Strategic

underwriting
995: 2023 Study text

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2 995/January 2023 Strategic underwriting

© The Chartered Insurance Institute 2023

All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part
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Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for
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legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 613 1
Electronic edition ISBN: 978 1 80002 614 8
This edition published in 2023

Updater
Lynne Broadhead BSc (Hons), MBA, ACII has over 25 years’ experience in the insurance industry. Her career has
included senior roles within insurance companies and brokers, specialising in underwriting and corporate
partnership business. Since 2009, she has been an independent consultant, providing services in relation to
insurance education, training and qualifications.

The author
Phil Foley FCII MCIArb MEWI, Chartered Insurance Practitioner. Phil’s executive insurance career has spanned
more than 40 years in the London, Dublin and international insurance and reinsurance markets. He began as a
trainee underwriter and developed as a client service broking director before returning to his underwriting roots for
the last two decades. In 1977 he started specialising in professional indemnity, gradually widening his knowledge
base to include all financial lines, before encompassing all liability lines of business as the Active Underwriter of a
Lloyd’s syndicate and Group Chief Underwriting Officer. He was a Director of a Lloyd’s managing agent and an
insurance company. Phil is currently a Director of Foley Specialities Limited, providing insurance underwriting and
claims services. He is also a member of the Professional Liability Underwriting Society (PLUS), the Insurance and
Reinsurance Arbitration Society (ARIAS UK) and the British Insurance Law Association (BILA).

Acknowledgements

For reference only

The CII would like to thank the following with their assistance with the first edition: Helen Hatchek FCII, Alan
Liddiard ACII, Massimo Vascotto FCII, Jennie Foley, Jim Benson, Michael Dickson and Lisa McHale.
The CII would also like to thank the authors and reviewers of other CII study texts in respect of any material drawn
upon in the production of this study text.
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
www.handbook.fca.org.uk/handbook) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts
where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for
all such material. Use of FCA or PRA material does not indicate any endorsement by the FCA or PRA of this
publication, or the material or views contained within it.
Typesetting, page make-up and editorial services CII Learning Solutions.
Printed and collated in Great Britain.
This paper has been manufactured using raw materials harvested from certified sources or controlled wood
sources.
 3

Using this study text

Welcome to the 995: Strategic underwriting study text which is designed to cover the
995 syllabus, a copy of which is included in the next section.
Please note that in order to create a logical and effective study path, the contents of this
study text do not necessarily mirror the order of the syllabus, which forms the basis of the
assessment. To assist you in your learning we have followed the syllabus with a table that
indicates where each syllabus learning outcome is covered in the study text. These are also
listed on the first page of each chapter.
Each chapter also has stated learning objectives to help you further assess your progress
in understanding the topics covered.
Your Advanced Diploma study material has been designed to help you develop study skills
that you may not be familiar with. The aim is that you should engage actively with the text,
which contains a number of features designed to assist your learning and study.
You will be directed to alternative sources of theory and practice (useful websites/
additional reading), encouraged to learn from your own experiences (research exercises),
to think critically (critical reflections) and provided with opportunities to apply your
knowledge and skills through practical application (scenarios).

Guide to your study text

Additional reading or useful articles: Management decisions: are questions
provide valuable references to books, management may need to address. They
journals and articles on related subjects. encourage you to understand the
mindset of management.

For reference only

Be aware: draws attention to important Refer to: Refer to: extracts from other CII study
points or areas that may need further texts, which provide valuable information
clarification or consideration. on or background to the topic. The
sections referred to are available for you
to view and download on RevisionMate.

Consider this: stimulating thought Reinforce: encourages you to revisit a

around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.

Critical reflections: challenge you to Research exercises: reinforce learning

think beyond the confines of the text. through practical activities.

Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.

Key terms: introduce the key concepts On the Web: introduce you to other
and specialist terms covered in each information sources that help to
chapter. supplement the text.

Study skills
As we have already stated, the Advanced Diploma study material requires you to engage
with the text in a way that makes you capable of applying the knowledge you have gained to
practical work situations. While the text will give you a foundation of facts and viewpoints,
your understanding of the issues raised will be richer through adopting a range of study
skills. They will also make studying more interesting!
We will focus here on the need for active learning in order for you to get the most out of this
core text. However, the CII’s online learning site, RevisionMate, covers a range of other
study skills that will be helpful to you in more specific areas of your studies, such as using
diagrams and tables, how to approach case study style questions, and how to identify your
own learning style to help you approach studying in a way that best suits you and will get you
the best results possible.
4 995/January 2023 Strategic underwriting

Active learning is experiential, mindful and engaging

• Underline or highlight key words and phrases as you read – many of the key words
have been highlighted in the text for you, so you can easily spot the sections where key
terms arise; boxed text indicates extra or important information that you might want to be
aware of.
• Make notes in the text, attach notes to the pages that you want to go back to – chapter
numbers are clearly marked on the margins and key passages have been pulled out for
quick reference.
• Read critically and raise questions about the text, apply it to your experiences, make
the subject ‘live’ – there are ‘critical reflections’ to encourage you to consider the facts
that you have read in the context of a working environment and the scenario questions
are designed to make you think about applying the knowledge in the same way.
• Make connections to other CII units – throughout the text you will find ‘refer to’ boxes
that tell you the chapters in other books that provide background to, or further information
on, the area dealt with in that section of the study text.
• Take notice of headings and subheadings.
• Use the clues in the text to engage in some further reading to increase your knowledge
of a particular area and add to your notes – be proactive!
• Use the research exercises and critical reflections to understand what you learn in a
real life application, not just memorise it.
• Relate what you’re learning to your own work and organisation.
• Be critical – question what you’re reading and your understanding of it.
Five steps to better reading
• Scan: look at the text quickly – notice the headings (they correlate with the syllabus
learning outcomes), pictures, images and key words to get an overall impression.

For reference only

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subjects tackled. More are available on RevisionMate.
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paraphrasing.

Useful websites
www.open.ac.uk/skillsforstudy
www.cii.co.uk/learning/knowledge-services/
Note: website references correct at the time of publication.
 5

Examination syllabus

Strategic underwriting
Purpose
To enable candidates to understand the strategic context within which an underwriting function is
managed.

Target Candidate
An underwriter with several years’ experience who is looking to develop their career through the route:
Section Head; Departmental Underwriting Manager; Company Underwriting Manager; MGAs, Brokers,
Syndicates, Captives, Reinsurance, Alternative Risk Transfer and Delegated Authorities.

Assumed Knowledge
It is assumed that the candidate already has a grounding in underwriting gained from study of M80
Underwriting practice or 960 Advanced underwriting, and knowledge of insurance organisations,
finance and regulations as typically covered in IF1 Insurance, legal and regulatory, or M92 Insurance
business and finance or equivalent examinations.

Summary of learning outcomes

For reference only

1. Discuss the impact of global strategic insurance issues on underwriting

2. Evaluate underwriting strategy within the external insurance context

3. Evaluate underwriting strategy within the internal insurance context

4. Analyse how the underwriting function should be led and resourced to deliver
the underwriting strategy

Important notes
• Method of assessment: Coursework – 3 online assignments (80 marks). Each assignment must be
individually passed.
• The syllabus is examined on English law and practice unless otherwise stated.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page

Published January 2023

©2023 The Chartered Insurance Institute. All rights reserved. 995
6 995/January 2023 Strategic underwriting

1. Discuss the impact of global strategic Reading list

insurance issues on underwriting
1.1 Explain how the global insurance market could be The following list provides details of various
analysed. publications which may assist you with your
1.2 Discuss strategic management tools and their studies.
appropriateness in evaluating global strategic Note: The examination will test the
insurance issues. syllabus alone. However, it is important
1.3 Analyse key global strategic insurance issues using to read additional sources as 10% of the
appropriate strategic management tools. exam mark is allocated for evidence of
1.4 Discuss the economic and insurance cycles.
further reading and/or the use of
relevant examples.
2. Evaluate underwriting strategy within the The reading list is provided for guidance
external insurance context only and is not in itself the subject of the
2.1 Evaluate the insurance industry value chain and its examination.
impact on underwriting strategy. The publications listed here provide a wider
2.2 Discuss the relationship between capital and the coverage of syllabus topics.
insurance industry.
2.3 Evaluate strategic drivers for risk appetite and their CII study texts
impact on underwriting strategy. Strategic underwriting. London: CII. Study
2.4 Discuss the importance of intellectual capital and text 995.
innovation to underwriting strategy.
2.5 Evaluate the underwriting value proposition and Advanced underwriting. London: CII. Study
potential conflict between different stakeholders. text 960.

3. Evaluate underwriting strategy within the Insurance, legal and regulatory. London: CII.
Study text IF1.

For reference only

internal insurance context
3.1 Discuss how the underwriting strategy fits within the Insurance business and finance. London:
business philosophy and framework. CII.
3.2 Evaluate the impact of the internal insurance value Study text M92.
chain on underwriting strategy.
3.3 Analyse the relationships between the underwriting Underwriting practice. London: CII. Study
function and other functions within the business. text M80.
3.4 Evaluate the drivers of portfolio management and Books / eBooks
their strategic implications.
A practical guide to corporate governance.
3.5 Analyse the interrelationship between the distribution
5th ed. Mark Cardale. London: Sweet and
strategy and the underwriting strategy.
Maxwell, 2014.
4. Analyse how the underwriting function A practitioner's guide to Solvency II. Geoffrey
should be led and resourced to deliver et al. (eds.). London: Thomson Reuters,
the underwriting strategy 2016.
4.1 Discuss the target operating model options for Capital requirements, disclosure, and
underwriting strategy.
supervision in the European insurance
4.2 Analyse the importance of human capital and
industry: new challenges towards Solvency
technology on the underwriting function.
II. Maria Grazia Starita, Irma Malafronte.
Palgrave Macmillan, 2014.
Colinvaux’s law of insurance. 11th ed.
London: Sweet & Maxwell, 2016.
Digital insurance: business innovation in the
post-crisis era. Bernardo Nicoletti.
Basingstoke: Palgrave Macmilan, 2016. *
Economics. John Sloman, et al. London:
Pearson Education, 2015.
Handbook of insurance. Georges Dionne.
New York: Springer, 2013. *

* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).

