Comprehensive risk assessment — the accurate selection, assessment and rating of risk — rests at the heart of sustainable profitability. Underwriting involves far more than simply matching premium to coverage consistently. It encompasses the surrounding processes, multiple sources of information, diversely talented staff and underlying technology all working in alignment with corporate goals. In today's environment of minimal investment returns, escalating infrastructure costs and increasingly competitive markets, maintaining this performance-based balance and alignment with goals has become more difficult than ever before. Few of today's leaders find their previously tried-and-true methods sufficient for delivering sustainable improvements in underwriting performance.
Treating One Symptom: The Underwriting Audit
Faced with increasing underwriting losses without the once-reliable offset of investment income, the traditional fallback is to turn to underwriting file reviews, or audits, in an attempt to improve quality and consistency. Long a best practice, these audits help determine the effectiveness of underwriting staff and address questions such as: Are guidelines followed consistently? Are they being applied as intended? Are there any gaps in training or comprehension of intent? A well-structured audit consists of six steps, closely tracking to each phase in the underwriting decision process:
- Gather information on an applicant's loss exposures and associated hazards.
- Evaluate the exposures and hazards.
- Develop and evaluate underwriting alternatives.
- Select an underwriting alternative, including determining the appropriate premium.
- Implement the underwriting decision.
- Monitor the loss exposures.
Using this approach helps bring to light deficiencies in underwriting processes, providing a basis for additional coaching, improved documentation and enhanced quality reviews. Yet in order to be effective, several assumptions must be true: the typically static guidelines are appropriate, the surrounding processes are effectively aligned with organizational goals, and the technological infrastructure has matured to a point of sufficiency.
Unfortunately, in today's dynamic and innovatively disruptive world, these assumptions are often no longer valid.
Facing Many Symptoms: The Underwriting Engine
What, then, can be done when there is a clear deterioration in once profitable practices and guidelines? Underwriting is categorically complex, hampered by fragmented critical information and overlaps between risk and coverage. Seeing the full picture is exceptionally difficult, particularly given the rapid rate of change and the constant influence of prior decisions. Faced with the pressures of market urgency and business need, the default is to seek the path of least resistance, to forgo analysis and leap to perceived cause, rushing to implement the first viable solution that appears. And that represents the challenge risk management leaders must overcome, particularly in times of constrained margins when sensitivity to small deviations in performance can make the difference between profit and loss. The upside of a randomly targeted solution is limited and the downside can be dramatic.
Instead, sufficient time must be taken to conduct an objective diagnostic assessment of the entire underwriting ecosystem. Today's complexities exceed what can be solved by a traditional file review; there are too many interdependencies and variables. Repositioning for profitable growth requires more than additional documentation or enhanced training of the underwriters; the root issues often are deeply embedded and not attributable to any one person or practice. Similar to the computerized diagnostics run before tuning up a high performance engine, the fine-tuning of underwriting starts with a complete diagnostic, call it a health check, encompassing the full range of processes, practices, metrics, structures and technologies. Without looking at the entire picture, changes will be remedial at best and may have unexpected negative consequences at worst.
Tune-Up Time: The Underwriting Health Check
Achieving optimal underwriting performance requires taking the time to thoroughly understand every aspect of the operation. This extensive process can be simplified by first dividing the assessment into five logically related stages, along with their associated focal points:
1. Assess strategic alignment
Clarity of product focus and market intentions
Change management practices
Target marketing effectiveness, niche profitability
Individualization of products by target market
2. Examine underwriting foundation
Current performance metrics (loss ratios, trends, productivity, etc.)
Staff levels, performance, experience, decision quality, accountabilities, authorities, roles
Flow of work, control points, process management, service levels, analytics
Technology availability, currency and relevance, gaps to industry standards, utilization
3. Evaluate existing artifacts
Guidelines, checklists and cross-reference tables
Audit methodologies, portfolio management definitions and practices
Competitive intelligence and monitoring mechanisms
Feedback loops with actuarial, claims and product management
4. Review implementation methods
Clarity of product definitions, intentions, pricing/rating plans and coverage limitations
Adequacy of risk sharing and retention programs
Service-level performance (FNOL, adjusting, loss control, subrogation, recovery, etc.)
External communications and training programs (product explanations, loss control, etc.)
5. Clarify distribution integration
Distribution channel selection and strategy fit with product and service strategies
Role of distribution within organization, consistency of alignment with defined role
Degree of partnership with distribution channel
Each stage of the assessment sets the starting point for the next, flowing from strategy through operational considerations to properly align with the distribution channel. Underwriting is rightfully being viewed as a dynamic flow of information through checkpoints throughout which knowledge is being applied to enhance the end results. Clearly the depth of results will extend far beyond what could be achieved with a file-based snapshot of guidelines interpretation and application.
Once all the stage assessments are done, documented and, most importantly, validated with a cross-functional team of subject matter experts, the broad situational assessment can be drafted. The goal here is to bring all of the various parts together to clearly communicate key issues, performance gaps, root causes and specific opportunities for improvement. Taken in total, this information can be used to prioritize the needed decisions and the improvements that should be expected as a result.
Banking Benefits: Optimized Underwriting
A reduction in losses in today's thin investment income climate is no small accomplishment; in fact, it is critical to long-term survival. Financial sensitivity to small variances in loss costs is at a high point, putting a magnifying glass on pricing, underwriting, claims and distribution. By investing the time and resources needed for an in-depth evaluation of the risk selection, assessment and rating process, leaders can in return expect to receive a blueprint for achieving sustainable profitability.
Given the hazards hidden throughout today's competitive landscape, and the constant demand for improved performance, navigating by blueprint holds a good deal more appeal than relying upon intuition and good luck. The work of the line underwriter must be recognized as "value-added," capable of transforming knowledge and information into an assumption of risk decision. In the long run, the best insurance companies will achieve competitive advantage by developing the judgment and decision-making capabilities of their knowledge workers.
We truly enjoy a healthy exchange of ideas and welcome the opportunity to discuss underwriting topics with you.
George Krempley is a principal consultant at The Nolan Company, a management consulting firm specializing in the insurance industry.
Steve Callahan is a practice director at The Nolan Company, a management consulting firm specializing in the insurance industry.
Readers are encouraged to respond to using the “Add Your Comments” box below. George can be reached at firstname.lastname@example.org. Steve can be reached at email@example.com.
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