The benefits of underwriting engines are now well understood (or they ought to be). They help drive down cost and bring a variety of other benefits such as detailed management information that in turn can be applied to distributor management and segmentation, customer targeting and reserving requirements.
But classically engines are expensive tools, and small insurers understandably blanch at the need to spend hundreds of thousands of dollars in purchase of the license and set-up costs, followed by maintenance fees. And there is the need to maintain and develop the engine’s knowledge base to keep it in line with any changes in underwriting philosophy, products, etc, and to optimize performance generally; that requires resources and implies further cost.
This is quite a dilemma. And just because an insurer has only small volumes does not mean it is on a road to nowhere. Some have a very strong positioning and brand within some very well defined and solid, but niche, market segments and, with a suitable strategy to maintain that – and ward off potential new-entrant predators – can quite feasibly sustain that business. But scale is undoubtedly an issue, and processing costs per case should be a matter of concern for small insurers, either from the view of profitability or of competitiveness of premiums. Or both.
One option for such insurers is, of course, to do nothing. They have a process that presumably works OK, and one which has sustained the business thus far. But no action might be acceptable now; for how long will it remain so?
If buying an engine means too small a bang for too many bucks, is there another option? What smaller insurers need to be able to do is tap into economy of scale. Just as individuals and firms can access services via Internet portals and other hosted facilities, so underwriting engines can be accessed in the same way. And this is starting to happen, with initiatives being started by engine suppliers and specially established ‘underwriting bureaux’. And where better to offer such a model than North America, a market already so comprehensively served by independent vendors of underwriting services?
Execution of this model is not without its challenges, though:
- Service providers might have minimum volume requirements – or prices that make processing small volumes relatively expensive.
- There are still set-up costs, although these are likely to be lower than with the traditional purchase route.
- How much customization is possible? Cost-effectiveness may depend on use of a standard rule-set, which may restrict an insurer’s ability to differentiate from competitors – or prove a problem for niche players with specialized products, particularly disability or critical illness plans.
- If customization is possible, how much will it cost?
- And there are still the issues of subsequent rules adjustment to keep in line with business needs.
While a rules engine bureau might ably address the issue of cost-effectiveness, small insurers still need to approach the subject of an engine in the same way as any other company. In particular it needs to avoid bolting an engine on to an existing process. An engine is about much more than automating some of the underwriting. It needs to be considered in the context of an appraisal of the entire new business process. And that should be part of a process of periodically asking:
- ‘What is our vision for our business?’
- ‘What is our proposition for customers (and maybe distributors too)?’
- ‘What sort of customer journey do we want to offer?’
- And hence ‘What access routes do we offer customers and what processes do we need to put in place?’
The point is that small outfits should be able to play the same games as the big boys in the market.