Can Insurtech help maintain underwriting discipline in a hardening market?
Back in the eighties when I first entered the Lloyd’s insurance market underwriting discipline simply meant doing exactly what the underwriter told you to do and not deviating from the rate sheet tucked conveniently at the top of the ‘box’ drawer. The focus back then was primarily on writing for premium, hitting capacity limits and meeting the business plan income targets, arguably with less thoroughness in assessing the true quality of what was coming across the desk. That was thirty years ago and the market was a very different place back then. In the soft market we’ve been operating in in recent years the pressure has been firmly on CUO’s to ensure underwriters write business under the strictest control and conditions. That is, however easier said than done and it’s difficult to avoid the shareholders cries for growth and market share and investors demands to hit quarterly targets. Underwriting discipline should be nothing more than properly evaluating a risk and making rational, reasonable decisions on acceptability, pricing and coverage and that may mean turning business away. Strong profitable companies realise that this may result in slower growth or even portfolio shrinkage but that that discipline ensures profitability…easily said. Warren Buffet once commented “We hear a great many insurance managers talk about being willing to reduce volume in order to underwrite profitably, but we find that very few actually do so.” The truth is there’s no long-term success in winning the race to the bottom…but at least you’re still in the race! At last year’s Monte Carlo Rendezvous, I met with an old Underwriter friend and asked what he felt was his biggest upcoming challenge he replied, ‘maintaining underwriting discipline in an environment that was due to see the first rate increases for many years in the wake of an active Cat season’. He went on to say many of his team had only ever known a soft market and had never experienced rate increases. This presents challenges; CUO’s need to be nimble enough to adjust where to put their lines and how to make the best of a hardening market, moving capacity quickly into new risks, lines and markets as rates become more attractive. Underwriting discipline in a soft market is about resisting temptation and not writing everything the broker brings round, in a hardening market it’s about giving in to the right temptation, writing selectively and taking advantage of every element of decision support available. Back in the eighties and nineties in the years of more frequent underwriting cycles this discipline would have been acquired through years of experience, developing an underwriting instinct through experiencing the market peaks and troughs laced with the painful lessons from being burnt in the past. Underwriters today may not have the experience of fluctuating market rates but they do have a new and more insightful weapon in their arsenal, insuretech. The modern underwriter has the advantage of an improved understanding of risk through the vast array of available data, predictive analytics and advanced statistical models. The trick now is how to get that available insight to the desktop at the point of underwriting in a way that adds real value and supports disciplined underwriting. That’s where the tech suppliers and innovation teams should step in. Front office and underwriting workbench solutions need to provide an easy to use, interactive experience with enough configurability to allow for carrier specific rules and logic to be surfaced on the desktop. This should be combined with concise, contextual and consolidated third party data to deliver a powerful decision support tool enabling quicker and more informed judgments. In a recent survey and report on emerging insurance technology Novarica, the US Analyst observed that the majority of carriers were already using predictive analytics and mobile technologies and these should no longer be considered emerging tech; the trends they are observing are more around Artificial Intelligence, Robotic Process Automation and sensor technology like IoT. Augmenting risk understanding with contextual curated knowledge delivered via AI and automating certain elements of the underwriting lifecycle will no doubt become more common and will certainly support the CUO in is drive for underwriting discipline. Perhaps surprisingly Novarica’s report noted the highest level of Proof of Concept activity was around chatbots with around 25% of participating carriers saying they either had PoC’s underway or were planning a pilot in 2018; is this the dawn of a new underwriter’s digital assistant? Exciting times ahead!