Evolving Underwriting to Maximize Risk Adjusted Profitability

Combined Ratio…..Expense Ratio…..Loss Ratio…..

Walk the offices of any insurance carrier and these figures will be prominently displayed.  Whether they’re in the main lobby, written on a white board or featured the company newsletter, these metrics have come to define what constitutes success or failure in the insurance marketplace.  Sure, these measures will always be relevant – but they are no longer the only way carriers are benchmarking success.  There’s now a movement to evolve these leading indicators, in fact, with leading Property & Casualty carriers driving the charge.  Today, insurers are just as likely to have Risk Adjusted Profitability (RAP) posted on their white boards.

What is Risk Adjusted Profitability?

RAP helps carriers compare their enterprise risk exposure (from losses, adverse investment environments, etc.) against profits (from underwriting and investments) and available capital reserves.  In order to have a positive RAP, carriers must earn their cost of capital and then some. Many carriers are now using RAP to take temperature checks on the overall health their business, business segments and even product lines, in an effort to strike a better balance between both profit and growth potential. 

It is one thing to measure things differently, but what do carriers do next?  How do they take the intelligence a measure like RAP provides and use it to execute differently?

When carriers examine opportunities to align business strategy to execution it is likely that underwriting will come squarely into focus. Specifically, how can they enhance underwriting capabilities to proactively address the challenges and opportunities that indicators like RAP uncover?  How do they incorporate the operational discipline required to ensure every underwriter is executing in lockstep towards a positive net outcome?

It will take some different thinking on the industry's part to achieve. Perhaps Peter F. Drucker summed it up best when he said, “If you want something new, you have to stop doing something old”. In this new operating environment, underwriting organizations must start weighting science higher than art and take steps to implement intelligent strategies that deliver performance in line with profitability and long-term growth objectives.

Here are three underwriting improvements carriers can make to optimize RAP outcomes.  

1. Effectively manage submission and renewal priority. 

  • The Old Way – All submissions or renewals are treated equally and supporting resources are distributed evenly. Work is managed based on what is at the top of the pile, or underwriters can self-select what they will work on first. 
  • The New Way – Submissions and renewals should be stacked, ranked and prioritized so resources (i.e. capital) are consumed by the highest value targets first.  Leveraging predictive and adaptive intelligence, carriers can continuously prioritize activity based on factors like account value, profitability, producer relationships and risk. Carriers can take this insight a step further to “right size” the approach and ensure each submission/renewal is assigned the most cost effective resources in the value chain.

2. Align volume composition to underwriting capacity objectives.  

  • The Old Way – Distribution channels repeatedly submit business you have no appetite for, or fail to realize the full breadth of your capabilities.  Underwriting capacity is often deployed and consumed on a first-come, first-served basis. The business composition is often a reflection of what made it through the gate.
  • The New Way – Rules and analytic-driven processes automatically determine which risks are a best fit and guide underwriters through the right steps to secure the business. Carriers can start moving to a model that optimizes the process based current exposures and available capacity on a day-to-day basis.  Underwriters can be prompted with the right cross-sell, upsell offers (even soft declinations) and proactively educate producers on new products or appetite preferences to influence channel behavior. 

3. Deploy enterprise underwriting best practices.

  • The Old Way – The underwriter is the main process owner and carriers rely on their experience, knowledge and expertise to navigate effectively. Underwriting consistency can vary wildly from business to business and even underwriter to underwriter. Manual processes and functional silos add to the expense line and make it difficult to understand how the business is truly performing or how it can be improved.
  • The New Way – Carriers need an enterprise model for underwriting excellence designed to improve underwriting outcomes and exploit economies of scale simultaneously. Business process technology can help carriers improve discipline by eliminating silos and guiding every underwriter through the processes that are the hallmarks of top performers. Furthermore, these solutions can be used to automate underwriting activities to help reduce costs and minimize system overhead with enterprise scale capabilities that can be deployed across lines of business.

By no means will carriers have an easy time adapting to these new approaches. Change never is easy.  However, as the advent of RAP shows, change is coming. Carriers that capitalize on opportunity, and take proactive steps that I’ve described above to heart, will have the best story to tell the market – in 2015 and beyond.