The chairman of ACE European Group, Andrew Kendrick, set out his vision for the future of profitable underwriting in a market environment which has changed radically over the past 30 years. Speaking to over 150 members of the London Market at an Insurance Institute of London lecture, Andrew Kendrick described five characteristics of what he called the ‘new normal’ for insurers. These are:
-Pure underwriting profit is increasingly difficult to come by– as evidenced by just four years of underwriting profit for the US property and casualty insurance industry since 2000.
-A combined ratio of 100 isn’t what it used to be–with insurers typically needing to target a ratio in the low-to-mid 90s to meet the cost of capital in a low interest rate environment.
-The industry is increasingly awash with ‘fast capital’–with the global property reinsurance sector reaching record capacity in 2012 and increasing interest from institutional investors.
-The cost and number of natural catastrophes is continuing to rise–with five of the 14 largest insured losses taking place in the past three years.
-Securing new revenue streams is a challenge in Europe’s slow growth economy–and risk managers are under increasing pressure to do more with less resource.
Kendrick said “A permafrost economy, and a permasoft market and investment climate, mean that the industry now needs to target a combined ratio in the low to mid 90s to have a chance of delivering adequate returns. So an insurer has two choices. Either keep doing business as you are and lower your target ROE… or take a different approach to how you underwrite.
This is certainly about underwriting discipline–taking a consistent approach and showing more grit and determination about making tough decisions. But it’s much more than this. It’s about doing things differently in a world where the ‘normal’ has changed, and taking a positive approach to the future. Perhaps we need to move beyond the rather vague set of aspirations we call ‘underwriting discipline’… and work to a broader and more inspiring vision of what I’d call ‘sustainable underwriting’.”
In his speech, Kendrick also described five potential do’s and don’ts of sustainable underwriting in action:
-Do get smarter at capital allocation–tomorrow’s winners will be those who invest effort in more sophisticated capital modelling, leading to better underwriting, pricing and entry and exit decisions.
-Don’t risk the asset side of your balance sheet–avoid the temptation of making higher returns from more exotic investments by always remembering that the client is buying the insurer’s balance sheet security.
-Don’t wait for a mega-catastrophe to execute your pricing strategy for you–underwriting cycles in different lines and geographies are less correlated than they used to be, while stakeholders are increasingly resistant to using exceptional losses as an excuse to raise prices in unrelated classes or geographies, meaning underwriters need to take better control of pricing decisions.
-Do dig deeper into your portfolios–use good portfolio management to fix problems but, importantly, also to identify new areas of profitable growth and to increase clarity around risk appetite.
-Do make the most of your data–real competitive advantage exists for those companies that can capture and analyse data to get a more sophisticated view of the business they are writing.
In conclusion, he said “I have no doubt whatsoever that we are now operating in a new normal. Our approach to underwriting needs to change. It might be a tall order, but sustainable underwriting is not rocket science. Fundamentally, what it comes down to is having a long-term vision, and a greater sense of determination and purpose. The good news is that we have better information and tools to help us than ever before. "
|
