Underwriting Management Chapter Slides

1. Chapter 3
MAIN INFLUENCES ON UNDERWRITING

2. CORPORATE STRATEGY & UNDERWRITING
STRATEGY
Corporate strategy – is designed to operate firm successfully.
Corporate objectives are high level statements of intent and are usually
expressed in very broad simple terms e.g. to be market leader in a particular
sector within 5 years.
Corporate strategy may include an objective to transact business in a particular
territory, to seek growth or consolidation and profit.
These objectives are influenced by market conditions and opportunities and the
availability of capital and corporate appetite, and will be regularly reviewed, and
adjusted, as necessary.

3. CORPORATE STRATEGY & UNDERWRITING
STRATEGY
Underwriting strategy - Derived from corporate strategy.
High level objectives is distilled into the underwriting strategy through business
plans, broken down into key elements, including:
• Claim ratio (Premium income to Claims) and expense ratio (Premium
income to Administrative expenses)
• Premium targets and Expected investment returns.
Strategy should be understood and implemented throughout the organization
along with other factors outside the organization for success.

4. CORPORATE STRATEGY & UNDERWRITING
STRATEGY
Different types of underwriting strategy
Main classes of business:
Insurer can apply its philosophy of a particular class of business to all classes
e.g. use of direct marketing channels for personal lines also used for other
classes and this can impact on expense ratio, staff requirement and retention
strategy.
An insurer can use indirect channels e.g. intermediary for marketing a product
due to its repute or relationship with customers in the market.
Organization offer preferential insurance terms to its members.
Commercial property Liability
Motor Marine and Aviation

5. CORPORATE STRATEGY & UNDERWRITING
STRATEGY
Different types of underwriting strategy (Cont.)
Personal lines products are often standardised with computer driven technology, while
using sophisticated rating and pricing models to try to secure and retain business in an
intensively competitive market. Underwriting expenses to some extent minimise the high
acquisition costs generated by extensive and expensive media advertising.
Non-standard personal lines, together with commercial lines business, generates
higher average premium but requires more customised underwriting and sometime use
higher commission rate which pressurised the expenses.
Each market or segment has its own attractions.
Product based underwriting strategy – Underwriting, claims, sales, and marketing
division report to a central business management function.
Functional division will operate across products but, ultimately, responsibility for the
underwriting results will rest with a team of senior managers who can be said to operate
the strategic policy.

6. COMPETITION FOR CAPITAL
Option available to a financial organization with surplus capital:
Gains, losses, and if borrowed capital is involved then interest payable to the
lender & dividend payment to shareholders must be considered for expected
return on capital. Therefore, underwriting function require capital and so
influence the underwriting strategy.
• Insurance co. short time liability – Early claim settlement – Require capital
• Insurance co. long term liability – Claim settlement take time e.g. EL
Purchase a new insurance company or expand its business
Invest in acquiring or building new premises & sold to meet liabilities at short notice
Return capital to shareholders, or do nothing

7. MARKET SHARE AND PROFIT
Organization’s strategy is derived from corporate objectives.
Underwriting cycle (Soft and Hard phase) effect the profitability of an organization.
Firms makes strategy and launch a new insurance product and justify its costs by gaining profits
from other insurance products.
Critical mass – A business plan might well provide for a negative underwriting results,
particularly, during the early year of newly established firm, when expense will typically be high,
until the firms portfolio achieves the level of income necessary to support set-up, and other,
ongoing, costs.
Profitable growth is more important than profit because of maintaining control over cost and desire
of investors. The prevailing state of market must be considered by insurers in order to develop a
strategy for market share.
The underwriters will have to take such decisions which looks ridiculous but necessary for an
organization e.g. When fixed costs are taken into account it might be necessary to accept business at
lower premiums in the short term, even if the results is an underwriting loss.

8. MARKET SHARE AND PROFIT
Internal tensions e.g. failure to communicate the strategic objectives and
business plan throughout the entire firm may result in negative and collective
efforts are required.
New entrants in insurance market can produce drastic results because of the
market competition, critical mass point and expense ratio.
New entrants require a strong nerve for starting a business in competitive
environment.

