Underwriting in the Digital Age

Insurance is like that security blanket we all need in our adult lives. In 1792, Edward Rees Mores founded the Society of Equitable Assurances on Lives and Survivorship, and he determined premiums based on one factor alone, age. Today, in the midst of the digital revolution, underwriters have a gamut of factors to decide from and they have multiple data sources at their disposal. Whether it’s health or corporate, insurance is all about underwriting. However, does this surge of data help or harm the underwriting process?

Health Insurance

Covering the basics

The primary data source for an underwriter will be the completed and signed proposal form. This document is binding and its purpose is to collect relevant information so that underwriters have a better understanding of their insured. With life insurance, for example, it will ask about your medical history, current medical condition, along with your age, occupation, lifestyle, habits, income, etc. Moreover, depending on the cover you chose, you might be asked to go for an in-depth medical examination. This process is to determine if you have any ailments that could increase your risk. The filled proposal form holds major value and if it is filled out fraudulently then the insurance policy is void.

New Data Sources?

Digitization in our personal lives could also affect how our premiums are being calculated. Many start-ups today collect data from various data sources, such as FitBits, Social Media, etc., and give them to insurance companies, that then analyze this data to price their premiums accordingly. For example, New York’s Department of Financial Services (NYFS) has guidelines for insurance companies that wish to use non-traditional sources of data, like social media, to determine premiums. According to them, life insurers can use social media, as long as they do not discriminate while determining premiums.

Loan Underwriting

We can’t talk about the changes happening in the insurance world, without addressing the underwriting in the financial world. So, what exactly is loan underwriting? Simply put, it is the process of raising capital. In the world of investment banking, it is when a bank raises capital for a government, corporation, or institution from investors through equity or debt security. It is a process of determining whether a borrower’s loan application is an acceptable risk based on the analysis of their credit, capacity, and collateral. In a country like India, where there are over 60 million micro, small, and medium businesses, that need loans; can multiple data sources help with this kind of underwriting, or does it add to the noise?

Out with the Old?

Although these new data sources can seem like a welcome change, there are a few things insurance companies need to keep in mind. The main challenge would be to separate the inherent biases that come with using non-traditional sources of data. It would be the insurer’s job to ensure that the process is non-discriminatory against factors like race, religion, and sexual orientation. Can algorithms using this data, really make accurate judgments about people? There is a possibility that out of context data may lead to unfairly high premiums. One way to overcome this is to have algorithmic impact assessments. This will ensure that companies have a clear understanding of their own practices and every decision taken to come up with these algorithms is transparent. Through these assessments, not only will the companies have a moment to self-reflect and make sure that they steer clear of any chance of inadvertent discriminatory behaviour.

Digitization and Underwriting

With various aspects of insurance operations are in the midst of a digital transformation, digitization will help companies stay competitive in the ever-evolving market. However, we have to remember that insurance is all about statistics and how you base your premium is all about probability. Compared to other industries, the insurance industry has been pretty slow in their uptake of technology to improve their processes. At this point, since it is all very new, it would be hard to say whether there will be a complete transformation with underwriting or if organizations would stick to their traditional ways. Only time will tell, in the meantime, we’ll just have to wait and watch.

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