Underwriting –In General Insurance

Industry
13th March 2006
Hyderabad
By G VRao

GVR Risk Managment Assoc. P Ltd, Hyderabad 1

 Structure of presentation
1. Who are our customers?
2. What is underwriting?
3. How is it being done now?
4. What are the objectives of detariffing?
5. What are current market characteristics?
6. Financial analysis of market trends.
7. Safeguards to orderly switch over.

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 Who are your customers?
• Ultimate users? Their staff?
• Brokers and Agents?
• Surveyors? Lawyers? Judges?—Outsourcers
• Your internal colleague staff?
• Anyone who has a financial interest in your
product?—All of them are your customers.
• Your job is to create value to meet the specific
needs of each entity in the value chain.
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 Pricing commodity risks
• Insurance is a almost commodity now.
• It is a bargain business; needing skills.
• Each customer is unique; your product is not.
• Price -- dependent on product & customer.
• As product is a commodity, evaluating customer risk
exposures & pricing risk is key to underwriting.

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 What is underwriting?
1. Knowledge of individual risk peculiarities.
2. Assessing how the risk & a peril produce
potential losses.
3. Estimating magnitude of losses—peril-wise.
4. Estimating insured’s systems & capabilities
for prevention & minimization of losses.
5. Prescribing rates, terms & conditions.
6. Deciding on retention & risk transfer.
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 Underwriting& Risk analysis.
1. Physical/ Technical aspects of risks.
2. Moral Hazard aspects of insured.
3. Environmental business aspects.
4. Underwriting skills aspects.
Let us examine each point in the next few
slides.

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 Technical aspects of U/W.
• Risk assessment-- characteristics of risk, nature of
perils covered, interaction between the two.
• Frequency and severity of loss occurrences & MPL.
• Fire prevention and minimization capabilities.
• Burning cost vs. prospective risk analysis.
• Accuracy of claims estimates—triangulation.
• Value addition- quality of claims handling--not priced.
Claims experience is everything in rating.

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 Moral Hazard aspects of U/W.
• Human element and its quality, expertise and
experience in handling losses and minimizing
them.
• Safety audit and accident investigation
mechanisms in place.
• Insured’s RM philosophy, sensitivity and
implementation.

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 Environmental aspects of U/W.
• Quality of market competition.
• Regulatory regime.
• Board/ Management attitude to risk exposures
within.
• Investor pressures and directions.
• Availability of reinsurance.
• Customer pressures and insurers’ reputation.

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 U/W skills aspects
• KASH in u/w—risks, terrain, customers, reinsurers,
competitors, u/w policy, brokers, staff, claims.
• Terms & conditions- responsibility for loss avoidance.
• Pricing of risk.
• Retention levels for insurer.
• Reinsurance availability.
• Customer profitability/ Profitability on risk.
• Brokers’ pressures/relations.
• Should investment income form part of rating?

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 Why detariffing?
• Market forces of supply & demand to prevail.
• Greater customer choice.
• To provide an enhanced role for brokers.
• To improve insurers’ efficiency through
competitive pressures on pricing and service.
• To enhance creativity and product innovation.
• Survival of the fittest –the name of the game.
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 Current state of underwriting.
• Tariff rates applied—no application of mind.
• Too many underwriters. Or too few ones.
• Mix of production & underwriting job profiles.
• Premium and not profit is the focus for most.
• Loss prevention & minimization -not an issue.
• High-cost industry—40% on EP.
• Distribution channels have added costs.
• LPA closure has sent wrong signals.

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 Rating agencies attitudes.
• Financial strength & also Management capability.
• Not listed—no market scrutiny, accountability.
• More underwriters or more investment analysts?
• Will bigger und.losses act as a market disincentive to write health, rural and social sector
business?
• What are antifraud and loss minimization measures of insurers now practiced?

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 Market composition on EP.
• Motor 50 %, fire 16%, engineering 5% of EP.
• Loss ratios on EP: motor 90%, fire 47%,
engineering 59%
• Combined ratio: motor 128%, fire 84%,
engineering 95%.
• Expenses around 38%/40%--likely go up.
• What will rate adjustment do to losses?

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 Share of Public sector.
• Motor 84% in 2004/5 from 88%-Rs 7500 cr
• Fire 72% down from 77%--Rs 3350 cr
• Engineering 67% down from 77%--Rs 835 cr
• Market share was 75% overall.
• Fire grew by Rs 35 cr – New players Rs 206 cr.
• Engineering Rs 22 cr—New Players Rs 104 cr.
• Motor Rs 530 cr—New players Rs 510 cr
• Matching point to point.

