How to solve the pricing/expense equation to better deliver profitability to life insurersExcerpts from Moodys’ recent study of how Robo Underwiters are transforming the life insurance sector. Reprinted with permission. Read the full report here.
Rigorous underwriting allows life insurers to price products appropriately, but also adds considerable expense to the bottom line and can make it harder to insure underserved populations. Many US life insurance companies see technology – in the form of automated underwriting software systems – as at least a partial solution to this dilemma.
Growing use of automated underwriting is credit positive for life insurers. Given increased consumer demand for simplified transactions, life insurance companies that successfully adapt automated underwriting systems will have a competitive advantage over their peers and improve brand recognition.
Automated underwriting versus traditional underwriting. Automated underwriting software reduces the manpower, time, and data necessary to underwrite a life insurance application, lowering expenses in the process. Eligible policies can pass straight through underwriting without human intervention, obviating the need for a doctor’s visit for certain simpler types of life insurance policies.
Data collected from the policyholder raises privacy, regulatory and cybersecurity concerns. Despite the efficiencies of automated underwriting, the increasing amounts and types of data available to insurance companies about policyholders raises questions around privacy and fairness in pricing, topics of concern to regulators. New regulations designed to protect consumers and their personal information could slow the underwriting process or increase costs in a way that partially offsets the benefits of automation. Additionally, the collection of vast pools of streaming data creates new targets for cybercriminals, and insurance companies will need to invest further in safeguarding policyholder information as a result.
Credit positive for life insurers
The application of automated underwriting technology will increasingly create a competitive advantage for life insurance companies that have advanced data and analytics. Given increased consumer demand for simplified transactions, more life insurance companies are using automated underwriting and technology-based solutions to reach new customers and cater to existing policyholders’ needs.
According to a survey conducted by Reinsurance Group of America, Inc. (RGA), in 2019, 40% of life and health insurers globally are using predictive analytics and tools in their underwriting processes, up from 14% in RGA’s 2013 Global Underwriting Survey. Being able to successfully integrate such technology will give insurers a competitive advantage over their peers and improve brand recognition.
Underwriters will be able to focus on strategy, portfolio analysis and more complex cases instead of a large volume of standard cases. The technology has positive implications for operations, including better turnaround times and customer experience, and can help firms handle an increased volume of business. Higher product penetration per customer and higher premiums with cross- and up-sell strategies are also a likely benefit to distribution.
Nonetheless, some potential drawbacks to automated underwriting include a high initial implementation cost that increases the company’s expenses. Expanding the use of the systems too quickly can add risk, given that automated underwriting methods have not been fully tested, and the limitations of automation are not yet fully known. Insurers might not get cost benefits as expected if a high number of automated applications subsequently require further analysis by the underwriters. Furthermore, the collection of data involved in automated underwriting is likely to raise privacy concerns and will increase regulatory risk.
Automated underwriting versus traditional underwriting
Life underwriting is the process of selecting the insured, then pricing coverage, determining insurance policy terms and conditions, and monitoring the underwriting decisions made. To a large extent, a life insurer’s success is measured by the effectiveness of its underwriting process. Underwriters traditionally have used and depended on vast amounts of historical data to evaluate and predict risks and losses. However, the standard life insurance underwriting process can be very time-consuming and expensive. Underwriters make decisions following guidelines specified in an underwriter manual, relying extensively on their personal knowledge and experience.
A traditional underwriting process takes about one month on average and it costs several hundred dollars to underwrite each potential applicant, resulting in high underwriting expenses. Automated underwriting eliminates reliance on underwriters, and reduces the manpower and time necessary for underwriting a policy, without compromising the quality.
Data collected from policyholders raises privacy, regulatory, cybersecurity concerns
The fact that automated underwriting makes greater amounts and types of data available to insurance companies about policyholders raises questions around privacy. For example, in the US, health details shared with a doctor or insurer are considered protected health information (PHI) and are governed by federal law. Requirements around PHI include the need to encrypt data, maintain firewalls and have up-to-date security software. In the EU, protection of personal data is a fundamental right, recognized by charter, and transfers of personal data across borders are governed by privacy rules. Similar cross-border protections exist in Asia, in addition to each country’s domestic privacy laws. Stricter laws could also come to the US, as demonstrated by the California Consumer Privacy Act (CCPA), which grants California consumers new rights concerning their privacy and consumer protection. CCPA requires companies to make detailed disclosures about their data collection and sharing practices. It also requires companies to respect consumers’ requests to delete personal information or to disclose how the data is being shared with a third party. This new statutory damages provision could lead to an increase in data breach lawsuits. Even relatively minor cyber incidents may influence consumers to file an action, given the amount of potential damages. Furthermore, if a proposed federal internet privacy law is enacted, then insurers all over the US would need to reconsider the way they use the data obtained from their consumers.
Read the full report here.