Does ‘Automated Underwriting’ Hold the Key to Life Insurance Success?
Looking at an industry well known for the cautious, incremental adoption of digital technology, the global pandemic has opened a strikingly different new chapter. Changes wrought by the ratcheting up of customers’ digital expectations, the way buyers purchase and access products, altered demographics and insurers’ own needs — all have driven an uplift in digital needs and digital solutions.
However, real barriers to a successful digital delivery remain in place and can often hinder the success of an organisation’s digital strategy. Whether its strategic decisions made in the boardroom, choice of vendors and technology, assessing cost and value, through to achieving the right operational model to meet project objectives, digital transformation journeys are still fraught with difficulty for many insurers.
According to a 2020 LIMRA study, the number of US Life customers preferring to purchase insurance face-to-face fell by more than 40%, from above 60%, in just a decade. The majority of those asked cited the lack of automation in underwriting as a specific cause. This trend is reflected across the industry and has become acute since the pandemic, as insurers have accelerated their model shift to digital.
For Life insurers, however, one hurdle has consistently been the lack of automation of the underwriting process. Nevertheless, according to a 2021 study by analysts Gartner, only 27% of insurers questioned used ‘reduction in average underwriting cycle time’ as a key metric. Clearly while digital transformation is a priority, the automation of underwriting is far lower on the agenda. Yet, two drivers for Life insurers to implement digital is to improve customer satisfaction to meet customers’ digital expectations and reduce the time it takes to underwrite business. For this to be a success then, it’s clear underwriting automation is a critical feature in achieving it.
What does underwriting automation entail and how do its main features enable better outcomes for digital, in terms of Life insurance? The main components of autonomous underwriting centre around AI autonomy through Machine Learning (ML), analytics and data, multiple automated functions driven through APIs, business process management (BPM), optical character recognition (OCR) and robotic processes (RPA). Put together, these components automate the risk analysis for clients and decides how much they should pay for their policies. Digitising this once complex manual process has eliminated vast amounts of paperwork and the storage required to house it.
It is hard to gauge which of these elements create the most difficulty for Life insurers. However, evidence from the small number of insurers who analysed the time taken to underwrite business as a process show there is an emerging gap between what customers expect — particularly across the more digitised younger demographic new to Life Insurance products — and what Life businesses are actually able deliver.
Furthermore, market disruption is beginning to disintermediate traditional carriers.
In an industry where legacy players have seen few real challengers up until now, some full-stack insurtechs – take for example Clover in the US – are poised to steal market share, and of course revenue from incumbents.
Those that are licenced to do so can control the price and undercut the market, have no need to share profits nor are they dependent of partners for delivery. Others that do not have a licence to operate can act as Managing General Agents (MGAs) and work with carriers to handle the underwriting. This kind of activity has been spotted also in the property line of business with players such as Lemonade. It’s not hard to imagine how these trends will progress into the Life side of the industry rapidly.
The argument for automation in underwriting grows more compelling by the day. However, it is not just technology and strategic issues that CIOs and their peers come up against when they seek buy-in at the boardroom. Trusting AI-based systems to replace centuries of trust in human decision making is not always an easy sell, and automation also threatens agent’s jobs which makes many organisations nervous and employees unhappy. Evidence from the US shows a 5.2% decline in underwriting roles so this does look like an emerging issue.
Nevertheless, it is important for Life insurers to remember that getting left behind is no longer an option. With insurtech challengers starting to nip at the heels of the market share incumbents have enjoyed for so long, even the most innovative strategies to adopt the full suite of AI and API-driven underwriting technologies, might still not be enough to lead the pack.