Published January 2023 2 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
 7

Portfolio construction and risk budgeting. 5th These are available on the CII website under
ed. Bernd Scherer. London: Risk Books, the unit description / purchasing page. You
2015. will be able to access this page from the
Pricing in general insurance. Pietro Parodi. Qualifications section of the CII website:
CRC Press, 2015. * www.cii.co.uk/qualifications.
Reinsurance: the nuts and bolts. Keith Riley.
London: Witherby, 2012. Exam technique/study skills
Reinsurance underwriting. Robert Kiln, There are many modestly priced guides
Stephen Kiln. 2nd ed. London: CRC Press, available in bookshops. You should choose
2017. * one which suits your requirements.
The economics, regulation and systemic risk
of insurance markets. Felix Hufeld, Ralph S.
J. Koijen, Christian Thimann (eds.). Oxford:
Oxford University Press, 2016.
Understanding the Financial Conduct
Authority: a guide for senior managers.
Ashley Kovas. Kibworth Beauchamp:
Matador Books, 2015.
Ebooks
The following eBooks are available via
www.cii.co.uk/elibrary(CII/PFS members
only):

For reference only

A short guide to risk appetite. David Hillson,
Ruth Murray-Webster. Burlington: Gower,
2012.
Fundamental aspects of operational risk and
insurance analytics: a handbook of
operational risk. Marcelo G. Cruz. Wiley,
2015.
Managing risk and opportunity: the
governance of strategic risk taking. Torden
Juul Andersen et al. Oxford: Oxford
Scholarship Online, 2014.
Shari'ah non-compliance risk management
and legal documentations in Islamic finance.
Aḥsan Laḥasāsinah. Singapore: Wiley, 2014.
Journals and magazines
The Journal. London: CII. Six issues a year.
Post magazine. London: Incisive Financial
Publishing. Monthly. Contents searchable
online at www.postonline.co.uk.
Concise encyclopedia of insurance terms.
Laurence S. Silver, et al. New York:
Routledge, 2010. *

Specimen guides
Specimen guides are available for all
coursework units.

Published January 2023 3 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
For reference only
 9

995 syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Discuss the impact of global strategic insurance issues on underwriting
1.1 Explain how the global insurance market could be analysed. 2A, 2B, 2C, 2D, 2E, 2F
1.2 Discuss strategic management tools and their appropriateness in 3A
evaluating global strategic insurance issues.
1.3 Analyse key global strategic insurance issues using appropriate 3B
strategic management tools.
1.4 Discuss the economic and insurance cycles. 3C, 3D
2. Evaluate underwriting strategy within the external insurance context
2.1 Evaluate the insurance industry value chain and its impact on 4A
underwriting strategy.
2.2 Discuss the relationship between capital and the insurance 4B
industry.
2.3 Evaluate strategic drivers for risk appetite and their impact on 4C
underwriting strategy.
2.4 Discuss the importance of intellectual capital and innovation to 4D
underwriting strategy.

For reference only

2.5 Evaluate the underwriting value proposition and potential conflict 4E
between different stakeholders.
3. Evaluate underwriting strategy within the internal insurance context
3.1 Discuss how the underwriting strategy fits within the business 5B
philosophy and framework.
3.2 Evaluate the impact of the internal insurance value chain on 5A
underwriting strategy.
3.3 Analyse the relationships between the underwriting function and 6A, 6B, 6D
other functions within the business.
3.4 Evaluate the drivers of portfolio management and their strategic 5C
implications.
3.5 Analyse the interrelationship between the distribution strategy 6C
and the underwriting strategy.
4. Analyse how the underwriting function should be led and resourced to deliver the
underwriting strategy
4.1 Discuss the target operating model options for underwriting 5E
strategy.
4.2 Analyse the importance of human capital and technology on the 5D
underwriting function.
10 995/January 2023 Strategic underwriting

For reference only

 11

Introduction
995 Strategic underwriting is an Advanced Diploma insurance unit and is intended for
students who are nearing the completion of their ACII qualification. You will have already
developed a solid grounding in the technical aspects of insurance and will be approaching,
or have already reached, first line management. It is assumed that you already have
knowledge of insurance organisations, technology, legal, regulatory, finance and capital
issues and of course underwriting.
The overall aim of this unit is to provide you with an introduction to the concepts and
processes of strategic insurance underwriting, with some of the issues that need to be
addressed by managers at this level. The syllabus and study text are designed to enable you
to evaluate the following:
• global strategic insurance issues;
• underwriting strategy within the external insurance context; and
• how the underwriting function should be led and resourced to deliver the underwriting
strategy.
Success in the 995 assessment will require you to be able to:
• evaluate key issues and concepts; this means that you must be able to demonstrate
skills in comparing and discriminating, assessing value and making choices;
• apply knowledge and skills to practical situations; using information, methods,
concepts and theories, and solving problems; and
• synthesise different aspects of the syllabus; this means you must be able to
demonstrate skills in using old ideas to create new ones and draw conclusions.

For reference only

The syllabus learning outcomes support the principle that understanding how and when to
use knowledge is as important as the knowledge itself. This study material has been
designed to support achievement, but you should note that success in the 995 assessment
will require you to undertake further reading and independent research beyond this core text.
Suggestions for further reading are included in the Reading List at the end of the syllabus
and additional reading lists are provided within the text. You will also find a number of
research exercises and other activities (see ‘Using this study text’ for further detail). Taking
the time to do these extra activities will not only enhance your chances of success in the
coursework assignments but also increase your effectiveness in your chosen career.
For reference only
 13

Contents
1: Overview of strategic underwriting
A What is strategic underwriting? 1/2
B Strategy formation 1/3
C The insurance value proposition in the global context 1/9
D Value chains 1/12

2: Key global insurance issues

A Regulation 2/3
B Data 2/11
C Technology 2/19
D Climate change 2/24
E Industry consolidation 2/28
F Other significant global insurance issues 2/34

3: Analysing and evaluating insurance issues

A Strategic management tools 3/3

For reference only

B Using strategic management tools 3/12
C Economic cycle 3/16
D Insurance cycle 3/19
E Scenario 3/29

4: Underwriting strategy within the external insurance

context
A The insurance value chain and underwriting strategy 4/2
B Capital 4/10
C Risk appetite 4/14
D Intellectual capital and innovation 4/16
E Conflicting stakeholder interests 4/21
F Scenario 4/24

5: Underwriting strategy within the internal insurance

context
A Impact of the internal insurance value chain on underwriting strategy 5/2
B Corporate strategy 5/5
C Portfolio management 5/8
D Human capital and technology 5/9
E Target operating models (TOMs) 5/18
F Scenarios 5/28
14 995/January 2023 Strategic underwriting

6: Underwriting and other functions within the business

A Underwriting 6/2
B Interrelationship between underwriting and other business functions 6/8
C Distribution 6/16
D Marketing 6/24
E Scenario 6/30

Self-test answers i
Legislation ix
Index xi

For reference only

 Chapter 1
Overview of strategic
1
underwriting
Contents Syllabus learning
outcomes
Introduction
A What is strategic underwriting?
B Strategy formation
C The insurance value proposition in the global context
D Value chains
Summary
Self-test questions

For reference only

Learning objectives
This first chapter provides a broad introduction to the content of this study text. After studying
this chapter, you should be able to:
• define strategic underwriting;
• explain the difference between strategy and operational issues;
• describe how to develop a strategy;
• describe how underwriting strategy aligns with a company’s vision, mission and values
statements, and overall strategy;
• discuss how technology will shape future insurers;
• explain why insurance must do more to meet the needs of customers;
• describe a value chain and its component parts; and
• discuss the component parts of the insurance value chain.
Chapter 1 1/2 995/January 2023 Strategic underwriting

Introduction
This study text provides a high-level framework to stimulate your thinking on the subject of
strategic underwriting. This study text is not designed to be prescriptive. The objective is to
discuss relevant topics and to inspire you to develop your own ideas and carry out your own
relevant research. Every strategy is unique to an organisation, so the insurance organisation
you work for may have a very different strategy from other insurance organisations.

‘Strategic’ can be defined as the identification of long-term or overall aims and the means
of achieving them.
Insurance underwriting can be described as the acceptance of a risk or risks under an
insurance policy. A more detailed definition could be: the selection, analysis and setting of
terms, including pricing and coverage, of a risk or risks under an insurance policy.

A high-level strategic approach contrasts with the fast-moving day-to-day underwriting of

numerous risks when rapid decisions are made within a framework of more detailed plans
and authorities. Detailed department and divisional underwriting plans must be aligned to the
annual business plan and the insurer’s underwriting strategy.
There can sometimes be confusion about the difference between strategy and operational
issues. Strategy is about making informed choices or trade-offs. It is not normally possible to
be all things to everyone so an insurer, like any other commercial organisation, has to decide
what it wants to achieve and how. A strategy establishes limits on what will or will not be
done. A strategy helps to:
• define an organisation;
• make it different from others in the same industry; and

For reference only

• give it a unifying focus.
Operational issues (such as effectiveness, efficiency, business transformation and process
improvement) are about doing things better, faster or cheaper. The processes that are being
improved are operational issues, which are designed to achieve strategic objectives.

Key terms
This chapter features explanations of the following ideas:

Frictional cost Insurance value Insurance value Mission statement

chain proposition
Strategic theme map Strategic Strategy formation Value chain
underwriting
Value chain analysis Values statement Vision statement

A What is strategic underwriting?

Strategic underwriting means identifying the overall underwriting aims of an insurance
organisation and deciding how those aims will be achieved. In order to assess the aims,
all relevant issues need to be studied, analysed and understood to establish how they will
affect the proposed underwriting strategy.

An underwriting strategy typically covers a long timescale – usually a three- or five-year

period. The strategy is used internally within the organisation, and externally with regulators
and other key stakeholders such as reinsurers or capital providers. Some organisations
consider a strategy document to be commercially sensitive and restrict its circulation to
senior management. They might request that third parties sign a non-disclosure agreement
(NDA) before releasing it.
Parts of an insurer’s strategy might be incorporated into its vision statement, annual report
and accounts or its advertising strapline. This means that certain segments of the strategy
would be in the public domain. An insurer may do this to help differentiate or distinguish it
Chapter 1 Overview of strategic underwriting 1/3

Chapter 1
from others, attract customers and to reinforce the essence of the company to employees
and other stakeholders.
This study text takes a holistic view of underwriting to include functions that may be located
in different departments or divisions within insurance organisations. Examples of these
functions include risk and compliance, reinsurance, distribution and marketing. No text on
underwriting would be complete without mention of claims, although discussion is restricted
to a minimum.

B Strategy formation
The senior management team will generally meet off-site once a year to review strategy or
perhaps to develop a new strategy. A start-up company would probably develop its strategy
during preliminary discussions between the founders. Figure 1.1 shows the ‘design school’
model of strategy formation, which illustrates the process of creating a strategy.

