The insurance industry is built on the skill of its underwriters’ in assessing and pricing risk, but there are some indicators that suggest an aging workforce combined with a continuing lack of contract certainty could be creating future challenges. Steps should be taken now to record the knowledge, experience and even the mistakes of industry professionals before they collect their 401Ks.

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

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

The net result could be fewer underwriters than today, managing ever larger and more complex portfolios, driven by increasing growth and productivity targets set by demanding boards and shareholders. This also increases the likelihood of errors and omissions, while introducing an ever greater risk of time lag between policies being bound and checked.

Amidst this dynamic, the employers of 21,000 underwriters currently aged between 55 and 64 face an interesting choice: Should they just watch as these people edge closer to collecting their pensions, or is there an opportunity to create a means of codifying and 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 began with a bang as insurance industry merger and acquisition activity finally kicked off after years of slumber. Global insurance M&A was valued at $4.6 billion in 2014 and $4.7 billion in 2013; however, 2015 eclipsed these two periods by the end of the first quarter with $11.2 billion worth of merger activity, according to Dealogic and the Financial Times.

Mind your T’s and C’s

To provide further context, the industry is sometimes accused of flying fairly close to the wind by loosening terms and conditions (T’s and C’s) as a means of attracting business when lowering prices alone will not clinch the deal. In response to the trend, Validus CEO Ed Noonan was quoted during 2014 as saying that some of the broadening of terms and conditions at recent renewals has been getting “out of hand.” Meanwhile, insurance and reinsurance lawyer Simon Kilgour, a partner at CMS in London spoke of his concerns about the widespread removal of terrorism exclusions in reinsurance contracts shortly before July 2014 renewals in an interview with Reactions Magazine, adding: “Ultimately as underwriters cede control of T’s and C’s, the damage can be even more far-reaching than rate cuts. In the long term, increased claims can make a falling premium look infinitely favorable to a disastrous combined ratio.”

If a new generation of underwriters here in the U.S. enters a market in which this approach to terms and conditions has become commonplace, it seems prudent to build a ‘clause management’ record now which could at least give those holding the pen in future years a clear picture of exposures from one financial year to the next.

Defining your risk appetite

Underwriters at commercial carriers in non-life markets apply their own judgements and experience to the role, utilizing resources like policy wording and clause libraries to give them a baseline for their contracts. The existence of an underwriting manual like those found in the life and health insurance professions is less common. Neither has the property and casualty industry adopted a universal system or process that can define and control the use of ‘preferred’ clauses and exclusions within a company or underwriting department.

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

However, knowing the terms and conditions of every policy as quickly after the sale as possible brings the debate to the point of contract certainty. Despite the efforts of the Risk and Insurance Management Society to promote its Quality Improvement Process guidelines, this quest remains frustratingly elusive.

Pressure will continue to be applied and insurance buyers are always keen to vent their frustrations about a lack of contract certainty. A recent report on the London market by the Boston Consulting Group and the International Underwriting Association highlighted “processing infrastructure” as a possible threat to London’s competitiveness as its global share of trade fell by 2 percent.

The report said: “Our interviews suggested that the whole industry does not deliver on infrastructure and service and this causes frustration for customers.” It added a salient quote from an anonymous “U.S. risk manager” who said, “People in our industry want to be able to interact in an efficient and speedy manner. I don’t want to have to wait 2-3 months for my policy to arrive after I have agreed [to] a larger insurance placement.”

Solutions

With challenges coming from all directions and an imminent knowledge gap, a means of downloading all of this aforementioned expertise into the next generation’s toolkit is urgently needed. But can insurers actually harness their risk appetite in a systemized way?

There is unique opportunity, if carriers and their underwriting teams engage in a frank discussion so they can define and communicate their ‘house view’.

When was the last time the company considered in a systematic way, the key provisions on policies issued by the firm that affect the pricing of risk? This could mean creeping extensions to cover where verbiage or terms have been broadened. It could be that over time a department has included or accepted write backs to reverse terms that were previously excluded. These are the things that all too frequently slip into new business without proper checks.

Another positive step might be to consider each class of business the company writes, the most common perils and jurisdictions the contracts provide cover for and then decide what the 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 be altered or broadened and have been noted by commentators recently as those most frequently tinkered with as competitive pressure creeps into negotiations. On property contracts, these are designed to regulate recovery of multiple losses which can potentially aggregate for reinsurers.

They typically range from 72 hours to 168 hours, depending on the insurer and the specific peril, but there have been unusually high limits on these clauses for flood and other events, frequently going beyond the normal one week ceiling. Elsewhere, terrorism exclusions may have been watered down with write backs of cover or cyber coverage may be implicitly given. The potential for unintentional exposures without this kind of review process is significant and an underwriting team should have the opportunity to consider what they think are sensible standards or risk sleepwalking into a potential disaster.

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

So much of what the industry does is based on standardization that it seems sensible for a market facing a retirement bulge to take some time and reflect on what it is losing. Contracts and verbiage have been written and adapted to make a highly complex risk transfer industry possible, but the industry is beginning to acknowledge that in a perpetual soft market, it will have to do more than simply compete on price while loosening its grip on terms.

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