Making Better Decisions for Better Automobile Underwriting Results For Renewal Underwriting of Automobile Exposures. A workbook that
teaches a graduated or progressive process for underwriting automobile renewal policies. Underwriting applications and renewals of
automobile policies is at best a difficult and challenging job. Implementation of the concepts in this workbook will help you
increase your underwriting profits.

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This is the first part of a workbook that teaches a graduated or progressive
process for underwriting automobile renewal policies.

Graduated Automobile Underwriting

A Process for Making

Better Decisions for
Better Automobile Underwriting Results

For Renewal Underwriting of Automobile Exposures

Copyright August 14, 1998 by John T. Gilleland, Jr. All Rights Reserved
Revised May 13, 2003

Instructor's Edition

as designed by

John T. Gilleland, Jr., CPCU, AIS, API, AU
Morgan D. Jones
Ruth A. Fennell, AIM, SPHR

(for AICPCU & CPCU Society distribution and use only)


This is dedicated to people who make a difference by thinking and acting to achieve excellence.
Front-line staff, trainers and mentors who work smarter to bring about greater customer satisfaction
in spite of pressures to be mediocre. Those who refuse to settle for less than performing faster, better,
cheaper today than yesterday are industry’s real leaders. These include:
Anthony Bessegato,
Tammy Boling
Joseph Clements
Rick Garcia
Brad Geary
David J. Grant
Warren Hope
Jack Jensen
Michael R. Michalko
John T. O' Brien
William Poulsen
Michael Vargas
Lisa Watley

I thank these and many unknown others who have fought the hard battles without
rewards or recognition because it was the right thing to do.


1 INTRODUCTION ................................................... 1
2 AUTOMOBILE INSURANCE PROGRAMS ................................. 10
3 THE AUTOMOBILE INSURANCE RISK UNIVERSE ........................ 14
5 RANKING AUTOMOBILE RISKS ...................................... 25
7 A MORE ADVANCED ANALYTIC PROCESS .............................. 59
8 A THREE DIMENSIONAL ANALYTIC APPROACH ......................... 68
9 CASCADING RISK ASSESSMENT MATRICES ............................ 84
10 PROMISES AND CHALLENGES ...................................... 94
APPENDIX ........................................................ 98

Underwriting applications and renewals of automobile policies is at best a difficult, challenging job because it involves making critical decisions about risk... decisions that ultimately determine whether the insurer makes or loses money. These decisions aren’t simply right or wrong. The degree of rightness or wrongness influences the amount of underwriting profit or loss. The greater the profit, the more correct the decisions have been made; the greater the un-profitability, the more poorly the decisions have been made. Implementation of the concepts in this workbook will help you increase your underwriting profits. Potential decision outcomes from underwriting decisions can be arranged as follows:
Monetary Outcome
Degrees of Right and Wrong

An industry paradigm holds that the more information the underwriter has concerning an applicant’s or insured’s risk, the better the underwriter’s chances are to evaluate the risk. However, this assumes 1) objective information is interpreted properly, 2) the information is used to implement risk management techniques correctly and 3) the underwriters’ subjective judgment is used prudently. The third ingredient is what determines, more often than not, whether an experienced underwriter is successful or not.

Logic tells us that an organized, structured approach to analyzing an applicant’s insurability increases the probability of making profitable decisions more consistently. Like cooking, it helps to follow recipes. However, most of us humans (and the human institutions that employ us) instinctively avoid and resist using an organized approach to decision making. Instead, we tend, by unconscious preference, to rely on gut feeling or seat of the pants guess work -- what scientists call intuition.
This aversion to structured analysis is not a question of individual intelligence, motive, or experience. It is simply the way the human mind works. The human mind was designed to make decisions intuitively while foraging for food and fleeing from life threatening danger. This workbook helps those who are looking to satisfy more advanced needs.

Figure 1.1

Intuition, which is another word for unconscious thinking, can be relied upon most of the time to lead us to effective solutions when confronted with simple problems. But when confronted with complex problems, like underwriting insurance policies, intuition cannot cope with the intricacies and nuances. Underwriters who glance over information superficially and guess at what should be done miss out on details inherent in complex problems. Therefore, we suggest an analytic decision-making process be used by underwriters.

Instead of following a structured format or recipe, our minds instinctively favor the first solution that seems satisfactory. Economists call this phenomenon “satisficing†(the merging of the words “satisfying†and “sufficingâ€). Nobel Prize winner Herbert Simon coined the new term, referring to the observation that managers most of the time settle for a satisfactory solution that suffices for the time being rather than pursue the optimum (most profitable) solution that a “rational model†would likely yield most of the time. What makes satisficing especially insidious is that we are instinctively disinclined to offer intellectual resistance to intuitive decisions because we by nature feel comfortable and confident with our intuitive impulses.

Intuition is driven and guided by a host of unconscious mental traits that defeat creative, objective, comprehensive, accurate, and reliable analysis. Seven of these traits* have especially adverse influences on our ability to analyze problems and make effective decisions:

We Let Emotion Guide Us
Emotion is perhaps the most troublesome trait in this regard, for we are inarguably emotional creatures. There is an emotional dimension to almost every thought we have and every decision we make. Sometimes emotion is so strong that it hijacks... overwhelms... our power to reason. This is not news to most people, of course. Alexander Pope wrote three hundred years ago that “What reason weaves, by passion is undone.†Still, the role that emotions, even subtle ones, play in our decision making is normally underrated, if not dismissed. But it shouldn’t be. As Time Magazine in 1995 wrote in reviewing Daniel Goleman’s book, Emotional Intelligence: Why It Can Matter More Than IQ (Bantam Books, 1995), “Whether we experience a somatic response--a gut feeling of dread or a giddy sense of elation--emotions are helping to limit the field in any choice we have to make.â€

Fear, anger, greed, and pride are emotions that blind decision makers. Underwriters who fear angering their supervisors will not boldly go where creative solutions beckon. Underwriters who think “agents are idiots†will not facilitate learning by customer service representatives and producers. Underwriters who seek to profit at the expense of their territories will not motivate producers to grow their books of business profitably with rate reductions.

