Spot the difference for underwriters


This is an aerial view of main location of the risk to be insured: Generic plc.

Company activities at and associated to the premises include: Property Owners; Manufacturing (incl. use of heat & work at height); Assembly (incl. clean room); Warehousing; Import/Export (loading/unloading – incl. quayside); Plant Owner/Operators; Wholesale; Distribution; R&D; Design: IT (mainframe); Admin./Accounts; Training, etc.

For the purposes of the task, let us assume that they are 2, competing, risks both with identical processes, sums insured, limits with similar EML’s, operational structure, growth history, financial performance, global customer/supplier footprint, credit profile, risk management and claims experience. The type of enterprises that are within the target range of risks that you are charged with securing in a competitive market place.

However, one of the risks is, significantly (measurably), more resilient than the other…sufficiently so that it could provide you with the competitive advantage required to secure the account. So, as an insurance, credit or financial risk underwriter:

Q. How do you identify and differentiate between the good and bad risk, providing a verifiable basis for an underwriting decision that enables you to win the business? Read more of this post

Governance–Risk–Compliance: accept responsibility to reap the rewards!


We know we can’t make reliable predictions about our environment..but it doesn’t stop us from spending enormous amounts of money to do so. Then to pay for the consequences of getting it wrong!

Introspection needs to get serious and, to do so, go beyond, “how can we improve our margins?” Apparently we don’t like to indulge in too much self-analysis, even though identifying and addressing “flaws” at source makes so much more sense. We can influence, manage or control what we do, why and how we do it. There is very little we can influence outwith our immediate environment. BusinessRisks

To put this into a business context and convey the message about how complex any business can become, consider the following table:

If this is insufficient to convince you that there are enough risks associated with behaviour to be getting on with please consider how many of these could be addressed by a robust Operational structure!

If you still have doubts, perhaps this extract, from a very interesting paper, will help. It was the result of a collaboration between US National Academies/National Research Council and the Federal Reserve Bank of New York on an initiative to “stimulate fresh thinking on systemic risk”.

Catastrophic changes in the overall state of a system can ultimately derive from how it is organized — from feedback mechanisms within it, and from linkages that are latent and often unrecognized Read more of this post

Insurance innovation: an oxymoron stuck in 3rd!


The transition from 1 to 3 was relatively straightforward because greater operational efficiencies and product commoditisation enabled insurers – and brokers whose aspirations matched theirs – to sell more by reducing pricing and increasing commissions.

But a “high growth” strategy is an all-or-nothing commitment that, eventually, has to take its toll upon the products and services provided. When GWP and ROI become the focus they do so, inevitably, at the expense of customer:

peace of mind; service; satisfaction; trust and (with them) reputational damage for the industry

So, as retention rates declined, an industry that, since its earliest days, thrived upon trust, loyalty and stability chose to spend increasing amounts on marketing and sales that promote – even reward – disloyalty and volatility!

Insurance system graphic(1)

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Warren Buffett urges more insurance underwriting discipline…


Is this just another opportunity for UK insurers to determine that such warnings, obviously, DON’T apply to them!?

“At bottom, a sound insurance operation requires four disciplines:

(1) An understanding of all exposures that might cause a policy to incur losses

(2) A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does

(3) The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered

(4) The willingness to walk away if the appropriate premium can’t be obtained,”

the letter states. “Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. ‘The other guy is doing it so we must as well’ spells trouble in any business, but none more so than insurance.”

via Warren Buffett Urges More Insurance Underwriting Discipline, Fewer “Testosterone-Driven” Decisions.

This is a much bigger issue than even WB appreciates

When “the Oracle” speaks he tends to worth listening to and this pearl is no different. However, the dire warnings of, such as PwC and Citi have previously been ignored and there is little evidence to suggest that this is about to change! Have insurers (and the wider industry) failed to learn anything from their (rightly) vilified “cousins” in banking?

Do they not realise that, whilst Banking institutions were deemed TBTF (see below), insurers most certainly are not.

I wrote, recently, about the differing views of insurance and systemic risk on the two sides of the Atlantic. For my money the UK view is dangerously naive and has little basis in evidence. The precarious state of global FS and the, tightly-coupled, national economies that rely upon them, are such that the failure of an insurer or, for example, a major consolidator in the broking sector, could trigger a new financial collapse.

As we know from recent economic history, systemic risk in FS moves at lightning pace. BUT, when (not if) the impact of a new and avoidable crisis cascades into social and cultural domains  – adding to the existing financial burden WE are having to live – this could prove to be the “death knell” for FS greed-mongers and inept Political Klepocrats.

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Aviva UK could shed £1bn nwp by end of year


Now I’m not really an “I told you so” kinda guy BUT just about anyone within the (insurance) industry who knows me, including some current/former senior NU staff and many Scottish brokers, will [finally] realise why I felt so strongly on the subject. My stance didn’t endear me to some at NU…even former employers…but I HAD to speak up on such an important issue. Particularly when I believed that, to join the massed ranks of brokers who content themselves with moaning instead of acting, would be the equivalent to a dereliction of duty to clients, employer(s), colleagues. I nearly forgot about the credibility and stability of the industry!

Take a look at this brief article from broking.co.uk. (Aviva uk could shed £1bn nwp by end of year Broking). I have consistently warned of the consequences of NU’s “strategy”. The reputational damage done. Their feeble attempts to provide anything resembling service to longstanding, stable and profitable relationships amounted to “lip service.” Instead they promoted and sought out relationships (sic) that could provide turnover (gwp) because, if NU secured market share, others couldn’t. A cunning plan in many sectors but not one with a “tail.” Ask any underwriter.

Long term relationships are built upon trust, mutual respect and customer service.

You can simplify the products and market them like a commodity but at the end of the day they are NOT commodities. You need distribution but not at the expense of sustainability of rating or commission. You can sell on price…but surely NOT if you compromise the integrity of the product or “after sales” service. Customers will tolerate a lot if the price is low enough and with countless millions spent on promoting a “cheap is good” message even those who knew this to be contradictory began to doubt.

It’s got to be a pretty bad day when a long term strategy, reflecting the nature of the industry and built upon quality, relationship, value & service is replaced by abandonment of underwriting – in pursuit of quantity (marketshare) – making relationships transactional and at unsustainable rating and commission levels. Not the kind of thing that a beleaguered staff can align with either.

Some may say that the leadership were more interested in individual glory. Even that they were greedy. Why else would NU and others abandon sound underwriting practises? Surely that would be like a bank abandoning governance and that is just plain ridiculous…isn’t it!!?

Let’s hope that the spotlight doesn’t fall on Aviva because spending an obscene amount of money on a change of name (instead of on improving customer service) whilst using the recession as a justification for making further staff cuts probably wouldn’t read very well.

Despite all of this I still don’t think that it is too late for Aviva to regain some respectability but it will take dramatic change at the highest levels and guys like John Kitson do, at least, appear to have a handle on how to start the process.