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Rethinking Underwriting for Commercial Lines

It is time to step up automation in commercial lines, and you can do just that with a powerfully rich combination of enhanced technology capabilities in the key areas of underwriting and policy administration – a combination that lowers cost, simplifies doing business, makes it easier to enter new markets and significantly improves underwriting outcomes.

Modern policy administration systems for commercial lines have matured and expanded. Many now offer automation assistance to a few aspects of the underwriting process, and a handful even address select parts of the quoting transaction process. But the news is that exciting, next-generation underwriting technologies and solutions are delivering automation directly to the desk of the underwriter and assisting in the management of the entire underwriting process.

These capabilities are enabling more insightful and timely service to the agent: a significantly streamlined process and workflow; rapid, if not immediate, turnaround of quotations; precision pricing; better risk selection – all in a user-friendly, collaborative environment. While all commercial lines insurers are able to benefit from some level of increased underwriting automation, this enriched level of underwriting finesse is particularly important to insurers that are writing mid- to large market risks and even highly specialized and complex risks, especially those that require negotiation and collaboration with the agent or broker. Insurers that are not paying close attention to what is being implemented by some of the market leaders are likely to be burdened with higher underwriting expense and saddled with less effective underwriting outcomes. If this automation plays out as projected, it might become a continual struggle to match the level of service that leaders are providing to agents and brokers – a struggle that could leave some insurance companies in the dust.

So why haven’t all commercial insurers installed these next-generation underwriting technologies and solutions – the very approaches that would put them in a leadership position or at least enable them to keep up with the mainstreamers of tomorrow? The answer boils down to a disconnect in linking desired business capabilities to the available technology capabilities and, perhaps of more importance, two major misconceptions. First, there is a misunderstanding relative to what a modern policy administration system can do for commercial lines underwriting. Some mistakenly believe that a modern policy administration system can and will provide next-generation underwriting automation for the underwriter. Second, there are misperceptions about the complexity involved in managing any overlaps or duplications that exist between the policy systems and underwriting solutions. The reality is that advanced underwriting solutions and technologies coupled with a modern policy administration system create a powerful combination that delivers a tangible competitive advantage.

It is indeed possible to transform the commercial lines underwriting process. This is a maturing area for solutions with new entries in the marketplace. These solutions now offer a rich and complete set of capabilities specifically designed for commercial lines underwriting – solutions that align well with the changing needs of the business and also capitalize on developing opportunities. These solutions really step it up for commercial lines insurers by applying the right level of automation to properly balance the science and the art of underwriting, to deliver real competitive advantage today and place desirable business that stands the test of time on the books.

Insurers seeking new capabilities need to look closely at these new offerings. Yes, the overlaps with what a modern policy administration system does are real, but this can be managed without great difficulty. Any perception of extreme complexity is typically misguided. The value an insurer can achieve from the powerful combination of a modern policy system and a complete suite of advanced underwriting solutions will far outweigh any effort involved.

I have been conducting research on, tracking, and reporting on both underwriting and policy administration capabilities in commercial lines for more than 13 years. These are exciting times for the industry. Real opportunities for stepping up to the challenges of the increasingly complex world of commercial insurance are here. The smart insurers will capitalize and become intelligently nimble – realizing their reward in profitability and market share. The rest will follow, struggling to catch up and stay in the game.

Getting Beyond the Policy Admin System

As SMA’s Karen Furtado wrote in last month’s blog post about core systems, “Now that the insurance industry recognizes modernization as an indispensable tool for remaining competitive, it is worthwhile to take a step back and look at the technical capabilities that insurers really need.” With underwriting, this requires a platform that extends beyond the policy administration system and makes optimal use of the expertise of the underwriters themselves.

Today’s environment is full of infinite possibilities for the future of underwriting. Advances in the electronic exchange of information have benefited the insurance industry in major ways. One example is apparent with the portals and exchanges that are making it easier for agents to submit business opportunities. Given the ease, more submissions are coming in the door. This increased workload coupled with new data sources for validation and verification leaves underwriters at a tipping point. With increased demand and increasingly more complex variables, they need a solution that gives them enhanced capabilities that extend beyond the same old way of doing things.

In today’s competitive market, the ability to issue a quote for every desired risk is critical. The power literally has shifted to the palm of the consumers’ hands, where they get instant gratification via their mobile devices. For some insurers, not being able to handle the volume of quotes that are being submitted to them means leaving significant money on the table.

