Unlocking the Performance Levers of Commercial Underwriting

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1 Cognizant Insights Unlocking the Performance Levers of Commercial Underwriting Equipping underwriters with the right tools can transform this critical function and result in significant savings in cost, time and effort. Executive Summary As insurers face tremendous pressure to improve their financial performance amid rough global economic weather, efficient risk selection and accurate pricing have become even more critical. However, most commercial insurers go about these processes in a haphazard, labor-intensive and nonstandardized manner. Underwriters spend an unjustifiable amount of time dealing with unclear workflows, lack of relevant information, multiple systems that require rekeying of massive amounts of data and, most important, the lack of powerful tools that they need to take meaningful decisions. Experienced underwriters spend their valuable time compensating for the process and system deficiencies instead of analyzing risks. This white paper analyzes the strategic objectives of commercial lines carriers that might warrant a change in the way underwriters have worked for decades. Underwriters Need for Technology Support To understand the dilemma that an underwriter faces every day, let us consider how Dave, a seasoned underwriter, allocates his time each day. With about a dozen submissions to underwrite every day, Dave has to reference guidelines, pull data from multiple sources, communicate with multiple departments to seek data points, enter data into various tools and seek and analyze the output, exchange data with brokers through phone/ and execute intermittent requests from brokers, internal customers, etc. He has to finish these tasks while retaining focus on his core task, which is to strike a balance between the quality of risks undertaken and getting new business. Today, he had almost finished preparing a quote for an important client, Zeon Broking, after two days of hard work, when Zeon s broker called him with some changes in the commercial auto line application. The broker wanted the revised quote on the same day. Noncompliance with the request would mean risking losing the client s business. The change appeared to have caused the risk to increase but calculating the magnitude of the increase would take time. In roughly four out of every five submissions, Dave faces this challenge to strike a balance between quality and speed. A compromise in quality could lead to winning the business but risking a potentially large claim that would result in deterioration in the loss ratios. On the other hand, focusing too much on quality could result in losing business. cognizant insights april 2013

2 In commercial lines businesses, automation can by no means replace the underwriters acumen and no amount of rules can substitute for the experience of a seasoned underwriter. Technology should rather be aimed at offering strong support to underwriters. That said, there is significant potential for technology to assist the underwriter in her job. This is not only because underwriting in commercial lines (with the exception of casualty and small commercial business) has largely been untouched by the technological advancements that policy admin or claims have witnessed in the past decade, but also because the role of an underwriter is undergoing a sea change. While many insurers have invested in tools ranging from workflow solutions to drive the new business process to telematics to improve loss control, what is lacking is an integrated approach to improving underwriting operations. The carriers that adopt this strategy early will over time build the most profitable books of business. Small Improvements Can Yield Large Gains In recent years, returns on investments have been declining and large-scale global losses due to natural disasters have made carriers increasingly dependent on underwriting for revenues. Even though the commercial insurance industry is seeing an upward trend in premium volumes, the market continues to be uncertain and the global economic conditions unpromising, making underwriting excellence a top priority for carriers. Since many insurance products have been commoditized over the years, leaving few opportunities for carriers to differentiate their products, improvements in risk selection and pricing can result in large increases in revenue and profitability. Figure 1 highlights the impact better underwriting would have on various parts of an insurer s financials. Even a marginal improvement in the selection of risks can have a tremendous impact on loss expenses. The quality of underwriting here refers not only to the right risk but also the right price for the right risk. While better risk selection is a powerful lever, the benefits of efficient underwriting should not be underestimated. And although better discipline and efficiencies will result in reduced underwriting expenses, improved selection of risks to assess would lead to improvement in the net underwriting income. For example, let us consider an insurer with $4 billion in written premium, and $3 billion in incurred losses. If better and consistent selection of risks results in even a 1 percentage point improvement in the loss ratio, it could lead to savings in the range of $40 million. Similarly, through better selection of risks to assess, if the insurer is able to improve the written premium by 2% it would result in a benefit of $80 million. This illustrates the impact underwriting processes have over the insurer s financials compared to areas such as claims where technology can strive to achieve only cost saving and not compelling top-line benefits. Potential for Increasing Underwriting Efficiency and Effectiveness 100 % Quality (Effectiveness) 65% 11% Speed (Efficiency) 22% 2% Premiums Losses Incurred Loss Expenses Incurred (Allocated and Unallocated) Underwriting Expenses Incurred Net Underwriting Income Figure 1 cognizant insights 2

