By JAMES MCCULLY,
product marketing manager, underwriting / policy administration at Guidewire Software, a provider of policy administration, underwriting, claims, and billing management solutions for the property/casualty insurance industry.
Property/casualty insurers finally have access to modern core systems and the technology needed to dramatically improve insurance delivery. An important question, however, is how to best use this technology to deliver maximum business value. One answer is to automate operations as much as possible, but there is an opportunity to do so much more.
Unlike automation where the focus is on increasing the speed of tasks and processes, a precision approach focuses on improving the quality of processes. Using the analogy of the production assembly line, the line can be run faster to turn out more product, but in a modern assembly plant, speed is only one consideration. Minimizing scrap, waste, and inventory while meeting quality tolerances is more often the goal.
Modern principles call for continually analyzing and retooling operations to bring about ever greater business value. They rely on controls, systems, and information to increase accuracy, provide support and resources, and more exactly match processes to need.
Four such principles applicable to insurance include:
-- Use data to provide the right information at the right time to inform decisions.
-- Find bottlenecks to uncover flaws and fix them.
-- Simplify processes to reduce errors and increase quality.
-- Eliminate waste to maximize return.
Insurers could use these principles to experiment, scrutinize to find information that drives better decision-making, get into the details of the logic applied at each step, and observe users to design processes that avoid wasted effort.
To illustrate this point, consider three examples of applying automation to an insurance process as compared to applying precision principles. Examples of processes that lend themselves perfectly to both automation and precision principles include: policy renewal, underwriting risk analysis, and product selection.
The policy renewal process can be extremely intricate, but the basic steps are consistent:
-- Policies that should imminently renew are identified, triggering pre-renewal activities, perhaps 30, 45, and/or 60 days in advance.
-- The policy is re-evaluated using as much new data as available to support a decision on how to change and price the policy.
-- The renewal must be executed on schedule, the policyholder and agent informed, the billing process initiated for the new term, and all the downstream financial systems updated.
To simply automate the process, an insurer would consider every opportunity to streamline and speed the burden of work, automating the start of the renewal process and the screening for no-touch renewals, for example.
A precision approach, focused on improving the quality of the process, would widen the scope of evaluation beyond speed, to include everything that might improve the accuracy of decisions and maximize the leveraging of human expertise. The results would be more significant and bring the potential for real competitive advantage.
Using the four principles presented earlier, the insurer's analysis might go something like this:
Eliminate waste: Perhaps some policies are still being assigned to underwriters that could instead be dealt with automatically. If business rules were modified so these types of policies were handled by straight-through processing, waste would be eliminated.
Find bottlenecks: Each underwriter makes decisions about the policies for which they want updated demographic data--a time-consuming undertaking. A bottleneck can be eliminated by grouping policies for this purpose and having the data automatically imported.
Use data: Knowing how timely customers are in paying their bills and what claims they've had would be helpful during renewal. Insurers can automate to bring that information into the underwriting desktop. They can then fully re-underwrite, taking into consideration all the available data, rather than just considering a few factors.
Simplify processes: When billing and claims information is added to the underwriting desktop, additional underwriting factors are introduced. While the additional information might make for better underwriting decisions, it adds another level of complexity to the process. However, if a weighting system that graded policyholders on their payment habits and claims history were used and applied uniformly and automatically, insurers could simplify this process.
The underwriting risk analysis process is time-sensitive to meet customer service expectations and includes basic steps:
-- The submission is confirmed as meeting the insurer's business appetite.
-- Underwriting reviews the data provided and may augment the information with outside sources.
-- The risk is then analyzed to determine if it is within company risk tolerance and can be adequately priced.
-- The underwriter makes the decision on risk suitability and terms, and then either submits a quote or declines the application.
Automation improves efficiency and speeds the process by reducing manual work. One way of reducing underwriting time and effort would be to write business rules that would automatically segment assessment types and assign them to appropriate specialists. The insurer could also set business rules to automatically order reports based on characteristics of the policy being applied for. While this automation of tasks would save time, there are no actual process enhancements.
A different approach, a precision approach, would be to look wider across the organization, deeper into the process, and higher on the task hierarchy. This approach opens the possibilities for greater accuracy and for processes aimed squarely at better delivery of insurance at greater profit. The thought process of an insurer applying a precision approach might go something like this:
Eliminate bottlenecks: Eliminate an operational bottleneck by automatically screening out unwanted submissions and eliminate a policy-review bottleneck by better matching each policy to the underwriter's skill set.
Use data: Some underwriters know when additional coverages or exclusions are necessary. Determine what attributes they consider and use business rules to flag those policies so all underwriters will uniformly write business within the insurer's preferred coverage/risk balance.
Simplify processes: Underwriting across policies should be on par for similar risks. Simplify by automatically performing best practice analyses for similar risks across policies, or even have the system suggest an outcome.
Reduce waste: Look at those policies not selected by the prospective customer. Significant effort can be expended reviewing a submission and preparing a proposal, only to have the prospect go with another insurer. Track reasons for the lost opportunity. Analysis and understanding would help the insurer refine its risk appetite or offering to improve close rates.
The product selection stage of the new business process is yet another area to compare and contrast. Basic steps include:
-- The prospective insured or their agent determines the need for an insurance product.
-- A particular product is selected and the risk information is collected.
-- The coverages and options are tailored to suit the insured's specific needs.
Applying automation, the insurer might speed the product selection by adding short questionnaires and segmentation logic on its agent portal or public-facing website, narrowing down product offerings for applicants. And they might automate evaluation of commercial applications by breaking out the various decisions and assigning them to underwriters based on their expertise. Again, improved process speed is the sole benefit.
Alternatively, with a precision approach, the insurer could look to improve accuracy, delivery, and decision-making across the entire process. Their thinking might be:
Reduce waste/eliminate bottlenecks: Look at improving abandon rates between quick quote, application, and bound policy. Better profile customers at the outset, offer more options so that they self select correctly, and ask the right questions so the initially quoted and final bound rates are consistently close.
Simplify processes: Set up the system to pre-fill much of the information needed using external sources. With fewer questions to answer, the process becomes markedly simpler and quicker for the applicant, resulting in an improved user experience and service.
Use data: Look at the profile of the prospect and risk in relation to the product selected. The insurer may be able to recommend additional options or coverage to up-sell.
There is tremendous potential when precision is applied to any and all key insurance processes. Once an insurer adopts a mindset of applying a precision approach in addition to the obvious opportunities for automation, they can gain significant improvements in efficiencies, service capabilities, competitive advantage and their bottom line.
The real value of new core processing systems is not just the one-time automation they bring, but the ability of some systems to enable continuous improvements in accuracy, productivity, decision-making, and profit. The key being that automation -- a perennial focus of insurers -- and productivity are not synonymous.
While you can pump water harder, if you have a leaky pipe you will get better returns from actually fixing the pipe. Likewise, reduced loss adjustment or underwriting expense are valuable goals, but it's much more valuable to minimize indemnity leakage and make good underwriting decisions to control the loss ratio.
August 1, 2011
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