As technology becomes more pervasive across all industries, human knowledge and discretion must cut through the clutter. In insurance underwriting specifically, many processes that were formerly handled by humans can be eliminated, but one thing remains true: technology cannot replace the benefits of human capital.

With technology adoption becomes increasingly prevalent in the insurance industry, the human element remains valuable in leveraging the onslaught of data that comes with it.

Here are three common misunderstandings of technology's impact on underwriting:

Myth No. 3: Big data replaces human capital.

While technical underwriting can provide some great advantages, a human element is always needed to validate the data. Many underwriting companies aim to cut placement processes by 80 percent using technology; however, when actually implemented this does not occur. While technology and data driven analytics can assist with some of the underwriting decision process, it cannot be relied upon exclusively for writing business.

Technical underwriting is only as good as the data you put in. If an underwriter is determining the rate for property risk through a statement of values, the technical price will be automatically computed based on information like construction, occupancy, protection, exposure data, earthquake zones, flood zones and heavy wind zones. But this is just the first step. Insurance companies must still rely heavily on underwriters to provide the human touch beyond the data. Insurance companies can then benefit from underwriter discretion and knowledge of business circumstances in determining exactly how much risk a client can take on and at what price. Technology does not offer the ability to take these factors into judgment.

Data can be a useful tool to justify risk models based on past events and the market environment, but clients also rely on brokers and underwriters to know their business so that they can explain this data and how it best informs their insurance needs.

Technical underwriting is only as good as the data you put in. (Photo: iStock)

Myth No. 2: Data knows all.

Every company or risk has a story. It is important for underwriters to understand this complete story when developing a plan to assume that risk and at what rate — something that technical underwriting simply cannot provide. Once technology has provided an initial view based on data, it is then the job of the broker to get the underwriters in front of the company's management to understand how they are handling their potential risk and have prepared for disaster recovery. There are many important questions that underwriters can ask their potential clients to understand the personality of the company and their contingency plan should something happen. The human underwriter can ask: What is your approach to risk? What steps are you taking to avoid risk? Do you have other facilities? Do you have contingencies in place if an event occurs?

Take a manufacturing company, for example, that is located on Florida's coast and seemingly would need to stop operations should a major storm hit its location, causing the company's revenue to drop during repairs. At least, that's what the technical model assumes. However, what it does not know — and a human underwriter will learn from talking to the broker and company management — is that the company owns a separate facility outside of St. Louis that can increase production if needed. If the insurance company relied exclusively on the technology, they would likely decline this business or charge a rate that was unacceptable because the risk was too high, losing an opportunity.

By not relying solely on data and technical underwriting to calculate a client's risk, insurance companies are not only making more informed decisions about their pricing, but also building relationships with their potential clients to serve as partners both in times of risk planning and incident damage control.

Every company or risk has a story. It is important for underwriters to understand this complete story when developing a plan to assume that risk. (Photo: iStock)

Myth No. 1: Tech underwriting generates a higher price.

It's a common misconception that technical underwriting generates a higher price and risk potential compared to underwriters computing it by hand. Not always. From a business perspective, underwriters can leave money on the table because a technical price can be significantly under the market price. On the other hand, the technical price could also be significantly above market price, causing the company to not be successful with the broker submissions they receive.

Because the technology needs all possible information keyed into the model, if an unknown goes in, the model will often jump to the worst possible conclusion. By having an underwriter who knows the unique factors that are a part of the insured's story, they can factor-in context so that the data set does not automatically assume the highest possible risk.

For example, the technical model may see that a building's exterior is made entirely of glass, causing it to produce a higher probability and severity of risk. A broker would have done his or her research to learn that the glass covering the exterior is hurricane-resistant and built to withstand high winds and communicate this to underwriters. Because the underwriter did not rely on technology to monitor these details, this business opportunity remains on the table. Though technology can be highly beneficial in insurance underwriting, providers must be careful to avoid allowing data to completely infringe on the underwriting process.

There's a great deal of value in data, but we cannot lose sight of the value of human capital in the process. By marrying human capital with data, we can provide the best counsel and risk mitigation to clients that takes various factors into account.

Marrying human capital with data provides the best counsel and risk mitigation for clients. (Photo: iStock)

Negotiating with carriers

Insurance brokers can also become consumed with data about the placements that they make, looking into pricing, limits, timelines and structure of past placements. While it's good to know and understand your product, focusing too heavily on these numbers borders on losing interaction between people. If a proposal comes in from an underwriter and they have a certain pricing, larger brokers often look at their data set internally to see what other products are going for and if the rating is within their range. However, on many occasions when we do the extra work by talking to underwriters, leveraging data and learning the client's story, we'll find that things that we place will typically be on the very low end of a data set or sometimes even outside of it. At Stephens Insurance, we don't aggregate placements and order them on the basis of who can handle increases and who is expecting a decrease, but instead we evaluate the market price for each individual risk and push for the best possible outcome for clients.

Stan Payne is executive vice president and director of the Property & Casualty division at Stephens Insurance. Stan can be reached by sending email to stan.payne@stephens.com.

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