May 07, 2013

The insurance industry has certainly experienced its share of technological disruption. One of the most significant – and perhaps underappreciated – changes has been the rise of dedicated underwriting systems. Alternately called the underwriting “desktop” or “work station,” underwriting-centric software has enabled carriers to reduce leakage, improve risk selection and pricing, lower processing costs, provide integrated account management and enhance the overall quality of their books.

Gail E. McGiffin, Ernst & Young
Gail E. McGiffin, Ernst & Young

During the mid-1990s, commercial insurers recognized that policy administration systems were unable to support increasingly sophisticated underwriting processes. Because no dedicated underwriting technology existed at the time, insurers were forced to develop their own systems. Many of these early applications simply aggregated information from disparate client and policy systems to provide underwriters with a cohesive view of their accounts and enable tracking of milestone processes. By the early 2000s, a few software companies saw an opportunity to develop packaged underwriting solutions. While a big step forward, these packaged offerings still required extensive customization to meet the unique processes and environments of individual carriers.

Fast forward to 2013. Underwriting desktops have certainly matured during their brief history. However, many in the industry still want to know specifically what underwriting desktops do that policy administration systems don’t.

The answer speaks directly to the fundamental differences in how these systems are used. Commercial underwriters need to go beyond policy-specific views to gain broader, account-level insights. Dynamic workflow capabilities are also necessary in underwriting, given the highly iterative nature of assessment and decision-making processes. Because underwriters ask more questions in assessing risk and need access to more data (hundreds of attributes including diverse external data sets) than that required for rating and issuance, they need systems that enable considerable depth of analysis, not to mention seamless hand-offs within their teams and integration with other business unit product offerings for cross-selling opportunities.

Further, underwriting systems use complex, rules-based methodologies such as profiling techniques and predictive models to best align risk selection with appetite and pricing with exposures, optimize contractual terms and conditions and tailor risk management programs. Compare that to policy administration systems, which typically capture policy-centric data required for calculation of manual premiums, application of modification factors, premium booking, policy issuance and statutory reporting. Their simple Q&A interfaces are designed to complete relatively simple tasks, rather than enable a complex analytical process. Commercial carriers considering an investment in underwriting systems will likely build their business cases around a few essential elements:

Reduced loss ratios through better risk selection, more accurate pricing and enhanced risk mitigation through improved terms and loss prevention the institutional expertise of the best underwriters is codified in the underwriting solution to promote continual learning and consistent decision-making.

Increased productivity and efficiency through automation of low-value manual tasks – this enables underwriters to focus on producer relationships, market growth, key account retention and higher-value analytical activities.

More targeted growth through consistently applied appetite rules, optimal pricing and terms for high quality business and faster turnaround on new business proposals.

Importantly, underwriting systems provide real-time insights into results. Underwriting and operations management teams benefit from more granular and timely data to analyze the leading indicators of their book performance such as hit and retention ratios, flow and mix of submission activity against plan and deviations from underwriting and pricing rules. Furthermore, these underwriting systems support more reliable compliance with regulatory requirements and enable rapid adjustments to processing due to external factors such as emerging risks or internal factors such as organizational change.

While underwriting desktops and workstations now have a definitive role in the insurance IT landscape (and, indeed, are recognized by leading insurance analysts), it’s important to note that underwriting solutions will always require a degree of customization. Whether starting with a vendor package, a vendor framework or an internal suite of systems, an underwriting solution should integrate with and leverage existing tools and data repositories as well as new sources of data enrichment. They must align with the variable processing needs of diverse risk complexity, which will include different automation and delegation approaches. And, they must complement the surrounding application landscape, including agent portals, sales and producer management systems and policy administration systems.

Today’s underwriting leaders are recognizing that the next generation of underwriting talent will grow and thrive not by the oral history passed along from the prior generation, but by the ability to provide an environment fueled by superior rules, insight-driven analytics, real-time collaboration and faster execution. Simply stated, the underwriting system will become table stakes for the industry.

About the Author: Gail McGiffin is a principal within Ernst & Young's insurance practice.