Transcript Underwriting –General Insurance Industry

Underwriting –In General Insurance
Industry
13th March 2006
Hyderabad
By G VRao
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Structure of presentation
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Who are our customers?
What is underwriting?
How is it being done now?
What are the objectives of detariffing?
What are current market characteristics?
Financial analysis of market trends.
Safeguards to orderly switch over.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Who are your customers?
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Pricing commodity risks
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Underwriting& Risk analysis.
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Physical/ Technical aspects of risks.
Moral Hazard aspects of insured.
Environmental business aspects.
Underwriting skills aspects.
Let us examine each point in the next few
slides.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Why detariffing?
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Current state of underwriting.
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Rating agencies attitudes.
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Share of Public sector.
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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For a major insurer--Fire
YEAR
2004/5
2003/4
GDP
EP
CL%/EP
EXP %/EP
CR %
UND RES.
Rs 507 CR
Rs 337 cr
47%
37%
84%
Rs 54 cr
Rs 536 CR
Rs 329 cr
32%
44%
76%
Rs 79 cr
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Motor
YEAR
GDP
EP
INC/ CL%
EXP %
CR %
UND. RES.
2004/5
Rs 1375 cr
Rs 1034 cr
120 %
38 %
158%
( Rs 600 cr)
2003/4
Rs 1208 cr
Rs 945 cr
107%
41%
151%
(Rs 468 cr)
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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TOTAL
YEAR
GDP
EP
INC. CL%
EXP RATIO%
CR %
UND. REST.
2004/5
Rs 3090 cr
Rs 2123 cr
90%
38%
128%
(Rs 595 cr)
GVR Risk Managment Assoc. P Ltd,
Hyderabad
2003/4
Rs 2900 cr
Rs 1972 cr
81%
42%
123%
(Rs 454 cr)
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Flexibility in rating?
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Who owns detariffing process?
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Declined risk pool?
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Underwriters’ dilemmas.
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Safeguards--1
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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Safeguards --3
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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.
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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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?
GVR Risk Managment Assoc. P Ltd,
Hyderabad
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