True Risk Analysis A Must In Hard Mkt.

Measured risk infers that some form of analysis took place. Without risk analysis, you have no measurement. Without measurement, you have speculation.

Lets go back to the barn example. Consider what would increase the potential for loss: construction of the building, water available, the fire department (full time versus volunteer), and the contents of the barn.

All of these items increase the potential for loss. A concrete block barn will not burn as completely and quickly as a frame, wood barn. A burning barn that has a fire pond is more likely to access water quickly to stop the fire. The fire department needs to have a pumper to pull the water out of the fire pond and fire fighters who can be there quickly.

The contents of the barn can cause the fire or add to the fire. Tractors stored in barns can add to a fire because of the fuel in their tanks, and a barn of improperly cured hay can cause fires.

As an underwriter, you should be thinking about the information that influences the profitability of the account. Risk measurement is understanding this balance.

The last 10 years have seen very little risk analysis. Consequently, we have an entire generation of underwriters who were not given the benefit of these lessons. They likely would have gathered data on the account, fit it into a pre-described program, determined the rate, and then discounted it to sell it. They were measured by production, and produce they did!

Risk underwriting in a hard market is imperative. Now, underwriters have been thrown into a hard market and are expected to make good risk decisions. How fair is that? Pricing was beaten down in the soft market. Underwriters were "encouraged aggressively" to get market share. Now, underwriters have to explain to their agents why their companies are no longer writing certain classes of business.

Neither environment is very satisfying.

What does all this talk about risk analysis mean? Risk analysis requires a developed intuitive sense that comes from years of recognizing when the pieces of the puzzle do not fit. That is risk analysis. This takes time. It might slow down production, but it certainly will have a positive effect on profitability in the long run. If you keep doing what youve always done, you will always get what youve always gotten. Bad habits equal bad results.

Let me show another example of risk analysis. All of us relate to the fear of terrorism, but how does that relate to how an insurance underwriter will manage the risks on their desk? Have you been told not to write certain classes of business anymore? Is it because you "cant make money in that business anymore?" As an underwriter, do you know why your company has made these decisions?

The need to address terrorism has caused the following:

Reinsurance costs for facultative placements have increased in price.

Reinsurance treaties have been amended unfavorably or cancelled completely.

Any structure too tall, too public, or too heavily populated is heavily scrutinized.

Capacity has shrunk, bringing pricing even higher to replenish it.

How would you solve these problems? How would you continue to meet your production goals in spite of these new limitations?

Lets shift to another hot topic–mold. Anyone can decide you will not write old buildings, schools, or apartments any longer. Lets determine some other options.

Mold is an issue in old buildings, or buildings that have had previous water damage, as evidenced by the loss runs. What about a loss control survey prior to issue that includes a water penetration analysis?

Consider being a member of an initiative to design a limited mold property coverage, working with your product design or line-of-business division.

Find a reinsurer that will write any limit of mold. Assuming your company allows reinsurance placements, find a reinsurer that will agree to write a specific class–such as apartments only. Then grow in that area.

Do not worry about what you cannot do. Determine what you can do and produce!

If any of these points confuse you or are areas where you do not have a firm grasp on the mechanics, you are not trained to completely underwrite risk. Risk does not end after a review of the loss runs or an analysis of the MVRs. It doesnt end with a loss control report or at the reading of a hazard assignment summary.

Barbara Reardon is the chief executive officer of Educating Underwriters in Batavia, Ill. She can be reached at Reardon@educatingunderwriters.com

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.