Blog: The dangers of dumbing down

Ashwin Mistry

Brokerbility’s Ashwin Mistry considers the dangers of going too far with the simplification of underwriting.

Dumbing down. It’s an accusation thrown about a lot these days. Often with justification.

And there has been plenty of talk in the insurance world about the dumbing down of underwriting, especially for personal lines and SME cover.

Dumbing down to a common denominator can leave policyholders exposed and underinsured, we’re told. Lack of underwriting scrutiny through standardised online questionnaires leaves yawning gaps in cover for small businesses.

But is that true?  Does the criticism stand up to scrutiny?

Data
In our technological age we are awash with data. Some is abused, some used to good effect. Underwriters make use of data to create predictive algorithms, analytics, psychological modelling and so on. It fair to say that when you contact an insurer for a quote, they already know more about you from your address, age and line of business than they would, in the past, have gleaned from a 30-page questionnaire.

As insurers move towards the increased use of AI this sophistication will increase exponentially. The flow of data will continue to expand, and psychology and behavioural economics will impact further on underwriting methodology.

So, because all the basic data is already available, insurers require only a short question set – focussing perhaps on your accounts and future aspirations –  to fine tune a specific risk. It may look like dumbing down from the lack of personal contact. It may appear that very little one-to-one information is being sought. But it is in fact the future of underwriting.

Caveat emptor
Where does that leave the broker? In my view it takes us back to one of the principles of insurance: caveat emptor. Ultimately policyholders have to take responsibility for the risk and the levels of cover they buy. In the main, especially with critical exposures such as fire, theft and flood, the decision is relatively straightforward. But not all risks are like that.

Some are new and may not yet be fully understood.  And some vary dramatically with political and economic fluctuations – Brexit being a case in point.

The 80:20 rule that we attribute to claims (with 80% of claims sorted efficiently through insurers established systems and the rest requiring some form of intervention) can be applied equally to risk management.

Businesses rely on knowledge and information to make informed decisions about insurance, depending on their resources and attitude to risk. Mostly they are sufficiently well informed to make mature decisions.

But there are other areas – the 20% – that are not so straightforward and that’s where the broker must step in. 20% of decisions will make a critical difference to any business. Every one of them is different, with different vulnerabilities: it may be new risks, such as cyber, or adapting to changing regulations with D&O cover or avoiding exposure to supply chain breakdown. But in each case the ultimate decision depends on flagging up known risks and applying informed advice.

Informed
In a politically charged era such as this with ramped up levels of uncertainty, the need for informed decision-making is clearly heightened. For instance, many companies are engaged in varying levels of Brexit stockpiling and brokers need to flag up the need to increase and reduce cover to match trading activities and avoid underinsurance.

Changing legislation is another area where companies need support. The Insurance Act 2015 puts the onus on the policyholder to present a fair proposal and the broker needs to be there at the outset to ask the right questions.

One of the direct consequences of the technological era has been the empowering of the customer. Policyholders demand more and more from insurers both in terms of cost and product. And, by and large, because of the pressure of competition in an extended soft market, they have got what they wanted. For instance, warranty-free, limitation-free cover is now practically standard. But technology has also made the insurer more distant from their customers and only brokers can bridge the gap.

The inevitable evolution of insurance – both underwriting and claims – as a result of computer technology and AI will continue apace. It will equip insurers to respond faster to new risks such as terrorism and cyber attacks and provide an array of new products for a changing world.

Businesses will be confronted with more choice and more decisions to make about their exposure to risk. And, they can decide to seek advice, ask questions and develop strategies with a broker, or live with the consequences.      

Ashwin Mistry is chairman of Brokerbility.   

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