A look at how improved technology and better availability of data is changing the role of the underwriter

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The march of progress is, as we all know, inexorable. And for many recent technological advances can be bewildering. Mobile phones get ever more complex, computers get increasingly advanced and televisions seem to be getting thinner and thinner.

Technology is now also increasingly important for the (re)insurance market, as our sister title GR investigates. Records are kept electronically, presentations are made using increasingly sophisticated software and risks are being modelled in ways that the industry could not have foreseen just a few decades ago.

“Today’s IT systems are much more efficient than they were just a few years ago,” Munich Re head of corporate underwriting Heike Trilovszky said. “It is now generally possible to enter various attributes for every individual risk and loss, and still be able to aggregate and sort portfolios rapidly, and search them for patterns. The main challenge primary insurers need to address is to set up their systems in a way that they can actually take advantage of these options.”

But reinsurers face the additional challenge that they do not always have full access to all the relevant data.

“Whilst individual risk bordereaux were still common in reinsurance a few decades ago, for reasons of efficiency these have successively been replaced by aggregated information,” Trilovsky said.

But the scope of information exchange available through modern technology could revive the old practice of using bordereaux.

“In property business, we have all become accustomed to large amounts of standardised data on natural hazards,” explained Trilovsky. “All other types of business still have some catching up to do as far as data standards and data granularity are concerned.”

So how exactly can technology help manage the enterprise view of pricing?

JLT Re global head of strategic advisory David Flandro said: “Chief risk and underwriting officers must now examine a wider range of variables,” he said. “For example, for short-tail pricing, profitability hurdles are examined – at what point does price become adequate for a certain risk on a discrete basis?”

Catastrophe models are helping here, said Flandro, adding that predictive modelling is coming of age and has already proven its value in lines such as terrorism.

Underwriters will also have to become more technically adept in the future, he said:“New technology is increasingly coming into play here, especially big data; that is, information which in the past was so wide-ranging that processing technology couldn’t analyse it in a meaningful manner. We can now process this data with modern technology to identify patterns that we simply couldn’t see before. “

According to Trilovszky, technology can help the enterprise view of pricing in a number of ways.

Firstly, better data about losses is crucial to properly indentify what causes them and how to price more accurately.

“An integrated system architecture provides the basis for a feedback cycle that allows every pricing assumption to be compared with the emerging performance,” said Trilovsky. “This enables us to identify accurately and at an early stage whether corrections need to be made to the price. Those who can only work with average values, whilst their competitors can distinguish more accurately between good and bad risks, will have to put up with below-average portfolio quality and ultimately lose out.

“For reinsurers, the ability to enter rate changes, and thus to determine the position in the cycle more rapidly, is a genuine competitive advantage in pricing.”

But there is a risk that (re)insurers can get bogged down in data. Trilovszky said: “The insurance industry is still in its infancy as regards whether and to what extent we can also use unstructured data. There is so much information available on the internet that it cannot possibly be searched and evaluated manually.”

The technological change facing the (re)insurance industry is a hurdle, and the pace of that change makes the height of that hurdle hard to estimate. But it is clear that this change can also give many competitive advantages to those players that deploy it well.