Figure 1.1: ‘Design school’ model of strategy formation

External Internal
appraisal appraisal

Threats and Strengths and

opportunities weaknesses of
in environment organisation

Key success Distinctive

factors competences

For reference only

Creation of
Social strategy Marginal
responsibility values

Evaluation
and choice
of strategy

Implementation
of strategy

Source: Mintzberg, H. (2000) The Rise and Fall of Strategic Planning. London: Financial
Times Prentice Hall. © Pearson Education Limited 2000.

As part of strategy formation, management should address basic questions, for example:
• What business are we in and why?
• What are the key issues we face in our business?
• How can we best compete?
The following sections explore each of these questions.
Chapter 1 1/4 995/January 2023 Strategic underwriting

B1 What business are we in and why?

The foundations on which strategy is built are the organisation's purpose, aspirations and
values. These can be reflected by an organisation's mission statement, vision statement
and values statement.
Mission statement
A mission statement briefly defines why the company exists – its purpose. Here are two
examples of mission statements, from Amica Mutual Insurance Company and Vienna
Insurance Group:

Mission statement: Amica Mutual Insurance Company, USA

Our mission is to create peace of mind and build enduring relationships.
Source: Amica Mutual Insurance Company, www.amica.com/en/about-us/mission-
statement.html

Mission statement: Vienna Insurance Group (VIG), Austria

Our Vision
We want to be the first choice for our customers. Our stakeholders see us as a stable and
reliable partner. This enables us to consolidate our position as the leading insurance
group in Austria, Central and Eastern Europe.
Our Mission
We stand for stability and competence in the field of risk protection. We use our
experience, know-how and diversity to move closer to our customers. We see it as our
responsibility to protect the values that matter to our customers.
Our Values

For reference only

Diversity
Customer proximity
Responsibility
Our Promise
We enable customers to live a safer and better life: Protecting what matters.
Source: Vienna Insurance Group, www.vig.com/en/vig/group/mission-statement.html

As you can see from just these two examples, mission statements can be quite different.
Amica’s mission statement does not mention the word insurance, while VIG’s mission
statement mentions being an insurer just once.
Vision statement
Most insurers have a vision statement that sets out their long-term objectives. A vision
statement is a high-level aspirational tool used to identify and communicate the company’s
goals and objectives. A carefully crafted vision statement helps internal decision-makers by
providing guidance on future direction.
We discuss vision and purpose again in Corporate strategy on page 5/5.
Values statement
The core values of insurance organisations are individual and varied, as may be expected.
Here is a values statement from Munich Re:
Chapter 1 Overview of strategic underwriting 1/5

Chapter 1
Values statement: Munich Re, Germany
We strive to exemplify our core values that shape our culture and how we conduct
business. It expresses the approach we take to achieve our mission and vision – and how
we treat each other and our clients along the way:
• Passion to compete
• Accountable
• Agile and adaptive
• Collaborative
• Respectful
• Leverage diversity
Source: Munich Re, www.munichre.com/us-life/en/careers.html#1864827619

Be aware
When setting or developing underwriting strategy it is vitally important to align this strategy
with the mission, vision and values statements of your organisation.
It is worth noting that many companies will now reflect their environmental, social and
corporate governance (ESG) values in its mission, vision and values statements. There is
a trend to have less formal categorisations of these areas. Fundamentally, the statements
are still there but they are presented differently. For example, take a look at the AIG about
us page: https://www.aig.com/about-us

Consider this…
What are your organisation’s purpose, aspirations and values? How are they expressed?

For reference only

Research exercise
Examine how your company’s mission and vision statements link to the underwriting
strategy.

B2 What are the key issues we face in our business?

The company can analyse the internal and external issues it faces using strategic
management tools. We describe these tools in Strategic management tools on page 3/3
and discuss how they are used in Using strategic management tools on page 3/12. The
outcome of this analysis will be a number of issues that the strategy must address. Issues
could range from whether the company should target international business to whether it
should set up a direct channel separate from the existing broker channel. Alternatively the
issues might be internal, such as whether the company requires a new underwriting system
to allow controllable scale to be built or whether it should hire underwriters with more
experience in the future in order to achieve its strategic objectives.

B3 How can we best compete?

The next step in the strategy formation process involves drafting the strategy itself, which
involves writing a statement describing what has been decided and how it will be achieved.
The document may reference the models used to analyse issues and debate options; for
example, ‘we looked at X and Y, but for these reasons we decided to opt for X’. An
underwriting strategy should address the core issues listed here (and may appropriately
address other issues as well):
• What is the value proposition that will differentiate our company from our competitors?
• What markets will we target?
• What customers in those markets will we target?
• What distribution channels will we use?
• What lines of business will we underwrite?
• What is our underwriting risk appetite?
• What is our competitive advantage?
Chapter 1 1/6 995/January 2023 Strategic underwriting

• What competencies do underwriters need?

• What technology will be employed in the underwriting toolbox?
• What does underwriting need from other business functions?
At this stage, the strategy needs to be sliced into strategic goals and then again into strategic
objectives and measures, ready to be communicated to the business and its employees. The
written plan (or map) with goals, objectives and measures is often complex and not always
easy to comprehend. Harvard Business School has developed a simplified strategy map that
is easier to use called a ‘strategic theme map’. Figure 1.2 shows Harvard’s strategy map,
created by Kaplan and Norton, which is organised into three vertical strategic themes and a
horizontal theme to cluster the learning and growth objectives.

Figure 1.2: Harvard generic strategy map: mapping strategic themes

Increase return on capital

Financial Increase revenues in

perspective Improve existing segments Grow revenues in
productivity and markets new products and
services

Improve operating Grow high-value Accelerate product

quality and efficiency customer relationships innovation

Customer Be a leader in quality Provide valued Introduce innovative,

perspective and reliability service, applications high-performance
expertise and support products and solutions

For reference only

Process
perspective
Improve supply chain Optimise customer Excel at technology,
efficiency and profitability product development
effectiveness and life-cycle
Expand channels, management
Improve quality, cost offerings and markets
and flexibility of
operating processes Build and maintain Identify next-generation
strong customer market opportunities
relationships

Learning Create a high-performance culture

and growth
Expand and build Develop leadership and Enable and require
perspective
strategic skills, an execution-driven continuous learning
capabilities and culture and sharing of
expertise knowledge

Source: Kaplan, R. S. and Norton D. P. (2008) ‘Mastering the management system’,

Harvard Business Review, 86(1), pp. 62–77.

The advantages of strategic themes are:

• Business units can customise each theme to fit with local conditions and their situation
while remaining within the overall strategy.
• The vertical themes lend themselves to simultaneously managing short-, mid- and long-
term objectives.
• The theme approach allows for coherent, rather than isolated and disconnected,
operation of objectives.
An insurer may have one overall strategic underwriting map, which is linked to strategic
underwriting maps for each underwriting unit.
Chapter 1 Overview of strategic underwriting 1/7

Chapter 1
B4 Underwriting platforms and operating structures
An underwriting function can exist within a number of different platforms and operating
structures. Historically, insurance companies, mutual insurance companies and Lloyd’s of
London syndicates have been the norm. Some were formed two or three hundred years ago
and a number of them, or their successors, are still in existence.
The one thing that they all have in common is that they were formed for a specific purpose.
The Marine and General Mutual Life Assurance Society was incorporated in 1852 as a life
insurance provider for seamen. When incorporated, drinking water was considered
dangerous and so seamen who abstained from alcohol were seen as a greater risk. Another
example is the Sun Fire Office, which was formed in 1710 to insure properties against fire
following the Great Fire of London in 1666.
Today it is unusual for insurers to restrict their target market to one customer segment or
their business to a single product line. These monoline insurers have specialised knowledge
of their target market, but they do not have diversification.
Diversification means not investing everything in one area, whether by type of business,
geographically and so on. Diversification is a risk management technique that, properly
executed, can reduce the potential for financial failure in the event that one line of business
suffers catastrophe losses. While diversifying into new areas does bring risk, it also spreads
the risk by reducing the dependency of the monoline insurer on a single product line or
geographical region. It is important to understand and model the degree of correlation
between product lines to ensure that exposure is kept within the insurer’s enterprise risk
management (ERM) risk appetite and other key performance indicators (KPIs).

Research exercise
Identify a current monoline insurer and examine its business model.

For reference only

In more recent years the number and style of underwriting platforms and operating structures
have grown to include:
• managing general agencies (MGAs);
• captives;
• banks;
• joint ventures;
• alliances;
• affinities;
• aggregators (price comparison websites);
• bancassurance; and
• brandassurance.

B5 What will insurers look like in the future?

Many insurance organisations publish future visions. Lloyd’s Vision 2025 details its vision to
be the global centre for specialist insurance and how it will move into emerging markets,
implement market modernisation initiatives and improve internal process efficiency. However,
once again we do not find an answer to our question in this paper.
What we do know is that the insurance industry is attracting increased attention from
alternative capital and entities that, at least on the surface, have no attachment to insurance
at the moment. Pension funds are a classic example of a relatively new supplier of third-
party insurance capital. To date, pension funds have preferred to support new or existing
insurers rather than own and operate an insurer themselves.
Disruptive technology
In chapter 2, we look at how technology is changing rapidly and how the internet allows
target operating models (TOM; a high-level representation of how a company is organised)
to be redesigned as the value chain is disaggregated (broken up into its activities or
processes). Many of the clearest examples of early adopters of disruptive technology don’t
involve insurance. Refer to Value chains on page 1/12 for more on value chains and Target
operating models (TOMs) on page 5/18 for more on TOMs.
Chapter 1 1/8 995/January 2023 Strategic underwriting

Airbnb and JUST EAT are examples of effective use of disruptive technology. In both cases,
the companies connect the customer and the supplier, which is where the majority of value
and profit is.

Example 1.1
A slightly more traditional example is the InterContinental Hotels Group (IHG), a large
hotel chain. In fact, IHG states:
'Since 2003 we have completed the sale of almost 200 hotels as part of our move to an
asset-light business model. In a few instances, we do still own hotels through recyclable
investments in order to drive the growth of our brands and expand our presence in key
markets.'
Its business is built on the technology systems and intellectual capital at the heart of its
business model rather than the physical buildings.
Source: www.ihgplc.com/about-us/how-our-business-works

Disruption to the insurance industry

We can say that insurance requires the:
• ability to collect, manage and interpret data;
• availability of capital; and
• technical skills.
Some companies such as Google have plenty of the first two and could easily acquire the
latter, so pose a serious threat to incumbent insurers.
The former chief executive officer of Lloyd’s of London, Inga Beale, gave a speech to the
Financial Times Future of Insurance conference in 2015 in which she warned that insurers

For reference only

are in danger of being ‘Uberised’ as technology allows companies from Google to Walmart to
undermine the insurance sector’s role of managing risk. She said that big data analysis
threatened to disrupt the insurance industry just as Uber, the ride-hailing mobile app, has
shaken the taxi trade.

