How Smart Follow Underwriting Works

Smart Follow underwriting and the algorithmic technology associated with it will bring a revolution of improved pricing and lower costs to insuring large and complex risks. In this email, Optalitix shares how new technology has allowed the emergence of Smart Follow underwriting which expedites and creates a more efficient underwriting process, reducing the effort required by the broker. Big tech companies like Google are already providing their input, and major insurers are getting involved. This article describes how Smart Follow underwriting differs from the current follow underwriting methodology. A typical syndicated underwriting process in Lloyd’s involves 3 main steps:

1. The client engages a broker to place the risk.
2. The broker finds a lead underwriter willing to price the risk and determine the terms of the cover. The lead underwriter might take 15% to 20% of the risk.
3. The broker then needs to find additional follow underwriters to provide the remaining risk capacity. This is a manual and time consuming process.

Figure 1: Typical syndicated risk process

The smart follow underwriting process using algorithms to determine risk cover reduces the amount of work required for step 3 (see image below). As the lead underwriter’s risk capacity is automatically enhanced by the follow underwriters, there is less work required for the broker to achieve the risk capacity required in risk 3 (the most time consuming part of the process).  This makes the lead underwriter with additional capacity more attractive to the broker, and results in more business for the lead underwriter and the syndicates that follow it.

Figure 2: Algorithmic underwriter process with smart follow reduces broker work

How do follow underwriting work with algorithmic underwriting?

The insurer agrees to a line of business (percentage of cover) for any risk quoted by a specific underwriter (the lead underwriter) and class of business, and meeting specific criteria (e.g. limited catastrophe cover). The criteria used to determine this capacity provision represent the algorithmic underwriting function. If a risks meets the criteria of the algorithm, the follow underwriter automatically provides underwriting capacity for the lead underwriter. This makes the lead underwriter more attractive for brokers as it reduces the amount of additional cover needed for the broker to source elsewhere.

‍What type of risks are covered?

‍The risks covered are typically based on their historic profitability and are underwritten by an experienced underwriter who has a good track record in the market. In some cases, more complex criteria may be used to determine the line to be provided – for example, any catastrophe-prone risks may be excluded. The criteria for determining the risks to be covered can be simple, but there is a greater degree of complexity emerging as follow underwriting grows in popularity, and as more advanced systems are built to track the risk (e.g. Ki insurance use AI and machine learning to determine which risks they want to follow).

‍Benefits of smart follow algorithmic underwriting

‍Algorithmic underwriting is a new way of writing insurance business that is proving popular for Lloyd’s syndicates. It offers benefits to all the parties in the process: Benefits to insurers using smart follow underwriting

• Increased levels of business by accessing high-volume quotes across the market at low cost.
• Reduces syndicate's overall capital requirements by optimising portfolio risks.
• Improved risk profits by accessing premiums provided by the best underwriters in the London Market.
• Expands syndicates risk knowledge into new areas using expert underwriters as a guide.
• Access emerging new insurance exchanges that provide capacity to the market.

Benefits to lead underwriters

• Expands capacity for lead underwriters, making them more attractive for brokers to lead risks.
• Provides credibility for lead underwriters who are chosen based on their experience and capabilities.

Benefits to brokers

• Reduces the number of following underwriters required, speeding up time to bind the risk and reducing costs.

In our opinion, smart follow underwriting using algorithms will become a market standard follow-only

‍The value of the smart follow model and the profits from existing follow-only syndicates coupled with the drive to digitize Lloyd’s will drive the smart follow syndicates growth significantly. Capital providers view these strategies as an attractive way to deploy capital, and while the risk experience of the existing smart follow syndicates is still new, it is looking positive with Smart Tracker generating profits in 2021. Future risk outcomes for these syndicates will be closely monitored by the rest of the market and we expect more smart follow syndicates to be set up.The attractiveness of having large capacity provided by auto-follow syndicates for their lead underwriter will ensure interest from the broker community. The recognition of the lead underwriter’s expertise and the potential for greater capacity will make lead syndicates with high auto-follow capacity attractive to brokers. Conversely, lead underwriters with fewer syndicates choosing to provide auto-follow capacity (possibly due to adverse performance or lack of experience in a line of business) will become less attractive for brokers to approach due to the difficulty of convincing other underwriters to follow the lead underwriter’s pricing.This will result in the best lead underwriters being able to dictate terms, and potentially increase charges for the follow syndicates. Lead underwriters will work to attract smart follow syndicates, and to boost their reputation in the market to increase the automatic capacity they attract with any business they price.As this market grows, and capital flows into the market, expect these smart follow syndicates to grow significantly, and for the best lead syndicates to boost their pricing expertise to attract them while worse performing lead underwriters will struggle to attract broker attention and lose market share. This Darwinian process of superior pricing driving additional business will become the future of the London market.