Study 9: The Underwriting Environment - Summary

Question 1

The insurer’s procedures

(The internal environment)

Answer 1

• An easy way for underwriters to adhere to the internal environment of their organization is to follow the line guide established by the insurer
• To make decisions not addressed by the insurer’s manuals, the underwriter must develop and apply judgement
• Developing judgement involves trial and error, and an understanding of the culture of their organization

Question 2

Centralized insurers

(The internal environment)

Answer 2

• Bulk of underwriting authority retained in head office, or with supervisiors or managers in a branch
• Detailed and structured line guides which allow for much less discretion for underwriters when accepting risks or setting terms
• Challenge: accountability without authority (ex. underwriters are accountable for the premium volume and profitability of the insurer, but denied authority or autonomy needed to meet objectives)
• Success depends on the soundness of the limits set for underwriters. More restriction for underwriters can be offset by greater certainty or predictability in decision making

Question 3

Decentralized insurers

(The internal environment)

Answer 3

• More autonomy and discretion for underwriters
• Line guide or procedure manual is less detailed than that of centralized insurers, resulting in fewer referrals to superiors
• Underwriters still required to refer risks outside of their authority
• Challenge: too little direction or supervision can lead to a lack of consistency in applying risk assessment and setting terms. Profitability depends mainly on judgement and initiative of individual underwriters.

Question 4

The effects of mergers and acquisitions

(The internal environment)

Answer 4

• Important to consider differing corporate cultures
• Companies with a similar corporate culture (ex. similar classes of business, aggressive or conservative in pursuing risk, centralized or decentralized etc.) may pose few obstacles beyond combining offices
• Differing cultures may produce clashes during a merger. Underwriters may be unclear about which rules to follow or the expecations to meet. Underwriters must be flexible in their thinking and adapt to new directions

Question 5

Sales or underwriting

(M&A Considerations)

Answer 5

• An aspect of corporate culture to consider is whether it is sales-driven or underwriting-driven
• An insurer that mainly underwriters auto insurance may have underwriters in a call center, working within rigid limits identified in the line guide, putting emphasis on premium volume and rapid, efficient underwriting of a large number of accounts
• Another insurer specializing in large, complex industrial risks may have an underwriter assigned to only one or two large accounts, placing emphasis on careful underwriting of individual risks and exposures over the generation of premium volume

Question 6

The parent culture

(M&A Considerations)

Answer 6

• Insurers may have roots distributed globally (ex. Canadian insurers compete with insurers who have branch offices in the US, Great Britan, Germany, Switzerland, France, Japan etc.)
• Differences in ownership and organizational cultural differences must be considered
• Important to exercise malleability, adaptability, and understanding to align with the internal environments of others

Question 7

Thanks to technology, underwriters now have increased and often instantaneous access to the following information

(The external environment)

Answer 7

• Whitepapers and articles about subjects generally of interest to an underwriter.
• Journals, newsletters, blogs, discussion boards, and forums pertaining to the industry. (ex. LinkedIn, Canadian Underwriter)
• Data analytics and databases (a few examples include CGI, OPTA, iClarify) of large-scale aggregate information. This information can include and help determine patterns and trends, and even contain more detailed information about a risk’s physical details or business operations.
• Company-circulated emails and updates to an intranet. Usually containing news regarding items such as results, developments, new initiatives, contests, and updates to policies.

Question 8

The impact of technology on underwriting

(The external environment)

Answer 8

• Greater volumes of information available in a short amount of time
• Risk that the amount of information can be too great to be properly digested. Underwriters may need to make a decision in a hurry, and will skim through information about a risk, ultimately basing the decision on superficial info
• Additional pressure on underwriters to make decisions faster and more effectively. Speed and faster turnaround more critical to winning business
• Technology makes consumers more knowledgeable and likely to ask more in depth questions to the insurer, increasing pressure on underwriters

Question 9

Global influences on underwriters

(The external environment)

Answer 9

• Insurance is a global industry; Canadian insurers account for only 1/3rd of the Canadian industry’s annual premium volume
• Canadian industry strongly influenced by American and European counterparts (ex. business interruption insurance provided on both the American form and British form)

Question 10

Social trends and the influence on underwriters

(The external environment)

Answer 10

• Changes in technology have created a more mobile society - people move freely between jobs and cities
• Canada is becoming more litigious. Increases in Canadian lawsuits over sexual abuse involving religious or other institutions
• Aging of the population requires more healthcare, increasing submissions for nursing homes or risks related to population age

Question 11

Examples of social trends which have impacted underwriting considerations

(The external environment)

Answer 11

• Cannabis risk
• Climate change risk
• Cyber risk
• Public health concerns

Question 12

Cannabis risk

(External social trends)

Answer 12

• Legalization of cannabis for recreational use in Canada led to the development of new insurance products to cover the risk
• Underwriters must have knowledge of various cannabis products (ex. dried cannabis, edibles, oils etc.)
• D&O liability will become crucial as jurisdictions continue to legalize cannabis use, which may result in cross-border activity

Question 13

Climate change risk

(External social trends)

Answer 13

• Most important concern for p&c insurers
• Climate change leads to physical risk (insurable or uninsurable loss or damage to property) and transition risk (shift towards decarbonization of the economy)
• Underwriters must consider climate change risk when underwriting property (ex. the territory, construction materials, fuels, and exposures)
• Specific climate-related products also exist, such as discounts for greener homes and offers to replace damaged property with more sustainable materials

