While it might seem pretty obvious to most readers that good underwriting is an important part of a healthy insurance industry, it has not always been. When interest rates were high in the past decades, underwriting was the scoop with which insurers piled as much premium as possible into their coffers. With rates of return on capital at historic lows, for a long time now, underwriting is no longer a scoop – it needs to be a finely honed source of profit.
In a recent article on AM Best, Pat Gallagher – chairman and president of the eponymous brokerage giant, made this point. Here is the relevant bit:
For more than five years he (Mr. Gallagher) said he’s warned about the lack of investment income, and thinks the renewed emphasis on underwriting helps carriers and customers.
“From 1986 to 2001 we saw a ton of insurance companies go broke,” said Gallagher, as pricing “went down and down, and then after 9/11 everyone went up 100%. That’s not a good thing.”
At first, I thought it was an odd thing to say, and even more odd to publish. It seemed a bit like reading: people eating is good for the restaurant industry. But, I filed it in my ideas folder and kept coming back to it…why?Here is the conclusion I’ve come to: underwriting is the gatekeeper for the whole industry, and it is up to underwriters and nobody else to ensure the amount of risk coming into the industry is matched as accurately as possible with the right amount of premium. If insurance in general, and I’m talking about the whole multi-trillion dollar behemoth, carries risk that is adequately offset and diversified, then everybody wins. Investors, reinsurers, brokers, carriers, agents and customers – everyone wins.
Conversely, if underwriting is poor, the industry takes on risks that are not properly backed up and the whole thing becomes tenuous. Obviously it’s the unforeseen risks that have historically upset the risk/capacity balance (i.e. asbestos, to name one episode), but sloppy underwriting can have the same toxic effect.
The quote from Mr. Gallagher resonated with me because I help build underwriting software. While I’m obviously hoping that our clients find grand success, my deeper hopes are that the software we are offering the market is actually improving the insurance industry in general. And, ultimately (if in a tiny way), we could be improving the lives of people, somewhere, by making insurance either available or more affordable for them because they are able to get a policy based on their risk instead of a haphazard map or other dodgy data source.
In other words, good underwriting is good for insurance…and good insurance is good for society.