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Unlocking the Performance Levers of Commercial Underwriting
Unlocking the Performance Leversof Commercial UnderwritingEquipping underwriters with the right tools can transform this criticalfunction and result in significant savings in cost, time and effort.Executive SummaryAs insurers face tremendous pressure to improvetheir financial performance amid rough globaleconomic weather, efficient risk selection andaccurate pricing have become even more critical.However, most commercial insurers go aboutthese processes in a haphazard, labor-intensiveand nonstandardized manner. Underwriters spendan unjustifiable amount of time dealing withunclear workflows, lack of relevant information,multiple systems that require rekeying of massiveamounts of data and, most important, the lack ofpowerful tools that they need to take meaningfuldecisions. Experienced underwriters spend theirvaluable time compensating for the process andsystem deficiencies instead of analyzing risks.This white paper analyzes the strategic objectivesof commercial lines carriers that might warrant achange in the way underwriters have worked fordecades.Underwriters’ Need forTechnology SupportTo understand the dilemma that an underwrit-er faces every day, let us consider how Dave, aseasoned underwriter, allocates his time each day.With about a dozen submissions to underwriteevery day, Dave has to reference guidelines, pulldata from multiple sources, communicate withmultiple departments to seek data points, enterdata into various tools and seek and analyzethe output, exchange data with brokers throughphone/email and execute intermittent requestsfrom brokers, internal customers, etc.He has to finish these tasks while retaining focuson his core task, which is to strike a balancebetween the quality of risks undertaken andgetting new business.Today, he had almost finished preparing a quotefor an important client, Zeon Broking, after twodays of hard work, when Zeon’s broker called himwith some changes in the commercial auto lineapplication. The broker wanted the revised quoteon the same day. Noncompliance with the requestwould mean risking losing the client’s business.The change appeared to have caused the riskto increase but calculating the magnitude of theincrease would take time.In roughly four out of every five submissions,Dave faces this challenge — to strike a balancebetween quality and speed. A compromise inquality could lead to winning the business butrisking a potentially large claim that would resultin deterioration in the loss ratios. On the otherhand, focusing too much on quality could resultin losing business.• Cognizant 20-20 Insightscognizant 20-20 insights | april 2013
2In commercial lines businesses, automation canby no means replace the underwriters’ acumenand no amount of rules can substitute for theexperience of a seasoned underwriter. Technologyshould rather be aimed at offering strong supportto underwriters. That said, there is significantpotential for technology to assist the underwriterin her job. This is not only because underwriting incommercial lines (with the exception of casualtyand small commercial business) has largely beenuntouched by the technological advancementsthat policy admin or claims have witnessed inthe past decade, but also because the role of anunderwriter is undergoing a sea change.While many insurers have invested in toolsranging from workflow solutions to drive the newbusiness process to telematics to improve losscontrol, what is lacking is an integrated approachto improving underwriting operations. Thecarriers that adopt this strategy early will overtime build the most profitable books of business.Small Improvements CanYield Large GainsIn recent years, returns on investments havebeen declining and large-scale global losses dueto natural disasters have made carriers increas-ingly dependent on underwriting for revenues.Even though the commercial insurance industryis seeing an upward trend in premium volumes,the market continues to be uncertain and theglobal economic conditions unpromising, makingunderwriting excellence a top priority for carriers.Since many insurance products have been com-moditized over the years, leaving few opportuni-ties for carriers to differentiate their products,improvements in risk selection and pricing canresult in large increases in revenue and prof-itability. Figure 1 highlights the impact betterunderwriting would have on various parts of aninsurer’s financials. Even a marginal improvementin the selection