PowerPoint PresentationUnderwriting Boot Camp | October 25-28, 2021
What is Underwriting? Chip Pecchio, CPCU, ASLI, ARe Vice President – Underwriting Manager RSUI Group, Inc. – Binding Authority Division
Educational Objectives
• Review important insurance definitions • Discuss the characteristics of the admitted and surplus lines
markets • Examine the roles and challenges of the various participants in the
surplus lines transaction • Discuss how insurers measure their results
Agenda
I. Important definitions II. The admitted market III. The surplus lines market IV. Scope of surplus lines V. The insurance transaction VI. The role of the retailer
Agenda (continued)
VII. The role of the wholesaler VIII. Challenges faced by the wholesaler IX. The role of the company underwriter X. Challenges faced by the company underwriter XI. Company measures XII. Questions
What is Insurance?
• A legal contract • A transfer mechanism • An exchange of a payment for a promise • One of many tools to manage risk • Benefit of insurance • Costs of insurance
Definitions
• Producer • A generic term for someone who sells insurance
• Retailer • An independent or exclusive agent who sells insurance to the end user
(policyholder) • Legally, a broker represents the client and not the insurer
Definitions
• Wholesaler • A firm that provides access to the surplus lines market for retail
producers
• Managing General Agency (MGA) • A producer with broad authority from carriers to bind coverage without
prior underwriting approval for selected classes of business
Definitions
• Admitted (standard) market • Comprised of insurers licensed in the insured’s home state
• Surplus lines market • A system that provides insurance on risks the admitted market elects
not to cover
Definitions
• Line of business • A broad general class of insurance business. General Liability,
Personal Auto-Liability, Commercial Property
• Class of business • A group of insureds who have similar exposures and experience, and
are grouped together for rating purposes
The Admitted Market
• Writes in excess of 90% of all P&C business • Licensed to write insurance in the states in which they operate • Rates, rules are forms are regulated by the states • Operates mostly through retailers, brokers or direct to consumers • Covered by state guaranty funds
The Surplus Lines Market
• Will insure risks that the admitted market wants to avoid • Three primary reasons:
1. Distressed risks (losses, condition, location) 2. Unique (a mermaid, big foot, Dorothy’s slippers) 3. High limits of coverage (multi-million dollar schedule of properties,
excess liability coverage for a national auto fleet)
The Surplus Lines Market
• General characteristics • Not licensed by the states BUT authorized to write insurance • Rates and forms are not filed, but that doesn’t mean this market is not
regulated • By statute, should not compete with the admitted market on price • Premium taxes are collected and remitted to the state by the wholesaler
The Surplus Lines Market
• General characteristics (continued) • Premium taxes are higher than those paid by admitted carriers • Surplus lines intermediaries can charge separate policy fees • Generally have a higher operating cost than admitted insurers • Misunderstood by consumers, retailers and regulators
The Surplus Lines Market
• Distribution • Managing general agents • Wholesale brokers • Program managers • Underwriting managers
• States license and regulate these entities since they are unable to directly regulate surplus lines carriers
The Industry Within the Industry
Year Total P&C DWP
Surplus Lines DWP
Surplus Lines Percent of Total
1990 $230,757 $6,532 2.8% 2000 $327,286 $11,656 3.6% 2005 $491,429 $33,301 6.8% 2010 $481,120 $31,716 6.6% 2015 $591,185 $41,259 7.0% 2018 $678,029 $49,880 7.4% 2019 $712,194 $55,485 7.8% 2020 $728,830 $66,102 9.1%
Direct Written Premium, in millions Source: AM Best 2021 Special Reports – U.S. Surplus Lines Segment Review
Sheet1
Year
1990
$230,757
$6,532
2.8%
2000
$327,286
$11,656
3.6%
2005
$491,429
$33,301
6.8%
2010
$481,120
$31,716
6.6%
2015
$591,185
$41,259
7.0%
2018
$678,029
$49,880
7.4%
2019
$712,194
$55,485
7.8%
2020
$728,830
$66,102
9.1%
The Industry Within the Industry Top surplus lines groups, 2020
Group Name Surplus Lines DWP
Lloyd’s $12,821,000 Berkshire Hathaway Ins. Group $3,558,566 American International Group $3,549,588 Markel Corporation Group $2,790,649 W. R. Berkley Insurance Group $2,261,045 Nationwide Group $2,246,189 Fairfax Financial (USA) Group $2,173,119 Chubb INA Group $1,939,963 Liberty Mutual Insurance Companies $1,706,466 XL Reinsurance American Group $1,664,981 Alleghany Insurance Holdings Group $1,285,912
Direct Written Premium, in millions Source: AM Best 2021 Special Reports – U.S. Surplus Lines Segment Review
Sheet1
Year
Group Name
$2,261,045
2018
$678,029
$49,880
7.4%
Policyholder Independent
Agent (Retailer)
