More than 80% of industry executives believe predictive models are critical to underwriting’s future but less than a third say their business has advanced capabilities in this area, according to a Capgemini report.

The findings reflect the challenge facing general insurers that are under pressure to improve earnings in an increasingly tough business environment.

An overhaul of underwriting practices appears necessary to align with evolving customer expectations around affordability, simplicity and transparency, achieve sustainable growth and improve underwriting results, the consulting firm’s report says.

However, organisational constraints such as data deficiencies, legacy systems and a lack of skilled talent are restricting insurers’ ability to respond.

“Today’s insurer is operating in one of the most precarious environments in recent memory. The industry must react to this volatility by rethinking the underwriting rule book,” Capgemini Global Insurance Industry Leader Adam Denninger said.

“It requires shifting away from legacy models by modernising core systems and deploying advanced technologies that drive better outcomes and transparency. Embracing [artificial intelligence-driven] insights and automation is crucial for the industry to drive a competitive path towards underwriting profitability that adapts to evolving risk dynamics and policyholder behaviours.”

The report says general insurers face a challenge meeting the needs of their underwriters as there are significant gaps between insurers’ data capabilities and the importance of various data types.

Underwriters believe relevant third-party data insights and predictive models are essential to accurately assess and price risk, but less than 37% of insurers have advanced third-party data capabilities and only 27% have advanced predictive modelling capabilities.

For example, about 49% of underwriters value drone image data, yet few insurers are equipped to support and analyse it effectively. And half of all underwriters want data from connected devices for real-time information about personal and commercial assets, but only 12% of insurers can capture such data effectively.

“The traditional approach to ... risk assessment and pricing is facing significant challenges,” the report says. “While premiums grew, underwriting struggled. During this time, combined ratios breached 100% as losses outpaced new business premiums.

“Legacy practices now fail against market transformations like climate change, cyber risks and mobility shifts amid high consumer expectations. Outdated underwriting engines require technologies that inject accuracy, efficiency and transparency to restore profitability.”

Click here for the report.