On the Web
McKinsey, Insurance 2030 —The impact of AI on the future of insurance (2018),
www.mckinsey.com/industries/financial-services/our-insights/insurance-2030-the-impact-
of-ai-on-the-future-of-insurance.

Insurers will have to embrace rapid change or risk being replaced by other entities. These
entities could be any organisation that holds large customer databases, such as social media
networks and mobile applications. Fitbit has more detailed information on people’s fitness
(activity, exercise, weight, food intake and sleep behaviour) from the activity logs of its global
users than each individual’s doctor.
Alphabet Inc. (Google) has reportedly been keen to move into the insurance industry for
some years. It already has extensive data on, and the ability to communicate with, millions of
current users. In 2011 Google bought the UK aggregator BeatThatQuote.com and in 2015,
Google Compare started selling auto insurance in the USA – although this was discontinued
within a year.

Consider this…
If the Virgin brand can make inroads into insurance, what would happen if Amazon or
Apple announced that they were going to launch insurance products?

When large volumes of data, a trusted brand and the latest technology are brought together,
it is easy to see how a potential new entrant might quickly carve out a share of the market.
They would have no need to build an extensive branch network, involve intermediaries or
even have a post room.
If the insurance industry does not adapt quickly to this changing world and transform itself,
disruptive competition from non-traditional sources, such as Google, Apple and innovative
Chapter 1 Overview of strategic underwriting 1/9

Chapter 1
fintech start-ups, will emerge as the ‘go to’ insurers of the future. Interestingly, a 2016
European survey by Fujitsu on consumer interaction with banks and insurers found that one-
fifth of those surveyed said they would buy banking or insurance services from potential
disruptors like Google, Amazon or Facebook.

Consider this…
Have you thought about how and why the organisation you work in began? Think about
these questions:
• Why does your company not transact particular lines of business?
• Why was your company domiciled in a certain country?
• Why does your company write business in some countries and not others?
• Importantly, how different might your company be if it was formed today as opposed to,
for example, 100 years ago?
The answers to some questions may be obvious, but you may need to research others.
You could also consider the following points:
• What would you include in your presentation if you were pitching to a potential capital
provider?
• How would you structure your business case in order to convince a sceptic to back yet
another insurer in an already crowded marketplace?
• Could you convince the capital provider to part with sufficient capital to enable you to
launch the underwriting company of the future?
You would need to clearly articulate the underwriting strategy to convince your potential
capital provider to support this new venture.

For reference only

Critical reflection
Strategic underwriting is not just for start-up situations. Consider other situations where
there could be a need for a strategic underwriting review.

C The insurance value proposition in the

global context
Insurance is at the heart of communities around the world. It lets people plan for the future
with confidence and helps them, usually financially, if accidents or disasters occur. The
insurance value proposition is the value placed on a policy purchased by a customer –
and by extension, the value of all policies purchased around the world. In this context, value
does not mean the price of the policy. It means the value perceived by individual customers
relating to the insurance product, service and advice. One customer may feel he can sleep
soundly now that he has bought his policy; another may now be able to carry on her trade
after having bought a certain policy. An unlucky customer may suffer a loss and have the
claim paid promptly, prompting them to consider that insurance prevented financial disaster.
The insurance value proposition has a social and economic impact on insurance customers,
communities and society. Many insurers use a value proposition statement to demonstrate
how their product or service will add value to the customer.
The first part of the insurance value proposition is the process of risk transfer, transferring
customers’ risks to insurers in exchange for payment of premium. This is the part of
insurance that customers primarily relate to, as they buy a policy that will make a payment in
the event of a named peril causing loss or damage.

C1 Insurance is vital for global development

The second, perhaps less obvious, part of the insurance value proposition is the monies that
insurers invest into the communities they serve. Insurers are capital-intensive and this capital
is invested into different types of investment vehicle – including government bonds, stocks
and shares, and infrastructure projects around the world – in order to generate a return.
Insurers provide a significant amount of capital to the global economy, which generates jobs,
Chapter 1 1/10 995/January 2023 Strategic underwriting

creates growth and stimulates economic development. The insurance industry directly
employs a large number of people, as well as creating work and wealth for service providers.
Insurance is vital, as financial institutions will not lend for trade and industry purposes unless
insurance is in place. It is said that insurance is the oil that lubricates the economy. In Islamic
insurance (Takaful) on page 2/42, we discuss how the lack of insurance that is compliant
with Shariah (Islamic law) has held back economic development in Muslim countries, and
how suitable insurance is needed to enable Islamic investment around the world.

C2 Insurance must remain relevant

For insurance to thrive and prosper, it needs to find ways to remain relevant by adapting to
current exposures and continuing to meet the needs of customers. Unless the insurance
industry innovates, it will be replaced by other mechanisms introduced by new entrants or
non-traditional sources.
Product innovation can be an excellent way of obtaining premium income without necessarily
having to compete with existing insurers. If an insurer launches a product for a risk that
customers cannot currently insure for, then the insurer is competing on a differentiated
product rather than the usual lowest common denominator – price. In this way, even mature
insurance markets can provide growth. There is a widely held view that first-time buyers of
new products are less price sensitive than buyers of traditional covers. Making the first move
in a new area of risk or product can be outside many insurers’ comfort zones but, carefully
designed and executed, the prize is a market-leading competitive advantage.

Research exercise
Consider if there have been any unique changes to the insurance products on offer in
today's market.

For reference only

Over the last 20 years, many risks have left the insurance market. The risks haven’t
disappeared; some have been retained on corporate balance sheets – uninsured – and in
the UK, the Government has assumed others. Examples of cover assumed by the UK
Government include Pool Re and Flood Re for terrorism and flood cover, respectively. If
insurers can find a way to provide cover for these risks, then even mature markets could
expand and grow.
C2A Insufficient limits available for some commercial risks
Insurers generally have sufficient capacity to satisfy demand for personal insurances.
However, increasingly, some commercial customers are unable to buy as much insurance as
they require in some classes of business.
An example might be a single project for a multi-billion dollar dam construction situated near
a heavily populated area. Suppose a limit in excess of US$1bn is sought. As most insurers
would classify this project as ultra-high hazard, brokers might find that they can only obtain
limits of US$250m. In this event, the financiers may decide not to back the project due to the
lack of sufficient insurance. If insurers fail to meet the needs of their largest customers, those
customers will look elsewhere and seek other means to satisfy their needs.
On one level, commercial insurance is necessary to provide balance-sheet protection to
buyers. Insurance allows the buyers to carry less capital as insurance transfers the risk from
the buyers’ balance sheet to the insurers’. The buyers are essentially renting capital from
insurers. In the construction project mentioned earlier, the owners might decide to retain the
first US$250m as an operational expense, but buy a limit of US$1.25bn to cover a potential
loss of US$1.5bn. Clearly, the needs of this major buyer of insurance are not being met as
the insurance market is only offering to insure the amount that the owners are willing to
retain uninsured.

Refer to
See Alternative risk transfer on page 2/39 for more on ART

There is a certain irony that this situation can occur even as a flood of new capital is coming
into the industry. The core of the issue would appear to be insurers’ appetites and their
traditional responses to certain situations rather than the quantum of capacity. The capacity
Chapter 1 Overview of strategic underwriting 1/11

Chapter 1
issue is one that the insurance industry needs to find a solution for before business is lost to
alternative risk transfer (ART) – a wide range of mechanisms to transfer risk without
purchasing a traditional insurance product. If the industry cannot remain relevant to
customers, then it will not have a bright future.
C2B Low-income customers
Another group of customers whose needs are not being met by traditional insurance is low-
income customers. According to the United Nations, nearly half the world’s population
survives on less than US$2 a day. These low-income people, the majority of whom live in
developing countries, need insurance specifically tailored to their needs at proportionate
premiums.
Microinsurance provides affordable cover for relevant specific perils that might include illness
or accident, crop failure and loss of livestock. Insurance is critical for the 3 billion people
living in poverty, yet microinsurance is considered to be a relatively new concept and is not
commonplace. Aon Benfield’s 2015 Insurance Risk Study identified microinsurance – with a
potential 4 billion new customers – as a growing market over the next five to ten years.
While this type of insurance supports individuals and families, the cumulative effect also
helps a country’s economy become more resilient and capable of growth and prosperity.
This has been a key focus of the FCA in the UK for a number of years and the new
Consumer Duty will also have an impact on this, although as yet we do not know
exactly how.

On the Web
For further information on the FCA Consumer Duty please refer to: www.fca.org.uk/
publications/policy-statements/ps22-9-new-consumer-duty

For reference only

C2C Risk managers’ concerns
A 2015 survey published by the Association of Insurance and Risk Managers in Industry and
Commerce (Airmic) revealed that UK risk managers were struggling to buy cover for some of
their biggest exposure concerns. The survey revealed that reputational risk was the number
one worry for risk managers; cyber risk also figured high in the list of concerns. Of the risk
managers surveyed, 93% did not buy cover for reputational risk, citing lack of availability or
inadequate cover. Approximately two-thirds of UK risk managers said they were unable to
buy insurance for loss or theft of personal data and business interruption, largely because of
inadequate cover and high costs. As an industry, insurance has to learn to be agile,
responsive and timely in meeting its customers’ needs.

C3 Frictional cost
When an insurance product is priced, only a proportion of the premium is allocated for
claims. Typically it might be in the region of 60%, dependent on actuarial best estimates.
Like any manufactured product, the price of the product must cover the costs of design,
manufacture, sales, marketing and distribution. Insurance is no different.

The difference between the estimated cost of claims and the total premium is the
frictional cost. The term frictional cost refers to the total amount to be paid for a
transaction. This includes all of the costs such as taxes, interest rates, research and
development expenses, and other similar items. Frictional cost can also be defined as the
direct and indirect costs associated with the transaction.

The insurance distribution chain can involve a number of intermediaries, particularly for
international business. The commission percentage varies between different lines of
business, but will typically be around 20%. In addition to commission there may be market
subscription fees and profit commission. Insurance frictional costs are much higher than
frictional costs in the capital markets. Unless frictional costs in the insurance value
proposition are reduced, ART will continue to erode traditional markets.
Chapter 1 1/12 995/January 2023 Strategic underwriting

D Value chains
A value chain is a strategic tool, which is used to assist in the consideration of each function
or activity undertaken in a specific industry or business within that industry. It is important to
establish the cost and the part played by each function or activity involved in the
manufacture/delivery of a product or service. At the simplest level, each business must
understand its cost base in order to allow a margin for profit.