Admitted Markets May Decline to Quote
• Reasons for declinations • Risks with losses • New ventures • No prior coverage • Below average condition of premises • Class of business • Values • Poor financials • Others
Access to Surplus Lines Market
• “Due diligence” requirements • Must attempt to place risk in admitted market first
• Specific number of declines • Required by statute in most states
• May have to submit an affidavit
• Export list • Types of insurance that can be placed in surplus lines market without
due diligence • Lists vary from state to state • Examples: Kidnap and ransom, products recall
The Insurance Transaction • Standard lines flow of business
• Wholesale or surplus lines flow of business
Policyholder Independent
Agent (Retailer)
• Owns the relationship with the ultimate customer • Responsible for obtaining appropriate coverages and services for
the insured • Generally makes the decisions on which wholesaler to use • Primary source of business for wholesalers
Role of the Wholesaler
• Manages the relationship with the retailers • Responsible for marketing the products and services offered by their
carriers • Depending on the relationship with the carrier:
• Policy issuance • Collection of premium • Collection and payment of premium taxes • Processing of endorsements and changes • Provide premium financing services for policyholders
Role of the Wholesaler
• Provides the following for their retailers: • Knowledge of coverage form • Knowledge of markets • Ability to customize products to meet the needs of the policy • Ability to react quickly to last minute requests • Empathy
• Educational resource • Collect underwriting information for carrier • Stays current on carrier changes • Assures that carriers get the business they want
Value of the Wholesaler
• Expertise and knowledge • Access to markets • Ability to provide options • Ability to customize products and pricing • Ability to say “yes” when admitted market says “no”
Challenges Faced by Wholesalers
• Distance from ultimate decision maker • A wholesaler must make two sales:
• To the retailer • To the insurance carrier
• Wholesalers and their business partners operations at the whim of the standard markets
• One more link in the chain of commerce • Keeping current with carrier changes
Role of the Company Underwriter
• Primary Objective • Select accounts that will generate an underwriting profit • Price the policy to cover losses, expenses and contingencies • Monitor decisions to assure that the desired results are achieved
Role of the Company Underwriter
• Other underwriting tasks and goals • Grow assigned territory • Suggest underwriting alternatives to producers • Provide customer service • Manage catastrophe exposures • Serves as an educational resource • Communicate changes in underwriting guidelines • Know when to make exceptions
Challenges faced by Company Underwriters
• Balancing the need for information vs. speed • Rapidly changing legal environment • Competitive nature of the market • Making pricing decisions without knowing the ultimate cost or
complete information • Managing an increasing submission volume • Reduction in resources (people) • Technology issues
The Life of an Underwriter
What Makes a Good Underwriter?
• Asking Questions – Sifting through the nonsense • Living in the Gray - Flexibility • Prioritizing/Time Management • Multi-tasking • Research • Beware of the “Shot-Gun” Mentality • Sales/Relationships – Pick up the phone! • Be logical • Know when to walk away
Company Measures How does an insurance company determine success?
More Definitions
• Written premium • The total premium on all policies written during a given period of time
• Earned premium • The amount of premium recognized as revenue for the portion of the
policy that has elapsed
• Surplus • An insurer’s net worth: admitted assets – liabilities
• Investment income • Revenue generated by investing funds held by an insurer
• Incurred losses • Losses that have occurred during a specific period regardless of when
claims are paid
More Definitions
• Loss reserves • Insurer’s obligation to pay claims that have occurred but not yet
been paid
• Loss adjustment expenses (LAE) • The expenses associated with adjusting claims
• Incurred but not reported (IBNR) • Losses that have occurred but have not been reported to the insurer
Unique Nature of Insurance
• The company is selling a promise • Claims often come in long after the policy has expired and can
take years to settle • Legal and medical costs continue to go up • Coverage limitations and exclusions will be challenged by the legal
system • Insurers use past performance to price the product today to pay
claims in the future
• Statutory: incurred expenses / earned premium • Trade basis: incurred expenses / written premium
• Combined ratio • The sum of the loss ratio and the expense ratio
Regulations Licensing, Taxes and Fees, Oh My!