* These seven traits are described in greater detail in The Thinker’s Toolkit: Fourteen Skills for Making Smarter Decisions in Business and in Life by Morgan D. Jones, Times Books, 1995.


We Use Mental Shortcuts
Our unconscious mind continuously takes shortcuts, over which we have no control, that drastically influence our conscious thinking. For example, if we hear someone say he or she is on a diet, we often instantly stereotype that person according to our views concerning dieting. This stereotyping is an unconscious reaction--a shortcut--of the mind from a stimulus (what we heard or saw) to a response (what we think/decide). We do not consciously decide to stereotype; the mind does it for us automatically without our asking. It is a connection--a mental shortcut--that the mind instantly makes through its complex neural networks that dictates our perception of that person. The uncomfortable fact is that, to see this person (the dieter) objectively, we must struggle against our own mind.

Many underwriting teams are understaffed, under-trained, and under appreciated. This prompts many underwriters to take as many shortcuts as possible. Taking short cuts helps some underwriters fit their workloads into eight hour days. Those who cave in to this pressure often subscribe to the credo “When in doubt, route it out,†letting others make difficult decisions instead of treating such needs as opportunities to learn and develop new expertise. Logic is a discipline that skeptics see as taking time away from answering the next phone call and doing the next piece of mail.

We View Everything in Terms of Patterns
Patterning is how our minds relate to the world around us. We recognize patterns in situations and in sequences of events that we have seen before. Stereotyping and cause-and-effect relationships are forms of patterning. The trouble with patterning is that when we want to see a particular pattern, expect to see it, or have become accustomed to seeing it, our unconscious mind not only fills in (makes up) missing information to form the wanted, expected or unaccustomed pattern, it edits out information that does not fit the pattern. As a result, much more often than we are aware of or willing to admit, we frequently mis-identify patterns, seeing patterns where none exist. These mis-identifications corrupt problem solving and decision making efforts.

Some underwriters review completed applications and assume the collected information indicates inappropriate exposures. Assumptions that are not based on statistics gathered by the underwriters or their actuaries are unfounded speculation. As professionals we should be able to substantiate our claims when making decisions. We should not see patterns that do not exist.


We Instinctively Rely On and are Susceptible to Biases
Biases are unconscious beliefs that condition, govern and compel our thinking and behavior. These shortcut mechanisms of the mind, like other mental traits, are instinctive and beyond our control. Acquiring a bias is not a conscious mental process; we really don’t have a role in it. The mind does it for us without our knowledge or consent. So, we are stuck with biases whether we want them or not. It’s the way the mind works. The trouble with biases is that we tend to give high value to information that is consistent with our biases, thus reinforcing them, while giving low value to, and even rejecting information that is inconsistent with our biases, thus preserving them. Biases unquestionably are, like deadly viruses, unseen killers of objective truth.

Underwriters who make biased decisions annoy their customer agents, producers, etc. Agents, their producers and customer service representatives expect underwriters to perform as professionals not as biased amateurs who do not think logically.

We Have an Innate Compulsion to Explain Everything
We humans are an explaining species. Explanations, by making sense of an uncertain world, render the circumstances of life more predictable and thus diminish our anxieties about what the future, immediate or distant, may hold. The compulsion to explain everything drives our curiosity and thirst for knowledge. The trouble with our artificial explanations is that our explanations do not have to be true to satisfy our compulsion to explain. Being satisfied, we are content to move on without seriously questioning our assumed explanation. This is one of the reasons we humans don’t give sufficient consideration to the many plausible alternative explanations that usually accompany most uncertainties.

Many underwriters do not trust profitably performing agency principles. Profitable agency personnel have proven themselves and earned credibility. Underwriters should trust such professionals’ unusual explanations. Weird things happen. Underwriters should not penalize their profitable agencies’ prospects because weird things have happened to them.

We Look for and Use Evidence that Agrees with Our Beliefs

This phenomenon is called “focusing†and it is the normal state of our minds. It tends to make us view problems and decisions one-dimensionally, meaning we satisfice--focus on the first solution that offers a reasonable explanation. This focusing can severely warp the objectivity of our analysis. The hallmark of focusing is advocacy -- taking a position on an issue, marshaling supporting evidence, and defending that position against the arguments of those holding (focusing on) opposing views. Advocacy works very well when someone other than the advocator is the decision maker. But when the advocator is also the decision maker, advocacy feeds and perpetuates our biases, beliefs and prejudices. It thus nurtures our tendency to focus and, in doing so, defeats objectivity. When we defeat objectivity, we limit, even prevent, full understanding of problems. Unfortunately, many underwriters prefer to believe their gut feelings instead of discovering what actuarial data is relevant, seeking individuals’ testimonies, and building chains of logic.

Underwriters who study their territories can develop deep understanding of their market’s trends and the influences that cause those trends. This study of loss runs, construction projects, etc. should help underwriters believe and use facts for decision making.

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