D1 What is a value chain?

The concept of value chains became recognised following the publication of Michael Porter’s
influential book Competitive Advantage in 1985. This book introduced a new way of
understanding what a company does.

Example 1.2
What is a value chain?
The concept was originally developed for the manufacturing industry, but it has universal
application.
‘The value chain identifies the separate activities, functions and business
processes that are performed in designing, producing, marketing, delivering,
and supporting a product or service.
The chain of value-creating activities starts with the raw materials supply and
continues throughout parts and components production, manufacturing and
assembly, wholesale distribution, and retailing to the end user of the product or
service.’
Source: Michael Porter.

For reference only

The value chain can be applied to a whole industry or to an individual company in it.
Source: Atkins, D. (2016) ‘Introduction to the Value Chain’ [PowerPoint presentation].
London: Cass Business School.

The value chain divides a company into each of the separate activities it performs. This
enables the company to analyse these activities to identify which ones add value to the end
buyer. Porter used his theory on manufacturing industries, but it can be used successfully in
any industry. The theory can be used at an industry or an individual company level.
The value chain has become a powerful strategic management tool. The basic theory is that
there are four types of business beneath the surface of most companies and they each have
different drivers. These are:
• financial capital: driven by return on capital employed (ROCE);
• manufacturing: driven by economies of scale;
• intellectual capital: driven by know-how and speed to market; and
• distribution: driven by economies of scope.
Historically, companies were vertically integrated, which means the company owned and
operated all parts of the value chain. This integration was perhaps thought necessary
because of the difficulties of successfully dealing with time and distance in the era before
global communications and the internet. In Disaggregation of the value chain on page 2/23,
we look at how technology – in particular, internet technology – has resulted in value chains
being disaggregated. Industries such as newspapers, vehicle manufacturing and IT were
some of the first to embrace disaggregation. Insurance has been slower to disaggregate,
although life insurance is more advanced than general insurance.
While modern communications and technology allow disaggregation to occur, the reason
why disaggregation is happening is that the drivers of ROCE, scale, know-how, speed and
scope can conflict with each other, resulting in compromise. Each part of the business has its
own needs and priorities. When they are all in the same company, these needs have to be
addressed and balanced with other parts of the company. The result is management
compromise and trade-offs. Use of the value chain tool enables a company to see whether
another company, which has the required specialist skills, might better perform a part of the
business.
Chapter 1 Overview of strategic underwriting 1/13

Chapter 1
A company’s value chain is linked to the value chain of its suppliers and its customers.
Porter coined the term ‘value system’ for this series of value chains.

D2 Value chain analysis

Value chain analysis is useful for working out how a company can maximise value for its
customers. The analysis helps define a company's core competencies and the activities in
which it has a competitive advantage. Competitive advantage can derive from being more
cost efficient or unique in what a company does or how it does it.
Value chain activities are linked or interconnected to other activities a company undertakes.
Changing one activity may well have an effect on other activities – for better or for worse.
The company needs to document and understand these links before it takes any action.
Value chain analysis involves breaking down the value chain and critically examining each
activity by asking questions such as:
• How much value does it add?
• Is it the best practice?
• Is it world class?
• Do we want that part to be world class?
• Is there another company that could do it better or cheaper?
• Should we cease doing a particular activity?
• Would disaggregation damage or improve our business?

D3 Insurance value chain

Often we visualise the insurance industry value chain in the way that the industry is typically
structured. Figure 1.3 illustrates this.

For reference only

Figure 1.3: The insurance industry value chain

Payment of risk premium

Risk transfer

Insured Broker Insurer Reinsurance Reinsurer Reinsurance Retro-

broker broker cessionaire
Ceding Ceding
commission commission

Commission Commission Commission

Advice Advice Advice

Payment of loss

Source: Adapted from Benson, J. (2013) ‘The Convergence of Third Party Capital and the
Reinsurance Industry’, EMBA thesis, Cass Business School, London.

For strategic purposes, it is more useful to consider the industry using Porter’s description of
activities.
Chapter 1 1/14 995/January 2023 Strategic underwriting

The insurance industry does not usually describe itself as a manufacturer; however, it makes
(or manufactures) insurance products using the raw materials of financial and intellectual
capital. Of course, insurance products are unlike many typical manufactured products, such
as white goods, but the activities of manufacturing, intellectual capital and distribution are
common to virtually all industries.
We can see from figure 1.4 that in strategic terms the insurance value chain consists of:
financial capital, manufacturing, intellectual capital, distribution and the customer. The driving
forces discussed in What is a value chain? on page 1/12 are also illustrated.

Figure 1.4: The insurance value chain in strategic terms

Driver Insurance examples

Financial
ROCE Holding company
capital

Policy and claims processing/administration, front-line

Manufacturing underwriting and claims notification payment processes,
Scale
procurement

Intellectual Technical underwriting and claims management, risk

capital Know-how management, product design and pricing

Intermediary management, call centre and internet

Distribution Scope presentation and design, marketing, CRM, sales
management

For reference only

Customer

Source: Atkins, D. (2016) ‘Introduction to the Value Chain’ [PowerPoint presentation].

London: Cass Business School.

Insurers can be structured in a number of different ways, but the essential functions will be
present (although they may be housed in differently named departments).
D3A Financial capital
Financial capital is normally held in the risk-bearing entity – the insurer – although even this
arrangement can be subject to variations. For example, Lloyd’s of London syndicates hold
some capital in the syndicate with additional capital (funds) held at Lloyd’s. The driver of
financial capital is the ROCE.
D3B Manufacturing
‘Manufacturing’ is carried out in various departments. These departments might include
underwriting, policy administration and claims. The driver is scale. The theory of economies
of scale is that there is a cost advantage of producing more goods, or in this case insurance
policies, because the fixed cost base is spread out over more policies. The cost per policy
can also reduce if variable costs are reduced by operational efficiencies.
D3C Intellectual capital
Intellectual capital would normally reside in product research and development, technical
underwriting, risk management, pricing, advanced analytics, actuarial, and underwriting and
claims management. The most valuable part of insurers’ intellectual capital is the experience
and expert knowledge of employees. The driver is the employees’ knowledge, or know-how.
D3D Distribution
Distribution involves all functions related to sales and servicing of customers. These
functions include broker relations, affinity partners, call centres, marketing, digital and social
media, customer relationship management and direct sales channels (including online and
mobile). The driver is economies of scope.
Chapter 1 Overview of strategic underwriting 1/15

Chapter 1
D3E Customer
The customer is a vital part of the insurance value chain, as no insurance organisation can
survive without any customers.

Research exercise
Draw a diagram of your employer’s value chain (or the value chain of a company with
which you are familiar).

Summary
The main ideas covered by this chapter can be summarised as follows:
• Strategic underwriting means identifying the future overall underwriting goals and
objectives and how these will be achieved.
• There are many different platforms and structures within which an underwriting function
can exist.
• Many insurance organisations have published future visions including the Insurance
Industry Working Group (IIWG) and Lloyd's.
• Insurers will have to embrace rapid change or risk being replaced by other entities.
• Insurance is vital for global development.
• Insurance must remain relevant.
• Growth can be generated from new products designed to insure customers' risks that are
currently uninsured.
• Alternative risk transfer and new entrants will continue to erode the volume of premiums
in traditional markets unless insurers do more to meet the needs of customers.

For reference only

• The value chain divides a company into each of the separate activities it performs.
• Value chain analysis is useful for working out how a company can maximise value for its
customers.
• The insurance industry manufactures insurance products using the raw materials of
financial and intellectual capital.
Chapter 1 1/16 995/January 2023 Strategic underwriting

Additional reading
Aon Benfield (2015) Insurance Risk Study: Global Insurance Market Opportunities.
London: Aon Benfield Inc. Available at: https://bit.ly/2JsgkWD.
Bates, I. and Atkins, D. (2008) Management of Insurance Operations. London: Global
Professional Publishing.
Benson, J. (2013) 'The Convergence of Third Party Capital and the Reinsurance Industry',
EMBA thesis, Cass Business School, London.
Gray, A. (2015) 'Insurers in danger of being "Uber-ised", Lloyd's chief warns', Financial
Times, 30 June. Available at: https://on.ft.com/2RpVQRe.
Insurance Industry Working Group (2009) Vision for the insurance industry in 2020.
London: HM Treasury. Available at: https://bit.ly/2qirMeF.
Kaplan, R. S. and Norton D. P. (2008) 'Mastering the management system', Harvard
Business Review, 86(1), pp. 62–77.
Koch, R. (2011) The Financial Times Guide to Strategy: How to create, pursue and deliver
a winning strategy. London: Financial Times Prentice Hall.
Lynch, R. (2015) Strategic Management. London: Pearson.
Porter, M. E. (1996) 'What is Strategy?' Harvard Business Review, 74(6) (November–
December), pp. 61–78.
Porter, M. E. (1985) Competitive Advantage: Creating and Sustaining Superior
Performance. New York: Free Press.
Porter, M. E. (1980) Competitive Strategy: Techniques for Analyzing Industries and
Competitors. New York: Free Press.

For reference only

Zook, C. and Allen, J. (2010) Profit from the Core: Growth Strategy in an Era of
Turbulence. Harvard Business Review Press.
 Chapter 1 Overview of strategic underwriting 1/17

Chapter 1
Self-test questions
1. Discuss how microinsurance benefits low-income populations.

2. What are the different businesses in the value chain and their drivers?

3. Why is value chain analysis a useful strategic management tool?

4. Describe the five business functions in the insurance value chain.

5. What is the difference between a vision statement and a mission statement?

You will find the answers at the back of the book

For reference only

For reference only
 2

Chapter 2
Key global
insurance issues
Contents Syllabus learning
outcomes
Introduction
A Regulation 1.1
B Data 1.1
C Technology 1.1
D Climate change 1.1
E Industry consolidation 1.1
F Other significant global insurance issues 1.1
Summary

For reference only

Self-test questions

Learning objectives
This chapter relates to syllabus section 1.
On completion of this chapter and independent research, you should be able to:
• identify key global insurance issues; and
• explain how the impact they have on the global insurance market could be analysed.
 2/2 995/January 2023 Strategic underwriting

Introduction
If you ask a number of chief executive officers (CEOs) which key issues have their boards
Chapter 2

undivided attention or are causing them sleepless nights, you will receive a variety of
responses reflecting the specific characteristics of their business. However, it is likely there
will be some consistent issues, such as:
• regulation;
• data;
• technology;
• environmental, social and governance (ESG) impact; and
• industry consolidation, competition and globalisation.
Indeed, if you are able to probe in more detail, the list may include:
• emerging risks;
• changes in political, economic, social and legal landscapes;
• the loss of market share to alternative risk transfer (ART);
• Islamic insurance (Takaful); and
• the insurance industry’s reputation.
In this chapter we highlight and discuss a core list of key global insurance issues that have
broad applicability within the insurance industry. We recognise that due to the rapid pace of
change and circumstances specific to a particular insurance organisation, this is a non-
exhaustive list.
Students should monitor changes to these key issues during their research and be
aware that:

For reference only

• new legal cases, legislation or other developments could impact these issues; and
• different terms may be used for the same or similar issues; for example, the term
‘environmental’ might be used to mean climate change including extreme weather events,
water supply crises, flooding, storms and cyclones and rising greenhouse gases.
The key issues that insurers face are always changing, in just the same way that the
communities insurers serve are always changing.

