Underwriting Profit at Your Fingertips in a Competitive Market
I was recently asked by one of our customers to speak at an Underwriting Conference on the topic of Building an Underwriting Culture in Insurance. As Gen Re is an underwriting company, this topic is something that we live every day. One of the key tenets of our company's philosophy is to focus on building a strong underwriting culture, one that can give our clients a competitive advantage in a difficult market.
The landscape in which insurance companies are operating includes a margin-thin business, a supply push, astute investors, low interest rates and aggressive competitors. These pressures often lead boards, executives, stakeholders and analysts to lose sight of the core values that insurance and reinsurance companies need in order to be successful.
It takes discipline to collect adequate premiums to cover losses, deliver an appropriate margin to the owner or mutual insurance company for taking on the underwriting risk, and to demonstrate consistent and clear expectations, with the goal of seeking and assuming risk at a pre-determined target-combined ratio.
How can a strong underwriting culture lead to greater success in a difficult market?
A McKinsey study found the following:
- As much as 25% to 50% of underpricing is due to mistakes in underwriting execution, not the soft market.
- 25% to 35% of a carrier’s active files have errors in underwriting, the vast majority of these errors result in underpricing.
In our own experience in performing underwriting reviews - for ourselves and our clients - we have found that misclassified exposures, inaccurate or out-of-date underwriting information, unclear underwriting guidelines, and incorrectly applied pricing mechanisms are not uncommon; fixing them can improve results in a difficult market.
The McKinsey study states that better underwriting execution can improve most carriers’ combined ratio from 4 to 11 points. The good news is that this can be done without significant dollar investment. Improvement in processes and accountability can make a significant difference - and quickly.
What are the first steps toward building a strong underwriting culture?
- Recognize and reward those underwriters with strong technical underwriting skills.
- Align this goal at all levels of the organization, including Human Resources and all Managers.
- Articulate the commitment to an underwriting strategy clearly and often.
- Utilize metrics to measure and report progress and results.
Writing business at pricing that includes an adequate return for risk can be daunting in a competitive market. Verifying that the risks you already write (and know) are underwritten and priced correctly is another source of underwriting profit that can contribute to the bottom line.