Underwriting –In General Insurance Industry

1. Underwriting –In General Insurance Industry 13th March 2006 Hyderabad By G VRao GVR Risk Managment Assoc. P Ltd, Hyderabad

2. Structure of presentation • Who are our customers? • What is underwriting? • How is it being done now? • What are the objectives of detariffing? • What are current market characteristics? • Financial analysis of market trends. • Safeguards to orderly switch over. GVR Risk Managment Assoc. P Ltd, Hyderabad

3. Who are your customers? • Ultimate users? Their staff? • Brokers and Agents? • Surveyors? Lawyers? Judges?—Outsourcers • Your internal colleague staff? • Anyone who has a financial interest in your product?—All of them are your customers. • Your job is to create value to meet the specific needs of each entity in the value chain. GVR Risk Managment Assoc. P Ltd, Hyderabad

4. Pricing commodity risks • Insurance is a almost commodity now. • It is a bargain business; needing skills. • Each customer is unique; your product is not. • Price -- dependent on product & customer. • As product is a commodity, evaluating customer risk exposures & pricing risk is key to underwriting. GVR Risk Managment Assoc. P Ltd, Hyderabad

5. What is underwriting? • Knowledge of individual risk peculiarities. • Assessing how the risk & a peril produce potential losses. • Estimating magnitude of losses—peril-wise. • Estimating insured’s systems & capabilities for prevention & minimization of losses. • Prescribing rates, terms & conditions. • Deciding on retention & risk transfer. GVR Risk Managment Assoc. P Ltd, Hyderabad

6. Underwriting& Risk analysis. • Physical/ Technical aspects of risks. • Moral Hazard aspects of insured. • Environmental business aspects. • Underwriting skills aspects. Let us examine each point in the next few slides. GVR Risk Managment Assoc. P Ltd, Hyderabad

7. Technical aspects of U/W. • Risk assessment-- characteristics of risk, nature of perils covered, interaction between the two. • Frequency and severity of loss occurrences & MPL. • Fire prevention and minimization capabilities. • Burning cost vs. prospective risk analysis. • Accuracy of claims estimates—triangulation. • Value addition- quality of claims handling--not priced. Claims experience is everything in rating. GVR Risk Managment Assoc. P Ltd, Hyderabad

8. Moral Hazard aspects of U/W. • Human element and its quality, expertise and experience in handling losses and minimizing them. • Safety audit and accident investigation mechanisms in place. • Insured’s RM philosophy, sensitivity and implementation. GVR Risk Managment Assoc. P Ltd, Hyderabad

9. Environmental aspects of U/W. • Quality of market competition. • Regulatory regime. • Board/ Management attitude to risk exposures within. • Investor pressures and directions. • Availability of reinsurance. • Customer pressures and insurers’ reputation. GVR Risk Managment Assoc. P Ltd, Hyderabad

10. U/W skills aspects • KASH in u/w—risks, terrain, customers, reinsurers, competitors, u/w policy, brokers, staff, claims. • Terms & conditions- responsibility for loss avoidance. • Pricing of risk. • Retention levels for insurer. • Reinsurance availability. • Customer profitability/ Profitability on risk. • Brokers’ pressures/relations. • Should investment income form part of rating? GVR Risk Managment Assoc. P Ltd, Hyderabad

11. Why detariffing? • Market forces of supply & demand to prevail. • Greater customer choice. • To provide an enhanced role for brokers. • To improve insurers’ efficiency through competitive pressures on pricing and service. • To enhance creativity and product innovation. • Survival of the fittest –the name of the game. GVR Risk Managment Assoc. P Ltd, Hyderabad

12. Current state of underwriting. • Tariff rates applied—no application of mind. • Too many underwriters. Or too few ones. • Mix of production & underwriting job profiles. • Premium and not profit is the focus for most. • Loss prevention & minimization -not an issue. • High-cost industry—40% on EP. • Distribution channels have added costs. • LPA closure has sent wrong signals. GVR Risk Managment Assoc. P Ltd, Hyderabad

13. Rating agencies attitudes. • Financial strength & also Management capability. • Not listed—no market scrutiny, accountability. • More underwriters or more investment analysts? • Will bigger und.losses act as a market disincentive to write health, rural and social sector business? • What are antifraud and loss minimization measures of insurers now practiced? GVR Risk Managment Assoc. P Ltd, Hyderabad

14. Market composition on EP. • Motor 50 %, fire 16%, engineering 5% of EP. • Loss ratios on EP: motor 90%, fire 47%, engineering 59% • Combined ratio: motor 128%, fire 84%, engineering 95%. • Expenses around 38%/40%--likely go up. • What will rate adjustment do to losses? GVR Risk Managment Assoc. P Ltd, Hyderabad

