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Commercial Insurers Turn Focus to Underwriting Automation

Research from SMA and Novarica indicates maturation in underwriting automation technology and new system investments among insurers.

Underwriting automation tools are becoming an increasingly important priority for commercial and specialty insurers, according to research from Strategy Meets Action (SMA) and Novarica. As a result of matured technologies, businesses are ready to pursue new investment projects that will lessen pricing pressures for all sizes of insurers and give leaders the competitive advantage they seek.

When choosing the functionality requirements for commercial lines underwriting automation, insurers must distinguish between simple and complex risks. Simple risks primarily consist of small or commercial business owners that have limited products, fewer employees and a premium of less than $10,000. Examples include mom-and-pop grocery stores or a fleet of limousines, which is larger but easy to underwrite.

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“The trend in the marketplace for simple commercial lines is to be more automated, with straight-through processing (STP),” says Deb Smallwood, founder at SMA. “The challenge for many insurers is having a legacy system that does not have real-time workflow, rules engines or the ability to integrate with analytics or external data sources.”

According to SMA’s survey results, 47% of respondents claim simple-risk underwriting automation is STP and a third describe it as automated processes that make workflow more efficient. While legacy systems often impede efficiency, modern policy admin systems can easily handle STP. Sixty-eight percent of respondents will invest in a new underwriting system or workstation for simple risks within the next 18 months.

As expected, complex risks are trickier to underwrite and require a wealth of information. “Large complex risks in commercial markets will always require an underwriter to evaluate and analyze some elements of risk before a quote or proposal is produced,” Smallwood explains. “Today, for these types of risks, the ‘evaluation and analysis’ step is usually done outside of the policy administration system with either an underwriting workstation, spreadsheets or set of various tools.”

SMA research holds that over the next 18 months, simple- and complex-risk insurers are increasing their underwriting investments. Over 20% of businesses will increase the underwriting portion of their IT budgets from 0-10% to 11-20%. Research shows that underwriting ranks third on IT project budgets behind policy administration and agent portals.

According to similar research from Novarica, specialty insurers are also narrowing their focus on underwriting capabilities. In addition to ensuring that policy admin systems are flexible enough to handle complex policies, they are improving underwriting and pricing by prioritizing the acquisition and storage of detailed risk data across core systems.

The specialty market is dealing with complex risk, in which the expert underwriter plays a much larger role. Such risk evaluation requires third party data, predictive analytics, and more human attention.

“Complex risks are still much more hand underwriting and will be for the foreseeable future,” says Matt Josefowicz, managing director at Novarica. “It’s all about empowering those underwriters with more communications tools and more data. A lot of the tech investment for underwriting in the specialty and large commercial side involves bringing all the information needed to make decisions to the underwriter’s fingertips as quickly as possible.”

Complex-risk underwriters present a challenge when implementing new technologies, Josefowicz explains. “The individual underwriting desks have a lot of political power,” he says. When dealing with high-value cases, these experts have a great deal of specialized knowledge and tend to call the shots for which technologies they want to use.

“It’s more of a star system of underwriters in commercial and specialty,” he explains. Oftentimes, they are less interested in efficiency and more focused on doing things in a manner that makes them most comfortable.

Insurers should also note that underwriting tech investments may lead to disagreement between the IT and business departments, which have distinct ideas of where to improve data-driven decisions. According to SMA research, the business side views efficiency and productivity as needing the most improvement. IT, in contrast, does not view data for decision-making as priority, especially for complex-risk underwriting.

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Kelly Sheridan is the Staff Editor at Dark Reading, where she focuses on cybersecurity news and analysis. She is a business technology journalist who previously reported for InformationWeek, where she covered Microsoft, and Insurance & Technology, where she covered financial ... View Full Bio

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