of risks can have a tremendousimpact on loss expenses. The quality of under-writing here refers not only to the right risk butalso the right price for the right risk. While betterrisk selection is a powerful lever, the benefitsof efficient underwriting should not be under-estimated. And although better discipline andefficiencies will result in reduced underwritingexpenses, improved selection of risks to assesswould lead to improvement in the net underwrit-ing income.For example, let us consider an insurer with$4 billion in written premium, and $3 billion inincurred losses. If better and consistent selectionof risks results in even a 1 percentage pointimprovement in the loss ratio, it could lead tosavings in the range of $40 million. Similarly,through better selection of risks to assess, if theinsurer is able to improve the written premium by2% it would result in a benefit of $80 million. Thisillustrates the impact underwriting processeshave over the insurer’s financials compared toareas such as claims where technology can striveto achieve only cost saving and not compellingtop-line benefits.Figure 1Potential for Increasing Underwriting Efficiency and Effectiveness100 %65%11%22%2%Premiums Losses IncurredQuality (Effectiveness)Speed (Efficiency)UnderwritingExpensesIncurredLoss ExpensesIncurred (Allocatedand Unallocated)Net UnderwritingIncomecognizant 20-20 insights
Underwriters Are Being CalledUpon to Do MoreUnderwriting has traditionally been a mixture ofart (as underwriters often argue) and science (astechnologists often believe). However, in recentyears a new dimension has been added to theunderwriter’s role.Underwriters now have to play the larger role of arisk consultant. The changing paradigm requiresthat underwriters spend less time handling sub-missions, which currently take up a major chunkof their day, and invest that time in developingrelationships with agents, acting as an advisorto clients and participating in organizationalactivities such as product development andportfolio analysis.This agenda has to be tackled in a comprehensivefashion because the levers that can free up theunderwriter’s time are hidden in several places.As Figure 2 indicates, underwriters are involvedin several activities that do not require theirexpensive time. These tasks can be de-skilled intochunks that can be packaged and completed bythe underwriter assistant or by a remote coun-terpart or a remote support group. Such a groupcan even share the support tasks for a group ofunderwriters, thereby achieving reduced laborcosts, better economies of scale and more con-sistency in the way these tasks are executed.Some smaller insurers have implemented thisapproach successfully, leaving their underwriterswith more time to deepen their relationships withtheir brokers. These relationships, in turn, fosterpremium growth and strengthen the insurers’position in price negotiations.The role of the underwriting support group — theunderwriting assistants, raters and operationsassistants — is also undergoing a change. Many oftheir activities will soon be consolidated and cen-tralized for economies of scale with niche groupstaking on work that requires specialized services.In some cases, this consolidation could be followedby de-skilling and outsourcing of the supportservices that do not require physical proximity tothe client and the underwriter. In the past, de-skill-ing and centralization of support activities weremotivated primarily by cost saving via operationsefficiency. However, even insurers that do not haveunderwriting expense reduction on their agendamight consider this option to ensure consistentapplication of business rules across the board.3cognizant 20-20 insightsFigure 2Underwriters’ Changing ResponsibilitiesRisk selection, manual rating and pricingSubmission handling, data cleanupand research of insuredNegotiation and dealing with agency issuesPost binding servicesProduct developmentAgency relationship/marketingPortfolio/territory analysisRisk consulting35%25%25%15%10%10%15%5%10%25%15%10%Figure 3Shifting Roles at InsurersUnderwritersUnderwriters to take upadditional roles such asmarketing representative,risk consultant, portfoliomanager and productdevelopment.UnderwriterAssistantsWith the advancement oftechnology and outsourcing/offshoring, the work doneby UAs will be automatedor outsourced and somewill be retained for careerdevelopment.PolicyServicersWith the advancement oftechnology and outsourcing/offshoring, the work done bypolicy servicers (includingraters) will be automated oroutsourced.
