KEY TAKEAWAY:
--Usage-based insurance for drivers shows the potential of continuous underwriting. Based on telematics and automated analysis, drivers' risks are continually being evaluated based on their driving behavior and miles driven.
--That capability is now spreading to numerous other types of insurance, providing ways for insurers to keep tabs on their portfolios in real time.
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Much is said about the need to modernize insurance, an industry rife with legacy carriers tethered to outmoded systems. In spite of the apparent opportunities, insurtech has had a hard time displacing large incumbent organizations and their traditional approach to underwriting. The plodding carriers, driven by their risk-averse cultures and bureaucratic inertia, survive without being on the forefront of tech advancements. Meanwhile, some insurtechs are here today and gone tomorrow, due in part to approaches that produce unsustainable loss ratios. A focus on growth over everything else has rarely been a winning strategy.
The other part of the challenge is that insurtech has been slow to effectively harness the data needed to build better rating models. Setting aside regulatory obstacles, new data acquisition strategies were heralded as the path to more accurately and efficiently pricing risk and modernizing the industry. Several prominent insurtechs, with pressure to grow rapidly in a short time, have since back-pedaled on their data-centric prophecies when it became clear they had not achieved the levels of underwriting profitability they had forecasted. The incumbents consistently outperformed the newcomers by remaining diligent in prioritizing underwriting basics and enjoying the luxury of years of proprietary, historical experience data.
So can growth and the pursuit of a healthy loss ratio co-exist?
It may seem the insurtech innovators have waved the white flag in their battle to conquer the traditional insurance mechanism, but we are in fact seeing a new commitment to enhanced technologies being deployed in insurance. Insurtech VC funding exceeded $2.3 billion in the first half of 2023, a robust sum even if significantly down from peaks experienced during the pandemic. While early insurtechs attempted to disrupt an industry that is built on a resilience to disruption, the next wave of insurtechs has conceded that certain fundamentals are non-negotiable if they are to foster a reliable insurance ecosystem promoting financial stability.
In this vein, an insurtech concept that is innovating the industry is continuous underwriting.
Continuous underwriting is the process of leveraging data and technology to apply underwriting strategies throughout the policy life cycle. Those of us who have spent time in the traditional small commercial underwriting space have experienced first-hand how a risk gets bound and then essentially forgotten. How many times have you seen a risk and thought “that carrier doesn’t even know what they’re on!”?
Underwriters have also been taught that the most profitable business is that which is already on the books. While this can be true, a failure to remain sensitive to the portfolio’s evolving risk can lead to detrimental results. Companies have long made this trade for the savings on expenses associated with detailed underwriting processes (but, let’s be honest, the situation usually ends with the book being re-underwritten anyway).
Instead of limiting the use of data to the initial submission, we can now monitor risk throughout the policy life cycle. The tools and systems are available for carriers to continuously underwrite more efficiently than ever, providing opportunities to proactively control the loss ratio while reducing disruptive and costly re-underwriting processes.
One form of continuous underwriting, in which technology promotes safe behaviors, is usage-based insurance (UBI). UBI strategies have been successfully implemented in large sets of homogenous risks, such as telematics devices/apps that measure driving behaviors. Now, a consumer’s auto insurance rates can be reduced based on safe driving and fewer miles driven. Beyond auto, UBI is manifested in areas such as cargo and handyman insurance, where the purchaser can only pay for the amount of coverage they actually need, and only when they need it.
See also: The Next Era of Underwriting
As consumer expectations evolve, more dynamic strategies and tactics will continue to progress into larger, more complex risk evaluation processes. Vertical software solutions (software built for specific industries and use cases) — such as bookkeeping software and point-of-sale (POS) systems — are increasingly critical for small businesses. The software contains vast stores of rich exposure information in real time, allowing the automation of continuing eligibility and pricing decisions by using another UBI concept called pay-as-you-go (PAYG). PAYG allows the accurate tracking of risks after the policy is bound, reduces premium leakage, provides cash flow benefits to the insured and can even help up-sell new cover when additional exposures are identified.
The use of always-current payroll data in workers' compensation started to take off decades ago and has evolved to become a default standard. Other small commercial coverages have evaded the adoption of this common sense approach to underwriting — until now. With the explosion of digital systems centrally managing the business data that underpins many classes of small business, we believe the same benefits can be passed on to small business insurance, such as a business owner’s policy (BOP) or liquor liability, that have exposure bases measured by sales.
Sustainability deserves consideration here. For a concept such as continuous underwriting to achieve commercial scale, carriers must be able to deploy the solution without correspondingly more onerous overhead and manual process. An automated continuous underwriting process will help insurers avoid unanticipated claims by identifying new hazards before the loss occurs — but where does the automation come from?
The simple answer is that automation from thoughtfully developed software has been built specifically to monitor risk factors and data. It doesn’t happen overnight, and legacy carriers will struggle to shoehorn another piece of software into their antiquated IT infrastructure. This industry dilemma requires a clean start approach to practical innovations.
Facilitating the adoption of continuous underwriting is a shift in insurance buying habits and general comfort in digital privacy controls. Younger generations are more amenable to sharing their data in exchange for products and services that fit their lifestyles. The expectation for immediate digital experiences is on the rise, and consumers are showing increased preferences toward mobile apps and AI-based virtual assistants. Further, underwriting investigations are now streamlined through integrations with external data providers that instantly address advanced considerations -- geospatial imagery can show deteriorated roof conditions in hail-prone areas, and AI-powered machine learning models can identify policies most expected to generate losses.
Automation that continuously brings current data into the underwriting process will allow insurers to more efficiently expand their operations. The human bias inherent in the traditional underwriting process will be reduced, generating greater confidence in the result and forging a path to sustainability.
The insurance industry readily admits that it must continue to innovate to remain effective. Insurance consumers have demonstrated willingness to adopt technological advancements, as they already have with UBI and PAYG. Underwriters unwilling to commit to continuous underwriting risk being left behind.
Up next: In Part 2, we explore practical examples for unlocking the potential of continuous underwriting for small business and address the impacts and benefits to key stakeholders.
