More, Better, Faster, Stronger
By Zack Schmiesing
The title of this article may sound like something belted out by an offensive-line coach. But many underwriters are hearing the same directives these days as new players to the commercial property coverage arena pour into an already-crowded marketplace. Many insurers are looking to improve revenue streams in the wake of modest-performing investments and challenging loss ratios that often carry tight underwriting margins. The increased competition has pushed many of the leading carriers to raise their investment in underwriting technology and embrace innovative strategies in deploying their resources.
Recent reporting from ISO MarketWatch® indicates that commercial lines property premiums have increased every month since May 2011. That pricing trend has attracted new insurers that are developing novel products for the playing field, while many existing players have set their sights on expanding their property portfolios. Recent catastrophe losses and tepid investment returns have brought further incentive for growth. The Insurance Information Institute (I.I.I.) reports the commercial property market experienced 8.7 combined ratio points from catastrophe losses in 2011, followed by a record 8.9 ratio points in 2012. During the same period, insurance return on equity (ROE) reportedly hovered near 5 percent, performing well below other financial industries. Despite such factors, policyholder surplus remains at record highs, pushing many insurers to look for ways to grow inorganically and diversify their risk portfolios.
Commercial Challenges: Complexity and Costs
Commercial property underwriting presents unmatched complexity, unlike the underwriting of its more homogeneous cousins, personal property and auto coverage. We’re not likely to see a big-box store advertising multiperil coverage on a stand-alone restaurant any time soon. And with complexity usually comes cost. A recent report from Strategy Meets Action (SMA) indicates that approximately 85 percent of commercial property respondents plan on increasing their expenditures for data and analytics in the coming 18 months. Additionally, more than 66 percent of companies have reportedly apportioned 10 percent or more of their IT budget specifically for underwriting purposes, with 20 percent of companies reportedly dedicating more than 30 percent. Those expenditures are most likely geared toward enhanced platforms and process tools.
Speed to market is the name of the game and will tend to drive many insurers’ operations. Those insurers leading the commercial property charge have likely become early adopters of automated decision support (ADS) strategies. The days of a policy application sitting idle on an underwriter’s desk (or unopened in an inbox) seem to have passed. But only recently have advancements in computing power and process development allowed insurers the ability to integrate vast amounts of valuable data resources with sophisticated analytics down to the point of sale.
While “big data” is a hot buzzword within the business world, the insurance industry is arguably the earliest pioneer of big data concepts and practices. Many property underwriters are realizing even greater rating accuracy through the use of third-party-licensed data, which, when combined with proprietary loss-experience information, helps build more robust rating structures. Those data attributes include, for example, location-specific information on crime, structural integrity, natural catastrophe risk, and building code grading. Industry innovators have already developed and actively integrated web-based servicing and application programming interface (API) calls to validate risk information for quick policy rating.
A recent survey conducted by Earnix and ISO noted that approximately 91 percent of insurers license external data, ranging from credit scoring to geodemographics to telematics. With ADS, underwriters are often no longer bogged down with tedious responsibilities to gather data. Instead, many are able to populate and, just as important, instantly validate multiple-risk data fields. Such capabilities help significantly increase the speed, volume, and consistency of reviewed applications.
Many insurers are finding they can no longer rely solely on mutual relationships to build and maintain revenue streams — undoubtedly a catalyst for those insurers operating through independent agents. As for agents, 99 percent of independent agencies polled have reportedly identified ease of doing business as a key aspect of their business model. ADS strategies often provide a solution by enabling insurers to produce quick quote responses and turnaround times. And independent agents usually don’t mind a declination, as long as it’s a timely declination.
Precise Segmentation = Quality Underwriting
Practitioners of ADS often realize benefits not only in speed and quantity but also in quality. The systems frequently help provide clear, consistent, and efficient processing of policy submissions while freeing up underwriters to focus on those exposures that require the most attention — and where risk and opportunity may be greatest. Through API and web calls, many underwriters are often using additional data points in the binding process to dial in the most accurate rating of properties. Increased rating segmentation is usually extremely advantageous to price complex risks with precision and confidence. Risk segmentation helps support competitive standing through reduced premium overage, frequently leading to better pricing and marketability while limiting uncertainty and potential leakage of premium.
With confidence in pricing, management can set clearly defined goals and guidelines to target and expand exposure portfolios. Additionally, ADS systems enable managers to take performance snapshots and make strategy adjustments in real time. These kinds of feedback and reporting features are critical for modern business operations.
End of the Underwriter?
Many commercial property insurers are streamlining the underwriting process through greater computing power and improved user interfaces. But does the investment in those processes marginalize the value of desk underwriters? The answer is no — in fact, quite the opposite. Commercial property risk is often unique and complex in nature. Experienced and seasoned underwriters are more valuable now than ever before. By shifting responsibilities for data collection to ADS systems, underwriters can focus on insights for specific risks. More insurers are looking to use the talent and skills of experienced underwriters, not only to tackle operational responsibilities but also to train recruits as the industry deals with an aging workforce nearing retirement.
Commercial property carriers today are seeing fresh faces and renewed vigor on the playing field. And those players aren’t just looking to participate — they want to dominate. More companies are investing and actively integrating sophisticated analytics and automated data analysis, and they’re making better use of seasoned underwriting talent. The best-equipped insurers have the ability to surge past opponents through competitive pricing and precise risk segmentation to build strong agency relationships and win the speed-to-market race. With investments and innovation using ADS strategies in place, the game is definitely on.
Zack Schmiesing is director of thought leadership at Verisk insurance solutions.