In recent times, particularly during ‘Insurance Month,’ I have been able to talk with a number of my colleagues inside insurance.
Most of us agree that these are turbulent, troubling, and challenging times for the industry.
There are so many internal and external factors that are influencing the way that we conduct business, which continues to force the industry to change.
External factors include the upcoming FTAA, the proposed Insurance Bill, increasing health costs (which affects Health insurance), increasing building costs (which affects Property insurance), increasing automobile costs (which affects Motor Insurance), a shifting economy and changing needs and desires of the consumer.
Internal factors include increased reinsurance costs, the lack of reinsurance capacity, mergers, acquisitions, increasing need for training, downsizing, more complex insurance products, a changing workforce, and competition.
Because of the difficulty in maintaining profitability during these times of change, many insurers have now reverted to what I call, bottom -line underwriting.
Underwriting is the process by which an insurer establishes a rate based on the level of risk that is being covered.
An actuary creates the formula that will be used in calculating the rate.
For instance, for life insurance, one of the key factors used is a Mortality Table. These tables estimate that at any given age, a certain percentage of people are expected to die. The older you are, the higher is the expectation that you will not live to see another year, and thus premiums increase as you age.
With Health insurance, a number of factors go into calculating a rate, including your sex, age, occupation, past medical history, etceteras.
A manual underwriting rate will use only the factors that an actuary has put together. Some years will be off, in favour of or against the insurer, but overall, for the long run, they should reflect the actual level of the risk.
Bottom-line underwriting is done when an insurer is trying to keep his head above the water and, therefore, makes decisions on rates based on the performance of the insurance company.
Whereas this may be necessary as a short-term solution, there is some danger in underwriting this way, First, the company is just putting a band-aid on the problem.
If rates are not reflecting the actual level of the risk, then the actuary needs to reevaluate the factors used. A second factor to consider is how bottom-line underwriting can throw the basis of the rates off course, the same thing that happens when there is a high degree of competition.
This is further compounded when there is both competition and bottom-line underwriting going on at the same time. It sometimes make you wonder if insurance companies are not sometimes their own worse enemy.
By Jeanine M. Lampkin
Jeanine M. Lampkin is a chartered insurance broker and is presently the Managing Director & CEO of Lampkin & Company Insurance Brokers & Benefit Consultants Ltd
