Sponsored article: The relentless march for underwriting performance
By Leon Walker, AdvantageGo
For any of us in the business of sifting through the financial reports of insurance companies, it is becoming apparent insurers around the globe have had to review and reorder strategic ambitions in light of the Covid-19 pandemic.
In this unique trading environment, organisations are walking a tightrope between mitigating negative economic impacts and the opportunities presented by a hardening market in many of their core lines of business. For senior leadership teams, the ability to manoeuvre between these two competing factors is still being constrained by the persistent requirement to underwrite better, lower operating expenses and achieve efficiencies at the same time.
In our opinion, the race for premium triggered by Covid-19 will continue to play out in the months to come, with pricing and underwriting excellence becoming the defining factors in winning market share and investor support. This is all taking place in an unprecedented economic environment for insureds. One of the most popular questions when brokers sit down with prospective clients is: “What is keeping you awake at night?” Right now, it would be unsurprising if even the most experienced risk managers’ response is: “Everything.”
Mind the gap
To further examine the real-world impact, the global insurance gap remains a prevalent problem. According to Lloyd’s this is particularly striking when it comes to emerging economies, which are the least insured.
Emerging markets account for $160bn (96%) of the total global insurance protection gap. In its report A World at Risk: Closing the Insurance Gap, Lloyd’s identified the developing nations that have the biggest gap, including some with an insurance penetration rate of just 1%. Between 2004 and 2017, 98% of losses resulting from natural catastrophes were not covered by any insurance.
The insurance gap has shrunk a minor 3% since 2012 and the 10 least-insured countries are the same as they were back then. This is not restricted to emerging economies: four more countries (Japan, Russia, the United Arab Emirates and Sweden) are now also identified as being underinsured. With emerging markets expected to invest $2.2 trillion in infrastructure annually over the next 20 years, emerging markets represent a sizeable opportunity for insurers looking to play their part in their expansion.
If insurers are prioritising the internal changes needed to help them grow and the opportunities are out there to do so both in traditional and emerging markets, why is this growth not happening?
As we approached 2019, according to Swiss Re’s World Insurance Study, the industry experienced approximately four years of pricing below long-run loss cost trends, the costliest 24-month period of global catastrophe losses on record and a prolonged low interest rate environment.
Together with some insurers’ decisions to adjust risk appetites and cut capacity, these factors have led to significantly improved pricing and terms and conditions. But growth is being held back by historically poor underwriting performance, as numerous businesses are still posting combined ratio of worse than 100%, while their investors continue to expect perpetual profitable growth. Something is not connecting.
Good underwriting is the key
In our experience of working in core markets over the past 25 years, profitable growth can only come with excellent underwriting performance, a clear example being the work Lloyd’s has undertaken with light-touch syndicates.
The anticipation of a harder market and the creation of a cohort of businesses that benefitted from unrestricted growth because of their good track record resulted in an increase in the aggregate Lloyd’s stamp capacity of 6.4% to £33bn ($43.6bn) for 2020.
This aligns with the fact that since 2018 there has been an increased focus on underwriting discipline characterised by widespread remediation planning across the market and the underwriting transformations at AIG and Zurich.
While originally based on changing policy limits, reducing risk appetite and driving out unprofitable business, this has now transitioned into strategic investments in technologies that target consistently positive underwriting performance.
In this new paradigm, underwriters are taking advantage of technology to help drive decision-making at the point of sale,and if you look closely at the newest entrants, this is driving both value and valuations across the market.
However, for the largest insurers, underwriting excellence is not a light switch that can be turned on and off. It is a cultural and relentless march that requires consistent behaviours, achieved in incremental steps, day by day and transaction by transaction.
For the largest insurers, underwriting excellence is not a light switch that can be turned on and off. It is a cultural and relentless march that requires consistent behaviours, achieved in incremental steps, day by day and transaction by transaction
Fortunately, enablers are now available to nudge teams along this path. The digitisation of insurance processes has continued amid the pandemic, but the industry needs to be more proactive in investing in digital capabilities that directly target underwriting outcomes. As a result of the rapid growth of external data sources, if insurers expect to grow and retain their value to customers they need to be comfortable dealing with various data channels.
Evidently, the role of the underwriter is increasing in complexity. The need to use intelligent digital solutions and advanced analytics, to help them understand risks at new levels of granularity is growing.
As a result, the focus has moved beyond insurers using tech that only helps to quickly deploy simple and isolated products. Most insurers have seen speed to market is only a small step on the journey to develop improved and more relevant portfolios.
Systems that holistically support pre-bind decision-making are coming to the fore, as the crux of the issue is teams relying on experience and tacit knowledge will continue to lack the confidence to grow both within product verticals and geographic territories.
Meanwhile, their peers that have introduced third-party data including information from corporate websites, social media and deterministic exposure management tools into the underwriting process are seeing their underwriters more accurately assess the sustainability of margins and therefore underwrite risks more confidently.
The digital disruption and related trends that were under way before the global pandemic will only become faster and more pronounced during the recovery.
There will inevitably be fast adopters, while others will get left behind, so it is imperative insurers work with vendors that challenge their thinking and help them invest in the right areas. The market-leading clients we work with are focusing their strategic investments on knowledge-driven platforms and through flexible API frameworks, wrapping legacy systems with tools that drive better decision-making.
Given the twin earnings and real-world impacts of Covid-19, we know market investors will be focused on returns. Returns are driven by performance and today, performance is driven by those that can leverage insights the best.
The direction of travel has been set. Welcome to the new normal.
Leon Walker is a senior director for business development at AdvantageGo