What is with all the underwriting questions?
The technological “how” of underwriting small business insurance has gone through a radical change in the last 25 years. What were formerly fax and paper-based processes are now, generally, a series of digital interactions. Amid this revolution, the underwriting process has been torn apart and rebuilt by insurance companies. What data points are required? What rules dictate an automatic quote or decline? What accounts are subject to underwriter discretion; etc.
Some in the InsurTech space would question whether this process has been re-engineered enough. Can it not be cut down to data sourced from third parties and fully automated? And what is with the large number of underwriting questions? They seem so “20th Century”. The questions introduce layers of complexity into the customer experience and drag down any hope of a high NPS.
But it is not a lack of willpower or laziness on the part of insurance companies that keeps these questions around. Their persistence stems from the underwriter’s virtue of prudence and an understanding of rational incentives.
Underwriting is an analytical discipline based on a review of past results, current conditions, and a predictable future. Particularly for liability insurance, the underwriter knows that whatever pricing and coverage decisions are made today will not be finally determined as profitable (or not) for five to seven years into the future. I may know that prior results show the business was break-even when claim frequency was 0.25 claims for every $1M in customer revenue. And presuming stable claim severity, that frequency of 0.30 claims per $1M revenue will yield a disastrous loss ratio. But if frequency comes in at a rate of 0.20 claims, then my division should hit the company bonus pool and my reputation for killing-it will be known far and wide. Underwriters know that the bandwidth between success and failure in insurance is not wide and it requires close monitoring and regular adjustment. It is no surprise that they will not forego the tools that allow deeper analysis of the business to be made as loss histories develop.
An InsurTech company operates in a separate universe. The incentives are set to perceive insurance from the customer’s viewpoint and “increase the joy / reduce the pain”. Long-term goals of profitability may be there, but short-term targets of customer engagement or business activity are what is measured. Profitability metrics are not published, or even known, by most of the staff. The desire to reduce the number of questions for the customer to receive a quote is natural in this context.
The insurance company is tasked with making a profit on a financial transaction and prudently requires tools in its arsenal when it needs to maximize profit or minimize losses down the road. The underwriting questions enable the insurer to segment between risks in greater detail. To forgo these questions is to ask the underwriter to trust that the otherwise undivided class will remain at maximum profit into the future. And that no competitors will sneakily figure out how to swipe those more profitable subgroups away. Short answer: they are not giving them up.
It would be interesting to see the results from an InsurTech that also underwrites small business insurance and how it compares with the results of traditional insurers. To my knowledge there are not any such providers today; Lemonade , Root Insurance and Metromile have wisely started with personal lines and are of course blazing trails in that space. For those InsurTechs in the small business world that partner with traditional underwriting carriers, particularly in the hardening market of 2020, the best advice may be to understand the environment that gives rise to the underwriting questions and accept this as an area of complexity and opportunity for competitive advantage.