Challenges of Digital Underwriting in Insurance

Written at Oct 5, 2023 12:23:08 PM by FinTech Global

Tradition is something to be honoured, but not at the expense of progress. In recent years insurance carriers have moved away from paper forms, and instead implemented digitalisation throughout their product. But there is more to come. In particular, the digital transformation of underwriting remains a key headache.

For many years the insurance industry has been slow moving, akin to running through treacle comparatively to the more change-receptive, adaptable sectors of the FinTech space.

But in light of the COVID – 19 pandemic, the sector has advanced, and even flourished, embracing technology to improve efficiency, enhance service, and expand the market.

This renewed effort to digitise now feels like it is reaching a crescendo, with a clear emphasis now being put onto underwriting, and attempting to find ways to move the industry towards digital underwriting, as opposed to the more time-consuming, inefficient traditional underwriting set-up.

The challenges of developing a successful underwriting programme

Eileen Potter, VP, Insurance Marketing at Smart Communications, believes that the infamously competitive marketplace in the InsurTech sector, coupled with the current hard market, means that developing a successful underwriting programme is currently a serious challenge for carriers.

These difficulties can even be exasperated when you consider other factors, such as types of risk (simple vs complex), as well as the specific line of insurance (Life vs. Property and Casualty – P&C). These intricacies mean that providing a unique and personable customer experience – at the first line of contact with a prospective user no less – is remarkably challenging. That isn’t even taking into consideration other universal challenges such as data management or regulatory compliance.

When quizzed upon how to develop a successful underwriting programme, Potter said: “Balancing a positive customer experience with effective risk management is essential to profitable underwriting, but insurers often struggle with the process of simply collecting information.

“Many insurers are still using PDFs and web forms that are not intuitive, resulting in missing and/or incomplete applications, slowing the process and driving frustration from underwriters, agents and prospects.

“Forward thinking insurers should be leveraging low-code/no-code platforms that turn the application process into an intelligent interview, personalising the automation and streamlining the entire process.”

Dave Connors, founder and CEO of distriBind, concurred with Potter’s belief that producing a successful underwriting platform is a daunting task for carriers. In fact, Connors claimed that the root of the problem, is that carriers do not have sufficient data-handling capabilities to deal with a digital transformation.

“Access to data and the ability to compile data from different sources for analysis. This is important in capacity decisions and portfolio management, but is an area many insurers struggle. It is generally a very time-consuming process due to the need to cleanse, re-structure and manipulate data before analysis.”

The time to change

However, despite all this apprehension. Now could be the time for insurers to develop a fast, efficient, and modern digital underwriting programme.

A 2021 report by Deloitte Insights suggests that underwriters are likely to begin working with new sources of data and technology as a means of making more strategic decisions. The prospect of utilising technology to automate repetitive and unproductive tasks, such as data compilation, would free up underwriters to handle the tasks that actually make a tangible difference to consumers.

The impact of technology such as digital underwriting cannot be overstated as underwriters serve as the connection between sales and policy writing. Having access to advanced data analytics could give carriers the advantage over their competitors – particularly in the competitive era of insurance underwriting that we currently reside in.

For many carriers, this game-changing technology could act as the silver bullet they need to ward off the threat from competitors, acting as their unique selling point, and differentiating them from their market rivals.

Blake Hill, FSA, FCIA, Vice President North America for dacadoo, concurs with the sentiment that the time is now for transformation if organisations wish to make a positive leap forward in regard to their underwriting capabilities and position in the industry.

“Uncertainty creates opportunity, and some insurers will utilise this to recalibrate their underwriting for advantages in the market.  Larger insurers have been leading this, and now medium-sized insurers will need to adapt or risk anti-selection in the marketplace.”

However, Hill stopped short of saying this competition jeopardises medium-sized insurers. He believes it isn’t necessarily bad for the market. He said, “Competition is a good thing for both consumers and the insurers, as it will allow specialisation to enhance margins for insurers while supporting customers with better fit of products.”

