Chapter 9 - The Underwriting Environment C120

Underwriters work in both an internal and external environment.

- Internal environment lies within the bounds of the organization

- External environment comprises all the influences outside the direct control of the organization

The Internal Environment

• The goals, operating procedures, and corporate culture of the organization are the most important aspects of the underwriting environment because they affect the u/w most immediately and directly.
• The most obvious way u/w's can accommodate themselves to their internal environments is to follow the policies and guidelines established by their employers to direct their work.
• To make decisions about matters not directly addressed in the insurer's manuals, the u/w must develop and apply judgment.
• To develop and apply judgment needed to achieve the insurer's objectives within acceptable limits, the u/w must seek to understand both the culture and the reasons arising out of the culture for the limits the organization sets for the u/w.

Centralized and Decentralized Insurers

• In a centralized insurance company, the bulk of the u/wing authority is retained for a few in the head office or for supervisors or managers in the branch.
• Line guides or other procedure manuals are often more detailed than in a decentralized organization and allow the u/w much less  discretion in accepting risk or setting terms for it.
• U/w's faced with risks or features of risks not explicitly addressed in their line guides must refer the risks in question to the appropriate head office u/w, unit supervisor or department manager for a decision.
• One of the dangers of the centralized approach to u/w may be accountability without authority.
• A decentralized insurance company is like its more centralized counterpart in that it requires u/w's to refer risks that fall outside their u/w authority to the appropriate superior.  However, it gives much more latitude to it u/w's.
• Line guide or procedure manual may be less detailed than centralized insurers.  U/w's tend to refer decisions to their superiors less often than their counterparts at centralized insurers.
• One of the dangers of the decentralized approach is that too little direction or supervision may result in as many approaches to assessing risk and setting terms as there are u/w' s.
• Decentralized insurer's success depends more on the initiative and sound judgment of its individual u/w's.
• An u/w at a more decentralized insurer, the lack of guidance or direction that heightens uncertainty may be offset by the latitude for a more entrepreneurial approach.
• The success of a more centralized insurer may depend more on the soundness of the limits set for u/w's.  For the u/w the more restrictive the limits on his or her discretion may be offset by greater certainty or predictability in decision making.

The Effects of Mergers

• Where companies that merge have similar corporate culture, there are relatively few obstacles beyond the purely logistical task of eliminating and combining branch offices and reallocating staff.
• Where companies that merge have differing corporate cultures, u/w's may be less clear about the u/wing rules or the expectations to be met.  The result of lack of clarity can be conflict.  Such a clash of cultures can persist for years after the merger and be a deciding factor in its success or failure.

Emphasis: Sales or Underwriting?

      Another aspect of corporate culture is the extent to which it is sales driven or underwriting driven.  That may depend in part on the classes of business chosen to pursue.  (See example on bottom of page 6)

The Parent Culture

v  Parent companies may not be Canadian

v  Insurers based in other countries often differ in their approach to insurance based on their own economic, social and political matters.

The External Environment

Ø  One of the most distinctive features of the u/w's external environment is its speed or pace of life, personal or professional.

Ø  Technology is a major contributor

Ø  "Information Age" for u/w's as there are technical bulletins and articles about subjects of interest for an u/w, journals and newsletters about the industry, memos and circulars about the company's results, policy and other developments, and ever more sources of info to consider on the individual risk for which an u/w is responsible.

Ø  Information from all sources is necessary for the u/w to maintain understanding for future exposures.  They must stay current through: TV, newspapers, radio, magazines, books and the internet.

Ø  By enhancing the ease and speed of communication worldwide, technology has helped make it possible to integrate the operations of large corporations on an international scale.

Ø  Technology has also expanded the scope of available info by giving u/w's access to info from around the world.

Ø  Technology advances has also created the problem of information overload.  Information from more sources than they can absorb and remember causes stress.  In addition to the stress the info can generate is the danger of misinformation in haste to make a decision.  (See the example on page 9)

Ø  "Perception is reality" the danger that a decision might be made on a superficial, perhaps misleading understanding of the exposures is compounded by the possibility that increased amounts of info will generate contradictory assessments of the risk or convey impressions that are inconsistent with each other, resulting in a poor decision.

Ø  The problem of info overload compounds of technology compounds the problem by requiring the u/w to make decisions faster and faster.

Ø  With so much info available to the u/w also makes a great deal of info available to the insurance buyer.

Ø  Pressures are also on brokers to do things faster, they may well lack the time to interview a client as thoroughly and gather many details as an u/w needs to make a fully informed decision.  Full info is still needed from the broker in order for the u/w to make a sound decision about the risk.

Global Influences

ü  It is important for u/w's in Canada to understand the relationship of their Canadian industry and practices to the industry and practices in other parts of the world.

