Exceptional Underwriting

Exception-based underwriting is a phrase frequently cited but commonly misunderstood. Its main purpose is to provide intelligent process automation of the underwriting function and provide consistency across all points of distribution. done correctly, It can sharply reduce the high costs of insurance transactions. Done incorrectly, it can actually put a company behind the curve. Here’s how to avoid the pitfalls.

EXCEPTION-BASED UNDERWRITING

Many people ask whether underwriting is an art or science. The standard answer is that it is a blend of both. Still, this observation only scratches the surface of how unique the underwriting process is from insurance company to company, and from risk to risk. Clearly, complex risks require the judgment and expertise of skilled underwriters. However, standard accounts in both personal and small commercial lines are also routinely processed and underwritten.

In fact, most traditional, paperbound underwriting manuals have business rules that follow a series of “if-then” requirements. The underwriting of many lines of insurance can often be distilled to the process of applying a set of rules to a given scenario. Here, exception-based underwriting (EBU), process automation and decision support can have the greatest impact.

What is the definition of EBU? It is the ability to define, automate and deploy underwriting rules across the enterprise – from the underwriting department to the sales and service distribution channel. A wide range of technology tools support EBU, including Business Process Management (BPM) platforms, imaging/workflow solutions, underwriting and rating engines that can be integrated at point of sale, business rules and “decisioning” technology, to name a few.

CRITICAL ELEMENTS

Two elements are vital to the success of EBU. First, the functionality of the underwriting process must be pushed to the point of sale, whether that point be represented by the broker, agent, call centre or even customer self-service. If underwriting rules are defined and automated but not moved to the distribution channel, then EBU will fail to reduce costs, plain and simple. Successful EBU deployments at the point of sale change the traditionally linear process of underwriting; they allow a customer-facing sales and service-oriented transaction and information gathering by multiple points of distribution. Increased use by distribution channels and the reduction of labor-intensive, manual touch points helps drive down the costs of the insurance transaction.

The second step that must occur on the underwriting side is the management of workflow and capacity to ensure that skilled people are doing the right tasks with the right decision support tools. This is what we call “operational excellence.” Too often, highly trained underwriters spend valuable time on routine document gathering or sifting through risk submissions not suitable to the carrier. In fact, in surveys of several insurance companies, we discovered that up to half of commercial lines submissions reviewed by underwriters do not even fit the company’s business criteria. The labor cost of handling these “transactions” is one of the big expenses for the property and casualty industry.

However, if technology can automatically review incoming submissions and generate a decision or recommendation, the underwriter can concentrate on exceptions, thus improving the speed of underwriting. EBU is all about process automation and decision support, reducing the need for an underwriter to intervene on routine tasks and therefore ensuring human expertise is dedicated to the evaluation of truly complex risks.

In property and casualty insurance, the most common areas for EBU have been the most commoditized – including personal lines and small commercial business, in which carriers can realistically target 80% or higher pass-through rates. Here, only a small percentage of applications or policies receive human intervention.

To maximize cost reduction in personal and small commercial policies, insurance companies need to define underwriting and process rules in process automation and business rules technologies. They will also need electronic, immediate access to third-party reports necessary for underwriting individual risks (i.e. MVRs). To optimize capacity and streamline workload, underwriting workstations that provide better visibility, management and reporting on underwriting tasks is also becoming more prevalent in personal and small commercial lines accounts.

COMMERCIAL LINES

Commercial lines insurance is emerging as a significant leader in cost reduction because of the application of these technologies and approaches. It is wise to remember, however, that there are important differences between personal lines and small commercial, as well as medium-to-larger commercial, risks. The concept of EBU is differentiated as it applies to more complex business clients. Technology still supports the underwriter in these more complex environments, but there is less reliance on pure EBU and decision automation. Instead, the focus is more on workflow, work management and capacity management. Cost reduction is achieved by automating the process to gather the right information from the right sources, permitting the underwriter to make better decisions. In pure commercial lines, we refer to this process as “collaborative-based underwriting.”

In the commercial mid-to-large market, underwriters are examining risks for which there are typically substantial premiums. Submissions generally require more analysis, information and documentation than standard accounts. This also means the process is labor-intensive, and even more costly than personal lines.

There are ways to reduce costs in a commercial transaction. One is to find a way to screen submissions that underwriters don’t want in the first case. A collaborative model can automate criteria for evaluating a submission, acting as an initial screen to ensure the best use of underwriting resources. Similarly, decision support systems can automate the type of information required for underwriting commercial risks – and when this data is needed in the process. Skill-based routing systems can also help to ensure the right underwriting specialist is looking at the right kinds of risks.

The EBU process is not without its challenges and obstacles. One of the main pitfalls, expressed by several carriers, is the fear of putting the wrong type of business on their books due to improper and incomplete filters. Oversimplifying rules just to allow for automation can be risky, particularly in commercial lines. EBU should present a path for insurance companies to achieve operational excellence.

Insurers can control the filters they put on automated underwriting, establishing what percentage of business they are comfortable passing through. Exception-based automation can be tweaked as business experience evolves. The goal is to reduce costs and increase automated decision-making – without sacrificing underwriting profitability. Several companies are actively pursuing this goal in today’s Canadian insurance marketplace.

Another common hurdle is that the EBU process suffers from poor functionality at the point of sale. Distributors are sales experts, not underwriting experts. The underwriting rules and EBU package must have a sales and service orientation to its user interface, or it will not be used. The process has to use a sales-oriented workflow in its presentation — one that allows a broker or agent to serve the customers, get decisions quickly and come in and out of the transaction.

EBU is not simply process automation, but intelligent process automation. There is little point in automating inefficient processes that have poor workflow. This was, unfortunately, the case with many of the first-generation insurance company Web portals. These portals simply took an old process, often driven by legacy systems, and automated it online. There was no clear definition of underwriting rules and no transition of these rules to the distribution channel. The result was unsatisfactory reduction in costs and few improvements in efficiency

One more big challenge faces EBU: it won’t work if the effort to apply business rules across multiple enterprise systems turns out to be cost-prohibitive. For many insurance companies, daily work flow must regularly cross boundaries of internal applications and departments, as well as extend to external entities such as brokers and third-party data providers. This is truly where the need for a Business Process Management (BPM) platform comes into play – one that can align various enterprise systems onto a common architecture.

In the property and casualty industry, insurance companies have little control over some marketplace realities. Soft or hard cycles often dictate, to some degree, a company’s premium growth, loss ratios and combined ratios. However, expense control is firmly within the grasp of carriers. Technology and process management can create effective EBU models that automate routine risks and put the expertise of the skilled underwriter to proper use. This not only improves efficiency, but drives costs down. No exceptions.