Research exercise
Can you ask your chief underwriting officer (CUO) what their current key insurance issues
are and why?

Key terms
This chapter features explanations of the following ideas:

Accountability Alternative risk Analytics Big data

transfer (ART)
Climate change Consolidation Convergence Data privacy
Derivatives Disaggregation Emerging risks Globalisation
Green issues Islamic insurance Legacy systems New entrants
(Takaful)
Regulation Reputation Sanctions Technology
innovation
Chapter 2 Key global insurance issues 2/3

A Regulation
In the UK, financial services regulation is the responsibility of the Prudential Regulation

Chapter 2
Authority (PRA) and the Financial Conduct Authority (FCA), which together create a twin
peaks regulatory structure. Figure 2.1 illustrates the UK regulatory structure.

Figure 2.1: UK regulatory structure

Bank of England
Financial Conduct
Authority (FCA)
Monetary Policy Prudential Financial Policy Enhancing confidence in the
Committee (MPC) Regulation Committee (FPC) UK financial system by
Setting interest Committee (PRC) Identifying action to facilitating efficiency and
rates. Taking control of the remove or reduce choice in services, securing an
PRA’s most systemic risk. appropriate degree of
important financial consumer protection and
stability and protecting and enhancing the
supervision policy integrity of the UK financial
decisions. system.

Prudential Regulation Authority (PRA)

Enhancing financial stability by promoting the safety and soundness
of PRA-authorised persons, including minimising the impact of their
failure.

Prudential regulation Conduct regulation Prudential and

conduct regulation

For reference only

Prudentially significant firms: Investment firms and
banks, building societies, credit unions, insurers and some investment exchanges, other financial
firms. services providers including
independent financial advisers
(IFAs), investment
exchanges, insurance brokers
and fund managers.

Changes to the regulatory structure

The Bank of England and Financial Services Act 2016 modified the Financial
Services Act 2012, which established the twin peaks approach. The 2016 Act puts the
Bank of England at the heart of UK financial stability by strengthening the Bank’s
governance and ability to operate more effectively as ‘One Bank’. The PRA became part
of the Bank, ending its status as a subsidiary, and a new Prudential Regulatory Committee
(PRC) has been established. The PRC operates alongside two other Bank committees,
namely the Financial Policy Committee (FPC) and the Monetary Policy Committee (MPC).

The PRA and the FCA regulate insurers in respect of prudential matters and conduct matters
respectively. Lloyd’s regulates managing agencies and their syndicates, in addition to the
PRA and FCA.
Brokers, unlike insurers, are not subject to dual regulation and are solely regulated by the
FCA. Some brokers also act as managing general agents (MGAs), or hold delegated
underwriting authority for insurers, leading to potential conflicts of interest where a party has
obligations to more than one principal. This is an issue that still has to be fully addressed by
regulators. It is the insurers who have ultimate responsibility to the regulators for making
sure their business is compliant.
 2/4 995/January 2023 Strategic underwriting

Be aware
995 Strategic underwriting is not an insurance regulation unit. A level of knowledge and
understanding of the UK regulatory framework is assumed in this chapter. Nevertheless, a
Chapter 2

more advanced knowledge of the regulatory regime is needed in order to successfully

operate at a strategic level within insurance. This chapter aims to identify key areas of
regulation of particular relevance to students of unit 995.
Refer to chapter 10 in IF1 Insurance, legal and regulatory, chapter 1 in M80 Underwriting
practice or chapter 1 in 960 Advanced underwriting for more information on the role and
impact of insurance regulation.

A1 Effect of the global financial crisis

Regulation of the insurance industry has increased since the global financial crisis in 2007–
08. Regulators were concerned that the insurance sector could fail in a similar way to the
banks. As a consequence, regulators have taken a similar approach to some areas of
insurance, as they did to banks. The result is not only more insurance regulation but also
that the increase has arguably made the use of capital more expensive. Regulators largely
ignored the fact that the business models for banks and insurance services – and, therefore,
the risks – are significantly different.
However, failure of insurance companies is not new: the insurance industry can point to a
pattern of organised ‘run offs’ which have in many cases had limited or no impact on the
market. On the other hand, Independent Insurance is an example of a UK insurer that went
into provisional liquidation in June 2001 causing hundreds of jobs to be lost and leaving
shareholders, policyholders, claimants and brokers as creditors.

Refer to

For reference only

Regulatory risk is considered in Identification of regulatory risks on page 2/5

Prudential regulation is not the only change to the insurance industry. Conduct issues are
also under scrutiny, with increased regulatory expectations as a result of enforcement action,
thematic reviews and other supervisory work.

A2 International sanctions
Sanctions legislation affects the risks and the individuals and organisations underwriters can
insure. A breach of sanctions can create both civil and criminal liability, exposing insurers to
the risk of prosecution. Insurers are forbidden to write any business subject to a sanctions
regime and have to comply with FCA requirements on financial crime by putting in place
systems and controls to check for designated persons. Complying with sanctions affects
both underwriting and claims.
The United Nations (UN) drive international sanctions legislation. On occasion, the UK
government and/or other overseas governments may act unilaterally to impose sanctions.
The purpose of international sanctions is to put pressure on regimes to, for example, support
democratic change, preserve or encourage human rights, prevent the proliferation of nuclear
weapons, fight terrorism or to restore peace to a region.
In the UK, Her Majesty’s Treasury (HM Treasury) administers sanctions legislation. The US
government imposes similar financial and trade sanctions which are administered by the
Office of Foreign Assets Control (OFAC). Insurers’ systems need to link with the lists
published by HM Treasury and OFAC in order to check against prospective policyholders,
policyholders, claimants and organisations and to monitor changes as each list is updated.
Each business in the insurance chain is responsible for their own compliance with sanctions.
Therefore, insurers, reinsurers, brokers and MGAs have to comply with the following in their
business as usual:
• background information regarding sanctions and guidance on due diligence and
screening procedures of general relevance;
• due diligence and screening considerations by method of acceptance;
• miscellaneous compliance procedures; and
• other sanctions regimes and US sanctions.
Chapter 2 Key global insurance issues 2/5

Sanctions compliance typically forms part of any terms of business agreement (TOBA) that
the insurer and broker agree as the basis of their trading relationship.

Chapter 2
On the Web
HM Treasury guidance: bit.ly/2mQeiEF
US Treasury guidance: www.treasury.gov/resource-center/sanctions/Pages/default.aspx

A3 Identification of regulatory risks

The FCA publishes its Business Plan each year, which incorporates its Risk Outlook,
identifies a number of areas that impact on insurance, such as the use of big data in
insurance and how poor culture and control continue to threaten market integrity. It includes
forward-looking areas of focus for the regulator, which senior managers should be aware of
and take into account in their own risk management and business planning.

Research exercise
Find the most recent FCA Business Plan, which is available from the FCA website. Which
areas are likely to have an impact on insurers? Which subjects are relevant to your own
company and how are they being managed?

A4 Focus on the customer

The effective management of conduct risk and delivery of good customer outcomes continue
to be high on the FCA’s agenda. Conduct risk is reflected by the regulated entities culture
and is found in all aspects of the business. The tone from the top is fundamental to conduct
risk and boards together with senior managers must be mindful of this in everything that

For reference only

they do.
Conduct risk also has a focus on all aspects relating to insurance products. Key areas of
concern include the initial product design, target markets and ongoing review to assess
whether the product is operating as anticipated. Ongoing monitoring should include
management information (MI) on cancellations, complaints, claims and method of product
distribution. Failure to consider these aspects and to focus on market penetration, profit or
another single factor would be an indication of conduct risk.
Conduct risk links to the fair treatment of customers, another area that remains at the fore of
the FCA’s concerns.
There is a growing focus on the insurance industry not only to be relevant to all customers
but also accessible. The Financial Conduct Authority issued guidance for firms on the fair
treatment of vulnerable customers and defines a vulnerable customer as: 'someone who,
due to their personal circumstances, is especially susceptible to harm, particularly when a
firm is not acting with appropriate levels of care.' The FCA's Consumer Duty rules and
guidance will set higher and clearer standards of consumer protection. This is due to come
into force on 31 July 2023 for new and existing products and services.

On the Web
Further information on customer vulnerability can be found at: www.fca.org.uk/publication/
finalised-guidance/fg21-1.pdf and www.fvtaskforce.com/resource-library.
The FCA's policy statement on Consumer Duty can be accessed here: www.fca.org.uk/
publications/policy-statements/ps22-9-new-consumer-duty.

Underwriting strategy needs to understand external pressures and needs and bring these in
line with the company strategy.
Alongside this, the CII have drawn up standards to ensure that members conduct their
business in an appropriate manner. In order to uphold these standards, the Chartered
Insurance Institute requires all members to adhere to its Code of Ethics.
 2/6 995/January 2023 Strategic underwriting

On the Web
The CII's Code of Ethics: www.cii.co.uk/media/9223937/cii_code_of_ethics.pdf.
Chapter 2

Transparency and insurance: a Companion to the Code of Ethics: https://www.cii.co.uk/

media/10125291/coh_j012891-chartered-transparency-ethical-companion-guide-
singles-10125286c4.pdf.

Regulator’s thematic reviews must be on senior managers’ radars. Reviews on topics such
as delegated authority and claims handling have provided guidance as to what good and
poor practice looks like when seeking to achieve good customer outcomes.