Therefore, a modern policy admin system is necessary for its ability to automate the processes that are performed by the underwriting department. These systems automate the data capture, base rating and rules and final pricing, and they manage formulas and document production for all risks. They process transactions for new business, renewals, endorsements, cancellations, reinstatement, etc. But, for complex risks, the risk analyses and evaluations that are determined based on information about credit, hazards, financials and loss experience are made outside the policy admin system. Automation supporting these decision-making processes takes place outside the policy admin system. SMA research shows just 37% of the entire underwriting process is managed via the policy admin system.

Before that harsh reality sets in, realize that the modern underwriting platform is not, should not be and cannot be a standalone system. Nor is the modern policy admin system a standalone solution. Now, the two (underwriting platform and policy admin system) should be connected, with the ability to perform the complex functions mentioned above.

One of our SMA imperatives is: “Interconnect Intelligence for Underwriting.” Nothing in modern insurance can happen in isolation, in a traditional silo. Those days are over, but, fortunately, the technology is available to support current and future needs. The key is finding the right connection points, the right technology and the right fit for your organization. Today’s real-time, big-data, high-volume market dictates the same from your company’s system, and that is why modern support for underwriting requires more than just a policy admin system.

The 5 I’s of Underwriting

The benefits of next-generation underwriting for complex risks are quantifiable and real. So, when, where and how to start?

When? Now. The sooner, the better.

Where? It all starts with understanding the possible. You need to know what is realistically possible with the offerings that are available today. It is equally important to figure out what will be possible in the not too distant future. Once you’ve got a grip on the possibilities, it’s time to set priorities. Describe the capabilities that go on the priority list using business terminology. This makes it much easier to have meaningful conversations between the business and IT interests. It is very important to look at how your plans for underwriting will align and work in concert with your policy administration system. Figure out what the best path for your organization is, and then just make it happen.

How? The most effective path for making progress depends on the characteristics and culture of the company. For some insurers, shifting focus to the possibilities for underwriting gets things moving. Other organizations might need some help or just a kick-start. You can move the ball forward significantly by bringing in advisers who can describe what the options are and then put the value in context for your company. The important thing is to make progress one way or another. Time is of the essence.

Simply put, the goal of underwriting is to maximize efficiency and effectiveness. SMA’s concept of modern underwriting capabilities can best be described by using the 5 I’s: Intuitive, Intelligent, Interconnected, Informative and Insightful. The next-generation insurers are embracing solutions that embody these characteristics, and they are reaping the benefits.

What do these 5 I’s mean for you? Let’s explore:

Intuitive — A user-experience-centric desktop, an intuitive desktop, saves time spent hunting and searching for information, and it eliminates rekeying into several systems. It also reduces the learning curve and ties directly to the main goals of underwriting: efficiency and effectiveness.

Intelligent — For complex risks that require the touch of an underwriter, the modern underwriting workstation can significantly augment the expertise and experience by incorporating and taking advantage of new sources of data and models. This new level of intelligence automation will help make better decisions and provide controlled discipline.

Interconnected — Modern underwriting capabilities are delivered through a variety of solutions that are tightly integrated with everything underwriting needs and feeds. The required capabilities extend beyond what a single solution can deliver. The requirements include an interconnected, intelligent, modern platform that facilitates easy integration and synchronization with core systems, tools, spreadsheets, models and data, as well as external data sources.

Informative and Insightful — Modern platforms provide underwriting with data and analytics like never before. Emerging technologies, as well as an abundance of new information, are generating new possibilities for underwriting and new ways to accomplish far-reaching transformation for the next generation of underwriting excellence. It is now possible to make smarter, more informed decisions by using new sources of data and models. New levels of sophistication in the information about both risk and customer intelligence are possible.

Looking back on my past-life as an insurer, I am in awe of today’s possibilities. The power that data and analytics are giving our industry is boundless. Just thinking about how far underwriting has come in a very short time makes me even more excited for the future! This is why at SMA we consider “Interconnect Intelligence for Underwriting” an imperative. It is critical to becoming a next-gen insurer. The world is moving as fast as we think it is. Any steps you can take to gain an edge by improving efficiency and effectiveness are must-take steps!

Shifts in Strategy: Making Sense of 2015

The insurance industry is in the midst of a historic shift. That might sound like an overstatement, but Strategy Meets Action’s research and observations from working with insurers back up this claim. For the past six years, SMA has been tracking and supporting the industry’s evolving maturity – by doing research and providing services – for insurers and the entire insurance ecosystem. For the first time, SMA’s research is revealing significant shifts in company modes; strategic investments; and project priorities that reflect success, maturity and a positive momentum across the industry. These shifts are resulting in a bifurcation of the industry, with a gap emerging and expected to widen between the leaders and the laggards.

