It's widely recognized that the insurance industry continues to face a combined ratio crisis. For a variety of reasons, claims costs are increasing, pushing the combined ratio into unprofitable territory. And while raising premiums might seem like an obvious solution, insurers understand that this approach is not sustainable in the long run.
The good news is, the deployment of AI to a number of key processes throughout the policy lifecycle has proven to significantly improve the combined ratio. Specifically, AI in insurance underwriting offers insurers a smarter way to improve their bottom line without overburdening policyholders with higher costs, shaving up to five points from the combined ratio.
AI-powered underwriting solutions provide insurers with an opportunity to more accurately assess risk and identify potential problems before policies are issued. By incorporating AI into the underwriting process, insurers can make more informed decisions, ultimately reducing exposure to high-risk policies and minimizing future claims losses.
One of the most immediate areas where AI makes an impact is premium leakage. Insurers lose between 10% and 15% of premiums each year due to leakage—often from honest mistakes or misstatements during the application process. AI can analyze applicant data against public records, identifying discrepancies or hidden risks, such as undisclosed ride-share driving or other activities that fall into higher-risk categories. This helps ensure policies are priced accurately and eliminates costly gaps in coverage.
Fraud is another significant challenge in the underwriting process. Digital fraud in the insurance industry has increased by 130-160% over recent years, with fraudsters using digital channels to exploit vulnerabilities. AI helps insurers identify suspicious patterns, such as recurring use of personally identifiable information (PII) across multiple applications. By detecting these fraud networks early, AI in insurance underwriting can prevent costly fraudulent claims, which often result in a 300% increase in claims severity.
Read the full article: Underwriting Risk and its Impact on the Combined Ratio
This is the second in a series of commentaries on the combined ratio problem facing the insurance industry. For further discussion of this topic and how the application of AI is addressing this challenge throughout the policy lifecycle, continue reading.