Underwriting in China—A Digital Transformation
By Orchis Li, Gen Re, Hong Kong and Dr. Celia Zhang Ying, Gen Re, Shanghai
Reinsurance News, July 2021
Editor’s note: This article is based on a publication which first appeared on https://www.genre.com/knowledge/publications/ri21-2-en.html. It is reprinted here with permission.
The life insurance market in China has grown tremendously with premiums increasing nearly three-fold from RMB1.06 trillion in 2010 to RMB2.96 trillion in 2019. Within a population now close to 1.4 billion, the insurance penetration—which has grown to 4.6 percent—is still far from that of developed countries.
In anticipation of further growth, insurers in China began to move their underwriting from a paper process to an online one approximately three years ago. Today the bulk of transactions are paperless, except for a small volume of bank channel applications. However, given the huge daily volume of new business insurers still have an urgent need to improve their processes further. While a major overhaul of underwriting is not needed, there is room to incorporate innovative ideas that address various pain points and provide a smoother customer experience while still balancing risk management needs.
In just two decades, China moved from an entirely cash-based economy to one dominated by mobile-payments and this has helped boost sales of insurance products online. The rise of online insurance has proved a catalyst for automation. Now technologies mean underwriting can be completed in less time thanks to much reduced manual interference.
Hurdles and Milestones in Online Processing
The insurance industry in China embarked on its digital underwriting journey some time ago, and ever since has worked closely with all stakeholders to implement digital solutions that further the evolution of underwriting in China—and beyond.
Digital solutions are addressing an array of issues. Today underwriters in China face demands for extremely fast turnaround times while dealing with an exponential growth in new business volume, so automating the selection process as much as possible helps to alleviate the pressure on them.
With the gradual reduction in the sales of savings products and a higher proportion of protection-oriented product sales the underwriting process is becoming increasingly important to insurers and reinsurers in China. Furthermore, the design of underwriting questions and how they flow, and the application of behavioral economics principles can encourage clearer and fuller disclosure, which in turn improves risk selection.
The introduction of online tailor-made underwriting rules for each specific product has created a seamless underwriting experience for customers, reduced manual work for underwriters, and enhanced consistency in underwriting decisions.
Last but not least, moving the risk selection process online helps insurers and reinsurers to collect underwriting data in a more structured manner. Insights gained from analyzing this data allows companies to further improve their process and to take on certain risks that might not have been possible previously.
First Generation (1.0)—Introduction of Smart Questionnaire
Several years back we witnessed the launch of the very successful online, mid-end medical product—commonly known as “Million-Dollar Medical.” In the first phase, when the smart underwriting questionnaire was developed, a smooth underwriting process was considered key to the success of this new product on a relatively new channel.
With affordable premiums and a rapid application process—a simple answer of “no” to having any of seven specified medical conditions—the product proved popular. Due to the product having a high deductible feature, this simplified approach was acceptable, and the claims experience in line with expectation.
The obvious drawback of this simplified approach is that when an applicant discloses that they have one of the stated medical conditions they are declined coverage regardless of the severity of that condition, when they would be offered terms using a more conventional underwriting approach. Over time the product features have been made richer with medical questions asked individually in a multi-layered reflexive style that helps collect more precise information on certain medical conditions. These changes have made it possible to offer this product to many more customers.
Interim Development (2.0)—Broadening Use Cases
For the second phase of development, dynamic questions were designed for short-term medical products and the automated underwriting process was expanded to also include questions required for mortality products.
Unlike for short-term products, underwriters assessing long-term mortality products require more information to properly evaluate risk. This includes information on an applicant’s health, medical history, family history, smoking, income, occupation, education, just to name a few. The list of medical questions for long-term mortality products is also different.
During this phase the wording of questions was modified so as to be more easily understood and layers of reflexive health questions were added to suit the product allowing underwriting decisions to be given to customers.
This approach works perfectly for policies with sums assured within non-medical limits that can be issued without automatic medical evidence. With extensive use of reflexive questions, manual follow-up on health questions with a “yes” answer has been greatly reduced, while valuable risk data can be collected that immediately enables companies to better predict the mortality risk profile of the applicants.
Forging Ahead (3.0)—Data Exploration
For the next phase of development, we explored how to further improve the current process by capturing and analyzing underwriting data. This led to the systematic inclusion of standard codes to capture all the medical conditions discovered during the underwriting process.
Until now it has proved difficult to analyze the data collected during underwriting due to missing information or poor record formatting. The codes mean we can track the progression of certain conditions throughout a policy lifetime and so derive more precise pricing from the data collected. We are also now better informed on areas that created underwriting friction and can therefore think of solutions to further facilitate straight-through processing to keep reducing the proportion of applications that need human intervention.
One significant finding from our analysis is that the take-up of rated policies is at par with those accepted on standard premium terms. This runs somewhat contrary to the popular belief among intermediaries that their customers are less willing to accept rated terms therefore driving down closing ratios. Instead it seems the online platform encourages medical disclosure and an acceptance of any increased premiums that may result.
Underwriting 4.0
With the learnings from the smart underwriting solutions developed, we ventured into pursuing a more comprehensive approach to online underwriting. One of the new ideas incorporated into this phase was product recommendations. In China, hypertension, diabetes and thyroid nodules have such high prevalence that they are common disclosures made by potential insurance customers. Insurance companies have therefore tailor-made products for individuals with high risk factors for these conditions, or an existing diagnosis of well-controlled disease. Naturally, the “standard” rates of premium applied to these products are different from generic products that target healthy lives.
When a higher-risk customer applies, the underwriting rules steer them automatically towards a product that caters specifically to their medical condition using a tailored standard rate of premium. This approach has improved the outcome for customers who would previously have been offered modified acceptance terms and perhaps felt this disadvantaged them.
What’s Next?
Our experience of moving the underwriting process online has given us many new insights. Even in analyzing the time taken by customers at each step of the process provided valuable feedback on customer behavior. It’s clear that technology is helping the industry to handle large volumes of applications quickly and with less human intervention, creating a better customer experience and improving closing ratio of new applications. Improving speed and efficiency will continue to be a key focus. We are also working on refining risk management through data mining and analysis of the underwriting data, as such bringing smarter insurance solutions to all.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Orchis Li is the general manager of Gen Re’s Hong Kong Branch. She is also responsible for the management of MNC’s client relationships, driving forward Gen Re’s InsurTech strategy in Asia and the analytics and development of Critical Illness products for the Asian markets. She can be contacted at orchis.li@genre.com.
Dr. Celia Zhang Ying is the regional chief underwriter for the Gen Re Life/Health Shanghai office. She is responsible for Gen Re’s underwriting assessment and medical research in mainland China. She can be contacted at yzhang@genre.com.