Underwriters face two kinds of pressure, explains Donald Light,a senior analyst with Celent. One is the need tosecure more business. The second is to make sure any business theywrite is profitable.

“Those often are contradictory pressures,” he says. “The easyway to get more business is to offer really cheap prices, but thebest way to make sure your business is profitable is to maintainyour pricing stance and not make concessions.”

Those pressure points are inflated by what Light calls “aprolonged recession or an anemic recovery, whichever phrase youprefer.”

One problem facing the industry is the amount of insurablebusiness has decreased as the economy has suffered.

“There are fewer businesses, fewer employees, fewer buildings,and fewer products being produced and sold,” says Light. “Thepressure to try and maintain the top line–get business on yourbooks–is pretty severe.”

Claudine Modlin, senior consultant at EMB, maintains underwriting andpricing have to go hand in hand. As pricing gets moresophisticated, the underwriting strategy has to adapt accordingly,she adds.

“Underwriting picks up where pricing lets off,” says Modlin.“Fifteen years ago there was a lot of subsidization in the ratesand underwriting was designed to allocate risks in light of thatsubsidization. Now that we see rating plans become much moreaccurate, underwriting has to adapt.”

When bad times come, all parts of the insurance foodchain–insureds, agents, carriers–are affected, explains PaulZamora, vice president of underwriting for ICW Group.

“You have to look at how you can do things more efficiently,” hesays.

For carriers, that means automating as many processes aspossible, particularly some of the minute tasks performed bycarriers and agents–data entry in particular. “How do we automate[those tasks] so we can do them more efficiently and process morebusiness without additional costs?” asks Zamora. “Insureds aresaying they can't afford to pay more in premiums–they have to findways to cut expenses. Insurance premiums are one of the areas wherethey are looking at to save money. [Carriers] have to make sure wehave competitive prices and in order to do that we have to automateas much as possible.”

Commercial Lines

The greatest challenge to automation has come in the commerciallines, points out Modlin. Commercial lines traditionally have beenhigh-touch in terms of underwriting activity with more wiggle roomfor the underwriter.

“Now what we are seeing in terms of underwriting strategy iseither more discipline on the manual filed-rate side or morediscipline on the scheduled-rating side,” she says.

Actuaries might be using statistical models to fit the rates andthere are underwriting models that use a variety of explanatoryvariables and are essentially unconstrained to determine what thebest rate might be, explains Modlin.

“The underwriting strategy should be designed to pick up thedifference between the two,” she says. “If the filed rate is $1,000but the underwriting model suggests it should be $1,200, that tellsyou right there that is a piece of business that is underpriced.What can underwriters do to adjust for that? Can they apply a debitin terms of scheduled rating debits? Can they choose to put it in adifferent company–more of a nonstandard company? Those are the waysunderwriting strategy has changed–the discipline around scheduledrating plans and the discipline around modifying the filedrates.”

Today's Market

Two strategic choices are affecting today's market, according toKaren Pauli, research director for TowerGroup.First, there are carriers that made the decision to keep competingfor business no matter what. Secondly, there are carriers thatdecided not to play that game.

The second group “is not going to get into a competitive bid forbusiness,” says Pauli. “They are going to hold to theirunderwriting standards and pricing guidelines and if they loseground, well, they lose ground.”

Pauli believes smart carriers are the ones that discovered whotheir best producers were, what their best class of business was,and had the technology to focus on pricing strategies that werespecific, finite, and focused–both geographically and with theproducer in mind.

“You have to be disciplined to pull off strategies,” she says.“The analytics is the key piece right now to assess your best risksand where you have some capabilities to up the price of somecoverage without blowing the customer out of the water.”

Zamora feels ICW Group has taken major steps over the last twoor three years to prepare for the inevitable return to a hardmarket

“We recognize that in order to be successful as the marketstarts to harden you have to have a competitive price,” he says.“We've already laid the groundwork from a technology standpoint. Weare operating about as efficiently as possible.”

