often at the expense of understanding the underlying underwriting processes and how they could be made more effective.

Changing processes is expensive: Insurers know when their underwriting processes aren't working as well as they should. They also know there are technologies available, such as document ingestion, risk scoring, and workflow tools, which can fix these problems. But there is often a view that they are cost-prohibitive, so they continue with existing practices that they have proved will work rather than subject the business to a change program.

Though these perspectives are real and understandable, they are not without consequence to insurer profitability.

At its heart, underwriting is a decision-making process bound by time and information. And like any assessment process, depriving underwriters of the time they need to apply their knowledge and insights is to risk selection, and pricing often leads to suboptimal choices that manifest through an adverse claims experience.

In addition to making better underwriting decisions, efficient processes also benefit the ultimate decision maker: the customer. Transparent, simple, seamless processes and better-quality decisions all increase customer satisfaction, whether it's for the end customer or the insurance broker who influences their decisions.

Though efficiency may ultimately reduce operating costs, more progressive insurers are also seeing this as an opportunity to improve the customer experience – either through digital solutions or new products that help differentiate and provide the capacity to scale and grow.

Underwriting efficiency starts with understanding current processes. As managers, we all have a good understanding of what our people do, but do we know what's going on beneath the surface?

What do people really spend their time doing, and are individuals doing things the same way?

If we stopped doing something, would it impact the business or the customer?

How does the work of my team rely on or impact other teams across the business?

Removing variations, eliminating tasks that add little value, and limiting the dependencies and impact on other teams can drive significant efficiency gains across the underwriting business by focusing on core activities rather than implementing widespread changes or system upgrades.

It's exciting the see how insurers are using this base-level process understanding to spur innovation. For example, using artificial intelligence to read, extract, and ingest information to allocate risks to underwriters. Some insurers are taking this a step further with analytics that score and prioritize quotes based on risk appetite and the likelihood of winning the business. Insurers working on legacy systems are deploying workflow platforms that stitch old and new technologies for faster handling times and more consistent decisions.

Our clients are tackling underwriting transformation to both improve the customer experience and find efficiencies. These changes, whether they are process improvements or digital solutions, need to be monitored for their effectiveness and be flexible enough to adjust to the changing world.