Some thoughts from Mphasis on underwriting risks, tech and more;
Over the last ten years, the risk landscape has evolved, characterized by the rise of increasingly complex, severe, and intangible risks. Macroeconomic challenges, including high inflation, interest rates, and the cost of capital, have compounded the hurdles faced by insurers in achieving underwriting profitability. Below we look at the challenges faced by insurers and how Digital Transformation can make the underwriting process more efficient.
A complex landscape
Every insurer is making significant investments in the transformation of their underwriting programs to enhance risk selection, pricing decisions, and reduce the costs associated with underwriting operations. Surprisingly, over 75% of them are struggling to fully leverage the benefits of these investments due to a range of challenges in successfully executing this transformation, including:
– Lack of a clear strategy for the desired future state and a framework for measuring the program’s impact on customers, shareholders, underwriters, and operations teams.
– Focusing on individual underwriting use cases rather than building a comprehensive portfolio of use cases that cover all aspects of the underwriting process and lay the foundation for reusable capabilities tied to measurable benefits.
– Dealing with legacy data and technology infrastructure, where critical data remains locked in proprietary and multiple core applications, with crucial information often embedded in legal contracts and unstructured formats like documents, images, and videos.
– Maintaining traditional delivery operating models that retain manual work processes, slowing down the transition from idea to production and limiting the ability to scale effectively.
– Inadequate talent management, from raising awareness among leadership executives about the potential opportunities to improving the execution capabilities of the delivery teams.
Archaic legacy systems
As previously discussed, manual procedures remain a significant obstacle to generating value. While the landscape of risk and the expectations placed on the underwriting role continue to evolve, the underwriting process itself, as well as the core administration technology supporting it, has remained largely unchanged. This results in underwriters dedicating over 50% of their time to administrative tasks, including data collection and validation, rather than focusing on their primary value-added responsibilities. They often rely on outdated or non-existent automation tools, hindering their ability to effectively prioritize tasks in their quote basket.
Moreover, the absence of collaborative tools makes it challenging and time-consuming for underwriters to access the expertise of various teams, such as risk engineers, claims adjusters, and back-office support personnel. It’s not uncommon for them to work across multiple, often disparate, core systems to manage customer information, risk data, and the quoting and policy management processes.
Underwriters are actively seeking ways to enhance the customer experience by streamlining customer journeys, reducing errors and omissions through intelligent automation, and facilitating seamless digital data flow.
Strategies Shaped by Fluctuating Markets
In the face of market uncertainty, insurers are swiftly adapting their underwriting strategies, reevaluating, and reshaping their underwriting strategies. Notably, factors such as extreme weather events, the surge in cybercrime and data breaches, escalating inflation, and social inflation are driving up claims costs. Additionally, high interest rates are increasing the cost of capital for insurers. As a result, a significant portion of the industry is already in the process of redefining their underwriting and risk-selection approaches.
Here are a few examples:
– Earlier this year, major insurers, Allstate and State Farm, made headlines by announcing their decision to cease writing new home insurance policies in California, partly due to the mounting wildfire risks in the state.
– Rate trends vary across different insurance lines. For instance, financial and professional liability lines witnessed a significant shift, transitioning from a 40% increase in the third quarter of 2020 to a decrease of 1% in the third quarter of 2022.
– In the realm of cyber insurance, commercial carriers are actively assisting clients in mitigating cyber threats and enhancing risk selection through the provision of threat intelligence, consulting, and training services.
– Furthermore, commercial carriers committed to achieving net-zero emissions are reallocating capacity toward industries with lower emissions, faster decarbonization pathways, and technologies that support net-zero goals.
Keeping up with the consumer
The evolving risk landscape and the advancing digital capabilities of top-performing entities are reshaping consumer expectations within the underwriting insurance sector. Underwriters are now anticipated to serve as risk solution partners for both their broker distribution associates and end consumers. They are expected to swiftly deliver in-depth risk coverage analysis, offer guidance on suitable risk products, and provide clarity on coverage terms and conditions.
Consumers expect underwriters to drive underwriting profitability through a mastery of risk selection, exposure portfolio analysis, feedback on claims losses, and the determination of risk pricing. Achieving excellence in underwriting proves to be a demanding undertaking.
The role of Digital Transformation
Given the challenges listed above, digital and data transformation can work to amplify the performance gap between leading insurers in the top quadrant and the rest of the industry. This will inevitably usher in increased competition and a compelling need for the creation of distinct competitive advantages to maintain a leading edge and foster growth. Several opportunities to establish such differentiating advantages are:
– Specialized Portfolio Focus: Concentrating on core lines of business in which insurers possess specialized underwriting expertise.
– Empowering Underwriters with Data and AI/ML Tools: Equipping underwriters with robust data insights and cutting-edge AI/ML tools to elevate their capabilities in the technical aspects of risk selection and pricing.
– Multi-Channel Distribution Flexibility: Offering multi-channel distribution capabilities, including direct, broker partnerships, and MGAs, to provide adaptability and agility in choosing the most suitable channels based on regional nuances and product distribution preferences.
– Dynamic Pricing Algorithms: Developing the capacity to dynamically adapt pricing algorithms to respond to day-to-day fluctuations and anticipate future trends effectively.
– Accelerated Product Innovation: Enhancing the speed of product development and deployment to harness opportunities presented by parametric insurance, risk prevention services, and addressing gaps in protection services.
Bringing AI into the mix
In our perspective, Generative AI offers the potential to create value across various dimensions from enhancing customer service and contact center operations and elevating technical expertise to streamlining regulatory compliance, all the while decreasing operational costs by automating manual processes and accelerating technology delivery.
The successful implementation of these capabilities has the potential to outperform peers, with a Net Premium Written (NPW) Compound Annual Growth Rate (CAGR) exceeding 4.4%, an average pure loss ratio below 55.4%, and an average total expense ratio lower than 30.2%.
A digital transformation cantered around underwriting, driven by a data-first mindset and the utilization of Generative AI/ML algorithms will empower underwriters to transcend their traditional roles and become Super-Underwriters.
About the author: Vijay Mahendrakar is head of Insurance Business Solution, Europe at Mphasis. Vijay helps brokers and insurers to successfully implement digital and data technology, transform their operation enabling business to be truly customer centric, digital first, data driven business and grow profitably. Vijay has 25+ years of experience with global BFSI customers, he brings unique expertise at intersection of Insurance business domain, legacy technology modernization, building cloud native platforms, monetizing data as an asset and transform operation ways of working. Similarly working with Mphasis, a global technology company, he brings rich expertise across business development, large transformation deal solution design and capture, consulting, and successful delivery of complex change programs.
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