Underwriting 4.0

They say permanence in life is flux itself. It is more true now in 2022, in a world coming out of the throes of a Global pandemic, into a War situation and possibly at the face of a Economic recession. There is a rather fast and furious change in how we consume financial services – thanks to some of these headwinds. For decades, Insurance customers wants and needs almost never changed – all we buy when we get Insurance is ‘peace of mind’.

Changing consumer wants and needs

The purpose of Insurance continues to remain offering Wellbeing and ‘peace of mind’, however what this peace of mind means has started to mean different things for different people. Post pandemic world has dictated most of these rules today – for instance, usage-based Auto insurance makes better sense as many are working from home and are commuting very less. People seek holistic Protection-blending propositions that cover accidents at home, including protection against Cyberattacks. Demand for Pet insurance has grown up sharply. Business interruption protection, newer variants in Life, Health and Protection insurance against future pandemics are the wants of today.

This fundamental shift in the nature of propositions that Consumers want, is only additional to the drive to Digital and omni-channel / multi-channel engagements. From rules being almost same / largely unchanged since decades to a sharp variants needed in proposition & products, Insurance as an industry needs to moult itself to stay relevant.

Underpinning foundation for all of this is the way Insurers have been Underwriting and how that has to adapt to new Consumer wants and adopt newer technologies.

Evolution of Underwriting

Underwriting, simply put – is the way by which Insurers assess the Risk for the likelihood of a claim.

In early 1900s, Underwriting was largely driven by single Risk class – premiums varying by age only. In 1930-40s, gender distinction was brought into premium calculations and in 1960-70s smoking / non-smoking distinction was brought out, which was considered innovative at the time. With the advent of lifestyle illnesses, in 1980s blood test was introduced in premium considerations. While Life, Health and Protection underwriting made these advances, Auto and Home insurance was largely same Risk assessment based.

With the risk class categorisation in 1990s, based on groupings of consumers who embraced healthier lifestyle the number of risk classes increased and Term products became very affordable – making Insurance highly competitive marketplace. During this period, the first expert underwriting systems (mainframe based) appeared and on-line underwriting manuals were introduced. Technology also had a significant impact on consumers, who demanded faster service and accessible products as it became more knowledgeable. In the 2000’s, there has been a liberalization of the preferred criteria and routine age and amount requirements, and an increase in the use of information obtained electronically from vendors databases and creation of automated Rules.

The volume, complexity and variety of data available today is challenging Insurers to find new ways to grow and innovate. Life insurers are starting to use predictive analytics to transform their data into useful insights for better decision making and to gain a competitive advantage. Home insurers are using Climate modelling to assess and try to predict areas of higher risk.

Enabling hyperpersonalisation, leveraging Data to build insights, becoming Agile-first to morph into Underwriting 4.0 is the need of the hour.

Future of Underwriting

Data is the fuel for an Insurer today. Leveraging a combination of rich data, building insights using newer technology and human capital is the future of Underwriting. 

There are 3 factors which are needing to be changed: understanding the evolution of Risk, dynamically building Rules, building Platforms that are agile to change. 

1. Evolution of Risk: No one can predict the future exactly – not even the weather nowadays! Assessing risks against uncertainty has become very key today. Recently we encountered the shortest day – with Earth’s rotation shortened by seconds. There is threat of Climate change becoming a reality with droughts, heatwaves this year. Newer illnesses, pandemic are needed to be viewed against the backdrop of people living longer and more healthier even. Existing Risk models and rules are no longer applicable and Enterprise Risk Management needs to be strengthened with Data, Analytics and made more dynamic to feed into Rules engine. 

2. Dynamically building Rules: Rules in underwriting have been based largely on Risk in a snapshot of time. However we now know that Risks constantly change. Although underwriting Rules were mostly Automated into Rules Engines in 2000s, these Rule engines now are on legacy technology. The Rules themselves need to be dynamically changed based on dynamic Risks. There is immense scope in using predictive analytics, AI/ML based models to dynamically tweak the Rules. 

3. Agile Platforms: Underwriting platforms have largely been untouched and legacy based since 2000s. Although a lot of investments in Digitisation has happened / is happening, there is a strong need for this modernisation to happen in Underwriting platforms as well. Every assessment pegs 60-70% of Insurers say that legacy is wearing them down to create differentiated propositions to their Consumers. A lot of leverage of existing technology improvement is needed in Underwriting to bring it to the Digital world.

 Todays Bank manager is an algorithm, can an Underwriter become one too?