Question 14

Cyber risk

(External social trends)

Answer 14

• Second most concerning after climate risk
• Involve losses that can result from a cyber attack or data breach
• No standard wording, can be offered individually or as part of a business package policy

Question 15

The following can be insured under cyber risk policies

Answer 15

• Third-party liability
• Cyber crime
• Extra expense
• Business interruption losses (resulting from a cyber attack or data breach)
• Crisis-management consulting services (to guide the organization on how to manage communications after a loss)
• Theft of data resulting in a privacy breach
• Unintentional transmission of a computer virus
• Network systems that become unavailable to third parties due to a failure in security
• Allegations of copyright or trademark infringement, libel, slander, or defamation, which could arise from various social media activities

Question 16

Public health concerns

(External social trends)

Answer 16

• Canadians are increasingly aware of environmental contamination as a threat to well being
• Ex. wood treated with chromated copper arsenate (CCA) can contaminate soil, and children could be exposed to such contamination
• Raises the possibility of lawsuits against manufactures of products treated with CCA. Underwriters should be aware of such developments when evaluating a business with similar manufacturing practices

Question 17

Privacy concerns and the impact on underwriting

(The external environment)

Answer 17

• Developments in technology have made Canadians more concerned about privacy rights
• Ex. data breaches involving Equifax, Uber, Yahoo, Home Depot etc.
• Insurers concerned about privacy involving use of electronic payment at point of sale (ex. credit cards, fund transfers, Google Wallet etc.). Insurers who use these payment methods offer greater convenience but at the potential risk to client information
• In response to privacy concerns, some governments have made it more difficult to obtain driving records for prospective insureds

Question 18

Judicial trends and the impact on underwriting

(The external environment)

Answer 18

• Underwriters should pay attention to judicial decisions for novel cases, as they will set the precedent for future proceedings
• Underwriters should consider liability hazards posed by farm risks or municipalities in light of any finding of liability against the defendants in lawsuits involving them. May affect whether they are able to accept similar risks in the future

Question 19

Judicial findings may have underwriting implications for these three things

Answer 19

• the policy forms under which claims are made;
• the willingness of insurers to provide coverage for people or businesses with similar exposures; and
• the terms under which insurers, through their underwriters, will offer coverage to such people or businesses.

Question 20

Economic trends that can impact underwriting decisions

(The external environment)

Answer 20

• Thriving economy
• Sluggish economy
• Global industry

Question 21

Thriving economy

(External economic trends)

Answer 21

• A thriving economy can lead to more merger and acquisition activity among businesses
• Important for underwriters to investigate existing insureds to see if they have merged or acquired another company
• Such activities would introduce a material change in the exposures the underwriter must assess

Question 22

Sluggish economy

(External economic trends)

Answer 22

• Businesses may find themselves under financial pressure as their incomes drop
• Frequency of claims increase in difficult economic times - more fraudulent activity and moral hazard, more staged claims and inflated claims
• Also affects the physical hazard presented by some insureds, who may not be able to afford the level of maintenance or housekeeping required to keep the building safe and clean

Question 23

Red flags that underwriters should look for to determine if an applicant is fraudulent or a ghost broker

Answer 23

• Accounts have similar telephone numbers and email addresses (which are really the contact details of the ghost broker)
• The individual applying for insurance has all the information needed to bind policy coverage at the initial contact with the broker or insurer
• Applications request minimum coverage limits, and/or less commonly known coverages, discounts, and underwriting rules

Question 24

Global industry

(External economic trends)

Answer 24

• Insurance has always been a global industry, and increases in technology have made it more so
• State of Canadian economy is largely affected by the global economy, which can also affect the market for insurance in Canada
• Ex. a decision by OPEC to increase or decrease the price of oil can affect the Canadian economy, leading to the hazards of a sluggish economy

Question 25

Legislation and regulation

(The external environment)

Answer 25

• Laws and regulations shape society and the environment in which underwriters work
• Obvious example is the statutory requirement for all drivers in Canada to have auto insurance
• The Financial Services Regulatory Authority of Ontario was created due to the rise in costs of liability insurance and the desire for certain municipalities to self-insure

Question 26

Legislative and regulatory changes that impacted insurance

Answer 26

• Reciprocal and captive insurers
• Pollution liability
• Public health and safety

Question 27

Reciprocal and captive insurers

(External legislation and regulation)

Answer 27

• Insurance reciprocals operate similar to insurance companies - issue policies, charge premiums, and pay claims. Reciprocals have essentially removed themselves from the traditional insurance market
• Captive insurance companies are usually created to write the parent company’s own insurance (ex. to reduce basic insurance cost)

Question 28

Pollution liability

(External legislation and regulation)

Answer 28

• Increasing number and severity of pollution incidents (ex. oil and chemical spills) led to increasing public concern about pollution
• More extensive statutes governing pollution control and environmental regulation

Question 29

Public health and safety

(External legislation and regulation)

Answer 29

• Laws that immediately affect health and safety of citizens indirectly affect the expenses of insurers
• This must be taken into account by underwriters when deciding to accept or reject risk and the premium to be set

Question 30

The public interest

(The external environment)

Answer 30

• Matters of public interest usually comprise more than one element of the underwriter’s external environment
• Ex. sub-prime mortgage crisis strongly affected the market for D&O insurance, due to the volume of lawsuits against managers of banks who affected the outcome of the crisis