3 Underwriters Changing Responsibilities 25% 15% 35% 15% 15% Submission handling, data cleanup and research of insured Risk selection, manual rating and pricing Negotiation and dealing with agency issues Post binding services Product development Agency relationship/marketing Portfolio/territory analysis Risk consulting 25% 25% 5% Figure 2 Underwriters Are Being Called Upon to Do More Underwriting has traditionally been a mixture of art (as underwriters often argue) and science (as technologists often believe). However, in recent years a new dimension has been added to the underwriter s role. Underwriters now have to play the larger role of a risk consultant. The changing paradigm requires that underwriters spend less time handling submissions, which currently take up a major chunk of their day, and invest that time in developing relationships with agents, acting as an advisor to clients and participating in organizational activities such as product development and portfolio analysis. assistants is also undergoing a change. Many of their activities will soon be consolidated and centralized for economies of scale with niche groups taking on work that requires specialized services. In some cases, this consolidation could be followed by de-skilling and outsourcing of the support services that do not require physical proximity to the client and the underwriter. In the past, de-skilling and centralization of support activities were motivated primarily by cost saving via operations efficiency. However, even insurers that do not have underwriting expense reduction on their agenda might consider this option to ensure consistent application of business rules across the board. Shifting Roles at Insurers This agenda has to be tackled in a comprehensive fashion because the levers that can free up the underwriter s time are hidden in several places. As Figure 2 indicates, underwriters are involved in several activities that do not require their expensive time. These tasks can be de-skilled into chunks that can be packaged and completed by the underwriter assistant or by a remote counterpart or a remote support group. Such a group can even share the support tasks for a group of underwriters, thereby achieving reduced labor costs, better economies of scale and more consistency in the way these tasks are executed. Some smaller insurers have implemented this approach successfully, leaving their underwriters with more time to deepen their relationships with their brokers. These relationships, in turn, foster premium growth and strengthen the insurers position in price negotiations. The role of the underwriting support group the underwriting assistants, raters and operations Underwriters Underwriter Assistants Policy Servicers Figure 3 Underwriters to take up additional roles such as marketing representative, risk consultant, portfolio manager and product development. With the advancement of technology and outsourcing/ offshoring, the work done by UAs will be automated or outsourced and some will be retained for career development. With the advancement of technology and outsourcing/ offshoring, the work done by policy servicers (including raters) will be automated or outsourced. cognizant insights 3

4 Time and Effort Allocations in the Insurance Process Average Number of Submissions that Pass Each of the Stages Average Lapsed Time Data Entry Duplicate Submission Preliminary Evaluation Initial Rating Risk Evaluation 2.5 days 4 days 1.5 days Pricing Proposal Creation Quote Issue Varies Submission Intake Submission Intake Create Proposal Bind and Issue Average Effort in FTE X hours Pre- and post-underwriting processes Core underwriting processes Figures based on Cognizant research. Figure 4 Quality of Underwriting Can Be Improved While Decreasing Cost of Operations In a typical middle-market business unit, only a small percentage (roughly 8%) of the submissions make it to the issuance stage. Our analysis indicates that about 90% of the underwriter s effort/time does not translate into business for the company. On average, an underwriter spends eight days on a risk submission for insurance coverage, and of the submissions he works on 70% are declined before the quote is generated and presented to the agent. When it comes to a specific submission, the underwriter spends a lot of time waiting for his support staff to do the prep work, or for the agent/broker to provide the information he needs. Also, a significant amount of time and effort is expended in entering the data in the multitude of systems that the underwriters use as well as in handling the human errors made in the data entry process. Clearly, much time is wasted in the current state of operations, and there is significant potential to increase the quality of the decisions made. It is evident that at each stage of the process, systemassisted improvements can improve efficiency and effectiveness. There are several areas in the underwriting process where the levers of leanness, and automation can be applied to achieve significant efficiency. This gain can, in turn, be invested to improve the quality of the underwriting as well as increase the number of submissions processed. Figure 5 (on the following page) illustrates that through automation and lean processes, the submission to quote ratio can be improved by up to 10 percentage points and the quote to issuance ratio can be improved by up to 6 percentage points. By reducing the reentering of data in multiple systems, and with improved task management and submission routing to the underwriters, the turnaround time can also be reduced from eight days to as low as 4.6 days. De-skilling of tasks can significantly reduce the average effort in terms of full-time employees (FTEs). Role of Technology: Automation and Decision Support Are Key Levers The insurance market follows a sinusoidal cycle, with the industry facing losses and profit alternatively. This market dynamic makes the job of an underwriter more difficult because he needs to follow the pulse of the market very closely and maximize profits during a boom and minimize losses (if not make a profit) during down cycles. To be able to do this, the underwriter must be equipped with a system that not only provides the right data at the right time but also the right tools to use the data to take the right decisions. While process rationalization through automation is the only sustainable way to achieve the former, a robust decision support system developed using various analytical models enables the latter. Flexibility in the system and processes will enable an organization to distribute the tasks effectively, attain the desired financial objectives and monitor the underwriting activities closely and accurately. The initiatives listed under the automation and decision support levers in Figure 6 (on page 6) are not independent of each other, and they will deliver the best results for the organization when built on an integrated platform. cognizant insights 4