9. THE UNDERWRITING CYCLE
Higher Profits
Higher Prices (Increased investments)
(Reduced competition) Higher capacity for that class
Capacity withdrawn (Increases Competition)
Lower prices
Lower profits or losses

10. THE UNDERWRITING CYCLE
Main factors which effect the cycle:
Insurers are interested in limiting the effects of cyclical influences on their
profitability and solvency margins and it can be achieved through selective
underwriting but it is always not practicable in the competitive market.
Economic cycles (Including effects of recession & level of investment return)
Political influences
Weather related claims
Changes to legislation or judicial decisions, resulting in new liabilities

11. MAJOR EVENTS AND TRENDS
External influences on underwriting strategy:
Economic trends – Country has its own economic trends which effects the insurance
cycle and underwriting strategy e.g. Inflation increase property value and so does the
sum insured. Similarly, theft claims increases due to unemployment.
Political Influences – Global conflicts effects economy and insurance cycle e.g. In
world war п oil price inflated and this in turn decreases vehicle use and so improved
the claims experience and it results in lower premium. Similarly, terrorism has effected
the availability of reinsurance and so has an impact on personal and commercial line
market.
Economic trends & Political Influences Weather related events
Long term industrial disease Pandemics & emerging risks

12. MAJOR EVENTS AND TRENDS
Weather related claims – In travel insurance a hurricane effects the person
negatively in USA.
It is also an important consideration for construction insurers in respect of physical loss or
damage and delays to project and contracts. Business interruption policy due to can
cause a great expense.
E.g. Storm and flood (Catastrophe places pressure on insurers’ and reinsurers’ capital
requirements to underwrite a business. Weather has far reaching effects on insurer,
therefore, insurer should consider the weather related claims in the formulation and
management of underwriting strategy e.g. Flood in Pakistan and Hurricanes in USA.

13. MAJOR EVENTS AND TRENDS
UK has introduced Climate Change Act 2008 and the key components are:
• Improve carbon management, thereby helping the transition for low carbon
economy
• Demonstrate strong UK leadership internationally for commitment towards its
responsibility for reducing global emissions.
Subsidence in UK is also a concern for insurance industry, therefore, experienced
and selective underwriting with high excesses is required. The cost of claims from
subsidence has fluctuated, primarily in line with the incidence of dry and wet
summers. Remedial measures such as, removing nearby trees and remedying
seepage from damaged underground pipes is taken, followed by monitoring and
repair, as appropriate.
Provision of cover for natural perils, such as flood and storm, in many countries are
the responsibility of the government e.g. Japan, USA.

14. MAJOR EVENTS AND TRENDS
Long-term industrial diseases - Asbestos related diseases and Mesothelioma effects
emerges after a long time of contracting a diseases during employment. El insurance
respond to this but it may possible when diseased employee after leaving the job come
to know about the disease, the employer has ceased the business or record of relevant
employee may have been lost or destroyed.
So, the UK government and insurance industry through ABI have made arrangements to
deal with such situations as mentioned above.
Pandemics and Emerging risks – Pandemics is an illness, disease or medical problem
spread over a very wide area, crossing international boundaries and affecting many
people e.g. influenza in 1918, claimed 20 m human lives. Similarly, H1N1 virus, Avian flu
virus which spread through migrated birds has crossed the borders of many countries.
The emerging risks like travel delay or abandonment due to volcanic eruption, Earth –
quake, B.I, and live stocks are difficult to quantify and therefore little or no coverage is
available in the market. So, insurers must monitor such emerging risks for the provision
cover by using strategy.

