Recently, I was asked to share my thoughts on life insurance underwriting in the future, with an eye toward what I would start planning now for a new and improved approach that could be implemented by mid-decade.
It is a big and interesting question, given the critical nature that the function plays in all lines of business, compounded by the issues created when a product set is blessed with an impressively long liability tail. Given that repricing on renewal isn’t an option for many of these products, and that underwriting for the moment remains a “once and done” effort, getting it right the first time is critical.
One of the other challenges, however, ties to demographics. As in other key functions, the current population of experienced underwriters is aging. For many carriers, their distributors are as well, with the average age of an agent now cresting 62. While that isn’t an especially old age, as an average it is stunningly high.
Industry data also shows that most life insurance companies have failed to develop effective strategies for selling products and services to anyone born after 1975, the midpoint of Gen X. Gen Xers themselves will hit the half-century mark during the current planning cycle. While this has led to issues in product design and distribution, too, but underwriting has its own considerations.
Here are the key areas insurers should focus on in underwriting from the perspective of people, process, and technology.
- An acquisition program for the next generation of talent is critical. With underwriters aging, sourcing the next generation is an immediate question.
- An effective training and development program is also critical. This has become even trickier than it was in the past. Automation means that many lower- and entry-level positions that have historically been used as training grounds are gone since those were the easiest things to automate for short-term cost savings. New programs will need to be implemented and continuously updated to deal with the ongoing surge of technological capabilities and process changes.
- Knowledge management is key to supporting what happens with people, and sharing things across generations is even more important given the changing views that people have of their career paths. Tours of duty for millennials and Gen Zers measure more in the 3-4-year range than the 30-40 years that were a fixture of earlier generations.
- Many companies supported underwriting remotely well before COVID-19 became a reality. This will continue to be the case, of course, but collaboration between home office and field partners will be critical with new generations employed on both sides of the wire. Perfecting this will be key to future success.
- Culturally, as more is automated, the whole question of “is it art or science” will again emerge. A company will need to both answer the question and have an effective change management process in place lest it create passive aggressive resistance to change.
- Tooling which supports automation is foundational. Creating the process of the future will require some notable rethinking of efforts. Imagining a different future rather than just using technology to make bad processes go faster will be key.
- Processes will need to be flexible in the future to accommodate an array of changes, as data sources change, algorithms improve, and regulators come to grips with what is permissible and what is not. The state variations may be significant in the future, too, indicating that additional flexibility in the process may be necessary while avoiding regulatory trip wires.
- Speed will of course be important, but perhaps even more important than absolute speed (once an acceptable throughput level is reached) will be operational transparency. Black-box processes are simply a bad idea going forward. Operational transparency can be easily addressed when people understand what it is—it is the foundation many people think about when they describe an Amazon-like process.
- Testing and compliance will be important, too. It is not unlikely that in pursuit of automation, speed, and improved profitability unintended bias will be introduced into the process. Concerns about this in group insurance are already clear, where plan sponsors increasingly ask carriers to “prove” that there’s no bias in what they do from a pricing and underwriting standpoint. Carriers should consider how they will react when regulators ask similar questions.
- Carriers should be mindful of how all this ties to field operations. As carriers move toward third-party distribution, they will lose control of some of the elements of the process they hold near and dear. How they consider an outside-looking-in perspective and support field relationships where they need integration may have a lot to do with their share of a distribution partner’s book in the future.
- There are plenty of commercial capabilities in the market to choose from. Buy, don’t build. Configure, don’t customize.
- Look for solutions with robust workflow capabilities that can automatically route work based on underwriting skills and experience. Skill-based routing can improve process, add to productivity, and help deal with volume ebbs and flows.
- Capabilities that can auto-adjudicate work up to specified dollar amounts and retention limits are key. Some carriers are already auto-adjudicating high-face-amount policies with effective data access and algorithms.
- Consider the capabilities and needs of a primary carrier’s reinsurers, and consider what tooling the reinsurer may already be bringing to market which can leverage treaty provisions.
- Data is going to be key in the future, so continuously considering the appropriate types and sources of data will be important. At the same time, keep an eye on the regulatory world to see what guidance may be forthcoming from the NAIC or the Departments of Insurance for each state a carrier operates in. Data-driven, algorithmic solutions that sound cool conceptually may turn out to be problematic depending on how discussions about how best to deliver on the social contract provisions of insurance evolve. As an insurance commissioner once said, “a risk pool of one…is no longer a risk pool.”
The future is arriving surprisingly quickly. Now is a great time to start preparing. If you’d like to discuss the evolution of underwriting in more detail, please drop me a note at [email protected].