5 Improvements Derived from Automation and Lean Processes Number of quotes increased by up to through automation. Average Number of Submissions that Pass Each of the Stages Issue ratio improved by up to 6 percentage points through better selection of submissions to quote. Average Lapsed Time Average Effort in FTE Submission Quote Issue 1.6 days 2.4 days 6.0 days Varies Submission Intake Rate and Price Create Proposal Bind and Issue X hours Pre- and post-underwriting processes Core underwriting processes Turnaround time reduced from 8 days to 4.6 days through various automation initiatives. Total effort reduced by 42.3% through automation, de-skilling and availability of decision support tools. Figure 5 For instance, consider rule-based selection on submissions to quote. By building this capability, we achieve positive impact on many levels and different kinds of benefits. This capability improves efficiency by letting underwriters work on submissions that have a higher probability of being qualified and quoted. It improves the scalability of the underwriting organization by auto-declining the poorest of those submissions, thereby freeing up underwriters time and enabling them to work on a larger set of submissions. It also becomes a decision support tool by automatically filtering bad risks. Technology also needs to be intelligent enough to overcome any catastrophic event and trigger stop loss across the system. For instance, if a particular zone is set to face a tornado or is already weathering it, then the system would automatically refuse to underwrite submissions from that region. Undertaking one small initiative at a time has been the norm in the underwriting technology landscape so far. However, except for a few carriers, such an approach leads to benefit leakage. For instance, analytics has been trumpeted as the single most important factor for improving underwriting effectiveness. While this is true in theory, when it comes to executing the idea IT departments always stumble over having to integrate the large volume of historic data into a single source of truth and develop a mechanism to collect and record data in a systematic way. While the former can be achieved with some difficulty, the latter is not possible without an integrated platform with a rationalized process. Conclusion Commercial underwriting is unlike other processes in the insurance industry in that it has an extremely complex and non-standard process, requires different types of skills, uses mostly unstructured data and is highly dependent on human judgment. Perhaps due to these very reasons and the strong belief until recently that this is a process that is not conducive to technological intervention, commercial underwriting has lagged behind in technology-based process modernization. Compared to other core insurance processes, small improvements in underwriting can lead to tremendous benefits both on the top line and bottom line of the insurer. But to transform the operation, carriers should be clear about what their strategy is and the business objectives that can be derived from the strategy. The work profile of underwriters is changing as market volatility has become the new normal and is something that they have to deal with on a daily basis. This change will cause underwriters to spend less time on their traditional submission management tasks and more time on relationship management and fulfilling the role of a risk consultant to their key clients. Systems need to quickly catch up to enable underwriters to shift gears. The quality of underwriting can be improved while reducing the cost of operations. That is, contrary to conventional wisdom it is not necessary to tackle these two imperatives cognizant insights 5

6 Automation and Decision Support Initiatives Cause Multipronged Impact. Impact Initiative Efficiency Responsiveness Decision Support Scalability Automation Automation of workflow. Skill-based routing, work assignment and forecasting. Automatic document generation from repository of templates. Automatic archival and retrieval of records, and triggered correspondence of documents. Rule-based selection on submissions to quote. Centralized availability of latest account information through integration 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 customer segments and needs. Figure 6 separately. In fact, the benefits will be greatest when they are approached in an integrated manner. The primary levers of performance in commercial underwriting are automation and decision support. Technology can play a significant role in tapping these levers. In recent years, many insurers have ventured into this area but without much to show for their efforts. Dealing with such a complicated setting in a tactical way means that at every tactical step critical details are overlooked. These may not affect the particular phase or process in question but may have negative effects on several other parts of the process. Every misstep in underwriting modernization has a particularly negative ripple effect, considering the profile of the primary users and their traditional resistance to automation. The answer lies in undertaking a deep analysis of the current problems and assessment of the specific drivers for modernization, which may vary by insurer and strategic thinking about execution. Adopting this mindset while embarking on the modernization will reap measurable top-line and bottom-line benefits for the insurer. It will also position them to quickly adapt to industry dynamics, be it a soft or a hard market, and to deal with the entry of new technologies or even a corporate imperative to broaden the range of products or markets. cognizant insights 6

7 About the Authors Jenny Nirmala Karuna Manoharan is a Senior Manager within Cognizant s Insurance Practice. She has over seven years of experience in business and IT consulting in the property & casualty insurance industry. She has worked with several U.S.-based and global carriers to develop modernization strategies and helped design and develop state-of-the-art underwriting platforms. Jenny holds a post-graduate diploma in business management from T. A. Pai Management Institute, Manipal, and a bachelor s degree in engineering from Bharathiyar University. She can be reached at Jennynirmala.Karunamanoharan@ cognizant.com. Soumya Ranjan Dash is an Associate Director in Cognizant s Insurance Practice. He has over nine years of management consulting experience in the insurance industry. Soumya has advised senior management of insurance companies on strategy, operations and technology issues such as underwriting roadmaps, claims process reengineering, policy administration application roadmaps, e-commerce strategy, postmerger IT integration, business intelligence strategy and operations improvement. He has a post-graduate degree in management from the Indian Institute of Management, Calcutta, and a bachelor s degree in engineering from the Indira Gandhi Institute of Technology, Sarang. He can be reached at Soumyaranjan.Dash@cognizant.com. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 156,700 employees as of December 31, 2012, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at or follow us on Twitter: Cognizant. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ USA Phone: Fax: Toll Free: inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) Fax: +44 (0) infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, India Phone: +91 (0) Fax: +91 (0) inquiryindia@cognizant.com Copyright 2013, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.