Leaders and Laggards

The general state of insurers, what SMA calls the “company mode,” has changed dramatically. For many years, SMA research revealed that 3% to 5% of North American insurers were just surviving ” struggling to be profitable. Today, 11% of insurers define their company mode as struggling, up from 4% in 2014. When combined with insurers in “sustaining mode,” the result is that one-third of the industry is not doing well. On the other hand, two-thirds of industry participants are growing or transforming. In fact, the percent that are transforming has grown from 13% back in 2010 to 34% in 2015. This supports what SMA and others have been saying – that the companies investing in technology and innovation are separating from the pack and positioning for higher growth.

Customers and Agents

Business drivers for strategic technology investments have typically been related to growth, cost management and business optimization. Now, for the first time since SMA surveys have tracked the drivers, customer demands and expectations and agent expectations are both in the top five on the list of business drivers. This is leading to a shift in technology investments. The way this manifests in individual IT projects is that they are grouped and integrated to support the major strategic initiatives. Customer experience, enterprise analytics and new product initiatives are examples of major initiatives that often require multiple supporting IT projects.

Investments will continue in core system modernization, but, as insurers complete their modernization, the shift in type and amount of spending will accelerate to these new strategic initiatives that address customer and agent needs and enable insurers to respond to new marketplace realities and opportunities. As a result, in 2015, customer engagement and experience is the number one strategic initiative for insurers. These types of investments beyond core systems are aimed at winning in the areas where traditional industry boundaries are fading, and in the digital world at large. Many insurers have arrived at the inevitable conclusion that becoming a digital insurer is mandatory.

Innovation and Transformation

The technology investments taking place by leaders today are not just step-changes aimed at improving operational efficiencies. They are positioning the company for major business strategy changes – launching new business models, partnering with companies outside the industry and venturing into new product and service areas. To accomplish this, insurers must create agile technology platforms and harness the power of emerging technologies, tasks that require innovation. And, as it turns out, innovation is sweeping the industry. One-third of insurers now have active, formal innovation initiatives, and the number is growing daily.

2015 promises to be an exciting and eventful year for the insurance industry. Every insurer has a choice to make. Embrace innovation and aggressively transform to capture new opportunities – or just continue with business as usual and run the risk of becoming a casualty in the new competitive battle.

For more, read SMA’s new research report, 2015 Strategic Initiatives: Making Sense of the Shifts.

How Does Your IT Budget Compare?

In my conversations with insurers, I am frequently asked about IT investments. People want to know what the trends are around IT budgets and how their spending on information technology compares with others. To help explore these topics, we analyzed insights from our portfolio of research and did some additional analysis.

Working on this research project was illuminating. The findings validated and quantified some key assumptions about how and where technology investments are being funded. Some of the major conclusions show that:

  • While there is wide variance in the percentage of premium that insurers are allocating to the IT budget, the industry average continues to run between 3% and 3.5%.
  • A significant portion of the IT budget is allocated for discretionary spending. Nearly 40% of insurers indicate that 10% or more of their budget is discretionary, and more than 20% of insurers allocate more than 20% of their budget to discretionary use.
  • There is major investment in technology-based solutions occurring outside the IT budget. 59% of insurers report significant spending outside the IT budget, with 5% of insurers stating that spending outside the IT budget exceeds 50% of the budgeted IT spending.

There are no hard and fast rules dictating an appropriate or normal or acceptable percentage of premium that should be spent on the IT budget. Spending levels are and should be influenced by the business climate, strategic initiatives and the competitive landscape.

It is great news that more insurers report better alignment of IT investments with business objectives and strategic initiatives. This alignment is critical to driving new collaborative approaches for addressing both challenges and opportunities. The industry is serious about investing in the modernization of systems and architectures. That investment is laying a foundation for the optimization of business processes and operations in every aspect of the environment. The result is transformation that delivers real value and the ability to drive innovation for the future.

This is a pivotal time for the industry, and technology is an essential enabler for the capabilities that will deliver needed growth and efficiencies in the coming years.

During the planning process, it is important to look beyond how the budget compares with that of peers, and to assess what funding is required to support the business capabilities that are needed to compete. Understand what the gap is. It may be necessary to exceed the traditional percentage of DWP allocation that your company has grown comfortable with. Realize that in today’s environment, the reality is that IT spending is high, and many companies are able to find additional funding in business units to help meet company goals and position for competitive advantage.

For more information from our recent report, IT Budget and Spending Realities and Trends in the North American P&C Insurance Industry, please visit our website: https://strategymeetsaction.com/.