A5 Accountability

Refer to
Solvency II is discussed further in Solvency II on page 2/8

The PRA and the FCA introduced the Senior Insurance Managers Regime (SIMR) in 2016 to
replace the previous Approved Persons Regime (APR) for insurers. The aim was to increase
focus on culture, individual accountability and transparency, and to incorporate the
governance arrangements for the Solvency II Directive. SIMR is intended to ensure that
senior insurance managers adhere to and consider regulation when making any decision.
SIMR extends beyond the scope previously laid down by the APR and includes:
• identification of more granular senior management functions, e.g. the function of chief
underwriting officer;
• the requirement to allocate ‘prescribed responsibilities’ to individuals;
• changes to fit and proper assessment criteria; and

For reference only

• new conduct rules and standards.
These changes will inevitably require greater scrutiny and challenge internally, as well as
improved record-keeping to appropriately evidence adherence to the rules. An example is
the requirement to have a documented governance map, to include all key function holders
and their reporting lines, to be updated at least quarterly. For large organisations with regular
movement of staff this could become a time-consuming operation. A UK branch office of a
foreign insurer may find that some function holders reside in other countries with matrix
intergroup reporting lines. In the future, it is expected that many country regulators will
continue to further increase their focus on good corporate governance, board collective
responsibilities as well as individual accountabilities.

Senior Managers and Certification Regime (SM&CR)

The Senior Managers and Certification Regime (SM&CR) has been in force for banking
firms and insurers within the scope of Solvency II since March 2016. It introduces a new
regulatory framework for individual accountability, which has three components: the Senior
Managers Regime (SMR), Certification Regime and Rules of Conduct.
The key features of the extended SM&CR are:
• an approval regime focused on senior management, with requirements on firms to
submit robust documentation on the scope of these individuals’ responsibilities;
• a statutory requirement for senior managers to take reasonable steps to prevent
regulatory breaches in their areas of responsibility;
• a requirement on firms to certify as fit and proper any individual who performs a
function that could cause significant harm to the firm or its customers, both on
recruitment and annually thereafter; and
• a power for the regulators to apply enforceable Rules of Conduct to any individual who
can impact their respective statutory objectives.
Source: HM Treasury (2015) Senior Managers and Certification Regime: Extension to All
FSMA Authorised Persons. Contains public sector information licensed under the Open
Government Licence v3.0.
Chapter 2 Key global insurance issues 2/7

A6 Harmonisation of regulation
Insurers are normally subject to national regulation in their home country. For example, AXA
is headquartered in Paris, France, and is regulated by the Autorité de contrôle prudentiel et

Chapter 2
de resolution (ACPR). One notable exception is the USA where state regulators hold sway
rather than the federal government. As a result, an international insurer operating in a
number of countries, must adhere to each country’s insurance regulations, in addition to
being regulated in its home domicile. This adds a significant degree of complexity and
expense to the operation of such businesses.
There is international consensus to move towards harmonisation of insurance regulation in
the same way that international accounting standards now follow either the International
Financial Reporting Standards (IFRS) or the US Generally Accepted Accounting Principles
(US GAAP).
The aim of harmonisation of insurance regulation is that all insurance activities will be treated
in the same manner irrespective of the insurance sector or the countries concerned, and
thus facilitate international trade. In accordance with current thinking, the regulation will be a
risk-based framework, as is Solvency II. The International Association of Insurance
Supervisors (IAIS) is driving this harmonisation.
We still appear to be years away from having harmonised insurance regulation standards
adopted that would satisfy all interested parties. This is an issue for multinational insureds
under a global programme, as it is almost impossible to guarantee 100% compliance in all
territories when covering a foreign risk due to different compliance requirements and often
lack of clear rules on international insurance in some jurisdictions.

Regulatory differences between countries now tend to be more in terms of timing of their
development rather than in their substance.

For reference only

Source: IAIS, 2006.

The issue that remains is that each regulator has certain scope in relation to interpretation,
which can result in slight variations of rules when implementing directives. Additionally, how
local rules are then legally interpreted and enforced can add to an inconsistent approach.
Funding and resource issues can also impact the local regulators’ approach. In the UK it has
been noted how the use of skilled persons reviews (sometimes referred to as S.166 reviews)
has been adopted by the FCA, whereas other jurisdictions are not adopting a similar
approach.
Businesses, including insurers, do sometimes seek out jurisdictions which are subject to less
stringent regulation. While harmonised insurance regulation is still some way off, there is
evidence that regulators are increasingly communicating, exchanging information and taking
action in a coordinated manner with other regulators around the world. However,
enforcement action and penalties can and do still differ between countries.
Differences in local regulation can impact an insurer in many ways. For example, it may be a
requirement to provide foreign regulators with data or information that is not readily available.
Even minor differences in regulation can lead to differing considerations. A local definition of
a consumer or small business can result in a customer being determined as a commercial
customer in one jurisdiction yet a consumer in another. For example, New Zealand defines a
business of fewer than 20 employees as small whereas in the UK it is fewer than 10.
Collating this data requires changes to systems and forms as well as staff awareness as to
the issues involved in each jurisdiction.
Differing regulatory requirements on the treatment of consumers can lead to increased
exposure to regulatory intervention, higher claims, more complaints and disputes outside the
courts; for example, in the UK with the Financial Ombudsman Service (FOS). Likewise some
jurisdictions require staff carrying out certain customer facing roles to have been trained to
specific standards or to have passed exams, which can lead to additional costs, wages and
record keeping.
 2/8 995/January 2023 Strategic underwriting

Regulatory reforms continue in many countries. For example:

The Indian Parliament finally passed the Insurance Laws (Amendment) Act, 2015,
cementing the eagerly awaited insurance reforms in the country. The reforms include raising
Chapter 2

the foreign investment cap on insurers and intermediaries from 26% to 49% and the laying
out of the statutory framework for the entry of Lloyd’s and branches of foreign reinsurers
to India.
The Brazilian Council of Private Insurance (Conselho Nacional de Seguros Privados, CNSP)
published Resolution No. 322 (20 July 2015) and Resolution No. 325 (30 July 2015)
amending the current Brazilian reinsurance regulations. The resolutions will reduce existing
regulatory restrictions gradually over a five-year period between 2017 and 2022.

A7 Solvency II

Be aware
A complete description of Solvency II is beyond the scope of this unit. For more
information, refer to chapter 1, section B in 960 Advanced underwriting.

The Solvency II Directive came into force in 2016. This was the first time that insurance
regulation had been modelled on the risk-based approach found in Basel II. Solvency II
promotes a risk-based approach to capital requirements linked together with corporate
governance, risk management, financial modelling and asset liability management.
Solvency II consolidates and reviews 14 previous EU directives relating to various life, non-
life, reinsurance, insurance group and winding-up directives. The objectives of Solvency II
are as follows:
• Improved consumer protection: It will ensure a uniform and enhanced level of

For reference only

policyholder protection across the EU. A more robust system will give policyholders
greater confidence in the products of insurers.
• Modernised supervision: The supervisory review process will shift supervisors’ focus
from compliance monitoring and capital to evaluating insurers’ risk profiles and the quality
of their risk management and governance systems.
• Deepened EU market integration: Through the harmonisation of supervisory regimes.
• Increased international competitiveness of EU insurers.
One of the negative effects of Solvency II is the cost of increased resources devoted to risk
management, compliance, internal audit and capital modelling. This adds pressure to the
expense ratio and tends to encourage insurers to reach an optimum size in order for their
expenses to be more proportional. This regulatory burden can and will continue to drive
mergers and acquisitions activity and consolidation within the insurance industry.
The European Commission can decide that a third country’s solvency and prudential regime
has equivalence to Solvency II and grant equivalence decisions. This avoids unnecessary
duplication of regulation and allows those insurance markets to operate internationally while
ensuring a similar level of solvency for the protection of customers globally. At the time of
writing, the Commission has given full equivalence decisions to Switzerland and Bermuda
and provisional equivalence to Australia, Brazil, Canada, Mexico, USA and Japan. One
example of the steps taken in the USA to move towards full equivalence and harmonise
regulation is the National Association of Insurance Commissioners (NAIC) Risk
Management and Own Risk and Solvency Assessment Model Act (#505) that became
law in 2015. This Act requires large and medium-sized US insurers to operate a continuous
process of assessing their risk management and solvency positions, similar to the own risk
and solvency assessment (ORSA) under Solvency II (see Risk management on page 6/13).
In addition, these US insurers will have to file an ORSA report annually.
Chapter 2 Key global insurance issues 2/9

Brexit
The UK left the European Union (EU) on 31 January 2020, following the referendum on 23
June 2016. A transition period applied until 31 December 2020, during which the UK

Chapter 2
continued to follow all the EU's rules.
From 11pm on 31 December 2020, UK insurers and intermediaries lost their passporting
rights to conduct business in the European Economic Area (EEA). To continue servicing
their EEA clients, many UK insurers and intermediaries decided to operate through new or
existing subsidiaries in the EEA, while the UK agreed to EEA firms continuing their
activities for a limited period of time, if they entered the UK's Temporary Permissions
Regime (TPR) at the beginning of 2020.
The EU has expressed its opposition to 'post box' European operations. And, it has
challenged arrangements where a new European operation was set up by the UK insurer
purely to deal with EU business post Brexit, with no or few employees physically present
in the relevant Member State.
Regarding the run-off period for existing insurance contracts, the UK has allowed EEA
insurers a 15-year period to continue servicing such contracts with UK insureds. The
matter is more complex for UK insurers’ contracts with EEA insureds, as every EU State
has implemented different rules which apply to UK insurers in its jurisdiction.
Negotiations about an equivalence regime between UK and EU regulation started in
March 2021 but have since broken down. It is unlikely the EU will grant equivalence to the
UK's regulatory regime, due to the expected divergence by the UK from EU rules in the
future, particularly in respect of Solvency II. Equivalence under EU law occurs where a
third party's regulatory framework is sufficiently similar to EU standards that firms from that
country are given access to the EU market. Equivalence is granted at the discretion of the
EU Commission and can be withdrawn or changed at any time. It is not, therefore, the
same as the passporting status enjoyed by UK firms before Brexit.

For reference only

From the UK's perspective, the EU Solvency II regime has been criticised because of its
imposition of high-risk margin requirements. In fact, during the Queen's Speech on 10
May 2022, it was announced that the Financial Services and Markets Bill will revoke
retained EU law on financial services, replacing it with an approach to regulation that is
designed for the UK.
Please note: This is the position at the time of publication. Any relevant changes that may
affect CII syllabuses or assessments will be announced as they arise on the qualification
update page for the unit.

Solvency II is a pan-European solvency regime which operates across all EU Member

States. When it was first introduced it was brought into UK law by specific legislation and via
the Prudential Regulation Authority rule book.
Now that the UK has left the EU, new UK legislation has been introduced (The Solvency II
and Insurance (Amendments etc.) (EU Exit) regulations 2019) to ensure that the provisions
of Solvency II continue to work in the UK. A consultation paper was released in April 2022
which aims to reform the Solvency II regime.

