Making underwriting more efficient is an area often overlooked by insurers. On average, they pay out 60–70% of premium revenue on the cost of claims and a further 20–25% on winning business through marketing and broker commissions. The premium balance funds operating costs (including underwriting expenses), provides profit for shareholders, and maintains critical access to capital.
So why is underwriting efficiency not higher up on the transformation agenda? In my opinion, even though these efforts represent only a small percentage of total operating costs, there are big gains to make through better underwriting decisions that would then lower the cost of claims.
Let's consider some of the big myths surrounding making underwriting more efficient.
Legacy systems need to be replaced: Some insurance companies still use policy systems developed before the turn of the century. These platforms, while dated, are critical databases that contain important risk, premium, earnings, reinsurance, and finance information. It's a common misconception that an insurer must replace these systems in order to start its underwriting transformation journey, and these systems are often blamed as inhibitors of operational efficiency.
Technical skills are more important than processes: Insurers rely on their underwriters' technical skills, product knowledge, and access to decision makers to deliver results by balancing risk and pricing. This focus on product knowledge, pricing, and distribution is often at the expense of understanding the underlying underwriting processes and how they could be made more effective.
Changing processes is expensive: Insurers know when their underwriting processes aren't working as well as they should. They also know there are technologies available, such as document ingestion, risk scoring, and workflow tools, which can fix these problems. But there is often a view that they are cost-prohibitive, so they continue with existing practices that they have proved will work rather than subject the business to a change program.
Though these perspectives are real and understandable, they are not without consequence to insurer profitability.