McKinsey & Company – Rewriting the rules: Digital and AI-powered underwriting in life insurance
Executive summary :
To many consumers, buying life insurance can be painful. Despite insurance companies’ substantial investments over the past several years in digitising customer onboarding and policy binding, progress has been slow and incremental and, for many companies, has fallen short of expectations. Many companies have failed to meaningfully scale their efforts to modernise underwriting.
Digitalisation must be accelerated
The recent COVID-19 lockdowns and ongoing physical-distancing protocols reinforce the need to rethink underwriting. More than ever, insurance companies must address customer and agent frustration with the still lengthy, high-touch, manual process. With COVID-19, paramedic home visits to conduct medical exams have become highly undesirable — especially for a “pushed” product that is not immediately crucial to the customer. In this environment, risk assessment must shift toward more remote, data-driven models, while distribution must shift from in-person interactions to more online interactions.
To stay relevant, life insurance companies need to accelerate their builds of digitally enabled, data-augmented, life-product purchasing journeys. In this article, we outline the barriers facing the modernisation of underwriting, offer a perspective on the primary factors required for success, and describe four concrete steps to accelerate transformation efforts.
Limited ambition: The state of accelerated underwriting today
The traction of many companies’ accelerated or automated underwriting programs has been limited, largely because insurers have taken a cautious, incremental approach to scaling automated decision making. These companies opt for small improvements to their risk frameworks and processes rather than considering the potential to rebuild and take a more modern approach to underwriting.
Indeed, most accelerated pathways today are limited to simple products like term and final-expense insurance policies. In addition, fluidless options are available only to a relatively narrow set of customers who fit age and face-value requirements (see Exhibit 1).
In many cases, these limitations are compounded by significant medical criteria (that is, insurers will accelerate only high-quality risks), resulting in many customers beginning an accelerated journey but becoming frustrated when, before the end of the journey, they must move back into a traditional underwriting process.
Insurers must be bold
In addition, consumers who opt for accelerated underwriting often don’t qualify for the preferred rates that are accessible to those who undergo full medical underwriting, including paramedical exams and lab tests. The differences can be significant: going from a standard to a preferred or preferred- plus rating can cut annual rates in half.
Especially given the changes brought on by the COVID-19 environment, insurers can no longer afford to be so cautious. A few companies offer examples of a bolder approach, launching new platforms and attempting to innovate from the ground up. For example, John Hancock recently introduced its eApp platform, which enables an end-to-end digital process across policies of all face values. The company provides instant decisions for applicants up to 60 years old for some products with up to $3 million in face value.
In a sample of eight insurers that launched streamlined underwriting programs, the companies saw a median rise in sales volumes of 14% over a two-year period (see Exhibit 2). Of course, additional factors, including pricing and distribution dynamics, also affect sales, but it’s clear that faster underwriting was a key component of these companies’ successful transformations.
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