cognizant 20-20 insights 4Quality of Underwriting Can BeImproved While Decreasing Costof OperationsIn a typical middle-market business unit, only asmall percentage (roughly 8%) of the submis-sions make it to the issuance stage. Our analysisindicates that about 90% of the underwriter’seffort/time does not translate into business forthe company. On average, an underwriter spendseight days on a risk submission for insurancecoverage, and of the submissions he works on70% are declined before the quote is generatedand presented to the agent. When it comes to aspecific submission, the underwriter spends alot of time waiting for his support staff to do theprep work, or for the agent/broker to provide theinformation he needs. Also, a significant amountof time and effort is expended in entering the datain the multitude of systems that the underwritersuse as well as in handling the human errors madein the data entry process.Clearly, much time is wasted in the current stateof operations, and there is significant potential toincrease the quality of the decisions made. It isevident that at each stage of the process, system-assisted improvements can improve efficiencyand effectiveness.There are several areas in the underwrit-ing process where the levers of leanness, andautomation can be applied to achieve significantefficiency. This gain can, in turn, be invested toimprove the quality of the underwriting as well asincrease the number of submissions processed.Figure 5 (on the following page) illustrates thatthrough automation and lean processes, thesubmission to quote ratio can be improved by upto 10 percentage points and the quote to issuanceratio can be improved by up to 6 percentage points.By reducing the reentering of data in multiplesystems, and with improved task managementand submission routing to the underwriters, theturnaround time can also be reduced from eightdays to as low as 4.6 days. De-skilling of tasks cansignificantly reduce the average effort in terms offull-time employees (FTEs).Role of Technology: Automation andDecision Support Are Key LeversThe insurance market follows a sinusoidal cycle,with the industry facing losses and profit alterna-tively. This market dynamic makes the job of anunderwriter more difficult because he needs tofollow the pulse of the market very closely andmaximize profits during a boom and minimizelosses (if not make a profit) during down cycles.To be able to do this, the underwriter must beequipped with a system that not only provides theright data at the right time but also the right toolsto use the data to take the right decisions. Whileprocess rationalization through automation isthe only sustainable way to achieve the former, arobust decision support system developed usingvarious analytical models enables the latter.Flexibility in the system and processes will enablean organization to distribute the tasks effectively,attain the desired financial objectives and monitorthe underwriting activities closely and accurately.The initiatives listed under the automation anddecision support levers in Figure 6 (on page 6)are not independent of each other, and they willdeliver the best results for the organization whenbuilt on an integrated platform.Figures based on Cognizant research.Figure 4Time and Effort Allocations in the Insurance ProcessDataEntrySubmission Intake Bind and IssuePricing Quote IssueInitial Rating100 88 5827 8Proposal CreationPre- and post-underwriting processesCore underwriting processesVariesSubmission Intake Create Proposal2 X hours73.3Average Number ofSubmissions that PassEach of the StagesAverage Lapsed TimeAverage Effort in FTEPreliminaryEvaluationRiskEvaluationDuplicateSubmission2.5 days 4 days 1.5 days
cognizant 20-20 insights 5For instance, consider “rule-based selection onsubmissions to quote.” By building this capability,we achieve positive impact on many levelsand different kinds of benefits. This capabilityimproves efficiency by letting underwriterswork on submissions that have a higher prob-ability of being qualified and quoted. It improvesthe scalability of the underwriting organizationby auto-declining the poorest of those submis-sions, thereby freeing up underwriters’ time andenabling them to work on a larger set of submis-sions. It also becomes a decision support tool byautomatically filtering bad risks.Technology also needs to be intelligent enoughto overcome any catastrophic event and triggerstop loss across the system. For instance, if aparticular zone is set to face a tornado or isalready weathering it, then the system wouldautomatically refuse to underwrite submissionsfrom that region.Undertaking one small initiative at a time hasbeen the norm in the underwriting technologylandscape so far. However, except for a fewcarriers, such an approach leads to benefitleakage. For instance, analytics has beentrumpeted as the single most important factor forimproving underwriting