Reducing Error Ratios in Underwriting for Compliance and Cost Reduction

Over the years I have been involved in a few insurer studies regarding the cost of mistakes. The most obvious, to an underwriter, is the cost of re-issuing policy documents processed in error. No one publishes these statistics (too embarrassing), but I am sure that almost every insurance company, at one time or other, has done similar studies and or tracks these mistakes as a KPI. As I was searching for information on this subject I came across this article  regarding the top 10 market conduct complaints (2013) by regulators against P&C insurers. It refers to a study published annually by insurance compliance experts Wolters Kluwer Financial Services.

According to Wolters Kluwer Financial Services, the top 10 most common market conduct compliance criticisms for property and casualty insurance are:

1. Failure to acknowledge, to pay, or deny claims within specified time frame
2. Using unapproved/unfiled forms and rates
3. Failure to provide required compliant disclosures in claims processing
4. Improper documentation of underwriting file
5. Failure to maintain claims documentation
6. Failure to process/pay total loss claims properly
7. Failure to provide required compliant disclosures in underwriting processing
8. Failure to adhere to producer appointment, termination and/or licensing requirements and adjuster licensing requirements
9. Failure to issue compliant adverse action underwriting notices
10. Failure to apply rates, rules and guidelines correctly

Besides the obvious claims mistakes half of the top 10 criticisms come from underwriting – the area of my interest. I thought I would take a quick look at one state regulator’s website to see what the latest compliance monitoring reports contained. I only looked at one report, out of the many that were there for 2014 here is just a small sample of what I found in Underwriting Error Ratios:

• From the universe of 270 policies, the 247 violations were based on 144 files resulting in an error ratio of 53%.
• The 17 violations noted were based on four (4) files resulting in an error ratio of 57%.
• From the universe of 3,662 policies, the 3,050 violations were based on 2,052 files resulting in an error ratio of 56%.

What we have here is a bigger problem. Here is where mistakes can be quantified in fines. All of the above compliance issues directly relating to underwriting errors have a huge cost in regulatory fines. I suppose that some may argue that this only affects insurers in the standard market and that Excess and Surplus Lines carriers are not as regulated as the standard markets. However, mistakes are still very costly and the obvious examples show how frequently they happen.

So what can be done to reduce error ratios? This is where having a partner help you with implementation of an automated underwriting solution. In our implementations we have discovered institutionalized errors. A classic example of that is a common policy wording that, over the years has been copied, modified over and over again, yet, having the same error within the wording that finds its way on to every policy issued with that wording. Implementation of automated underwriting allows an insurance carrier to examine their underwriting workflows and practices thoroughly. As well as to test the validity of certain common practices within a new framework.

Imagine an underwriter that works 24/7, never takes a break and never goes on vacation. Even more amazing is that this underwriter never makes a mistake; always calculates the correct premiums, attaches the right coverages and never accepts an unacceptable risk according to the guidelines. That is what automated underwriting is all about.

In addition to the obvious benefits in the previous paragraph, an automated underwriting solution delivers real time quotes, policy documents and inquiry. Carriers with successful implementation can see huge gains in efficiency with everything from a paperless work environment to staggering improvements in hit ratios, reduction in Not Taken Up and much happier brokers and customers.

• Using unapproved/unfiled forms and rates
• All forms face rigorous scrutiny as they are converted and stored as HTML. When they are automatically assembled into the pdf document they become a part of a policy. Rates are thoroughly tested and the filing is automatically produced with the underlying rates, rules and wordings.
• Improper documentation of underwriting files
• All documentation for the underwriting file is centrally stored every piece of underwriting information including pictures, documents, policy and application are contained within the policy. It also makes it very easy to conduct an underwriting audit.
• Failure to provide required compliant disclosures in underwriting processing
• The whole underwriting process is automated including the proper disclosures required by the various regulatory body (on a State by State basis).
• Failure to issue compliant adverse action underwriting notices
• As above. An Automated Underwriting solution can produce notices by triggered events. Once the rule is set, if an event happens where a notice has been triggered any pre-programmed underwriting notice will automatically be sent.
• Failure to apply rates, rules and guidelines correctly
• All stored in data and procedures. The regulatory filing is (if required) is produced from this stored procedure.