Brilliant apart but better together

“As companies seek to modernize underwriting, they must strike a delicate balance to manage the tensions of art versus science, automation versus judgment, and autonomy versus control.”

From art to science: The future of underwriting in commercial P&C insurance, McKinsey & Company

As technology evolves ever faster, we humans can sometimes feel left behind. In insurance, where human judgement has always been important, some underwriters feel that developments in artificial intelligence (AI) could be making their role obsolete.

They’re missing the point. The wise insurer knows that underwriters and their insight are essential to the future, however powerful AI it becomes. For a business to succeed, it will have to pay the same attention to the human spheres of culture and talent as it does to data, analytics and machine learning.

Businesses invest a great deal of time on the end-user or customer – it is seen as the sexier end of digital transformation. But they also need to make sure that the people and processes within an organisation are equipped to make the most of the digital opportunity.

Data-rich competitors

Big tech companies like Amazon, Google and Facebook entering insurance pose a huge threat. These organisations are already way ahead in their use of data.

Even high-street names are increasingly digital. For example, Nationwide Building Society extracts data from unstructured sources, such as free-form text fields – where users can type in their answer rather than selecting from a dropdown list. This improves model input accuracy in real time, which helps the company make faster and better decisions.

In 2020, Deloitte surveyed 200 chief underwriting officers or equivalent business leaders from around the world for its 2021 insurance outlook. One of the trends it highlighted is that underwriters “are being challenged to move from hindsight, where underwriting decisions are made after the fact, to foresight, where portfolios are monitored to assess the impact of risk in real time”. In the future, historical data alone may not be enough to underwrite an evolving set of risks.

The solution is for insurers to automate routine tasks and use emerging technologies and alternative data sources to empower underwriting professionals, freeing them up to learn new skills and take on enhanced responsibilities.

Hand on the tiller

In Deloitte’s survey, respondents cited “greater use of automation, alternative data, and artificial intelligence” as the top three changes they need to make in the underwriting process to stay relevant through 2021 and set the stage for growth.

But to make these developments effective, they will need to look to the people who will use them.

Yes, people generally represent the highest cost to an organisation. However, training and encouraging them to be the best they can be has never been more important. As insurtech evolves, roles like underwriting will need to change and modernise as well for insurers to remain competitive.

Making underwriting easier

It’s understandable that people are nervous about tech replacing them. But underwriters who embrace the digital path can enhance their core skills and expertise, allowing them to widen their career paths. Deloitte observed that data-driven tools can greatly supplement human judgment, enabling many successful underwriting teams to outperform peers. Ultimately, these technologies will probably make their jobs easier.

Recent research from McKinsey’s Journey Analysis, which looked at leading commercial-focused P&C companies over the past three decades, shows why consummate underwriters should relax.

In some businesses where leaders applied the ‘black-box’ approach, favouring AI and advanced analytics over underwriters’ judgement, McKinsey found that “this overemphasis on analytics led to a vicious cycle in which imprecisely modelled guidance did not accurately anticipate future risk experience. As a result, underwriting performance deteriorated, staff lost faith in the models, and (since judgment and creativity were discouraged) underwriting skills diminished.”

Art versus science

Underwriters aren’t inexpensive. Improving their processes, quality and volume can only be of benefit. Automation can remove human error, improve quality control and minimise risk, allowing underwriters to get on with doing the work they are qualified to do. Better systems in a company empower existing employees and attract new talent, which in turn increases output and improves job satisfaction.

Through hard experience, companies now appreciate that the black-box approach does not work. For businesses to thrive, the environment in which underwriting operates is as important as the technology that is emerging around it.