Zamora also believes the hard market is around the corner.

“I originally thought it would be the fourth quarter of thisyear, but I'm now predicting it will be the second quarter of nextyear,” he says. “We're seeing carriers increase prices inCalifornia. We're seeing carriers produce results that are notprofitable. There is less reserve for them to dip into to maketheir financials look better. Carriers that are going to thrivewill have to operate in a highly efficient manner. We'rethere.”

Light doesn't agree with Zamora's assessment. He believes themarket remains soft, with a few exceptions, such as offshore oilrigs and the energy sector. “Much of that is driven by the lack ofa robust economic recovery,” he says.

Underwriting Trends

From a technology standpoint, Light sees three trends prevalentin the underwriting field:

o The development of underwriting workstations

o Automation of tasks within the underwriting process

o The use of analytics

Celent analysts are finding more interest among insurers inmoving to the next generation of underwriting workstations.

“In one sense, any underwriter that does any part of theunderwriting job with a computer has an underwriting workstation,”he says. “Insurance companies are seeing the value of having anintegrated set of screens and capabilities, both for inquiry andfor seeking and processing data all in one place with coherentnavigation and the ability to share information within the company,with the producers, and sometimes with the insured partiesthemselves.”

Some vendors have developed underwriting workstation products,but Light points out many policy administration solutions aregiving new business functionality much more attention, which hefeels translates into some form of underwriting workstations.

Automating Tasks

One area that has helped insurers improve decision-making iswith the emergence of business intelligence solutions, according toLight.

“Business intelligence can be thought of as occupying a kind ofmiddle ground between conventional reporting and the analyticprocess,” he says. “Business intelligence will borrow from bothworlds and try to show a lot of data that can be manipulated tosome degree and drilled into to some degree by the lineunderwriters and different levels of management. The fruit ofapplying analytics to the underwriting process to some degree canbe garnered by the intensive use of business intelligence systems.Small or midtier carriers might be steered to a businessintelligence system where prices have come down and things are moreaccessible.”

Modlin sees more automation in underwriting today, particularlywith business rules engines. “There always will be a bigger rolefor underwriter intervention on the commercial lines side,particularly for larger risks. But for some segments of theportfolio–even some like commercial auto that almost smell and feellike a personal lines risk–I could see there being a lot moreautomation and more business rules engines to make the entireprocess more low-touch from the underwriting perspective and savingsome of their time and energy for larger accounts.”

Modlin doesn't believe the role of the underwriter will diminishin the area of the larger account risks that are more individuallypriced.

“[Underwriters] have to be involved in the monitoring of thisbusiness,” she says. “Are the business rules working as designed interms of what business we are converting, what frequencies and lossratios are being achieved? There has to be a stringent monitoringsystem in place once these rules roll out.”

Business rules engines “have a really good place on this earthfor things like knockout rules and triaging business so theunderwriter can really focus on the best things,” says Pauli.

She believes every carrier needs business rules engines, but shepoints out they are backward looking.

“You adjust them based on having reviewed your last quarter'slosses,” she says. “You bring your top senior underwriters togetherand craft the rules and put them in. They are really important, butthey are not as good as the analytics models.”

Predictive Analytics

Light feels the use of analytics in underwriting is at an earlystage.

“Underwriting decisions are made by some combination ofunderwriting policies and underwriter judgment,” he says.“Analytics is viewed as a third force in how different underwritingdecisions are made. An analytic toolset can be applied to a largeamount of data and give insights into the characteristics of a riskbeing submitted for coverage.”

Even tier-one carriers still have to have the analytic toolsets,the people who use the tools, and the willingness of seniormanagement to incorporate the insights that are obtained.

“The difficulty for smaller companies, unless they tap intooutside data sets, is they may not have enough data or informationto apply the tools,” says Light. “Plus, [the tools] are relativelyexpensive and you have to have the staff that can use them.”

Underwriters need to be intimately involved in the analyticalprocess, points out Modlin.

