Cloud Helps Aegon Religare Gain Competitive Edge

Summary:

A cloud-based automated underwriting solution helps Aegon Religare fix one of the insurance industry’s most trying challenges and gives it competitive advantage.

Highlights:

By using a hybrid cloud model, Aegon Religare shrunk the size of the automated underwriting project from Rs 2 crore it had earmarked for the solution to Rs 33 lakh.Sankar Narayanan Raghvan, Director-IT, Aegon Religare, gave his company an automated underwriting solution that shrunk turnaround time to issue a policy by half.

Here’s a fun way to spend a few hours. Go around telling people you’re an underwriter. Now watch closely as their eyes dart around, then blink dumbly as they try to figure out what that means. Undertaker? No, can’t be, he’s too well dressed.

Tip: Do not try this with friends in the insurance industry.

To the insurance industry, an underwriter is as crucial as a taxi is to a taxi service or tea to a tea-taster. That’s because underwriters are entrusted with the hard job of assessing the risk level of an insurer’s customers and attaching an appropriate premium to that risk. If they get it wrong, bad stuff happens. 

“For an insurance company, underwriting is a core business activity. All other activities emanate from this activity. Underwriters analyze information on insurance applications to determine whether a risk is acceptable and will probably not result in an early claim to the insurance company,” says R. Qaiser, professor, National Insurance Academy.

The amount of importance attached to them, however, has made underwriters an expensive resource—and a significant risk to their businesses.

Aegon Religare, like any insurer worth its salt, wanted to find a way to lower that risk.

Risky Business 

Way back in 2008, Sankar Narayanan Raghvan, director-IT, Aegon Religare, was already toying with the idea of automating some of the functions of his company’s underwriters—and hopefully lower the company’s dependence on them.

He probably wasn’t alone. With the growth of the insurance sector and other risk-based businesses, good underwriting skills were getting hard to come by. And as the greenest shoot on the Serengeti—the company had just launched pan-India operations earlier that  year—it wasn’t always easy for Aegon Religare to attract killer talent, which preferred to graze on more well-known pastures. 

Even when Aegon did succeed to hire talent, there was no certainty that its underwriters would stay. “We do 40 to 50 percent of our annual business during December to March. But during that period there is a sharp increase in attrition levels among underwriters. When they quit during peak business season it poses a grave challenge to the business; it puts at risk the profit matrix of our business. And recruiting new underwriters in the middle of frenzied business activity is tough; even if you do find new resources it takes time for them to understand each of your products and the rules of the company. This can lead to weak underwriting process and mounting losses,” says Raghvan.

But that was not the only reason Raghvan was looking at automating Aegon’s underwriting. Manual underwriting is open to errors, expensive errors. If, for example, an underwriter overlooks that a prospective customer has a cardiac problem, he could decide to okay the policy or price it with the wrong premium.

“The quality of underwriting will determine the long-term survival and profitability of insurers. A lack of prudent underwriting practices can result in rising underwriting losses. Insurance companies ignore this at their own peril,” says prof. Qaiser.

While such errors are few and far between, their impact can be quite severe. The industry average for underwriting errors is a minuscule 2 percent but if the sum assured and the coverage is high then the financial loss incurred by the company can be sizeable. And Aegon Religare wanted to lower those odds. 

But, in 2008, unable to work around the Rs 3.8 crore price tag for an automated underwriting solution, Raghvan walked away from the project. 

We wanted to improve the customer value proposition. With the shortest TAT for issuance we wanted to show them that we honor their time. If we could reduce the timeframe to three to five

Insuring Efficiency

Two years later.

At his desk, Raghvan squinted in concentration at his plan for an automated underwriting solution. He had put the idea into cold storage long ago, re-visiting it occasionally to check if there was a new way to get around the price. 

In 2010, with the growing maturity of the cloud, that time could be now. He felt excitement bubble up inside. If he figured right, the cloud could help the company do away with the costs associated with hardware, software, and licenses and cut the Rs 3.8 crore price down to size.

