Will automated underwriting systems finally replace the underwriter for term life insurance products? Could these systems be the catalyst that finally allows life insurers to penetrate the ever elusive middle market? I think both answers are “maybe.”
Today’s new business and underwriting systems offer broad functionality for the producer and the underwriter. Reflexive electronic applications, instantaneous third party data integration, and risk related configurable underwriting rules all can help the producer to potentially issue a larger number of policies instantly.
The newest generation of new business and underwriting systems offer electronic applications that give early insight into how much medical underwriting is needed on a case. Using insurer defined rules that assess risk and reflexive questioning, the system determines what, if any, medical underwriting requirements are needed. Because the system evaluates the risk, the application may never be seen by an underwriter. That’s because for many term products up to a certain face value, the insurer’s rules may rely solely on instantly accessed third party databases. According to Celent’s research, this currently happens less than 25% of the time, but the capability is there to expand the use of these systems to meet the needs of the middle market and at the same time lower the cost of issuing lower face value policies.
The recession has meant there is a larger percentage of the population on the lower end of the income spectrum than ever before. This has important implications for life insurers since more people may look to buy lower face value policies. These applicants demand lower premiums and faster issue times. To streamline the application to issue process and to meet these demands insurers can look to today’s new business and underwriting systems with their straight through processing (STP) functionality and their potential advantages in reducing the cost and time associated with insurance sales and underwriting for all policy types.
The newest generation of new business and underwriting system can also give an insurer deeper insight into its own underwriting rules. The data analytic capability of the system monitors system behavior so insurers can make immediate risk related rules adjustments. If the access to data helps push the level of reliance on the underwriting engine by increasing instant issue policies, the new business and underwriting system could pay for itself through operational savings. Although overly simplistic, using data from Celent’s discussions with life insurers that actively use a new business and underwriting system, a 10% increase in simplified issue policies (assumes the switch of approximately 525 policies from medical underwriting to instant issue with savings of $.40/$1000 per new business face amount) could result in savings of approximately $100,000 per year. That’s a potential break even in four to five years for some vendor systems available today.
According to a Society of Actuaries 2010 study, automated underwriting has been fairly successful for life insurers who use automated underwriting for simplified issue and non-medical underwriting, and to a slightly lesser degree for flagging pieces of information in the underwriting process for review by an underwriter. If an insurer can get past the cultural issues related to using automated underwriting systems, and as long as it does not try to replicate all medical underwriting with an automated system, true benefits will be seen. So, underwriters will still be needed for term products, but to a lesser degree, and the growing middle market has the potential to be penetrated further than ever before.
For further reading on the new business and automated underwriting systems available in the North American market today, read Celent’s North American Life Insurance New Business and Underwriting Systems, 2010: Life, Health, and Annuities ABCD Vendor View.