Will automated underwriting systems finally replace the underwriter for term life insurance products? Could these systems be the catalyst that finally allows life insurers to penetrate the ever elusive middle market? As Celent sees it, both answers are "maybe."
Today's new business and underwriting systems offer broad functionality for the producer and the underwriter. Reflexive electronic applications, instantaneous third party, and risk related configurable underwriting rules all can help the producer to reduce Not-In-Good Order" applications and to potentially instant issue a larger number of policies.
A new generation of new business and underwriting systems allows the producer to walk through a set of application questions with the applicant that are intended to give insight into how much medical underwriting might be needed on a case. New business systems allow risk related rules to be defined for an application. The rules may generate reflexive questioning, the additional questions that are triggered as a result of an answer. As each question is answered, rules determine which underwriting requirements are necessary. Further, immediate access to pharmacy and other third party databases enriches an insurer's knowledge of an applicant's risk before the ink is even dry on an application. As a result, for many term products up to a certain face value, the insurer may rely solely on non-medical underwriting using the third party data. Because the system evaluates the risk associated, the application can potentially never be seen by an underwriter. According to Celent's research, this only happens less than 25 percent of the time today, but the capability is there to expand the use of these systems to meet the needs of the middle market and at the same time lower the cost of issuing lower face value policies.
The middle market in the United States is shifting, or as some economists suggest, "sagging." As a result of the recession, there is a larger percentage of the population on the lower end of the income spectrum than ever before. This has important implications for life insurers in that a larger percentage of the market may look to buy lower face value policies. These applicants struggle to afford high premiums and often are not in a position to wait three weeks or longer for an underwriting decision. They want to know they are approved much sooner. As companies look for ways to streamline the process to meet the demands of applicants, today's new business and underwriting systems have straight through processing (STP) functionality and offer a wide range of potential advantages in reducing the cost and time associated with insurance sales and underwriting for all policy types.
Further, the newest generation of new business and underwriting system could give an insurance company deeper insight not only into its applicants and customer base, but also into the rule sets that support its underwriting decisions. Using the data from a new business and underwriting system could eliminate many of the concerns that prevented insurers from trusting underwriting rules engines in the past. No one denies that insurance executives understand the importance of reviewing their underwriting data and rule sets regularly to improve the profitability, speed and efficiency of their underwriting decisions. But, today's new business and underwriting systems can provide access to data that might reduce underwriting costs and help push the level of reliance on the underwriting engine to above 25 percent. For example, underwriters can analyze disclosures that caused a request for medical evidence and immediately know which rules are triggering the request. By analyzing the case outcomes related to the rule and the requests, the underwriter might be able to adjust the rule to avoid some costly evidence requests.
Celent estimates that a 10 percent improvement in instant issue could result in large operational savings that over time allows the new business and underwriting system to pay for itself. Although overly simplistic, using data from Celent's discussions with life insurers that actively use a new business and underwriting system, a 10 percent increase in simplified issue policies (assumes the switch of approximately 525 policies from medical underwriting to instant issue with savings of $.40/$1000 per new business face amount) could result in a potential break even in about four to five years for some vendor system s available today.
According to a Society of Actuaries 2010 study, automated underwriting has been successful for some life insurers who used automated underwriting for simplified issue and non-medical underwriting, and to a slightly lesser degree, for flagging pieces of information in the underwriting process for review by an underwriter. Once a life insurer can get past the cultural issues related to using automated underwriting systems, and as long as it does not try to replicate all medical underwriting with an automated system, true benefits will be seen. But as stated in the beginning, underwriters will still be needed for term products, just to a lesser degree, and the growing middle market has the potential to be penetrated further than ever before.
For further reading on the new business and automated underwriting systems available in the North American market today, read Celent's North American Life Insurance New Business and Underwriting Systems, 2010: Life, Health, and Annuities ABCD Vendor View.
About the Author: Karen Monks, an analyst with Boston-based Celent, an has a wide spectrum of consulting expertise including operations in life, annuity, and long-term care insurance, business process redesign, strategic planning, business case development, communication and training, new product and market assessment, competitive analysis, benchmarking, and process measurement/customer satisfaction. She can be reached at [email protected]