The insurance industry is built on the skill of itsunderwriters' in assessing and pricing risk, but there are someindicators that suggest an aging workforce combined with acontinuing lack of contract certainty could be creating futurechallenges. Steps should be taken now to record the knowledge,experience and even the mistakes of industry professionals beforethey collect their 401Ks.

Tens of thousands of underwriters are approaching retirement andthe Bureau of Labor Statistics (BLS) reveals that projectedemployment in this particular profession is likely to fall 6percent by 2022, and it appears the insurance industry may have apeople problem.

This collection of highly specialized individuals could dwindleto fewer than 100,000 souls if the BLS forecast proves accurate,and with market consolidation picking up, insurance companies haveeven more reason to build greater economies of scale into theirbusinesses.

The net result could be fewer underwriters than today, managingever larger and more complex portfolios, driven by increasinggrowth and productivity targets set by demanding boards andshareholders. This also increases the likelihood of errors andomissions, while introducing an ever greater risk of time lagbetween policies being bound and checked.

Amidst this dynamic, the employers of 21,000 underwriterscurrently aged between 55 and 64 face an interesting choice: Shouldthey just watch as these people edge closer to collecting theirpensions, or is there an opportunity to create a means of codifyingand transferring their experience for the next generation?

The need to improve productivity could be the main driver,especially with fewer companies in the industry. This year beganwith a bang as insurance industry merger and acquisition activityfinally kicked off after years of slumber. Global insurance M&Awas valued at $4.6 billion in 2014 and $4.7 billion in 2013;however, 2015 eclipsed these two periods by the end of the firstquarter with $11.2 billion worth of merger activity, according toDealogic and the Financial Times.

Mind your T's and C's

To provide further context, the industry is sometimes accused offlying fairly close to the wind by loosening terms and conditions(T's and C's) as a means of attracting business when loweringprices alone will not clinch the deal. In response to the trend,Validus CEO Ed Noonan was quoted during 2014 as saying that some ofthe broadening of terms and conditions at recent renewals has beengetting “out of hand.” Meanwhile, insurance and reinsurance lawyerSimon Kilgour, a partner at CMS in London spoke of his concernsabout the widespread removal of terrorism exclusions in reinsurancecontracts shortly before July 2014 renewals in an interview withReactions Magazine, adding: “Ultimately as underwriterscede control of T's and C's, the damage can be even morefar-reaching than rate cuts. In the long term, increased claims canmake a falling premium look infinitely favorable to a disastrouscombined ratio.”

If a new generation of underwriters here in the U.S. enters amarket in which this approach to terms and conditions has becomecommonplace, it seems prudent to build a 'clause management' recordnow which could at least give those holding the pen in future yearsa clear picture of exposures from one financial year to thenext.

Defining your risk appetite

Underwriters at commercial carriers in non-life markets applytheir own judgements and experience to the role, utilizingresources like policy wording and clause libraries to give them abaseline for their contracts. The existence of an underwritingmanual like those found in the life and health insuranceprofessions is less common. Neither has the property and casualtyindustry adopted a universal system or process that can define andcontrol the use of 'preferred' clauses and exclusions within acompany or underwriting department.

This is difficult to understand because building a set ofpreferences about the types of risk an organization wants to insureand those it does not could be presented as a sensible objectiveand one which boardrooms would most likely applaud.

However, knowing the terms and conditions of every policy asquickly after the sale as possible brings the debate to the pointof contract certainty. Despite the efforts of the Risk andInsurance Management Society to promote its Quality ImprovementProcess guidelines, this quest remains frustratingly elusive.

Pressure will continue to be applied and insurance buyers arealways keen to vent their frustrations about a lack of contractcertainty. A recent report on the London market by the BostonConsulting Group and the International Underwriting Associationhighlighted “processing infrastructure” as a possible threat toLondon's competitiveness as its global share of trade fell by 2percent.

The report said: “Our interviews suggested that the wholeindustry does not deliver on infrastructure and service and thiscauses frustration for customers.” It added a salient quote from ananonymous “U.S. risk manager” who said, “People in our industrywant to be able to interact in an efficient and speedy manner. Idon't want to have to wait 2-3 months for my policy to arrive afterI have agreed [to] a larger insurance placement.”

Solutions

With challenges coming from all directions and an imminentknowledge gap, a means of downloading all of this aforementionedexpertise into the next generation's toolkit is urgently needed.But can insurers actually harness their risk appetite in asystemized way?

There is unique opportunity, if carriers and their underwritingteams engage in a frank discussion so they can define andcommunicate their 'house view'.

When was the last time the company considered in a systematicway, the key provisions on policies issued by the firm that affectthe pricing of risk? This could mean creeping extensions to coverwhere verbiage or terms have been broadened. It could be that overtime a department has included or accepted write backs to reverseterms that were previously excluded. These are the things that alltoo frequently slip into new business without proper checks.

Another positive step might be to consider each class ofbusiness the company writes, the most common perils andjurisdictions the contracts provide cover for and then decide whatthe company feels represents its “standard” for this.

For example, what should the company's standard approach to“hours clauses” be? These are among the most likely clauses to bealtered or broadened and have been noted by commentators recentlyas those most frequently tinkered with as competitive pressurecreeps into negotiations. On property contracts, these are designedto regulate recovery of multiple losses which can potentiallyaggregate for reinsurers.

They typically range from 72 hours to 168 hours, depending onthe insurer and the specific peril, but there have been unusuallyhigh limits on these clauses for flood and other events, frequentlygoing beyond the normal one week ceiling. Elsewhere, terrorismexclusions may have been watered down with write backs of cover orcyber coverage may be implicitly given. The potential forunintentional exposures without this kind of review process issignificant and an underwriting team should have the opportunity toconsider what they think are sensible standards or risksleepwalking into a potential disaster.

If a decision can be made, this can then be explained, loggedand acted upon.

So much of what the industry does is based on standardizationthat it seems sensible for a market facing a retirement bulge totake some time and reflect on what it is losing. Contracts andverbiage have been written and adapted to make a highly complexrisk transfer industry possible, but the industry is beginning toacknowledge that in a perpetual soft market, it will have to domore than simply compete on price while loosening its grip onterms.

If individual companies can create a “house view” that istransferrable to the next generation, the odds of maintainingproductivity with fewer people will increase.