What is Digital Underwriting?

Digital Transformation - July 7 2021

“We are living though a dramatic evolution of underwriting capabilities within the industry,” writes Arthur Borden, VP – Product Services, CNA in the Commercial Lines Underwriting Priorities eBook. “It is being driven by the promise of digital transformation, including AI/ML, and all of the risk management, operational efficiencies and customer experience benefits derived from them. The results have typically increased productivity, accuracy and ultimately lowered loss ratios. This transformation is accelerating decision velocity for the underwriter by using the right mix of process and technology.”

The pace of digital transformation in commercial lines underwriting has only accelerated during the past 18 months of the pandemic. “We’ve seen things that many people in the commercial insurance industry said were going to take 5 or 10 years happen in 1 or 2 years,” says Ron Glozman, CEO and Founder of Chisel AI. “Many people think, or used to think, that digital certificates and simple things like online signatures wouldn't be possible, but regulation has very quickly caught up.”

While it's clear that underwriting is going through a major digital transformation, what do we really mean when we refer to “digital underwriting” in the context of commercial insurance? As with any rapidly evolving capability, the answer depends on who you ask. The term encompasses a broad spectrum of technologies that aim to assist and empower underwriters to better manage risk, automate and accelerate the underwriting lifecycle, and be responsive to customers.

“Some people think digital underwriting is the algorithm that makes the decisions,” explained Nathan Root, Head of Product Management in Technical Underwriting, Zurich North America during our recent webinar titled 2021 Commercial Lines Underwriting Priorities and Trends. “Other people think that it’s getting the policy into a PDF format instead of a stack of paper. Other people think that it has to do with doing automated quote proposals or binding, or maybe how the billing works if it’s EFTs versus check. So, and the reality is, all of those are digital underwriting.”

Empowering Underwriters through Innovation

Ultimately, digital underwriting is about using innovative technologies and new data sources to achieve greater agility and efficiency in the insurance back office by automating time-consuming, error-prone manual tasks and repetitive administrative work that today eat up a large portion of an underwriter’s day – time that could be better spent providing expert advice to clients.

“Instead of having to throw more humans at the work as your business grows, you have things like optical character recognition, robotic process automation, natural language processing, natural language understanding, and so on that really streamline the underwriter’s work, and, quite frankly, leverage the skills that your people have without some of the more clerical tasks that don't necessarily maximize their knowledge and value.” says Rob Galbraith, author of The End of Insurance As We Know It. “And then, finally, there’s digital distribution and communication; being able to intake submissions digitally and communicate back and forth on submissions or particular accounts. The pandemic has really accelerated and put a premium on that kind of system when we weren’t able to meet face to face as we might have done in the past.”

“The phrase that I tend to use is decision velocity,” says CNA’s Art Borden. “Can I make a decision that I like and that I think has credibility and stands the test of time, that actually gives the insured a result that they are looking for and makes us a co-equal partner in that contract, something that I can get my arms around and help foster that decision velocity discussion? I really want to be able to support my underwriting community in a way that helps them get quick access to the information they need, validated access, quick turnaround back to the customer on those types of decisions and, you know, the best sort of experience that we can generate.”

Digital Underwriting Moves Upmarket

Savvy commercial lines Insurers have always understood that if you want to have the greatest impact on your business, you should focus on underwriting where even small, incremental improvements can have a major effect. How a commercial insurance company defines digital underwriting and where it chooses to focus its digitization efforts is determined by the organization’s business focus, size, and overall digital maturity, but few would argue that digital underwriting is a mission-critical priority today.

The vast majority of commercial lines insurers are still reliant on manual, paper-based processes to varying degrees. In key operational areas, these manual processes have proven to be remarkably resistant to change. Take electronic rating, for example. “Most of us would be surprised if there was still paper-based rating out there,” says Zurich’s Nathan Root, “but in certain lines of businesses and certain setups, it’s still paper-based rating. They’ve still got a rate journal that they go to, and that’s the way that it works.”

Digital underwriting is hierarchical in that as the size and complexity of risk increases, so too do the amount of human intervention and manual tasks required to assess, price, and write the risk. While insurers in the small commercial market tend to be more highly digitized, data-driven, and automated end to end, digitization advances like straight-through processing have been slower to move upmarket to larger commercial lines insurers, but it is happening.

“Some of the success that small commercial has had piggybacking on the success of personal lines is now causing companies to say, ‘Well, you know, what about some of the mid-market? What about some of these large accounts?’ It’s not going to happen overnight. And I don’t know that will ever happen for larger accounts the way it has on the smaller accounts, but the conversation is happening in a way that I don’t think it necessarily was before,” says Rob Galbraith.

“In the high end of the middle markets and in the large account space, it’s going to be a person who needs to evaluate this information,” Nathan Root says. “So, the data has to at some point turn into information that is friendly to how a human interacts with the data. So, it’s got to be meaningful, and it can't be, you know, “Here's a nine-hour video of drone footage.” That's not valuable for a person. It's valuable for something, but it’s not valuable for a person.”

The ability to extract and interpret vast amounts of unstructured and semi-structured data is a key requirement for digital underwriting. Recent SMA research finds that 90% of commercial lines insurers are investing in technologies in the AI family with insurers especially seeing the potential in leveraging AI for unstructured data. According to SMA, “from the people, process, and technology viewpoints, the wide range of AI capabilities – RPA, NLP, machine learning – all will play major roles in underwriting transformation.”

“Honestly, there’s an expectation that the experience that users have in the small business world is moving up into middle and large, and those producers don’t expect to have to submit all the information that they have historically had to in the past,” Borden says. “They have an expectation that we’re going to be in a position to make those decisions on risk assessments and pricing without great demands on their time to generate pricing for them and turnaround a quote quickly. So that focus is mission critical. We have to make it simpler.”

The Digital Underwriting Journey

Defining digital underwriting excellence is a moving target today. Traditional underwriting metrics are in the process of being reimagined with the customer experience at the forefront, and digital transformation is not a fixed destination but an evolving process of iteration and refinement.

“You know, digital signing, as an example – that’s not primarily driven to change the loss ratio, but it does have a massive impact on the customer experience,” Root says. “It doesn't really change the expense ratio that much, but if you don’t do it, it’s going to be a game changer for you.”

“As you start down a path with digital underwriting and you get into ‘under construction’ and ‘well underway,’ what you find out is that you didn’t understand the underwriting process as well as you thought you did,” explains Rob Galbraith. “And you actually find new opportunities. And then you go back to the beginning, and you start your assessment and evaluation all over again in that new area, and then that cycle continues to accelerate.”

Changing customer expectations have created a new sense of urgency for commercial lines insurers to address long-standing operational issues with manual underwriting processes that continue to create bottlenecks, friction, gaps, and barriers to growth.

“The bar, the benchmark, bottom floor, is ratcheting up very, very quickly,” Nathan Root adds. “So doing nothing means you fall behind very rapidly. And investing substantially could mean you fall behind more slowly, without even catching up. So, thinking about the journey, what does it look like on the outside? What are the capabilities? And then how rapidly can it be adopted? I think the bottom line on commercial insurance is it’s at a space where there are very mature capabilities. The outward progress in terms of things that have been digitized – there’s been quite a bit done already. The adoption rate is getting to be more even across the industry, which means that it is ripe for a massive acceleration. And I think that the acceleration that we saw pick up in the pandemic will only continue.”

Watch the on-demand webinar Commercial Lines Underwriting Priorities for 2021 & Beyond to hear more expert insights and guidance from CNA, Zurich North America, and Rob Galbraith on the evolution of digital underwriting in commercial insurance.

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