Drilling Down High-Level Data for Forensic Study of Loss Runs to
Improve Underwriting Territory Profitability
by John T. Gilleland Jr., CPCU, AIS, API, AU
note:: Have you ever noticed that what comes around,
goes around and reappears? Perhaps it has a new name, but the
basic concepts in our industry don’t change much. In the
last edition of Underwriting Trends, I had asked the question of
“What role should we play in securing the future for the
insurance industry?” In part, this entails getting
“back to basics” and sharpening our underwriting
skills to strengthen underwriting profits.
To this end, I am including excerpts from an article written by John T. Gilleland Jr., CPCU, AIS, API, AU, back in 1999, which was updated in 2003. Although too large to print in its entirety (which will be posted on the section web site), I thought some of the generalized underwriting information would be useful.
The Need for a Better
Traditionally, property and casualty underwriters have relied upon their company and/or regional exception underwriting eligibility guidelines whenever evaluating applications, renewals, referrals, and change requests. These guidelines are often set when a company or a product is initially rolled out. Most guidelines are not updated to reflect analysis of markets’ performance. Therefore, rates are usually the only things that get updated/revised when loss ratios increase. Many underwriters assume their rates will be adjusted appropriately to market trends. We suggest guidelines be adjusted much more often than rates.
Guidelines are static; markets are volatile. Use of guidelines that do not reflect current market conditions will not enable underwriters to react to their markets’ pressures, characteristics, events, or trends. Lack of market analysis and tailored underwriting action permits inception and continuation of negative
| underwriting results trends. Growth and
profitability are the key underwriting results/objectives.
We need “acceptability” guidelines to help underwriters know how to react more profitably to risks that are eligible but have adverse characteristics or tendencies. Underwriters who manage their books of business in reaction to their markets’ trends work to make eligible exposures more acceptable because they know what is and is not likely to be profitable in their markets. This article proposes that any book of business’ growth and profitability should be managed in a new way. Our use of the term “managed” is meant to indicate we expect underwriters to:
Management techniques such as MBO, goal setting, process improvement, and statistical analysis should be considered for use when evaluating, planning, and working to improve any book of business. Underwriters should use much more than just program eligibility guidelines and gut feeling to underwrite. Underwriters should constantly develop market acceptability guidelines that serve specific purposes for limited times. Acceptability guidelines should change as markets change.
What Does Portfolio
The article in its entirety (on the web) outlines analytic approaches for evaluating underwriting territories and reacting wisely. There are two descriptions of processes. The first description is very basic and at a high
| level. The second is very detailed and has three
examples. This material describes one of several approaches to do
what is called “portfolio management underwriting” in
the Insurance Institute of America’s API 28 and 29 courses
as well as its Focus Series self-study workbook titled Personal
Insurance Portfolio Management.
Traditional portfolio management was developed by financial investment managers. It is a school of thought that was developed and has evolved to help investment portfolio (groups of stocks and bonds) managers to do things like reduce the financial impact of unfavorable market swings. Portfolio management of investments helps minimize the impact of a few declining stock and bond values on an investment manager’s portfolio of stocks and bonds. Portfolio management underwriting helps underwriters minimize the impact of a few unprofitable policies on an underwriter’s book of business.
Investment managers generally follow four rules when applying portfolio management principles. These are relevant to underwriting concerns too.
• Carefully determine what your benchmarks (comparables) should be. Measure your portfolio’s performance in relation to relevant benchmarks. Take corresponding actions to get your portfolio to perform so that the benchmarks are achieved or exceeded. This means gap analysis1 should generate the beginnings of an action plan targeted at specific needs.
• Analyze your benchmarks in terms of what risks are generally expected, usually unacceptable, and may be tolerable if conditions are right. This means portfolio managers should be knowledgeable enough to be consistent when setting goals, making decisions, and being flexible in their negotiating and planning.