With the difficulties in 2008's credit market providing the background, 2009 promises to be a challenging year for insurance underwriters. Interestingly, while the market will certainly be volatile, the work done in the last few years by some insurers will position them to leverage the current market conditions into significant market opportunity. While the current conditions imply a strategy of returning to core business capabilities and a flight to quality, some of these insurers are also viewing it as an opportunity to question their operating assumptions and look for new and creative business solutions. 2009 MARKET PRESSURES

With losses to surplus due to the financial market difficulties predicted to be in the 10% to 20% range for 2008, the rating agencies will be focused on financial stability, which translates to underwriters as a focus on underwriting profit, not on net profit. Insurers will need to demonstrate disciplined underwriting procedures in order to comply. More attention will be paid to catastrophe exposures, with both environmental and weather exposures as the focus for P&C and employee concentrations for workers' compensation. Enterprise risk management initiatives will concentrate on data accessibility and data quality in order to evaluate the relationships among risks. Organizations will be pressured to better respond to questions regarding the inter-relationships of risks identified from across the organization.

Market consolidation will continue, with the Safeco/Liberty Mutual deal just one example of a potential series of transactions in 2009. Due to credit pressures from the financial markets, some organizations will look for mergers, others for acquisitions in order to gain access to more capital or achieve more critical mass. This market consolidation may result in a shrinking of available markets, putting additional pressure on production processes.

The regulatory environment also is expected to change, with only the scope and scale of the change being debated. With insurer CEOs calling for the establishment of an Office of Insurance Information, congressional members looking more closely at the concept of an optional federal charter, and the NAIC approving a controversial reinsurance framework to reduce or eliminate capital requirements on non-U.S. insurers, the lines are being drawn for significant debate. The ultimate outcome is expected to impact product development processes, and expand distribution opportunities, both of which will challenge some underwriting departments.

The financial markets' performance will reverberate within the insurance community in other ways. Credit pressures on the agencies and their clients will further complicate planning problems. Indeed, difficulties in obtaining credit are predicted to result in a decrease in the number of surviving small companies, and additional downsizing by large organizations. Economic uncertainty may also delay the retirement of baby boomers.

Demographics issues will also play a role, as a retirement-induced talent squeeze will put pressure on agency distribution channels by exacerbating their succession planning problems. Likewise, many insurers, faced with the loss of experienced underwriting personnel, will be challenged to recruit, hire, train and deploy new underwriting staff in the coming year.

Firms have hired young people who bring energy, enthusiasm, intelligence and creativity to the job. However, they don't appear to have the same work orientation as many of the people who have worked in the insurance industry for the past 30 years. Young employees don't expect to retire from the organization they work for now - they look for portable 401k accounts rather than the pension accounts so important to many older employees. Younger employees expect to make a contribution relatively quickly rather than expecting to first "learn the business." The current job market makes the historic stability of the insurance market attractive, and the opportunity to attract high-quality talent has rarely been greater.


While the pressures in the market appear dire, the business improvements implemented in the past few years by some insurers position them well to weather the market downturn better than not only other insurers, but other financial services market segments as well. Attention to improvements in pricing precision and underwriting performance management, increased "ease of doing business" for the agency distribution channels, improvements in operational efficiency and staff augmentation efforts provide opportunity to those insurers who had the insight to address these issues prior to the current environment. This foresight, combined with the expected market hardening and firming of rates, should allow these insurers to emerge well positioned for profitable growth once the market shrinking begins to reverse.

Ease of doing business, especially for the independent agent, has been a priority for many insurers for a number of years. More flexible rating environments for both quoting and new business submission, automated bridging from agency administration systems to front-end quoting systems, and enhanced Web-based agent self-service have all proven to be merely baseline capabilities in the struggle to make it easier for agents to do business. These firms are now turning to more sophisticated rules engines and workflow engines to automate transaction processing (personal lines auto, for example) or to automate delivery of collaborative information to both an agent and an individual underwriter for decision-making. In addition, while automated transaction processing historically started with personal lines auto coverages, it is rapidly being adopted for commercial lines as well. With the increased demand for underwriting profit, the trend for automated transaction processing will expand rapidly as insurers become more comfortable with the application of predictive analytic models and business rules as surrogates for human decision-making (see sidebar below). Investment in this capability during the market downturn provides opportunity to streamline operations, while at the same time increase the ease of doing business for the agent.

Other technology capabilities also provide opportunity to take advantage of the current environment. In addition to the rules and workflow engines identified above, advancements to rating, document management and billing engines have improved the ability of insurers to advance their operational excellence and increase their agility in responding to market changes and product demands. These applications also support the disciplined oversight and management of more diverse staff sourcing strategies. Staff augmentation options - distributed processing centers, transaction processing outsourcing, technology infrastructure or data management outsourcing, or utilization of more contract labor - will streamline operations and reduce processing redundancies. The current market conditions provide opportunity for fiscally conservative firms to invest in these technologies now at very attractive rates.

However, the true promise of technology is in the thought leadership facilitated by a deeper "visceral" understanding of the organization's data. Firms are turning to their data for insight into new and creative solutions to core underwriting needs. Analytic solutions are available from consulting firms that build predictive algorithms, software firms that provide the tools for insurers to build, manage and maintain their own algorithms, and solution providers that supply the data infrastructure and the analytic tools to build and maintain analytic solutions without a high infrastructure maintenance cost. Deep experience in building analytic environments is no longer necessary. It is in the management of the organization's analytic data that the primary insight occurs. Carriers that take this market opportunity to focus on resolving data-quality issues, to restructure data analysis environments and to look for third-party data providers will be well positioned when the market turns.

While the current market situation is challenging at best, it also provides underwriters with an opportunity to rethink business processes, improve and enhance data environments, invest in collaborative technologies and attract high-quality talent.

Mark Gorman is principal, Mark B. Gorman & Associates LLC, Minneapolis.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

Market Downturn Provides Opportunity for Analytics

In research conducted this summer on behalf of Insurance Networking News, I asked about the use of predictive analytics in new and renewal business underwriting. While the results are a bit overstated (obviously only organizations using predictive analytics in some way were represented), approximately 62% of all respondents were either already using, or had in development a program to use predictive analytics for enhanced pricing precision. For P&C insurers, another 50% to 55% are using, or are in development with, initiatives for use of predictive analytics in company or tier placement and in underwriting performance management initiatives. For life and annuity insurers, another 58% were using predictive analytics for underwriting performance management and for better business segmentation.

These initiatives utilize historic data to build models that are used to either automate the underwriting decision (especially in the case of personal lines) or support the underwriter in making more informed decisions (more prevalent in commercial lines and life underwriting). Companies not currently utilizing this technology are not realizing the benefits in increased pricing precision, consistency in the underwriting decision or advanced utilization of third-party data. Advanced firms are utilizing the predictive analytic algorithms to help guide and monitor underwriting decisions, especially during times of rapidly hardening or softening markets. This market downturn provides an opportunity for companies not utilizing predictive analytics in their underwriting processes to potentially find cost-efficient ways to develop this capability. For example, they may combine the utilization of excess capacity from internal resources with consulting services they've contracted with at attractive rates based on reduced demand in the consulting community.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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