Kansas City, Mo. - Vision may be the most important element required to underwrite liability risk, says Ajay Gupta, marketing leader of GE Insurance Solutions, a provider of reinsurance and commercial insurance and risk management services. Gupta says insurers tend to look backward at historical loss experience but not forward to factors that may impact future losses.Gupta's article, "Crisis or Opportunity: The Liability Dilemma", appears on GE Insurance Solutions' Web site at: www.geinsurancesolutions.com/erccorporate/theinstitute/pc/0601_cris.htm.
In his article, Gupta explores a theme that has haunted reinsurers in the last few years: adverse development on long-tail liability risk. He probes for the root cause of the problem that has in some cases forced re/insurers to add billions in loss reserves.
"When pricing is inadequate, brokers and insureds contend that the underwriter didn't ask the necessary questions," he says. "The reality may be that the underwriter didn't understand the full scenario in the first place."
Gupta continues: "The important issue for an underwriter is how a contract can be sensibly priced when the outcome may not be known for 30 years, as is the case with asbestos litigation." He contends that insurers are often hamstrung because their underwriters are generalists "who may understand a little about many industries," but rarely are "experts in a specific medical discipline or industrial sector. As disciplines become more specialized, underwriters struggle to keep up with new developments and the drivers behind such change."
The answer, Gupta says, lies in providing frontline underwriters with the understanding and the tools they need. Gupta refers to it as understanding "the true cost of capital the insurers put on the line when they write a given volume of business or exposure over a 12-month period."
Specifically, Gupta calls on insurers to recruit more specialist underwriters and enhance their training, employ rigorous underwriting discipline and implement strong risk management controls to avoid the dilemma of pricing uncertainty.
Gupta concludes with a cautionary note that recalls a time when re/insurers specifically relied on investment income to achieve profitability and making an underwriting profit was uncommon: "Without providing this insight to underwriters, insurers will always be in the position of selling their product first and figuring out their true selling price after a loss comes in."
Source: GE Insurance Solutions
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