Smart Communications’ Potter admitted that the competition for insurers has certainly arrived, but also agreed that carriers now have to focus on offering additionally services to differentiate themselves. She stated, “InsurTech startups and companies like Amazon are already challenging industry incumbents for market share.

“Digitising the underwriting process has certainly lowered the barrier to entry for new, tech-savvy players, but it has also created opportunities for established insurers to improve efficiency and customer experience so they can hold on to their piece of the pie.

“With respect to profitability, the hard market has taken care of some of that organically, but from a longer-term view, insurers can focus on offering additional services – such as risk mitigation advice or personalised customer experiences – to help differentiate themselves and justify increased premiums, along with streamlining processes through automation and AI to reduce operational costs.”

While some businesses choose to capitalise on chaos and uncertainty, others feel compelled to evolve to stay competitive. As this demand only rises, dynamism has never been a more important skill for carriers to have in their repertoire.

Potter opened up on how insurers are being forced to recalibrate their underwriting strategies amidst the economic uncertainty. She said, “It really depends on the insurer and things like their current combined ratio, risk mix, and appetite for potential profit and loss.  The insurance industry is dynamic, and factors including emerging technologies, shifts in consumer behaviour, and changes in risk profiles – due to climate change, for instance – are constantly forcing them to evolve – or at least to consider how they can manage change.”

Is Generative AI the future?

According to the Generative AI website, despite being a fledgling technology, GenAI is a type of artificial intelligence that can create a wide variety of data, such as images, videos, audio, text, and 3D models. It does this by learning patterns from existing data, then using this knowledge to generate new and unique outputs. GenAI is capable of producing highly realistic and complex content that mimics human creativity, making it a valuable tool for many industries.

GenAI is already shaping the future across various domains, and its influence on our lives is set to grow exponentially, according to the site.

dacadoo’s Blake Hill firmly believes that GenAI can be integrated into underwriting programmes globally, reducing the risk of human error, and producing a more streamlined and refined approach to underwriting.

Hill said: “Where Generative AI can be used without sharing any client private data or proprietary underwriting model details, a generative AI could be used to summarise lengthy documents, compare across different providers/commentators, and extract data into formats, thus reducing the effort of human underwriters.

“Furthermore, Generative AI could be used to write feedback for advisors/customers regarding the analysis and decision of underwriting.”

While the future with widespread Gen AI implementation would see less human errors, it certainly would not cut people out of the process. In fact, underwriters would still play a vital part of the future of digital underwriting. However, AI will prove to be an unimaginable advantage for insurance companies that seize the opportunities to integrate it into their solutions.

Potter explained the role that GenAI could play in the future of underwriting. She said, “Because Generative AI is capable of analysing large datasets rapidly and can extract insights that might not be immediately apparent to human actuaries or underwriters, it can help insurers make more informed decisions on individual risks and can also help them to refine their overall underwriting strategies.

“Additionally, AI can automate parts of the underwriting process, such as data collection and an initial risk assessment, freeing up human underwriters to focus on more complex cases.”

However, some are still wary of the potential pitfalls of GenAI technology. distriBind CEO Connors was one to speak out, admitting that the technology, while innovative, will not solve every problem for insurers.

Connors said, “AI can be used to quickly summarise large sets of data, and highlight anomalies for further attention. This can be a significant time-saver and allow more efficient decision making. There is a danger, however, in over-reliance on this from people who misunderstand what generative AI actually is and how it generates its answers. It should be a tool to support decision making, not the decision maker.”

Global carriers now see the impending digitalisation of underwriting as a necessity, not just an option. With competition and consumer demands at an all-time high, insurers must streamline their processes. Particularly when you consider that insurance in many cases, is such a personal market to the users. Digital underwriting capabilities would offer firms the ability to recalibrate and restructure their organisations, to put the user first.

For carriers aiming to remain relevant in the long run, integrating GenAI as a digital solution into their underwriting platform is certainly a game-changing possibility. But the challenge of not losing the personal touch – that so many consumers find vital – will loom large for carriers. So while change is certainly a headache, and keeping traditional processes is definitely the easier option, long-term prosperity may necessitate insurers taking the leap toward digital underwriting.

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