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Study finds AI and advanced predictive modeling needed to meet underwriting challenges

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Capgemini Research Institute’s recently released World Property and Casualty Insurance Report 2024 explores technology advancements needed to meet the challenges facing the underwriting industry. 

The research institute examines the use and need for technology throughout industries.

“The property and casualty insurance industry faces significant challenges, with global combined ratio reaching 103% in 2022,”Anirban Bose, Capgemini board member and CEO of Financial Services Strategic Business Unit, says in a foreword to the report. “Inflationary pressure and a volatile risk landscape have tossed traditional underwriting strategies into disarray.”

Bose says trailblazers are breaking free from legacy models and harnessing data through predictive analytics, AI, and cutting-edge technologies. 

“Our report found that underwriting trailblazers rarely miss their business goals, sparking topline growth, positively impacting profits, and enhancing risk oversight,” Bose says. 

Losses have outpaced premium growth and legacy practices haven’t been able to keep up with challenges such as climate change, cyber risks, mobility shifts, and consumer expectations, the report says. 

Insured losses from natural catastrophe events reached $123 billion in 2023, marking the fourth consecutive year and the sixth in the last seven years with losses of more than $100 billion, the report says. 

Evolving risks are also growing because of technology advancement, it says. 

“For example, repair costs for a mid-size electric SUV are 53% higher than those for a similar traditional vehicle as usage pattern changes,” the report says. 

Globally, insurers face challenges in adjusting rates, the report says. It uses California, South Australia, and Switzerland as examples. 

Personal insurance line rates have increased to meet the challenge with a 4.5% increase between 2019-2022 in the United States, it said. 

The report says another survey conducted by Capgemini, “2024 Global Voice of the Customer,” found that 42% of customers said they find the underwriting process complex and lengthy. 

“Most policyholders want to know whether the cost of premiums equates fairly to the value delivered,” the report says. 

Twenty-seven percent of policyholders said they switched providers in the past two years and 60% said they switched for lower premiums.

Consumers and insurers are also at odds about data collection. Fifty-three percent of customers were concerned with how much personal information that insurers collect. 

Yet, 63% said they’d be willing to provide more data in exchange for transparency, discounts, and reassurance that their information was secure. 

Stronger and more transparent communication could shift relationships with consumers, the report says. Yet only 25% of personal line carriers have advanced interactive feedback loop capabilities, the report says. 

“However, among insurers that deploy such loops at scale, 90% report underwriting improvement,” the report says. 

Meeting consumer needs is important to the industry, the report says. 

“As a result of the vicious cycle, the industry is in jeopardy of losing relevance,” the report says. “Modernization is vital to restoring trust between individuals seeking risk buffers and insurers providing financial protection.” 

Insurers can start meeting challenges the industry faces using predictive models and AI, the report says. 

Capgemini’s “2024 Global Insurance Executives” survey found 54% of executives said insufficient access to data was a top challenge. Fifty-one percent noted legacy systems as a challenge and 47% said a lack of skilled talent. 

Eighty-three percent of executives also believed predictive models were critical for the future of underwriting. 

Yet, 37% of insurers have advanced third-party data capabilities and 27% have predictive modeling capabilities, the report said. 

A majority of executives (62%) felt AI could elevate underwriting quality and reduce fraud. Yet, only 43% trust automation tools, and 67% said analytical tools are overly complex. 

The report considered concerns the industry should pay attention to when implementing predictive models. 

“Insurers must collaborate with regulators to enable responsible innovation and expanded usage of accurate risk pricing models,” the report says. 

The report continues by saying AI models could have biases that cause some demographic groups to suffer. 

“The situation raises compliance concerns because most underwriters do not fully understand algorithmic recommendations,” the report says. 

Success requires underwriter support and a robust technical foundation, according to the report. 

Companies can start laying a foundation with workbench pillars such as: 

    • Workforce management: Helps automate guidelines, referrals, and pre-populates documents, and personalizes agent portals;
    • Process automation: Can handle policy renewal reminders and seamlessly consolidate third-party data;
    • Risk insight: Enables decision recommendation engines that keep the underwriter in the driver’s seat; and
    • Portfolio management and governance support book reporting, stress test scenario modeling, and auditability.


Photo courtesy of William_Potter/iStock

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