Insurance Underwriting Business 101: Steps Involved, Key Challenges, and Future
Insurance providers and banking institutions use a process known as underwriting to assess the possible risks associated with a business or individual while evaluating an application for insurance or loan.
Whether you are an insurance agent, business owner, policy holder, or someone who is keen about understanding the world of insurance and underwriting business, this blog is for you.
Read till the end to learn:
- What is Underwriting?
- Steps Involved in Insurance Underwriting
- Difference Between Underwriters and Insurance Agents
- Challenges with Underwriting Business
- Role of Technology in the Future of Underwriting
The word ‘underwriting’ originated with the financial backers of the venerable Lloyd’s of London insurance agency who signed their names on a slip of paper under the description of the risk they decided to take, in exchange for underwriting, they were rewarded with a premium.
Ever wondered how the cost of your insurance premiums are evaluated?
Insurance at its core is the act of taking over monetary responsibility for an individual (or entity) against the risks involved in the coverage in exchange for a fee (premiums). Therefore, it is essential for an insurer to have a complete understanding of the risks involved when evaluating an insurance application.
At the heart of any insurance company is a team of underwriters who carefully evaluate the risks associated with each application, before deciding whether to offer coverage as well as what premiums to charge.
Underwriting is the process of meticulously evaluating the probability, scope and value of claims based on information gathered from multiple sources and deciding the premiums, for accepted applications.
While underwriting is an integral part of providing insurance, it is not exclusive to the insurance industry. Underwriting also enables banking institutions to evaluate risks associated with loan applicants. Whereas investment banks use underwriting to assess risks while buying securities issued by a company attempting an IPO, to ensure their investment will give a higher return.
The underwriting process varies as per the type of insurance, however, below are the key steps involved in insurance underwriting:
Factors Considered for Underwriting Business Risk Assessment
The factors considered by an insurance company while evaluating an application differ depending on the type of insurance policy being offered.
For example: For an automobile insurance, the applicant’s driving record is the most factor to be considered.
Here are some common factors that underwriters take into consideration while assessing the risks associated with an insurance policy:
The applicant’s financial history helps underwriters in assessing their capabilities for paying monthly premiums as well as evaluating their probability of making future claims.
Financial record includes credit score, past loan defaults, occupational history, monthly income etc.
Underwriters look at an applicant’s medical history to determine the probability of health-related claims.
Medical factors considered by underwriters include family medical history, current & past medical conditions, allergies, and hereditary diseases etc.
Lifestyle & Hobbies
A person’s lifestyle and hobbies are an important consideration in term and general health insurance policies as it helps underwriters to assess probability of future claims.
Lifestyle factors may include, use of prescription or recreational drugs, alcohol & tobacco use, frequency of foreign travel, or any risky hobbies such as skydiving, surfing etc.
It is easy to get confused between underwriters and insurance agents, as they both work for an insurance provider.
However, the key responsibilities undertaken by individuals at these roles differ vastly.
Responsible for evaluating insurance applications based on the available information and assessing the risks associated as well as determining the premiums for the respective policies. An underwriter is the individual who takes fiscal responsibility against the risks in the event of a claim..
Responsible for selling the insurance products and services to the customers, as well as answering customer queries, offering guidance, and negotiating on behalf for the insurance company to find the best coverage and premiums.
Insurance companies today, have standard products with standard risk profiles, and automated underwriting. However, for complex cases, underwriters are still needed for accurate risk assessment.
With the onset of a customer first digital approach, insurers are rapidly adopting new age technologies to cope with challenges related to their core legacy underwriting business solutions.
Some common challenges faced by insurers today with underwriting are:
Managing Customer Expectations
Smartphones have become the most convenient way of managing most if not all the key aspects of our lives. From shopping to paying bills, to buying insurance.
With rapidly increasing consumer expectations insurers find it difficult to offer comfort, convenience and speed when selling their products using legacy underwriting business solutions.
Fraud Detection is Getting More Complex
The thing about technology is that it is available to everyone, scammers included. According to a report by the FBI, insurers have to face losses over $40 Billion every year due to non-health insurance related fraud.
For an average family in the U.S this means they must pay increased premiums ranging between $400 to $700 each year.
Identifying Cross-Selling Opportunities
Insurers that are still using legacy underwriting business solutions, have a tough time finding opportunities to cross-sell or up-sell their products to customers.
This is primarily due to a lack infrastructure to store and process large volumes of incoming consumer data.
Slow Risk Assessment Process
Risk assessment is a crucial component of insurance underwriting business. With a wide range of factors to evaluate, it takes increased amount of time for underwriters to do their due diligence.
Plus, with increased insurance fraud rates, insurers must scrutinize that much more when assessing the risks related to an applicant.
Inefficiencies with Manual Underwriting
Underwriting can be quite an intensive process as underwriters must extract valuable information from a wide range of unstructured data sources.
Moreover, such vast volumes of data processed manually, human-error is bound to creep in, which may lead to inaccurate underwriting.
High Turn Around Time for Launching New Products
In the ever-evolving insurance ecosystem, insurers need to keep bringing new products to market that fit the changing needs of the consumers.
But with, outdated technical infrastructure and manual underwriting process, insurers struggle to sell more due to higher turnaround time to launch new products and services.
Much like the rest of the world, the insurance industry is also undergoing a technological revolution.
According to McKinsey, “as AI becomes more deeply integrated in the industry, carriers must position themselves to respond to the changing business landscape”
With artificial intelligence and machine learning paving the way for improved efficiency for the underwriting business, insurers must figure out a way to integrate new business underwriting digitalization solutions with legacy systems.
ML can help insurers to reduce overall time taken to assess risks associated with insurance applications by analysing large sets of unstructured data within minutes. Moreover, by analysing data coming in from historic claims, credit scores and social media, insurers can significantly reduce fraud related loses through AI powered pattern recognition.
“The ability of machine learning to assist in spotting suspected fraud is well established, but human-led data science is just as capable so far,”
-Areiel Wolanow, Managing Director, Finserv Experts
Though AI implementation is a priority to boost operational efficiency, it is also important to remember that the insurance industry has just begun its venture into technology driven underwriting.
Insurance companies should look for partners that can offer technological solutions focused on specific use cases and needs of their business, while digitalizing their new business underwriting and sales distribution solutions.