15. Share of Public sector. • Motor 84% in 2004/5 from 88%-Rs 7500 cr • Fire 72% down from 77%--Rs 3350 cr • Engineering 67% down from 77%--Rs 835 cr • Market share was 75% overall. • Fire grew by Rs 35 cr – New players Rs 206 cr. • Engineering Rs 22 cr—New Players Rs 104 cr. • Motor Rs 530 cr—New players Rs 510 cr • Matching point to point. GVR Risk Managment Assoc. P Ltd, Hyderabad

16. For a major insurer--Fire GVR Risk Managment Assoc. P Ltd, Hyderabad

17. Motor GVR Risk Managment Assoc. P Ltd, Hyderabad

18. TOTAL GVR Risk Managment Assoc. P Ltd, Hyderabad

19. Flexibility in rating? • Fire operating ratio 80% upwards. • Engineering operating ratio 90 % upwards. • Motor operating ratio 125 % and more. • Intermediation costs will go up- 5% or more. • Reinsurance will be more expensive—margins lower. • How will future rating structures look like? GVR Risk Managment Assoc. P Ltd, Hyderabad

20. Who owns detariffing process? • Who is the chief beneficiary of detariffing? • IRDA? TAC? Insurers? Brokers? Consumers? • Who owns responsibility for success or failure? • What u/w changes have insurers pledged? • What changes have brokers pledged? • What new regulatory changes are intended? • How will motor business be managed? GVR Risk Managment Assoc. P Ltd, Hyderabad

21. Declined risk pool? • Will it work? • Can membership be made compulsory? • Who owns management of POOL? • What is owners’ financial stake? • What if it pushes up costs and losses? • Will the remedy prove worse than disease? • What next it it fails? GVR Risk Managment Assoc. P Ltd, Hyderabad

22. Underwriters’ dilemmas. • Is he equipped to underwrite? • Is his loyalty to internal rate book? • Is his loyalty to organization? • How will his performance be judged? • Will it slow down decision-making? • How will he be punished or rewarded? • How will he deal with internal & external pressures? GVR Risk Managment Assoc. P Ltd, Hyderabad

23. Market gyrations. • Crush competition at any cost? • Brokers to dictate market’s future. • Bancassurance to melt under pressures for lower rates. • IRDA will have a fuller plate of complaints. • Product innovation to gain comp. Advantage. • Reinsurers a focus of market pressures. GVR Risk Managment Assoc. P Ltd, Hyderabad

24. Safeguards--1 • Define underwriter’s role—job profile. • Define authority—including discretionary. • Appoint underwriters 3 months earlier. • Use current tariff as binding reference rates. • Specify binding parameters for swing rates—upward & downwards. • Keep current terms, wordings and conditions for two years. GVR Risk Managment Assoc. P Ltd, Hyderabad

25. Safeguards--2 • Product changes in tariff should be treated differently from “file and use” procedures. • Brokers’ remuneration from insured. • If not, brokers to specify brokerage- each risk. • Information slip must be compulsory. • Inspection of risks above a limit a must. • GI council to set up a committee - tariff change GVR Risk Managment Assoc. P Ltd, Hyderabad

26. Safeguards --3 • Leverage IT for customer communication. • Capture customer data on computers. • Use MIS for locating system weaknesses. • Zero on laser-like on customer dispute resolution. Audit the current systems and innovate. • Reduce costs- customer cannot afford 45% on EP to obtain cover. • Develop micro-insurance as a new market. GVR Risk Managment Assoc. P Ltd, Hyderabad

27. Get back to school! • Not only underwriters but management as well. Insurance is a community based idea. • Industry is for consumer benefit. • You are a financial intermediary and a trustee for customers –those that pay premiums but do not put in claims as well.. • All are underwriters in insurance. GVR Risk Managment Assoc. P Ltd, Hyderabad

28. The long haul? • Policies are up for renewal each year; but not your reputations or corporate values • You have a right to choose your customers. • But do not punish customers, if they made a choice in you as insurer.Trust is reciprocal. • Be in tune with customer expectations—he is continually changing, demanding. • What are your moments of truth? GVR Risk Managment Assoc. P Ltd, Hyderabad

29. Happy hunting for rates! • Underwriting is like hunting for good customers • No profession in the world with so many financially linked in one transaction! • One has to be a gainer and the other has to be a loser. • It is win-lose situation—and not win-win like Life Insurance. • Your character and conduct are on display. • How great you want to be? Or how mean? GVR Risk Managment Assoc. P Ltd, Hyderabad