effectiveness. While thisis true in theory, when it comes to executing theidea IT departments always stumble over havingto integrate the large volume of historic data intoa single source of truth and develop a mechanismto collect and record data in a systematic way.While the former can be achieved with somedifficulty, the latter is not possible without anintegrated platform with a rationalized process.ConclusionCommercial underwriting is unlike otherprocesses in the insurance industry in that it hasan extremely complex and non-standard process,requires different types of skills, uses mostlyunstructured data and is highly dependent onhuman judgment. Perhaps due to these veryreasons and the strong belief until recently thatthis is a process that is not conducive to techno-logical intervention, commercial underwriting haslagged behind in technology-based process mod-ernization.• Compared to other core insurance processes,small improvements in underwriting can leadto tremendous benefits both on the top line andbottom line of the insurer. But to transform theoperation, carriers should be clear about whattheir strategy is and the business objectivesthat can be derived from the strategy.• The work profile of underwriters is changingas market volatility has become the newnormal and is something that they have todeal with on a daily basis. This change willcause underwriters to spend less time ontheir traditional submission managementtasks and more time on relationshipmanagement and fulfilling the role of a riskconsultant to their key clients. Systems needto quickly catch up to enable underwriters toshift gears.• The quality of underwriting can be improvedwhile reducing the cost of operations. Thatis, contrary to conventional wisdom it is notnecessary to tackle these two imperativesFigure 5Improvements Derived from Automation and Lean ProcessesIssue ratio improved by up to6 percentage pointsthrough better selection ofsubmissions to quote.Turnaround time reducedfrom 8 days to 4.6 daysthrough various automationinitiatives.Total effort reduced by42.3% through automation,de-skilling and availability ofdecision support tools.Submission Intake Bind and IssueQuote Issue100 88 5837 14Pre- and post-underwriting processesCore underwriting processesVariesRate and Price Create Proposal0.8 X hours4.22.1Average Number ofSubmissions that PassEach of the StagesAverage Lapsed TimeAverage Effort in FTESubmission1.6 days 2.4 days 6.0 daysNumber of quotes increasedby up to 10% throughautomation.
cognizant 20-20 insights 6separately. In fact, the benefits will be greatestwhen they are approached in an integratedmanner.• The primary levers of performance incommercial underwriting are automation anddecision support. Technology can play a signifi-cant role in tapping these levers.In recent years, many insurers have venturedinto this area but without much to show for theirefforts. Dealing with such a complicated settingin a tactical way means that at every tactical stepcritical details are overlooked. These may notaffect the particular phase or process in questionbut may have negative effects on several otherparts of the process. Every misstep in underwrit-ing modernization has a particularly negativeripple effect, considering the profile of theprimary users and their traditional resistance toautomation.The answer lies in undertaking a deep analysisof the current problems and assessment of thespecific drivers for modernization, which may varyby insurer and strategic thinking about execution.Adopting this mindset while embarking on themodernization will reap measurable top-lineand bottom-line benefits for the insurer. It willalso position them to quickly adapt to industrydynamics, be it a soft or a hard market, and todeal with the entry of new technologies or evena corporate imperative to broaden the range ofproducts or markets.Figure 6Automation and Decision Support Initiatives Cause Multipronged Impact.InitiativeImpactEfficiency ResponsivenessDecisionSupportScalabilityAutomationAutomation of workflow. Skill-based routing, work assignment and forecasting. Automatic document generation from repository oftemplates.Automatic archival and retrieval of records, and triggeredcorrespondence of documents.Rule-based selection on submissions to quote. Centralized availability of latest account information throughintegration of data and documents. Ability to support multiline core processing status reporting. Multiline, real-time rating. Documentation of UW thought process. Automation of binding, policy issuance, and service setup. Context-sensitive help/underwriting guidelines. Decision Support (Analytics)Systematic evaluation of risk appetite. Automatic selection of policies to pursue for renewal. Models to improve accuracy of pricing decisions. Models to improve the selection of submissions to quote. Product design through analysis of customersegments and needs.