The power of the algorithm

Bringing automation to underwriting in the commercial insurance market has lagged far behind the advances made in personal lines. But the advent of so-called ‘algorithmic underwriting’ has the potential to finally eliminate the paper trail from London’s vast wholesale insurance market.

Specialty and corporate risk classes, where risk is distributed by brokers around numerous underwriters, have proved to be a hard nut to crack because they rely heavily on the expertise and experience of lead underwriters.

In London, the world’s biggest corporate insurance hub, after securing the lead line, brokers still usually take the risk – by email or often physically – to follow underwriters, one at a time, with the associated documents attached. Lead underwriters will typically provide cover for between 15% and 25% of the entire risk.

Each interested follow underwriter has to unpack the risk in its entirety, check it out, consider it, weigh it against their own risk appetite, price it, and reply to the broker.

Digital underwriting platforms, which are based on algorithmic technology, are gradually replacing this cumbersome and time-consuming process by allowing the creation of ‘smart’ lead underwriters and ‘smart’ follow underwriters. It is estimated that gross premium worth more than GBP 3 billion was written via portfolio underwriting or algorithmic platforms in the London market in 2023.

Gilbert Harrap, CEO of independent digital exchange InsurX, defines algorithmic underwriting as the process of using technology to automatically identify risks that match a defined appetite. 

“The algorithm automatically matches risk parameters to insurers’ appetites to see if any given risk meets at least one insurer’s appetite and is priced within the range set by the insurers. If all those boxes are ticked, the risk will be underwritten automatically. In some cases, though, risks may be referred for review by an underwriter in line with the ‘algorithmic rule’ an insurer sets for InsurX,” Harrap explains.

This could happen if, for example, a risk only matches 22 of the 25 criteria set by an insurer. In cases where a risk does not match any of the participating insurers’ appetites, the risk will be automatically declined.

An independent exchange for corporate and specialty insurance, InsurX launched a platform for London’s contingency insurance market in 2023 and rolled out its platform to support trading direct and facultative property business in late 2023.

All participants in the insurance chain stand to gain from the cost savings associated with automation through algorithmic underwriting. In addition, follow underwriters can increase their exposure to pre-priced business while lead underwriters benefit from the additional capacity they attract.

Brokers see a sharp cut in the amount of work they must do to achieve the cover for each risk because capacity is provided automatically by follow syndicates.

Another important advantage of an algorithmic exchange like InsurX is that insurers can update their underwriting appetite in real time and receive granular risk-level reporting on their portfolio.

Harrap says that InsurX collects all relevant data points contained within an insurance policy and its accompanying documents (schedules of values, business interruption reports, etc). The company then enriches this information with third-party datasets, with platform extensibility to further enrich the data through class-specific expert data vendors, such as Songkick in the Contingency market, or RMS in the Property market, and a wide range of relevant third-party data providers for each class of business.

Harrap believes there will always be a role for both expert specialty brokers and underwriters; indeed, this is why complex risks come to London in the first place. “But at the same time, wholesale brokers are acutely aware that there are risks out there which they simply cannot place cost-effectively without algorithmic underwriting,” he says.

Widening the risk distribution net to more underwriters and even to alternative capital suppliers could also help insurers provide more cover for emerging risks. Harrap foresees InsurX extending its platform to insurance linked securities (ILS) investors, for example, or even supporting secondary transactions of insurance contracts.

“The insurance market is a key enabler for global trade. In an increasingly interlinked world with fast-emerging, largely underinsured risks, such as climate change and cyber attacks, to name the two hottest examples, the cost of insurance needs to come down for the insurance market to play its part and support businesses and governments by providing effective risk transfer,” Harrap concludes.