Expert Commentary

The Driver: It's Price, Not Risk

Has a fundamental understanding of clients' businesses, risks, and their ability to manage these risks been pushed aside by a focus on pricing? It seems that underwriters are being forced to focus on generating underwriting premiums as opposed to relying on investment income. This trend and its ramfications are examined.

July 2003

Market conditions currently favor the sellers: underwriting firms. The approach of the moment seems to be, "Don't confuse me with the details; just send money, and a lot of it!" Do underwriters approach underwriting with the view that every risk fits into one of three buckets: good, bad, and ugly, and correspondingly: expensive, very expensive, and outrageous?

Risk & Pricing

Given historically low interest rates globally, underwriters are being forced to focus on generating underwriting premiums as opposed to relying on investment income. At the same time, underwriters' credit quality has eroded due to lack of earnings (principally from investments), recognition of off-balance sheet liabilities such as asbestos or old claims, unsuccessful enterprise diversification strategies beyond the insurers' core business, and lack of focus on past qualitative risks underwritten.

Is the current rate environment and degradation of credit quality causing underwriting firms to be less risk adverse to survive? Alternatively, are underwriters now carefully evaluating underwriting specifications and clients' financial statements, and asking tough questions regarding the qualitative aspects of risk management to make better risk decisions? Do underwriters probe to determine the relationship between risk management and the clients' leadership group, or are they merely interested in the exposure/loss data for running their internal models?

In times when investment income is very low, underwriters may be tempted to accept higher risks in exchange for the arbitrage of premium income. Are underwriters accepting higher degrees of risk in their books of business based on a comprehensive understanding of each client? If so, are they making commensurate adjustments in their reserve levels?

There are no media reports declaring insureds are going without insurance; therefore, certain underwriters must be accepting greater risks, providing their current pricing objectives have been satisfied. Are these insurers maintaining an adequate balance between risk and premium as well as carefully balancing the risks in their portfolios to avoid significant losses in any given year? The corollary, and seemingly unfair aspect of this market, is that good risks seem to be difficult to place simply because the discounted premiums they deserve do not measure up to underwriters' minimum premiums in the current market. Perhaps, high quality firms are being penalized because of insurer's credit quality deterioration, lack of investment income, and incomplete understanding of each risk.


It is fundamental to understand clients' businesses, risks, and their ability to manage these risks. There is a significant difference between a company that has been lucky enough to avoid significant claims and one with high quality risk management practices. If a company has significant risks, restructuring the credit and doubling the premium is only a short-term solution. Without quality risk management and clear support from the clients' senior management, underwriters are most likely under-pricing the risk because long-term solutions are not in place.

Are risk managers leading an effective effort, with operating management, to raise the awareness level of the importance for risk control? For example, are engineering reports collecting dust or buried in stacks of paper on an operating manager's desk? Have specific actions been taken within certain time frames? From an underwriting perspective, have underwriters asked for and obtained concrete examples of how a contingency work-around for a critical facility would mitigate a loss? Are the underwriters satisfied that they have written an account within the internal underwriting guidelines … price and volume of written premium?

If insurance companies tighten their underwriting guidelines in times of low interest rates and make a profit, imagine what the results would look like if interest rates increased 200 to 300 basis points and they maintained the same standards. Unfortunately, underwriting guidelines tend to become relaxed when interest rates go up, and underwriting companies act more like investment firms who are market timers and stock pickers. They might be successful for 1-2 years, but it has been proven time and time again that first quartile results cannot be achieved consistently for 5 years or more.

It should be recognized that underwriters, like other businesses, have a defined strategy. The strategy may call for being opportunistic in niche segments of the market or alternatively, being broadly diversified, multiline underwriters with firm risk qualification/selection criteria. It is critical to understand your customers/clients and stick close to what you know and do best.


Price is important but the critical issue seems to be: Do risk managers know what to expect from an underwriter? Is there a misunderstanding or confusion about coverage or intended coverage, and/or potential lawsuits? How are risk managers and their firms being represented in the marketplace? Remember, insureds should think that they are buying a forward contract for a 1 in 50- to 100-year event. Ideally, underwriters will experience perhaps a couple of these events every year; however, total premium income should allow for the payment of these catastrophes, expected losses, and expenses, and still generate a profit. Trading dollars with an underwriter, by "insuring" expected losses, is tantamount to borrowing money from a bank at over 33 percent interest rates!

Insurance should be a pooling vehicle for collecting premiums and paying for catastrophic events, not a mechanism for managing cash flow associated with the expected expenses and losses of a risk management program. It is in the best interest of underwriters and risk managers alike to work from a platform of understanding and not just focus on exposure, data, and price.

If underwriters only analyze a particular risk or account for 2 weeks a year during the renewal process, who is managing the risks 24/7 for the remainder of the year? Can underwriters assure their leadership group that the clients' risks are well managed? If not, the claims adjustment process will be even more problematic.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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