Underwriting put to the test

The underwriting process is a core component of new business in life and as such represents a significant risk under Solvency II. Munich Re provides support for process optimisation.

The traditional underwriting process is determined by a life insurer’s business and sales model and is founded primarily on the quality of the medical checks and the financial and technical assessment of proposals. At many companies, it is part of existing risk management systems put in place to avoid or reduce the operational risks.

A key component of Solvency II’s Pillar 2 is the governance system, which every European insurer will be obliged to have in place in a form consistent with the specific characteristics of its operations and enhance in the years ahead. A new aspect for many insurers is the extension of process logic, which had previously been geared to efficient division of labour, to take in a risk-based view of core processes as significant operational risks in the future.

Operational risks under Solvency II: Impact for life insurers

The operational risks faced by life insurers in practice include the following:

• The underwriting process is founded on the information provided by the proposer or the sales function, inevitably creating a risk that the entire process might be based on erroneous – or deliberately falsified – input data.
• Highly confidential personal data are transferred at every interface in the underwriting process, creating risks of data loss, erroneous data transfer and incompatible IT systems.
• The involvement of both internal functions and outside partners can lead to operational gaps, for example failure to define liability issues properly in policies.

The internal control system (ICS) plays an important role in monitoring operational risks in core processes, as the ICS key controls are applied precisely at those points in the underwriting process where the highest exposure to risk has been identified. Thus, a properly implemented internal control system not only meets the regulatory requirements, but also identifies potential for process optimisation.

Standardised and automated processes facilitate cooperation with Munich Re

The role of the reinsurance partner will also change as a result of the more stringent control and reporting requirements. A life insurer using, for example, an external risk assessment and pricing tool such as Munich Re’s MIRA system needs not only technical and operational security for the daily use of sensitive data in its business, but also the certainty that all legal and regulatory requirements are fully depicted and integrated.

Munich Re expects that, in future, standard and automated processes or audits will increasingly form a part of risk management at the interface between insurer and reinsurer. This would not only increase the quality of cooperation between the two, but would also become established as an integral component of the life insurer’s reporting and documentation requirements vis-à-vis the regulator.

With its extensive experience in building its own risk model and its prompt analysis of all Solvency II-related developments from both an insurance and a reinsurance perspective, Munich Re is today already providing support to its cedants in many areas that will be of key significance under Solvency II.

In its Knowledge Series, Munich Re analysed in detail the vulnerability of the extremely multifaceted underwriting process to operational risks and examined it in the light of the Pillar 2 requirements for governance, before briefly describing how a reinsurer can help its life insurance clients to minimise and manage the risks.