From Art to Science: The Future of Underwriting in Commercial P&C Insurance

By McKinsey & Company

Recent research looking at leading commercial-focused property and casualty (P&C) companies over the past three decades affirms the traditional view that underwriting excellence remains paramount to company performance. Findings from the research reveals “operating results—more than capital leverage or investment returns—has the greatest impact on overall financial performance.”

The research’s observations finds this success requires a relentless focus on five essential building blocks: portfolio steering, pricing adequacy, risk selection, capacity optimization, and coverage design.

As technologies such as big data, advanced analytics, and artificial intelligence continue to advance and new innovative applications emerge, each of these building blocks will evolve and become increasingly more data driven.

“Organizations must adapt to incorporate these technologies while also focusing on critical enablers such as distribution, culture, digital, and strategy. Collectively, these building blocks and enablers are the foundation of underwriting excellence.”

The essentials of great underwriting go beyond risk selection and pricing, rather encompassing a “comprehensive set of capabilities across hard and soft skills, qualitative judgements about future industry performance, and rigorous portfolio management” in order to avoid markets that cannot compensate for a balance with unfavorable conditions. There does need to be a human element in the ever-expanding influence of technology in the world.

Although data-drive tools greatly supplement human judgement with superior risk selection in overcapitalized markets, there were instances that the overemphasis on analysis with a black box-modeled output resulted in a “vicious cycle in which imprecisely modeled guidance did not accurately anticipate future risk experience.”

As companies seek to modernize underwriting, they must strike a delicate balance to manage the tensions of art versus science, automation versus judgment, and autonomy versus control.

Read more here.

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