Algorithmic underwriting uses computer-based models to price insurance policies, assign risk ratings, or determine coverage limits and terms. Its use is becoming increasingly common in the UK insurance industry and beyond as insurers strive to remain competitive by taking advantage of advances in technology.
While insurers have been using computers to help underwrite policies for decades, the use of algorithms has become more widespread and sophisticated in recent years, thanks to artificial intelligence (AI).
In the past, most insurers used simple linear regression models that looked only at a few variables, such as age, gender and postal code.
However, AI and data storage advances have enabled insurers to develop much more complex models considering thousands of variables. Today’s algorithms are much better at predicting which customers are likely to file claims than their predecessors.
Not only does algorithmic underwriting improve customer experience by making the process faster and easier, but it also allows insurers to tailor policies to meet each customer’s needs.
In a world where competition is only getting more fierce, insurers who embrace algorithmic underwriting will be well-positioned to win the battle for customers.
The benefits of algorithmic underwriting
Algorithmic underwriting offers several advantages over traditional underwriting methods. Perhaps most importantly, it leads to better customer experiences overall.
Here are just a few ways in which algorithmic underwriting improves customer experience:
1 | It’s faster
Because algorithmic underwriting relies on automation, it’s much faster than traditional methods—in some cases, decision times can be cut down from days or weeks to hours or even minutes.
2 | It’s more accurate
Algorithms don’t get tired or make mistakes due to human error. They will always produce accurate results if they’re well-designed and well-executed.
3 | It leads to better outcomes
Because algorithmic underwriting is more accurate and transparent than traditional methods, it ultimately leads to better outcomes for both insurers and insureds – meaning happier customers all around.
How does algorithmic underwriting use computer-based models?
Algorithmic underwriting involves using computer-based models to:
- Price insurance policies
- Assign risk ratings, or
- Determine coverage limits and terms
Models are based on data that can be either static – a driver’s age and gender – or dynamic – a driver’s accident history. By using data from large pools of policyholders, insurers can develop models that accurately predict which customers are most likely to file claims.
This knowledge then allows insurers to charge premiums that reflect the risks posed by each policyholder.
Algorithms can also automatically identify potential discounts that a policyholder may be eligible for, such as loyalty or bundling discounts. By automatically identifying potential discounts, insurers can offer more personalised pricing that reflects each policyholder’s unique circumstances.
Finally, algorithmic underwriting provides insights into customer behaviour that can be used to develop new products or marketing strategies.
It’s fair to say that all of these advancements mean that algorithmic underwriting has been a game-changer for the insurance industry.
By using AI to analyse data, insurance companies can now more accurately assess risk and tailor coverage to each individual. This has led to a number of successful applications of algorithmic underwriting, including:
Reduced premiums for low-risk drivers
Insurance companies have used AI to develop models that identify which drivers are less likely to have an accident. As a result, these drivers received significantly lower premiums.
Customised coverage for seniors
AI developed models identify which seniors were more likely to need long-term care. This allows insurance companies to offer customised coverage better suited to customers’ needs.
More accurate fraud detection
Insurance companies have long struggled to detect fraud, but AI is helping to change that. By analysing data patterns, AI can flag potential fraud far more effectively than human investigators.
Conclusion
Algorithmic underwriting is still in its early days, but it has already significantly impacted the insurance industry. As AI continues to evolve, we can expect even more transformative applications in the years to come.
Overall, algorithmic underwriting is a win-win for both insurers and policyholders.
By making the process faster and easier while also providing tailored coverage options, it improves customer experience while also delivering valuable insights into customer behaviour.
For insurers looking to stay competitive in today’s market, embracing digital underwriting is a must.
