Digital Underwriting in Commercial Insurance: Q&A with Alan Demers, InsurTech Consulting

Insurance Industry News & Views - April 7 2021

Alan Demers, CPCU, AIC is President of InsurTech Consulting. With 30 years of P&C insurance experience, Alan provides strategic development, subject matter expertise and advisory services. A former insurance executive, most recently initiating Claims Innovation at Nationwide, Alan collaborates in the forefront of insurtech, partnering with insurance leaders, start-ups and service providers to modernize personal, commercial and specialty insurance. We sat down with Alan to ask a few questions about digital transformation in the commercial insurance industry, Insurtech partnerships, the key trends impacting commercial lines underwriting today, and why he is passionate about the future of insurance.

Alan, you recently contributed to our crowdsourced eBook Underwriting Priorities 2021 & Beyond. In your chapter, you and co-author Stephen Applebaum argue that commercial lines underwriting in 2021 is a whole new ballgame. How is the art and science of underwriting evolving, and which technologies and digitization initiatives should carriers focus on to make their underwriting processes more efficient, profitable, and responsive to customers?

Art and science is a great way to describe the underwriting process where science or data is applied to the humanized art of risk selection. Underwriting practices are evolving by adding more and better science as data is constantly growing and improving. The science part of the equation has really accelerated with broader and deeper information, i.e., big data, public information, geospatial, and new technology. Each are giving greater insights on behaviors and clearer context to risk characteristics. In just the last few years, technology like telematics, wearables, and sensors have mushroomed, along with artificial intelligence which is advancing rapidly.

Yet the art side of the equation demands human judgement. Tangential influences such as a carrier’s particular (and current) risk appetite are human decisions. Growth desirability in select business verticals and a company’s orientation around growth vs profitability are applied by decision makers. Whether going through a tightening or re-underwriting cycle or loosening with lower rates and more availability. These levers remain important and necessary while the pace has gained momentum toward more immediate matching of customers with protection – all at a faster and on-demand tempo especially for small business lines. Insurers naturally hesitate when moving further away from human practices but must do so in order to deliver.

Insurance carriers and brokers collect mountains of data, but they still struggle to gain the insights needed to accurately assess and price risk. If you had to give the industry a report card, how well do insurers manage risk today?

Since managing risk is not independent from balancing growth and profitability objectives, one can argue the industry does a good overall job. Select companies outperform the industry, especially when they are disciplined and know their verticals well. However, underwriting costs remain high, translating to high cost of customer acquisition, which can stymie growth, and are also passed along in costly premiums. The underwriting process remains lengthy from start to finish. And while not designed to personalize risk, the current process may actually price certain risks either too high or low. A grade of C+ feels appropriate for today’s demanding world.

If you look behind the curtain at the commercial insurance back office, there is still an incredible amount of time-consuming, repetitive manual work and re-keying of data. How far away are we from achieving meaningful digital underwriting and workflow automation?

The idea of STP (straight through processing) is already here in some pockets. Digitization of point-of-sale sets the stage for instantaneous “give and receive” expectations, whether shopping for select coverage or simply price comparing. However, there is a long way to go before forms, pdfs, and file sharing processes are phased out and to a level where efficiency reaches optimal ROI expectations. In other words, most or all manual work can be automated, especially for small commercial lines, which is a matter of time and investment, not so much because of lacking available technology.

New entrants focused on select lines of coverage or business verticals have an advantage by penetrating the market with STP automation from shop, quote to bind, and trailing documents. And they are thriving.

I would also point out incumbent insurance company barriers around workflows, process and people structures which are often outdated. Legacy ways or working often rival legacy system inefficiencies. More complex commercial underwriting may not even be in scope for STP for practical reasons. There are many physical and mindset barriers to overcome. So, we are still years away from widespread STP with lots of great progress unfolding. Either way, changing business owner demands are fueling the need for speed. And insurer competition to drive underwriting costs downward are here to stay. Thus, it’s not a matter of if but when STP becomes the norm.

The pandemic has disrupted the entire insurance value chain including traditional distribution channels and producers – and some of the changes are likely to be permanent. How are insurance carriers coping with the ongoing impact of COVID-19 and a hardening market?

Much has been said and written about the negative disruptive market changes from the pandemic, so I will focus on the many positives and opportunities ahead. Prior to COVID, the insurance industry already faced much motivation from the likes of new digital entrants, numbers of MGA models and various aggregators. COVID both exposed outdated processes and gave a great confidence boost to carriers who were able to quickly adapt to remote practices for their employees, agents, and customers.

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I think most were quite surprised in their own ability to pivot so quickly. Necessity truly is the mother of invention in this context. Meanwhile, like a low tide, the rocks of inefficient practices were exposed and have given new life to modernizing the most common transactions and a renewed appetite to tackle more. The post-pandemic view is more focused and determined to automate and operate touch-free.

