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With every new technological promise to further automate underwriting come the warnings: underwriters are dead, long live underwriters. And yet once every putatively new technology, having swept through the industry, vanished once more, underwriters reappeared stronger than ever.

Who's kidding whom? Automated underwriting, which has been a staple of risk management ever since the insurance industry adopted the mainframe more than 50 years ago, will surely remain for the next 50 and beyond.

The core competency of underwriters, risk selection and pricing, have always remained, experts say. New automated tools at underwriters' disposal have only made their jobs more valuable as underwriters today have information on risks that wasn't available to them even five years ago.

"There will always be a need at some level for a knowledgeable worker who is well adept at risk selection and calculating pricing mechanisms, always," says Lou Balicki, vice president of information systems with Century National Insurance Co. in Los Angeles.

Balicki, who started at INA more than 35 years ago, says that the underwriter's ability to select and price risk dates as far back as he can remember. That's true particularly of complex commercial lines but even in simpler commercial lines and personal lines that lend themselves to automation.

"Even in the automated lines, you need knowledgeable individuals to direct what tools to apply to risks," he says.

For 50 years now, two minds, the mechanical one of the computer and the human mind of the underwriter, have learned to live side by side. One hasn't upstaged the other. Instead automated underwriting has turned into a powerful tool to complement the job of the underwriter.

"The better underwriters don't just adopt automated underwriting," Balicki adds. "They have demanded it. Veteran underwriters look at 200 risks a day, for one reason or another. The better ones want the automated underwriting and have even had a hand in its creation."

It's true that with every new wave of automated underwriting a handful of embittered underwriters may be shown the door, but ultimately, it's the support staff that often bears the brunt of the automation revolution rather than the underwriters themselves, underwriting veterans point out.

But that's to be expected, and happens in virtually any industry where members of the old guard refuse to change, according to longtime underwriters. In case risk managers hadn't noticed, there's not a commercial risk anywhere generating annual premiums of less than $25,000 in which underwriting is not, for the most part, completely automated.

Of automated underwriting's incessant march into areas once dominated by flesh-and-blood underwriters there can be no doubt, as underwriters call on software to help them select risks and calculate prices facing even the most complex risks.

But even that is a welcome trend, says Dan Munson, founder of CDS Business Mapping, the developer and marketer of the popular RiskMeter hazards mapping service used by more than 200 insurance carriers, as it will liberate underwriters to emerge into the light of "judgment."

"Automation is coming to (natural) catastrophes and nuclear risks as probable maximum loss is being written into the software," says Munson. "You want underwriters making judgments, not just rubber-stamping things."

"A lot of what automated underwriting does is to liberate the underwriters we've got," adds Tim Carter, chief underwriter for Zurich North America. "We're using models not to get rid of underwriters, but to give them good tools to work more effectively."

And judgment, often best exhibited by underwriters who can balance all the risks facing a large company and come up with the right price to reflect a corporation's exposures to those risks, can't be duplicated by a machine says Henry O. Schramm 2nd, a senior vice president for workers' comp at ACE.

"The judgment factor is very important because the difference in the judgment factor is knowing how to balance those elements and the variability within them and give the appropriate weight to them," says Schramm.

Executing the balancing act is where the limitations of scoring models and mathematical algorithms become evident, the underwriters say, and where the artistry and experience of the real-life veteran manifest itself.

LIMITING AUTOMATION

The largest commercial risks, those to which Fortune 500 companies are exposed, can never be completely automated, nor should they be, long-time underwriters say. In fact, it would be downright foolish to do so, as only the judgment of a veteran underwriter can balance the art of the premium paid with the risks to which a multinational is exposed.

Machines, notes Carter, are only as good as the data fed into them. "If you go with 98 percent flow (98 percent of risk untouched by underwriter) you're in trouble," he says. "It is important to be able to quote on a wide range of risks and that means that (human) underwriting intervention adds real value."

The trick is for underwriters to focus on the parts of the risk where the benchmarks are less predictive, says Carter. And even then, in the specialty lines or when it comes to risks underwritten by Lloyd's the risk is too diverse to be able to get as much data as necessary to accurately price a risk.

In commercial lines, says Jeff Beauman, vice president of underwriting at property insurer FM Global in Johnston, R.I., "The consequence of the error will drive routine tasks but once you get above that you take advantage of the experience of the veteran underwriter."

As corporations have changed, the consequences of risks to which they are exposed are greater than those to which they were exposed 50 years ago. "If they have a catastrophic fire the consequence is far more complex today than it used to be," Beauman says. That's because corporations today operate with business models based with fewer tangible assets but with the ability to produce goods with higher margins.

Beauman notes that FM Global differentiates itself from other underwriting companies because of its ability to call upon the skills of its 1,500 engineers to help underwriters assess the risks to properties the carrier is insuring.

Nor is automation always economically feasible, points out Bob Morrell, CEO of Riskonnect, a Marietta, Ga.-based vendor which helps corporations assess the risks they face across the entire company. "As lines become progressively more complex to underwrite, the technology required to automate becomes more costly."

Gerry Rojewski, vice president of ACE Environmental Risk, also notes that if clients want to change the terms of their policy an underwriter needs to get involved to be able to re-evaluate the contract and reset terms and price.

... so much for predicting the demise of the underwriter.

Ironically, an underwriter's ability to judge a risk hasn't changed much at all over the past 30 years. Nor is it likely to, according to underwriting veterans. The fundamentals of loss forecasting, exposure evaluation and appropriate pricing are the same today as they were 30 years ago, says Schramm.

The difference today is the access underwriters have to information through different channels: the Internet and ever more powerful menus available on applications, for instance, and the ability of underwriters to collect data on a particular risk has exploded.

Says Balicki: "An underwriter can make a decision much quicker today than in the past, and the faster you can get the information, the closer you become to the risk and the more accurately you can price for it. Ultimately, that should be better for the customer, the agent, as well as the company."

In commercial lines, there's only one future for underwriters and automated underwriting, and it is a life lived together.

CYRIL TUOHY is managing editor of Risk & Insurance®.

April 15, 2008

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