“You can have statisticians or actuaries fitting modelsinvolving all these variables, but the underwriter sniff-testability is invaluable,” she says. “They need to be part of theanalytic process in designing these business engine rules and towhat risk the rules will apply.”

Pauli believes larger carriers have a distinct advantage in theuse of analytics. Many of them have successfully used analytics inthe personal lines and are bringing them into the commercial linesarea now.

“It's the larger carriers that have been able to do that,” shesays. “They have capabilities. They have data. They have IT people,and they can focus on that. Probably one-third of the carriers cando that and they are the bigger folks.”

It's not the cost of analytic tools that is the holdup, explainsPauli.

“What I think is the general perception and to some degreereality is you have to have your data in good order,” she says.“You have to have aggregated data and a data warehouse.”

Pauli believes analytics can help because there are someprocesses that can be automated and there are some issues where theunderwriter needs decision support.

“It's hard to slay the dragon of tradition that commercial linesunderwriting is an art form,” she says.

Straight on Through

Most carriers have developed straight-through processingcapabilities where an agent can get online, answer some questions,and get a quote within minutes, explains Zamora. This meanscarriers have to become more efficient in processing business tostand out from the competition.

“You have to make it easy (for the agent and the insured) andstraight-through processing has changed that substantially,” saysZamora. “Technology has allowed us to be much more efficient inmanaging our processes and has allowed us to turn the quote processaround quickly.”

At one time, ICW Group had a much larger data-entry staffbecause the carrier would get most of its policy applicationseither through e-mail or fax and had to rekey all the data,explains Zamora.

The problem was compounded by internal systems that were unableto communicate the different aspects of the process with eachother.

“On our side, all those systems communicate,” says Zamora. “Wedon't rekey data so we can operate more efficiently with a smallerstaff. Our procedures have changed substantially in terms of how wemanage our day-to-day workflow.”

Zamora credits the underwriting solution from FirstBest–whichICW Group has branded Snap–with giving the carrier a competitiveadvantage.

“We are the only carrier in California that has this uploadfunctionality from a workers' comp standpoint,” he says. “We canupload the data through [the agents'] agency management systems, sowe don't require agents to go online to our system to rekey thedata. We have streamlined their workflow and we can offer a quickturnaround from a quote standpoint.”

Price Optimization

Modlin believes the industry is seeing more pricingsophistication on the personal
lines side.

“Whether that is the use of better methods–those that are morestatistically based–or whether it is tapping into additionalexplanatory variables, I think those are enhancements,” shesays.

Modlin also sees better treatment of what she calls the highdimension variables, such as getting the right price bygeography.

“There might be hundreds of ZIP codes in a particular state,”she says. “How do you combine them in the right manner to getbetter territorial definitions?”

Another area that excites Modlin is the use of priceoptimization techniques. Actuaries involved in pricing businesshave developed what Modlin calls a cost-based rate.

“There's always been confidence around that rate, but it's thebusiness' job to tweak that rate in a certain direction based oncompetitive pressures and not wanting to overly dislocate theexisting portfolio,” she says.

Goal

What some carriers have done is pass on work to the agents, aroute ICW Group has purposely avoided.

“We found a way to use network functionality so both [the agentand the carrier] can be more efficient,” says Zamora. “If carriersare going to be successful in the future, they have to offer acompetitive price and to do that they have to be more efficientthrough technology.”

ICW Group is looking to accomplish that by putting its bestunderwriters together, picking the biggest class of business, andfinding the best approach to underwriting. Zamora feels rulesengines and decision-making technology allow ICW Group to be moreconsistent in its approach to underwriting, but that has brought achange in the responsibilities of underwriters.

“The old-fashioned underwriter was more like a goalie: How do Ikeep the carrier from making a mistake?” explains Zamora. “Now ourunderwriters are more focused on sales–building relationships withour agent and broker partners. They are spending more timeanalyzing risk and less time with the data entry stuff.”