ü  Canadian-owned insurance companies have accounted for only about one third of the Canadian industry's annual premium volume.  The rest is divided between American and mostly European insurers.

ü  Canadian insurance industry practice is tied as closely to Europe as to the USA.  (See example on bottom of page 11)

Social Trends

• Faster pace of life and choices made possible by technology have helped create a highly mobile society in which many people may move freely between cities, jobs, careers with fewer boundaries on their aspirations.
• With increased mobility and fewer personal boundaries has come a heightened perception of individual rights and entitlements, as a result there has been an increase in litigation in Canada.
• As a result of more litigation especially in the areas of sexual abuse notably involving religious or other institutions.  It is now an issue that liability u/w's need to consider.
• Governments have become frequent targets of legal action over human rights, political rights and treaty rights.
• Another broad social development with implications for insurance is that we have an aging population.
• Changing social attitudes are reflected in many other developments that will affect the work of u/w's in one way or another.  (See example on bottom of page 13)
• Canadians have become increasingly aware of environmental contamination as a threat to their well-being.  This raises new possibilities of lawsuits against manufacturers for injuries to people that might be attributed to their product.
• Walkerton is another example of environmental contamination.  This means potential losses for the insurers of those governments and private concerns found liable for harm arising from their failure to properly perform those roles.

Privacy Concerns

• Technology change is accompanied by concerns about the implications of new technology for Canadian's rights to privacy.  There is a growing concern of the improper sharing of personal info, whether intentionally or inadvertently, by companies or governments that hold such info.
• Insurance industry, another cause for concern about privacy is the increased use of credit cards and payment plans to give the insured's choices.  (See example on the top of page 15)
• The heightened possibility of lawsuits makes it more important for u/w's to keep in mind that an u/w's file on any account could be required as evidence in proceedings.
• Notes should be written with care to not to embarrass or undermine the insurer if the files were to be produced in court.
• Underwriters must be discreet about the informal networks they have used to exchange info amongst themselves. U/w's need to be sensitive to the appearance of collusion and be discreet about the kind of info being shared in the necessary exercise of building and maintaining relationships.

Judicial Trends

• U/w's need to pay attention to trends in the judiciary-to trends in the court decisions that help determine the exposures to loss that insurers face by resolving lawsuits in favour of their insureds or the parties suing them.  (See example on bottom of page 16)
• Decisions may affect the availability of liability insurance, the price of that insurance, and the measures that u/w's might require to be taken to become acceptable risks.
• The prudent u/w monitors court decisions for developments that may affect his or her response to risk.

Economic Trends

      The market for insurance is part of the market at large: the economy.

      The state of the economy affects an u/w in less abstract, more direct ways.  (See example starting on the bottom of page 18)

      When the economy deteriorates more people and businesses find themselves under financial pressure as income levels drop, insurer's often find that the frequency of claims increases in difficult economic times.

      Financial pressures on insureds create a moral hazard, the temptation to put in a claim for the proceeds increase.

      The state of the economy also affects the physical hazard presented by some insureds.  (See example on bottom of page 19)

      In a poor economy often maintenance and housekeeping expenses are the first to be reduced.  Yet in a good economy increased hazards are also a problem, as people and equipment are often working to full capacity or even overtime.

      The state of the economy is one of the most important external aspects of the u/wing environment.

Legislation and Regulation

v  Laws and regulations are required to shape both the society in which we live and the environment in which u/w's work.  An example being mandatory automobile insurance.

v  Reciprocals operate the same as insurance companies, they issue policies, charge premiums and pay claims.

v  Captives are similar and are usually created to write the parent company's own insurance.

v  Reciprocals and captives are examples of alternative risk transfer.  They reduce the market for traditional insurance and help influence the market cycle and demands that places on u/w's.

v  Legislation now plays an important role in environmental liability litigation and is therefore an important consideration for u/w's of risks whose operations my entail environmental hazards.

v  Political and social trends are often eventually represented in legislation and regulation that has implications for u/w's.

The Public Interest

Ø  Matters of public interest usually comprise more than one element of the u/w's external environment, such as Enron.

Ø  The Enron scandal in several ways affected the insurance market directly.  (See example on top of page 27)

Ø  The market for directors and officers liability insurance was directly and strongly affected by the Enron scandal.  Capacity for coverage tightened and rates and other terms hardened in light of the increased scrutiny of corporate directors and officers and questions about their possible contributions to the scandal and their proper role in preventing other such scandals.

Ø  Underwriters must pay attention to the world around them, both inside and outside the office.

Ø  The enemy is complacency, the u/wing environment is constantly changing and u/w's must constantly monitor that environment.