Taxes
• Wholesaler collects and pays state premium taxes • Wholesaler passes tax on to retailer • Retailer passes it on to insured • Regulations vary by state
Fees
• A policy fee on non-admitted carriers and Lloyd’s may be imposed (varies by state)
• This is in addition to the premium tax and in most cases is fully earned
• Should be “reasonable” in relation to premium • Some states do not allow a policy fee
So, how are we doing?
Net Written Premium Growth (All P/C Lines): Annual Change, 2008-2019
Net Written Premiums rose more in 2018 than in any year in the prior decade.
The spike was due largely to reinsurance changes driven by tax reform.
-20
-15
-10
-5
0
5
10
15
20
(% )
US DPSL Composite vs P/C Industry – NPW Growth, 1974-2020
Source: AM Best 2021 Special Reports – U.S. Surplus Lines Segment Review
Chart2
(%)
(%)
Source: AM Best data and research
(%)
P/C Insurance Industry Combined Ratio, 2000-2018*
*Excludes Mortgage & Financial Guaranty insurers 2008-2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best; ISO, a Verisk Analytics® business; NAIC data from S&P Global Intelligence; I.I.I.
110.1
115.8
107.5
100.1
98.4
100.8
90
100
110
120
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Q2
Heavy Use of Reinsurance Lowered Net
Losses
Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market
Sandy
time since 1971-73
2002
$8,300
-$600
$6,260
-$5,000
-$2,500
$0
$2,500
$5,000
$7,500
$10,000
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Net Underwriting Gains and Losses, 1st Quarters
Sources: NAIC data, sourced from S&P Global Market Intelligence, ISO/PCI. 2019
P/C Industry Operating Ratios
Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.
89.1%
91.2%
96.7%
92.1%
100% The lower the ratio, the better.
• Operating ratio = combined ratio (losses plus expenses as a percent of earned premiums) minus net investment income as a percent of earned premiums.
• Operating ratio includes all insurance and investment operations except taxes and capital gains and losses.
Exceptional catastrophe years (2011, 2017) drove the operating ratio above 92. A "normal" range is 88-92.
Key Sources of P/C Insurer Profits
Through first quarter. Data are before taxes and exclude extraordinary items. Source: NAIC data, sourced from S&P Global Market Intelligence.
$4.0
-$2.2 -$1.2 -$4.2
-$10
$0
$10
$20
$30
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Net investment gains Underwriting gains/losses
$ Billions Steady Investment Gains, Good Underwriting Results Lifted Profits.
46
at $837.0B
The industry now has $1 of surplus for every $0.79 of NPW, near the strongest claims-paying status in its history.
The P/C insurance industry is in very strong financial condition.
$400
$500
$600
$700
$800
$900
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020:1H
U.S. Inflation-Adjusted Insured Cat Losses
*2020: Aon estimate through April. 2010s is average of 2010 to 2019. All losses are Direct. Sources: Property Claims Service, a Verisk Analytics business; Aon; Insurance Information Institute.
41 38
$0 $10 $20 $30 $40 $50 $60 $70 $80 $90
$100 $110
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20*
B ill
io ns
, 2 01
Katrina, Rita, Wilma
2019 – 11th worst year for U.S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980-2019 is $20.1B.
Harvey, Irma, Maria
Summary
• Despite a challenging economy, a worldwide pandemic, and a whole host of issues; the insurance industry continues to survive and prosper
• Producers and insurers are working hard to provide needed protection for policyholders
• The future is uncertain, and success will require lots of hard work!
What is Underwriting? Chip Pecchio
Please take the evaluation for this session
The Industry Within the IndustryTop surplus lines groups, 2020
The Insurance Transaction
Access to Surplus Lines Market
The Insurance Transaction
Company Measures
More Definitions
More Definitions
More Definitions
Net Written Premium Growth (All P/C Lines): Annual Change, 2008-2019
P/C Insurance Industry Combined Ratio, 2000-2018*
Net Underwriting Gains and Losses, 1st Quarters
P/C Industry Operating Ratios
Policyholder Surplus, 2006–2019
Questions and Final Thoughts