Balancing risks and benefits of digital transformation in insurance underwriting

By Cynthia Ezekwe.

Recent advancements in technology, such as artificial intelligence and machine learning, have fueled growth in the global insurance sector by improving efficiency, enhancing service delivery, and expanding the market. Insurance companies are now using these technologies to better understand and meet the needs of their customers, process claims more quickly, and identify fraud more accurately.

As the insurance industry transitions to a more digital underwriting process, some experts have expressed optimism about the potential benefits of this trend, while others have raised concerns about the challenges involved.

On the one hand, some see digital transformation as a boon for the industry, citing improved efficiency, reduced costs, and better customer service. On the other hand, others point to challenges involved like data privacy, security, stating that digital transformation of underwriting remains a ‘’major headache’’ to insurers.

The Insurance Training Centre (ITC) defines insurance underwriting as the process of evaluating a risk to determine if it can be insured, and at what price. Underwriters assess factors such as the likelihood of loss, the cost of the potential loss, and the financial stability of the insured. They use this information to make a decision about whether or not to insure the risk, and if so, at what premium.

For an insurance company to maintain a healthy loss ratio, the underwriting process is of critical importance. It is a key component of the business and, along with investment returns, plays a significant role in determining the company’s financial performance. By effectively evaluating risk and pricing premiums accordingly, underwriters can help ensure that the company remains profitable

When underwriting decisions are made poorly, insurance companies can end up with high loss ratios, paying out more in claims than they collect in premiums. Historically, underwriting was a manual process, relying on the experience and judgment of the underwriter.

In recent years, however, technology has started to play a role, with tools like data analytics and artificial intelligence being used to support decision-making. This shift has the potential to improve the accuracy and efficiency of the underwriting process.

Digital underwriting has several advantages, including increased accuracy and efficiency. For example, by using AI to analyze risk factors, insurers can better assess the likelihood of losses and price policies accordingly. This can help reduce costs and improve the customer experience. In addition, the digital underwriting process can make it easier and faster for customers to get quotes and purchase coverage online. These benefits can ultimately lead to increased customer satisfaction and retention.

On the contrary, one key challenge posed with digital transformation of underwriting  is data privacy and security. As more data is collected and stored digitally, there is an increased risk of data breaches and unauthorised access to sensitive customer information, which can have serious consequences for both insurers and their customers.

However, the digital transformation of underwriting also comes with some challenges, particularly around data privacy and security. As more data is collected and stored digitally, it is important to ensure that this data is protected from unauthorised access and misuse. Failing to do so can lead to serious consequences for both insurers and their customers, such as data breaches, identity theft, and reputational damage.

One important consideration when implementing digital underwriting is the potential for algorithmic bias. If the algorithms are not trained and tested properly, they can produce unfair or inaccurate results that may discriminate against certain groups of people. This can raise ethical and legal concerns for insurers, who have a duty to ensure their underwriting decisions are fair and equitable. To avoid this, insurers need to carefully design and test their algorithms to ensure they are free from bias.

According to a 2021 report by Deloitte Insights, underwriters are expected to increasingly use new data sources and technologies to make more strategic decisions. The report suggests that by automating repetitive and time-consuming tasks, such as data collection and entry, underwriters can focus on tasks that add value for consumers, such as risk assessment and relationship management. This will likely require underwriters to acquire new skills and develop new ways of working with technology.

“The impact of technology such as digital underwriting cannot be overstated as underwriters serve as the connection between sales and policy writing. Having access to advanced data analytics could give carriers the advantage over their competitors, particularly in the competitive era of insurance underwriting that we currently reside in,’’ the report noted.

Deloitte Insights also pointed out   that the game-changing technology could act as the silver bullet some insurers need to ward off the threat from competitors, acting as their unique selling point, and differentiating them from their market rivals.

According to Blake Hill, vice president North America at Dacadoo, organisations that wish to make a positive leap forward in their underwriting capabilities and industry standing must embrace the trend of digital transformation. He averred that by leveraging technology to streamline and optimize their underwriting processes, they can gain a competitive edge in the industry and better serve their customers.

“Uncertainty creates opportunity, and some insurers will utilise this to recalibrate their underwriting for advantages in the market.  Larger insurers have been leading this, and now medium-sized insurers will need to adapt or risk anti-selection in the marketplace,” Hill added.

While some experts believe that embracing digital transformation can give insurers a competitive advantage, Eileen Potter, VP of Insurance Marketing at Smart Communications, notes that the current hard market and competitive InsurTech landscape present unique challenges for carriers looking to develop successful underwriting programs. She believes that these challenges must be carefully considered and addressed to maximize the potential benefits of digital transformation.

Potter believes that striking a balance between a positive customer experience and effective risk management is essential for profitable underwriting. However, she also notes that collecting the necessary information can be a significant challenge for insurers.

“Digitising the underwriting process has certainly lowered the barrier to entry for new, tech-savvy players, but it has also created opportunities for established insurers to improve efficiency and customer experience so they can hold on to their piece of the pie,’’ she said.

In light of the current economic uncertainty,Potter disclosed that many insurers are being forced to rethink and adapt their underwriting strategies amidst the economic uncertainty.

Potter observed that many insurers are still using PDFs and web forms that are not intuitive, resulting in missing and/or incomplete applications, slowing the process and driving frustration from underwriters, agents and prospects.

She suggested that insurers that are serious about improving their underwriting programmes should consider adopting low-code/no-code platforms that transform the application process into an intuitive and personalised interview.

This approach,she explained, can streamline the entire process, reducing frustration for all parties involved and improving efficiency, and creating a competitive advantage for insurers in the marketplace.

According to Dave Connors, founder and CEO of distriBind, carriers face significant challenges when it comes to building successful underwriting platforms. One of the main issues he highlighted is the lack of data-handling capabilities, which can make it difficult to manage and analyse the large amounts of data generated by a digital transformation.

Connors noted that without the right capabilities, carriers can struggle to keep up with the demands of today’s digital world.

“Access to data and the ability to compile data from different sources for analysis is important in capacity decisions and portfolio management, but this is an area many insurers struggle with. It is generally a very time-consuming process due to the need to cleanse, re-structure and manipulate data before analysis,’’ he added.