In the meanwhile, other developments, like the beating Indian insurers were taking, began to make automated underwriting seem like an inevitable decision. For one, it could lower their losses and up their efficiency. “International best practices point to the automation of underwriting as a means of becoming more sophisticated in insurance operations. Automation of underwriting can have a double impact on profitability: It can improve loss ratio and also decrease intermediation costs, making processes cost effective,” says Anshu Vats, Principal of A.T. Kearney Middle East. 

To get started, Raghvan sent out RFPs for an automated underwriting solution. Some of the parameters were: A focus on tight execution timeline, the sturdiness of a solution, and the resilience of the technology platform. 

“Technologically, we needed a workflow and a strong rules-engine because underwriting is based on rules. We were open to a programming platform agnostic solution. It could be either Java or .Net platform,” says Raghvan.

With an eye on the cloud, he says his RFP he clearly stated that Aegon was open to a hosted solution and that he paid special attention to an exit strategy, back up and disaster recovery. Within two weeks of receiving submission from vendors, the evaluation was complete. 

They had decided to implement a hybrid cloud model and zeroed in on a product called AURA. “AURA was a robust system with high processing accuracy and consistent throughput. It enhanced our end-to-end management of the issuance process,” he says. 

Because he was using a hybrid model, Raghvan spent a lot of time studying security issues. Since the cloud provider’s servers were located in the UK, he was very careful about safeguarding sensitive customer data. In order to protect data privacy, he ensured that no personal data of a customer is shared on the rules engine. 

“Confidential data like the name of a customer, his address and contact number are not put on the rules engine. At the time of issuance we give a contract number to the customer and only that detail is used for underwriting purposes,” says Raghvan. 

Raghvan says that because Aegon Religare’s internal team did not have the expertise to build the rules on AURA, he decided to rely on the expertise of his implementation partner who had some underwriters. 

Partially thanks to the cloud, Raghvan had the system up within six months. He decided to phase out the implementation and automate 50 percent of all policies that Aegon Religare receives. The cloud strategy, he says, also shrunk the size of the project’s cost significantly from Rs 2 crore that he had earmarked for the project to Rs 33 lakh.

We wanted to improve the customer value proposition. With the shortest TAT for issuance we wanted to show them that we honor their time. If we could reduce the timeframe to three to five

Premium Benefits 

Perhaps more to the business’ pleasure, the solution gave the Rs 450-crore Aegon Religare a competitive advantage that neither it—or most of its larger competitors ever had: Faster turnaround time for policy issuance. 

One of the many aims of Project EUS (Expert Underwriting System), says Raghvan, was to shrink the time it took underwriters to pass a policy. Because they worked manually, underwriting a policy could take up to four days, delaying issuance, which could anywhere between seven to nine days, matching the industry standard. 

“We wanted to improve the customer value proposition. With the shortest TAT for issuance in the industry we wanted to show them that we honor their time. If we could reduce the timeframe to three to five days we would gain a competitive advantage over our industry peers,” says Raghvan.

Today, any policy run through the new system, which now covers about 65 percent of all policies, is issued and out of the door is a total of four days, putting Aegon Religare streets ahead of the competition. 

Apart from shrinking underwriting time, Aegon Religare also saw many of the benefits that are associated with automated underwriting including lowering underwriting cost (the company did away with 12 underwriters), increasing efficiency (Aegon currently has 23 underwriters, a number it has maintained over the last year), ensuring consistency of underwriting (Raghvan says they have minimized errors in risk assessment), minimizing the invasiveness of underwriting, and entering new markets and channels.    

It also introduced other long-term benefits. By equipping Aegon Religare with an automated underwriting solution Raghvan is winning brownie points with the insurer’s re-insurer Reinsurance Group of America. In the insurance world a re-insurer shares risk with an insurer.

“If I collect Rs 50 lakh in premium from a customer, I am taking a risk of Rs 10 lakh and passing on the risk of Rs 40 lakh to the re-insurer. 

Consequently, I also have to pass on the premium to the re-insurer to manage that risk. If I can assess risk more meticulously and adopt a structured approach to underwriting then I can better my claim ratio and my re-insurer will pass some of those benefits to me. Over time the premium rates will come down. This could be called underwriting profit,” says Raghvan, who says that Aegon Religare hopes to derive some of these advantages over the next six to seven years.