by Tim Dodge
How life insurance used to be underwritten: Sales agent meets with prospective client. Takes written application for coverage. Mails application to company. Application goes to underwriter's desk. Underwriter requests additional information, such as the results of a physical exam. Underwriter receives requested information. Application is accepted or rejected. Underwriter orders the policy to be issued. Policy is issued. Either the company bills the customer directly for the premium or the agent collects it from the customer.
How life insurance can be underwritten now: Customer fills out brief questionnaire on insurance company's website. The insurer's backend underwriting system reviews the answers and amount of insurance requested. Customer may be immediately informed that the company will issue the policy. Customer enters a credit card number to pay the premium. Otherwise, the application goes to an underwriter for further review.
As this simplified comparison shows, life insurance underwriting procedures today are a far cry from what they were years ago. Consumers today are used to being able to shop for and price products and services online. They want immediate responses from businesses. A life insurance company that tried to underwrite policies the old-fashioned way would be out of business very quickly.
Life insurance underwriting is changing. Technology, in the form of electronic underwriting rules (EUR) systems, predictive underwriting, point-of-sale underwriting, automated case management, data collection and analysis, and outsourcing, is driving these changes and helping insurers operate more efficiently and meet customer demands.
Rules-based underwriting systems are now available from software developers such as Step Solutions, Accenture, StoneRiver and Majesco. Some insurers, such as Principal Financial Group, have created their own proprietary systems. SBLI and others have adopted e-signature technologies to shorten the application process.
EUR systems automatically apply the insurer's underwriting rules to cases submitted electronically. An agent or prospective buyer completes an online questionnaire. The system then decides whether to accept or reject the case or refer it to an underwriter. Some insurers may decide to have minimal automatic handling. For these insurers, the system does an initial screening for factors such as age, gender, smoking habits, and general health. After that, the case goes to the underwriter for in-depth review.
A more automated approach is to allow the system to screen applicants and issue some policies without any human underwriting involvement. For example, the rules may permit the system to issue policies with face values below $100,000 without referrals to underwriters. A fully automated system removes the human touch altogether. The system screens, approves or rejects applicants. It then tells the policy administration system to issue new policies for accepted applicants.
Predictive underwriting applies data to previous applications for coverage and uses it to explain patterns in the underwriting results of those applications. It then uses these explanations to predict the results from new groups of applications. This simplifies the underwriting process from the buyers' standpoints. The process becomes easier for them and improves the chances that they will purchase the policies. Insurers may want to use this for healthy prospects shopping for relatively low face amounts. It can also help insurers segment potential buyers, simplify questionnaires, and create models of likely purchasers.
Point-of-sale underwriting systems have similarities to EUR and predictive underwriting. All three can encourage consumers' direct purchase of insurance from the insurer. Agents can also use POS systems to deliver real-time quotes based on information validated immediately. The systems can build in predictive underwriting to provide a quick idea of a case's profit potential. They can also use e-signature technologies to speed up the application process.
Automation can also assign incoming cases to the most appropriate underwriters. For example, systems may sort applications by the type of product (whole life, universal life, term, etc.); once sorted, the applications for variable life products would go to certain underwriters. Systems could also sort applications by face amount. Applications for large face amounts can be automatically sent to more experienced underwriters.
Underwriting systems can pull data from third-party sources so underwriters need not order and wait for reports. This gives them a more complete picture of the risk in a shorter timeframe. It also allows them to quickly verify information provided by the applicant. With enough third-party information, underwriters may be able to waive medical exams, speeding up the process and improving efficiency.
The reports that systems can retrieve go beyond health information. Systems can obtain motor vehicle records, credit reports, and financial records such as mortgages. Applying the rules set up in the EUR system, underwriting decisions can be made quickly and with little or no human involvement. A report by Ernst & Young foresees insurers using data such as social media activity in the process. Online activity, the report notes, can leave a record of an individual's eating, smoking and drinking habits; how much he travels and where he goes; whether he belongs to (and visits) a gym; whether he participates in risky sports activities; and family health issues that he might not have disclosed on the application.
In addition, the customers themselves can transmit data to insurers via wearable technology. This includes items like smart watches, fitness trackers, and blood pressure monitors. This enables what Celent referred to in a recent report as "post-underwriting" - evaluating the insured after the purchase. Some insureds, worried about privacy, may hesitate to do this. However, others may be attracted by potential premium savings.
Insurers are increasingly turning toward outsourcing certain functions to third-party vendors. Activities that do not provide a competitive advantage or that are relatively simple may make sense to outsource. Tasks that create processing bottlenecks may also be attractive candidates.
Another Ernst & Young report from 2014 forecast that tomorrow's life insurance underwriters will wear multiple hats. They will be sales executives; decision scientists; customer advocates; and innovators. Look for life insurers to continue seeking out new ways to use technology. Those who can shorten the underwriting cycle and close sales faster will be in the best position to succeed.