The hardening market is also an opportunity for pricing to ballast and improve bottom line results especially among challenged lines like business auto and commercial trucking, which have been struggling for several years. However, this must be tempered given the numbers of carriers seeking to rebalance their mix from personal to commercial lines. With the outlook of autonomous vehicles threatening personal lines, multiline insurers took a hard look at the future of commercial and began placing more commercial lines bets over the past few years. Rate taking decisions have never been more challenging in this regard.

Established insurance carriers and brokers are increasingly partnering with small, nimble Insurtech startups to achieve their digital transformation goals. Based on your experience, what are the secrets to a successful technology partnership?

Partnering with insurtechs is not only a great option to help carriers get to the next level quickly but also a must have in order to keep pace with technology and growth opportunities. Finding the right partners can be consuming however, as insurers often find themselves constantly sifting through all the various insurtech offerings – perhaps more shopping than buying. The hard part is finding a way to get started. Here are four keys to success from a carrier perspective when engaging with an insurtech:

  1. Tangible alignment of technology matching a company’s strategy and strategic intent
  2. Clear pain point identification and prioritization
  3. A deliberate innovation and insurtech approach, especially when scouting
  4. Ensure people, process, and customers are at the forefront of any digital transformation

On the insurtech side, I look for those who truly understand the unmet need and have demonstrated how their solution can make a material difference. Many insurtechs stall by not being able to easily and clearly align their offering. Another vital ingredient is for the insurtech to bring creativity and support that will help carriers actually implement and launch, avoiding elongated pilot phases.

What do you see as the next big technology breakthrough or market trend that commercial lines carriers and brokers need to prepare for now?

There’s lots of new technology already in play with plenty of room to mature and expand. The power of artificial intelligence and machine learning is still early on and just getting started on the edges with success. One technology breakthrough is related to more, better and faster, powered by exponential growth in computing power captured through connected devices. Everything from clothing to appliances and equipment are forecast to explode over the next five years. Such advances will improve the volume, variety, and collection of data – each instrumental for better underwriting and pricing of risk. Insurers can prepare by investing and experimenting now rather than waiting for a perfect solution or perfect timing.

Market trends like embedded insurance and the expansion of more services take the traditional policy of insurance from a promise to protect to more active prevention is beginning to take shape. A good example is the Volvo and REIN insurtech pilot combining purchase of Volvo trucks with insurance and telematics together. Although insurance at vehicle point-of-sale is not a new concept, the ease of adding insurance choice combined with telematics and a streamlined experience is indeed new and different. The power of faster quoting and automated underwriting are the underpinnings of such market trends. Agent distribution is just one of the areas impacted by this type of market disruption.

Take out your crystal ball: What do you think the insurance industry will look like in 10 years?

In ten years, we should expect to see some major differences in a number of areas which will drive more M&A for both survival and new opportunity. I think we will see the most activity among the top 25 carriers for these reasons.

Taking a step back, the insurtech movement is just about 6-8 years in widespread practice. And during this time, carriers have launched innovation teams, built labs, and invested heavily to learn and adopt emerging technology at an unprecedented pace. Meanwhile, venture capital has flooded the insurtech landscape giving life to scores of new startups. Let’s also not forget how much incumbent insurance industry vendors and providers have advanced during the same time frame. This has already led to gains in productivity, better customer experiences, automation of process, and new products and markets. Now, just imagine ten more exponential years ahead.

Autonomous features in vehicles will be a reality in 2031 and, while it will take another decade and longer to change the entire mix of vehicles, insurance will make a similar leap forward. This alone is driving insurers to move upmarket to commercial lines, while those excelling in personal auto are already rapidly taking market share. Smaller carriers will move away from auto lines entirely to remain profitable. New protection products to cover new risks and exposures will develop and adapt to shifting liability realities related to future of mobility.

I am most excited about the changes which benefit consumers and business owners alike. As an insurance veteran, it has always been important to stay grounded in the mission and purpose: Helping others prepare, protect, and recover when something goes wrong. The prospect of insurance becoming predictive and proactive to actually prevent losses and add value throughout the course of the policy period with new services is incredibly appealing. Sprinkle in incentives and rewards to drive the right behaviors and everyone wins with interactive insurance or insurance-as-a-service, which truly is my favorite forecast.

Alan DemersAlan Demers, CPCU, AIC is President of InsurTech Consulting. With 30 years of P&C insurance experience, Alan provides strategic development, subject matter expertise and advisory services. A former insurance executive, most recently initiating Claims Innovation at Nationwide, Alan collaborates in the forefront of insurtech, partnering with insurance leaders, start-ups, design thinking experts and service providers to modernize personal, commercial and specialty insurance.


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