This is a fascinating, and challenging, time for insurance carriers facing “enhanced” competition in their traditional lines of business, changes in customer preferences, broad demographic changes, and rapid advances in technology. Maintaining footing and focus while revising operating models to address what both property/casualty and life/annuities carriers should see as a “New Normal” is a hallmark of the current planning/budgeting effort.
Advances in technology, complemented by the rise of a dizzying array of capabilities under the banner of “InsureTech,” provide carriers with interesting opportunities to reimagine key core business processes. For many, new business underwriting represents one of those key processes.
This makes the release of our new Novarica report on STP adoption rates particularly timely. The new business and underwriting space is one where advanced data management and business intelligence capabilities make it possible to get more granular analysis of risks, which carries the dual benefits of being able to get a better price match while reducing the time to decision. Carriers need to monitor developments in the market since this has become an arms race where failing to maintain pace with direct competitors can lead to unhappy consequences, including self-inflicted adverse selection experiences. If a carrier concludes underwriting is art, while competitors decide it is science, risk pool characteristics can be fundamentally altered with predictable consequences.
The real answer to the “art versus science” question is actually a combination of the two. As in many areas of insurance, for new business and underwriting, cyborgs are better than either humans or technology alone.
So what are the caveats? We are rapidly moving into uncharted waters in terms of the limits of focused pricing from both a regulatory and a social perspective. Insurance has historically been about risk pooling, providing coverages for loss in a population where there is uncertainty about where or who the losses will impact. In a battle to get ever finer rating classes, the question of how far is too far is clearly on regulators’ radar. At a recent NAIC meeting, a commissioner keynote presentation noted that “a risk pool of one is no longer a risk pool.” Pushback against going to extremes in underwriting can be seen as one of the issues that the Affordable Care Act sought to address on the health insurance side. Could that happen with other lines of business?
A recent article in the National Law Review took up this case, addressing a wide array of issues, including the potential loss of risk pools as we currently know them, and whether that would really benefit insurers and customers alike. The article makes it clear that the ultimate impact of advances in technology, specifically the use of InsureTech capabilities to get at “better” or more refined pricing and risk analysis, are for the moment unknown. Competing rules are emerging in different state jurisdictions, and a move to what might be called “personalized insurance plans” could create lower-cost plans for some while freezing others out of a market where premium costs have simply become too high. In effect, this is what happened to the health insurance space in the United States.
Carriers should keep one eye on the technology advances, but also consider working to frame a broader industry consensus on how some of this should be applied. If a regulatory response is probable, the old adage that the best defense is a good offense could take on new meaning here. The future is fast arriving, and now is a great time to consider the implications. Data and IT strategies that can prepare carriers for this future should be very much top of mind.
This is also a great time for carriers to join Novarica in NYC for curated InsureTech Summit events focused on commercial lines and individual/group life lines of business. Seeing what is happening in this space can provide invaluable new perspectives.
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