15. MAJOR EVENTS AND TRENDS
Volcanic eruption – Occur from the movements of tectonic plates, resulting in
the escape of hot magma, ash and gases from below the planet’s surface with
devastating effects e.g. travel disruption (Previously, not cover in travel
insurance policies but now some insurers are providing this cover) results delay
and travel abandonment etc.
Earthquake – Occurs when there is a sudden release of energy in the earth’s
crust, causing the shaking and, sometimes, fracturing of the ground surface.
Tsunami – When the source of a large earthquake is offshore a tidal wave (or
tsunami) can occur, with catastrophic results.
Just think about Karachi in Pakistan

16. MAJOR EVENTS AND TRENDS
Contaminated land – Industrial processes or activities present a
hazard to the general environment. The awareness about environmental
pollution has got attention of legislators around the globe and so insurer should
consider developments in environmental legislation and associated liabilities for
polluters, owners, and occupiers of the land.
Specialist markets are providing specialist cover for pollution known as
Environmental Impairment Liability (EIL) insurance, the cover provided by
general liability policies is still typically restricted to sudden & unforeseen events.
Similarly, material damage property policies provide cover limited to pollution
or contamination resulting from the operation of an insured peril under the
removal of debris clause.

17. LEGAL CHANGES
Legal changes and case law have impacted on the insurer’s liabilities, and its results.
Funding litigation – Has introduced the facility to recover legal expense insurance
premiums and success fees from opponents, and removing them from the scope of
legal aid, except for clinical negligence actions.
ATE and BTE legal expense insurance (Knowledge services – fact files) –
www.cii.co.uk

18. LEGAL CHANGES
Periodic Payment Order (PPOs) – Lump sum payment to injured person has not
proved beneficial due to life expectancy or the poor investment return, advice, under
performance or even failure of the investment fund.
Social Security Act 1989 introduced structured settlement which are used where the
injured require a long term care and so claimant receives a payment to meet their
immediate needs, together with periodical payments (Insurer or reinsurer purchase
annuity or pay itself) to provide income for future provision and care.
Courts Act 2003 - Court can now order periodical payments.
Discounts rates – Assumed rate for payments should be aligned the return on
Government bonds (GILTS), which provide a more modest expectation than the more
volatile share prices because of poor investments results on which the injured party is
dependant.

19. MARKETING STRATEGY
Marketing mix - Product, Price, Place, Promotion (Decision of marketing based on
PPPP).
2 Main types of distribution channels for insurance:
• Direct – Insurer’s employees sell the insurance product or direct mailing techniques are
used to promote sales e.g. Direct marketing, Co. sales staff, Home service agency (sell
industrial life assurance only), internet.
• Indirect - Intermediaries paid by the insurer promote products on insurer‘s behalf e.g.
Agents, brokers, consultants & advisers. Use for Complex products.
Scheme & delegated authority – Insurers delegate some authority to intermediaries e.g. to
issue motor cover notes, within defined given criteria.
Binders – Give a great deal of flexibility to intermediary within defined limits & policy
wording have been specially negotiated to fit a particular client category e.g. haulage
contractors, warehouse keepers, etc.

20. MARKETING STRATEGY
Aggregators collects information from different data sources like search
engines on the internet. Market aggregators rely upon co-operation with brokers
& insurers to access their pricing of different risks. Aggregators affect the
accuracy of the quotation as limited questions asks from the aggregators for
quote. They are consumer focused priced comparison mechanisms rather than
the distribution channels and save time.
Impact of pricing models – Expenses, commission rates and business
retention effects the pricing models. Underwriting & pricing of models differ for
direct (incurs high acquisition costs) and intermediary business.
Intermediary’s remuneration (delegated authority or direct administration), claims
experience, pure price of risk, additional expenses and optional modification
effects pricing models and so to the business strategy.

21. MARKETING STRATEGY
Branding (Has the power) – Key aspects of marketing and use of image of
quality, reliability or service, forged by the personal experience of the product,
recommendation or simply an affinity developed by familiarity with the name of
the product or provider. This affinity is at the heart of advertising and as a result
“Product loyalty” created.
Regulation
Taking account of the requirements of the industry regulator is a key
consideration in distribution activities.

22. MARKETING STRATEGY
Underwriting control
Nature of underwriting control varies according to the chosen distribution
method. Auditing of employed staff is necessary.
Centralised underwriting functions will have responsibility for exercising control
over the technical aspects of the insurer’s operation, with responsibility for
things as, e.g., setting underwriting policy, maintaining rating and underwriting
parameters, including authorisation (and sometimes implementation) of rating
changes.