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For a major insurer--Fire
YEAR 2004/5 2003/4

GDP Rs 507 CR Rs 536 CR

EP Rs 337 cr Rs 329 cr
CL%/EP 47% 32%
EXP %/EP 37% 44%
CR % 84% 76%
UND RES. Rs 54 cr Rs 79 cr

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 Motor
YEAR 2004/5 2003/4
GDP Rs 1375 cr Rs 1208 cr
EP Rs 1034 cr Rs 945 cr
INC/ CL% 120 % 107%
EXP % 38 % 41%
CR % 158% 151%
UND. RES. ( Rs 600 cr) (Rs 468 cr)

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 TOTAL
YEAR 2004/5 2003/4
GDP Rs 3090 cr Rs 2900 cr
EP Rs 2123 cr Rs 1972 cr
INC. CL% 90% 81%
EXP RATIO% 38% 42%
CR % 128% 123%
UND. REST. (Rs 595 cr) (Rs 454 cr)

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 Flexibility in rating?
• Fire operating ratio 80% upwards.
• Engineering operating ratio 90 % upwards.
• Motor operating ratio 125 % and more.
• Intermediation costs will go up- 5% or more.
• Reinsurance will be more expensive—
margins lower.
• How will future rating structures look like?
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 Who owns detariffing process?
• Who is the chief beneficiary of detariffing?
• IRDA? TAC? Insurers? Brokers? Consumers?
• Who owns responsibility for success or failure?
• What u/w changes have insurers pledged?
• What changes have brokers pledged?
• What new regulatory changes are intended?
• How will motor business be managed?

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 Declined risk pool?
• Will it work?
• Can membership be made compulsory?
• Who owns management of POOL?
• What is owners’ financial stake?
• What if it pushes up costs and losses?
• Will the remedy prove worse than disease?
• What next it it fails?
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 Underwriters’ dilemmas.
• Is he equipped to underwrite?
• Is his loyalty to internal rate book?
• Is his loyalty to organization?
• How will his performance be judged?
• Will it slow down decision-making?
• How will he be punished or rewarded?
• How will he deal with internal & external
pressures?

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 Market gyrations.
• Crush competition at any cost?
• Brokers to dictate market’s future.
• Bancassurance to melt under pressures for lower rates.
• IRDA will have a fuller plate of complaints.
• Product innovation to gain comp. Advantage.
• Reinsurers a focus of market pressures.

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 Safeguards--1
• Define underwriter’s role—job profile.
• Define authority—including discretionary.
• Appoint underwriters 3 months earlier.
• Use current tariff as binding reference rates.
• Specify binding parameters for swing rates
—upward & downwards.
• Keep current terms, wordings and
conditions for two years.
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 Safeguards--2
• Product changes in tariff should be treated differently from
“file and use” procedures.
• Brokers’ remuneration from insured.
• If not, brokers to specify brokerage- each risk.
• Information slip must be compulsory.
• Inspection of risks above a limit a must.
• GI council to set up a committee - tariff change

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 Safeguards --3
• Leverage IT for customer communication.
• Capture customer data on computers.
• Use MIS for locating system weaknesses.
• Zero on laser-like on customer dispute resolution.
Audit the current systems and innovate.
• Reduce costs- customer cannot afford 45% on EP
to obtain cover.
• Develop micro-insurance as a new market.

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 Get back to school!
• Not only underwriters but management as
well. Insurance is a community based idea.
• Industry is for consumer benefit.
• You are a financial intermediary and a
trustee for customers –those that pay
premiums but do not put in claims as well..
• All are underwriters in insurance.

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 The long haul?
• Policies are up for renewal each year; but
not your reputations or corporate values
• You have a right to choose your customers.
• But do not punish customers, if they made a
choice in you as insurer.Trust is reciprocal.
• Be in tune with customer expectations—he
is continually changing, demanding.
• What are your moments of truth?
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 Happy hunting for rates!
1. Underwriting is like hunting for good customers
2. No profession in the world with so many financially
linked in one transaction!
3. One has to be a gainer and the other has to be a loser.
4. It is win-lose situation—and not win-win like Life
Insurance.
5. Your character and conduct are on display.
6. How great you want to be? Or how mean?

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