A risky business: Is technology a threat to the underwriting profession?

Automation is generally looked upon as a favourable thing as it introduces efficiency and boosts productivity. It basically enables machines or programmes to do the work instead of a human. But automation is becoming a threat to some professions and according to reports it’s the insurance underwriters whose professions are top of the list of jobs at risk of being automated.

But in order to understand why underwriting professionals will soon have to find another career it is important to first explore what the career entails.

So, what is underwriting?

Underwriting is the process of evaluating risk from a third party.

Once the risk has been determined, an underwriter will assume, or take on that risk, in exchange for a set fee.

The fee is normally in the form of a commission, premium, spread, or interest. Where there is a group of underwriters, the primary underwriter is called a book runner. In investment banking, the book runner is the lead underwriting firm that oversees the books.

Underwriting is a central function in the financial world and underwriters are considered the risk experts within the mortgage and insurance industry, in equity markets, and common types of debt security trading.

In the mortgage industry, an underwriter will assess whether the borrower will be able to repay the mortgage or loan and how likely they will be to default on a payment. In the insurance industry, the underwriters will gage the likelihood of too many policyholders filing similar or the same claims at once and see if they are able to spread the potential risk among as many people as possible. With equity markets, underwriters will check the profitability of an investment.

Underwriting services are generally provided by large financial institutions, such as banks, or insurance or investment houses, which their own set of underwriting guidelines to help the underwriter determine whether the company should accept the risk.

An underwriter’s main role is to help the company establish the true market price of risk by analysing each case individually and determine which transactions they are willing to cover and what rates they need to charge to make a profit. If the risk is deemed too high, an underwriter may refuse to cover it. For example, underwriters are unlikely to loan large amounts of money to the unemployed or give life insurance policies to those in poor health.

What skills do you need to become an underwriter?

There is no proper underwriting qualification for school leavers to study at university. In general, underwriters tend to have a degree in any discipline, although a qualification in accounting, finance, economics, law, management or business studies is ideal. More specialist roles may also require medical knowledge or a scientific, technical or engineering degree, especially within the life insurance sector.

Underwriters spend most of their day analysing statistics, so you need to have some experience and enjoy working with figures and lots of data. You will also need sound verbal and written communication skills, good judgement, and the ability to negotiate and be able to work with new technologies.

Most graduates enter the profession by starting in an assistant role within an underwriting team and working their way up. Another option is to undertake a financial services apprenticeship or structured graduate training schemes in underwriting offered by some of the larger insurance companies. However, these schemes tend to be competitive and difficult to obtain.

Either way, on the job training is usually provided once you are in the position and this often leads to a professional qualification, certified by an authoritative body. Career progression is possible by promotion into senior underwriting positions or through specialisation or management.

Broadly speaking, there is an even divide in the insurance sector, with underwriting being male-dominated and insurance claims being more female-dominated.

How did the profession start?

Like the insurance sector, the underwriting profession can be traced back to Lloyd’s of London. Back in the 17th century, the renowned insurer specialised in marine insurance and would accept some risk for a voyage in exchange for a premium.

At the time, risks associated with a sea voyage would have been the possibility of a shipwreck that could cause loss of cargo or the death of crew for example.

The individuals that were paying the premiums would literally write their names under the text, detailing the sea voyage that Lloyd’s would assume the risk for. This is how the term underwriter was coined. 

How has technology revolutionised the profession?

In the past, underwriting was described as an art and a science but today, underwriting is less of this and more technology- based.

Innovative technology is posing a severe threat to the industry with over 80% of decisions now being made by a machine. In America, Forbes listed insurance underwriting as one of the 10 most endangered jobs in 2015 and estimated that employment in the sector will fall by 6% come 2022.

We have already seen a swing from paper-based applications to those that are system-based and simple cases are being processed without human intervention. Medical records, examination reports, and laboratory test results are being submitted online and underwriting engines are processing these automatically.

The use of big data and InsureTech has brought about the biggest change. Underwriters in the past would have previously utilised static process such as historical data but today insurers now use a dynamic process that relies on real-time data.

For example, new generation wearable devices allow for the monitoring of an individual’s health in real-time. Medical and life insurers can use this, as well as face recognition technology to predict life expectancy by incorporating factors such as chronological age, gender, smoking habits and body mass index (BMI).

Another example is the use of social media which has a big impact on underwriting. Large data aggregators are already analysing online information from social networking sites in order to identify important trends, emerging opportunities, and risks.

Predictive underwriting is also allowing insurers to build models that will give accurate predictions about future outcomes, such as natural disasters and health pandemics.

The shift in processes has, in turn, caused a shift in the role of the underwriter. Insurers require a different skillset that has moved away from the science or medical background. Instead, the underwriter of the future must be technologically competent and can synthesise and analyse a wide range of new data sources and interfaces to identify important trends, new areas for analysis, and emerging opportunities and risks. 

How has the Covid-19 pandemic affected the industry?

As like all other areas of business, the insurance and underwriting sector has been forced to close under the national lockdown. The shutdown has put a halt on centuries-old traditions and forced traditional insurers, like the world’s leading commercial insurance market Lloyd’s, to go fully online for the first time ever. If there are no major hitches, this could signal the start of an even bigger digital transformation.

Aside from this, cost is the biggest knock-back from the pandemic. Lloyd’s has estimated that the 2020 underwriting losses covered by the industry will hit $107 billion. The British insurance and reinsurance market projected that its own casualty and property (C&P) claims could reach up to $4.3 billion by June 30 and warned that this could rise further if the pandemic continues.

Underwriters are also are adapting their underwriting and adding exclusions as a result of the pandemic. Some insurers have added underwriting questions, stopped requesting medical evidence or started to postpone applications amid the COVID-19 crisis and many applications will now be required to disclose if they have tested positive for Covid-19, been advised to self-isolate or had any symptoms.