Art and Science: Underwriting at the Efficient Frontier
In his book “Blink”, Malcolm Gladwell cited how experts in art history can instinctively discern whether a piece of art is a forgery, without quite knowing why. Despite the many advances in forensic science and technology, this “Sixth Sense” provides the expert observer with a distinct and incremental impression which leads to superior decisions.
Excellent underwriters have a similar sixth sense which allows them to intuit when something does not add up about an insured and their story. These underwriters draw on their years of experience, refined judgement and a keen perception of exposures and controls, allowing them to expertly balance aggressive premium growth with superior risk selection. Their ‘sixth sense’ is a key ingredient in enabling them to operate close to ‘the efficient frontier’ of underwriting.
The world is rapidly producing tremendous volumes of increasingly accurate and wide-ranging data from which AI can glean actionable insights. Advances in IoT, large scale web scraping and NLP, geolocation data, and image recognition are providing previously unimagined insights into the true exposures and controls associated with a risk. This evolution should be welcomed by all, as it brings underwriting decisions closer to the efficient frontier while freeing up time for underwriting personnel to strengthen broker relationships, evaluate and adapt the portfolio strategy, and build new products for customers.
As strong advocates for the power of data, we nevertheless recognize that science and technology alone do not always lead to the best underwriting decisions. Having worked closely with hundreds of distinguished underwriters from many leading insurers, we appreciate that these top underwriters often achieve superior outcomes by effectively combining data-driven insights with their intuitions on risk and on the commercial viability of an account. For example, they might rely heavily on experience and judgement when determining whether to apply credits to win an attractive deal, while heeding their suspicions and investigating an exposure further and, on occasion, when concluding that a producer is just wasting their time on a policy which should not be quoted.
Making Underwriting Better
Insurers will be well served by listening attentively to the judgements of their top performing underwriters. Such underwriters often discern nuance that is not accounted for in standard rating models or underwriting guidelines. They know where to accept information at face value and where to probe deeper. When harnessed appropriately, the intuitions of the best underwriters can help to improve underwriting processes and guidelines and, importantly, help to advance the state of the science.
Ultimately, the science and the art must work hand in hand to achieve superior risk-adjusted returns. The stronger this collaboration becomes, with human and machine working together and empowering each other, the faster underwriting will advance to a new frontier.