McKinsey & Company finds that most P&C insurers in North America and Europe are investing in data and analytics to improve underwriting.
Those with the most advanced capabilities will enjoy better underwriting results and financial performance, the think tanksaid in a report entitled How data and analytics are redefining excellence in P&C underwriting. Underwriting excellence is also one of two key traits that industry leaders possess, the other being pricing sophistication, say analysts Kia Javanmardian, Sirus Ramezani, Ashish Srivastava and Cameron Talischi.
“Best-in-class performers are putting distance between themselves and competitors by building advanced data and analytics underwriting capabilities that can deliver substantial value. For example, even the leading insurers can see loss ratios improve three to five points, new business premiums increase 10 to 15 per cent, and retention in profitable segments jump 5 to 10 per cent, thanks to digitized underwriting.”
The McKinsey analysts predict that P&C insurance manufacturers will increasingly use the power of data and analytics to proactively assess their outlooks and identify market opportunities ahead of the competition, similar to the way hedge funds predict capital market developments.
How do the leaders do it?
McKinsey’s report is brimming with examples. One shows how insurers are using advanced data and analytics to reimagine risk assessment, improve the customer experience and enhance efficiency and decision making throughout the underwriting process.
“The same insights can often be used in loss prevention. Leading carriers regularly tap once-unimaginable volumes of third-party data from diverse domains, including environmental data, industry-specific data, location data, government data, and more. They have built agile capabilities to obtain, test, maintain, use, and reuse the data in their models,” the report explains.
This development also involves continual revisions of their risk models, McKinsey continues. “Of course, the hallmarks of underwriting excellence differ by segment, so insurers also rely on segment-specific data and their knowledge of underlying risks to inform the highest-impact use cases,” the firm’s report reads.
In personal lines, risk underwriting is enhanced through basic risk segmentation models and underwriting criteria guided by rules accumulated over time. In small personal lines, the introduction of a digital underwriting delivers a distinctive broker-agent experience, McKinsey says.
“As with personal lines, use of advanced analytics and external data enables a disproportionately high share of STP, with only complex risks routed to underwriters for review. Even for these risks, surgical flags target an additional review by an underwriter, thereby increasing the efficiency of the underwriting process and reducing turnaround times for decisions,” the McKinsey analysts note.
What about midsize and large companies? How are insurers integrating digital and analytics into much more complex risks?
Risk evaluation continues to depend on underwriter experience and judgment, McKinsey points out. All the same, the use of digital and analytics can help a firm identify risks for “light touch” renewal of a risk, or prequalify or triage potential new clients. McKinsey also notes that insurers in this segment are using analytics program interfaces to integrate their underwriting standards into digital workflows, allowing their underwriters to focus their attention on their area of expertise. “Managers can readily assess the extent to which underwriters are following the guidance and recommendations codified in the system,” McKinsey says.
The challenges
Integrating digital and analytics into underwriting processes to build agile, cross-functional teams takes some work for a P&C insurer, McKinsey warns. “Most insurance carriers limit their data and analytics efforts in underwriting to building specific use-case models and then revisiting these models every two or three years. Best-in-class insurers establish dedicated, cross-functional teams comprising representatives from the business team (product managers, marketers, agents, and underwriters), the analytics team (data scientists and engineers), and IT (solutions architects and user-experience and user-interface designers),” the think tanksays in its report.
The result is more valuable underwriting models with shorter working cycles that support rapid improvements. “Adopting this more dynamic approach takes some work, starting with a shift in leadership mindset but also including rewiring core processes, developing new capabilities, and increasing employee engagement,” McKinsey points out.
The problem is that many P&C insurers underestimate the effort required, McKinsey analysts warn. They often begin this digital journey without the skills needed to complete it.
“Achieving underwriting excellence ultimately hinges on having highly trained and motivated staff. Yet insurance executives often cite human capital—not financial capital or any other asset—as their scarcest resource in the current business environment,” the think tank’s report states.
Leading P&C insurers have acquired, developed and retained the talent needed to make the transformation. Upskilling and reskilling underwriters to the new environment is just as important as attracting new talent, McKinsey believes
“Leading insurers also recognize the need to make fundamental changes to frontline roles, such as underwriting and underwriting support, and to redesign frontline processes to take full advantage of new analytics tools. Because employees often struggle to change their work behaviors on their own, leading insurers make investments aimed at building both their capabilities and their confidence,” McKinsey explains.
Continuous improvement
Ultimately, insurers need to create a real-time feedback loop to ensure continuous improvement in their underwriting processes. “Leading insurance carriers have replaced periodic broad monitoring of market shifts in underwriting with real-time monitoring of market microsegments. They have supplemented their monitoring of internal indicators with monitoring of external competitor data to help them determine when and where to make underwriting adjustments,” McKinsey adds.
These insurers also conduct claims-trend analyses to identify product features that are proving more or less profitable than expected and that may warrant adjustments. “The key to success is detecting the impact of model, market and rate actions in weeks, not months,” McKinsey says in its report.