On the Web
https://www.gov.uk/government/news/uk-government-powers-on-with-reforms-to-solvency-
ii

With the UK is outside the EU there is no longer mutual recognition of each other's
regulatory systems, which means that the UK has to obtain 'equivalence' status from the EU.
This would mean that the EU recognised that the UK, although now known as a 'third
country', has a regulatory system which is equivalent in robustness to that of the EU. The UK
granted that status to the EU in late 2020, but as at mid 2021, the EU is yet to reciprocate.
 2/10 995/January 2023 Strategic underwriting

A8 Licences
While national regulators are gradually trying to harmonise their approach to regulation, most
countries still retain the ability to issue licences, which enable insurers to operate within their
Chapter 2

jurisdiction.
The task of obtaining licences for an insurer that wishes to expand internationally can be
quite challenging.
Trade blocs can be advantageous to insurers where regional barriers to trade (tariff and non-
tariff barriers) are reduced or eliminated among participating countries. The EU is the world’s
largest trading bloc and represents the second largest economy in the world.
When the UK was part of the EU, it was part of a system that allows insurers that are
authorised by one EU member state to be ‘passported’ within all other EU member states.
The EU Services Directive 2006/123/EC sought to guarantee the freedom of, establishment
and freedom to provide services after the European Council was deemed to be in breach of
the Treaty on the Functioning of the European Union (TFEU). Passporting removes the
requirement that an insurer would have to obtain a licence from each EU country’s insurance
regulator before being able to write business in other member states. The only requirement
is for insurers to notify their home regulator, who then notify other EU regulators. Passporting
is an efficient system, as an EU insurer only has to manage their relationship with their home
regulator. However, there remain other nuisances that can present administrative difficulties
for uninformed insurers in specific European countries. For example, delegating binding
authority to a broker or agent in Italy will cause Italian regulators to treat an insurer as having
become established in Italy and subject to Italian regulation.
Passporting is one implication of the UK’s exit from the EU that will have to be addressed.

Research exercise

For reference only

The fastest growing area of world trade is the services sector. Generally the rich countries
have concentrated on business and financial services, including insurance. Identify the
types of trading blocs around the world and research to see which have applicability to the
insurance industry.

One of the reasons why Lloyd’s is a desirable trading platform for insurers is that it holds
specific licences or authorisations in approximately 100 countries or territories. Lloyd’s
syndicates can underwrite business in those territories subject to their laws and regulations.
A few global insurers hold a large number of licences or authorisations that rival Lloyd’s, for
example AIG, Allianz and AXA. However, only Lloyd’s allows existing insurers or new
entrants to form a syndicate and join their trading platform while retaining ownership.
Interestingly, a number of the global insurers mentioned above are on the Financial Stability
Board (FSB)’s 2016 list of global systemically important insurers (G-SIIs). G-SIIs are insurers
whose distress or disorderly failure would potentially cause significant disruption to the global
financial system and economic activity, i.e. global systemically important insurers.

On the Web
Lloyd’s Crystal: bit.ly/2RlCHzs
FSB: www.fsb.org
FSB list of G-SIIs: bit.ly/2JwyLcU
Axco – global insurance market information: www.axcoinfo.com
Chapter 2 Key global insurance issues 2/11

B Data
Data has always been important for insurers. Customers supplied data in proposal forms and

Chapter 2
risk submissions when applying for insurance products. Originally insurers only captured
limited data because it was difficult to record and store information before computers were
commonplace. Even when computers were introduced, the cost of data storage and
processing prohibited recording anything other than basic information. The information that
was recorded was typically the policyholder's name and address, the sum insured or limits,
premium and other variables unique to that policy, of the sort that are usually contained in a
policy schedule. Rarely was information kept on the detail of the risk, perhaps with the
exception of survey reports. Until relatively recently, information was contained on individual
risk paper files which meant that extracting data for analysis was an extremely time-
consuming event.
Over the years, insurers have gradually increased the amount of digital data capture, but
older (now legacy) systems limited the amount and quality of data they could process. Fast
forward to the advent of Solvency II and the requirements for data integrity, internal models
and enhanced MI. Now there is an imperative to capture and analyse ever-increasing
amounts of data to satisfy the needs of:
• regulators with regard to data protection;
• legislation; and
• internal clients and external stakeholders, e.g. shareholders, brokers and customers.
Issues such as what information must be captured and how long it should be retained must
be weighed against capturing non-essential data in the expectation that it may be useful in
the future.

Critical reflection

For reference only

It is interesting to note that today we have far more data than in the past and far better
tools to analyse it, but there still appears to be a lack of analysis by some insurers.
Assuming that you agree with this statement, can you think of potential reasons for the
lack of analysis by some insurers?

B1 Data privacy
An important legal issue relating to holding data is data privacy. In the UK, data protection
law stipulates that personal data should only be kept for as long as necessary and only used
for the purpose it was collected. Most companies inform the customer that their data will be
captured and attempt to obtain the customer's consent via various mechanisms such as tick
boxes at the bottom of forms or in terms and conditions. Whether these consents will be held
to be valid is an open question that doubtless will be tested in the courts in due course.
As more data is stored and more databases created, the risk of theft or loss increases and in
a number of cases the FCA have levied heavy fines on insurers. The issue of data security is
business critical and yet legal responsibilities surrounding compliance with applicable
regulatory requirements with cloud computing are still evolving. In 2014 the International
Organisation for Standardisation (ISO) published Code of Practice ISO/IEC 27018, which
establishes commonly accepted control objectives, controls and guidelines for implementing
measures to protect personally identifiable information for the public cloud environment.
The Information Commissioner’s Office (ICO) is the UK’s independent authority set up to
uphold information rights in the public interest, promoting openness by public bodies and
data privacy for individuals.
In 2015 several health apps approved by the UK’s National Health Service (NHS) were
found to leak data, according to a study led by a team of researchers at Imperial College
London. As reported by Computer Weekly, the study aimed to explore the data privacy risks
posed by a number of different apps listed in the NHS Health Apps Library. The results of the
study show that more than 89% of the apps listed transmit sensitive information to online
services but 66% of them did not encrypt data after it had been uploaded to the web. None
of them encrypted data locally on the mobile device itself. Thus anyone with access to a
smartphone containing the app could access your personal health data.
 2/12 995/January 2023 Strategic underwriting

Research exercise
Find and review the five largest fines levied by the UK FCA against insurers, MGAs or
brokers following data breaches.
Chapter 2

EU data protection law prohibits the transfer of personal data to countries or territories
outside the European Economic Area (EEA) unless they are considered to provide adequate
protection. One of the ways certain US organisations can demonstrate an adequate level of
protection is by signing up to the Safe Harbor principles, a self-certification standard
operated by the US Department of Commerce and enforced by the Federal Trade
Commission. In 2000 the EC issued a decision outlining a series of model clauses under
which personal data can be transferred outside the EU. However, in Schrems v. Data
Protection Commissioner (2015) an Austrian lawyer filed a complaint against Facebook
Ireland objecting to the fact that its servers are located in the USA. The basis of the case
was that the USA offers no real protection of EU citizen data against state surveillance, as
demonstrated by the Snowden revelations about mass surveillance of EU personal data. The
outcome was that the Court of Justice of the European Union (CJEU) ruled that the
adequacy of the protection provided by the Safe Harbor privacy principles is invalid (US
Adequacy Decision 2000/520/EC). In 2016 the EC adopted the EU–US Privacy Shield,
which imposes stronger obligations on US companies to protect Europeans’ personal data
and reflects the requirements of the CJEU in its 2015 ruling. The framework for transatlantic
data flows provides:
• strong obligations on companies in the USA to protect the personal data of European
citizens;
• robust enforcement;
• clear safeguards and transparency obligations on US government access; and
• several redress possibilities for EU citizens.

For reference only

B1A General Data Protection Regulation (GDPR)
The EU General Data Protection Regulation (GDPR) came into effect in May 2018.
According to Andrus Ansip, Vice President for the digital single market, European
Commission, GDPR is ‘a major step towards a Digital Single Market’. Companies outside the
EU that have EU customers are now subject to GDPR, which was not the case ;previously.
GDPR will change the way that businesses can store, use and transfer personal data. The
penalties for data breaches are significantly increased, fines will be the greater of €20m or
4% of global turnover. GDPR is complex and there is more to it than is highlighted here.
Who does the GDPR apply to? The GDPR applies to ‘controllers’ and ‘processors’. The
definitions are broadly the same as under the now superseded Data Protection Act 1998
(DPA 1998) – i.e. the controller says how and why personal data is processed and the
processor acts on the controller’s behalf.
The GDPR places specific legal obligations on processors; for example, firms are required to
maintain records of personal data and processing activities. A firm will have significantly
more legal liability if it is responsible for a breach. These obligations for processors are a
new requirement under the GDPR.
Controllers are not relieved of their obligations where a processor is involved – the GDPR
places further obligations on controllers to ensure their contracts with processors comply
with the GDPR.
What information does the GDPR apply to? The GDPR applies to personal data.
However, the GDPR’s definition is more detailed, reflecting changes in technology and in the
way in which information is collected. It makes it clear that information such as an online
identifier – e.g. an IP address – can be personal data.
The GDPR applies to both automated personal data and to manual filing systems where
personal data is accessible according to specific criteria. This is wider than the DPA 1998’s
definition and could include chronologically ordered sets of manual records containing
personal data. Personal data that has been anonymised – e.g. key-coded – can fall within
the scope of the GDPR depending on how difficult it is to attribute the pseudonym to a
particular individual.
Chapter 2 Key global insurance issues 2/13

Sensitive personal data: The GDPR refers to sensitive personal data as ‘special categories
of personal data’. These categories include:
• race;

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• ethnic origin;
• politics;
• religion;
• trade union membership;
• genetics;
• biometrics (where used for ID purposes);
• health;
• sex life; or
• sexual orientation.
Principles: Under the GDPR, the data protection principles set out the main responsibilities
for organisations. They are similar to those in the DPA 1998 with added detail. The most
significant addition is an accountability principle: the GDPR requires firms to show how they
comply with the principles – for example by documenting the decisions they take about a
processing activity.

Data Protection Principles

All personal data should be:
1. processed lawfully, fairly and in a transparent manner in relation to individuals;
2. collected for specified, explicit and legitimate purposes and not further processed in a
manner that is incompatible with those purposes;

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3. adequate, relevant and limited to what is necessary in relation to the purposes for
which they are processed;
4. accurate and, where necessary, kept up-to-date;
5. kept in a form which permits identification of data subjects for no longer than is
necessary for the purposes for which the personal data is processed; and
6. processed in a manner that ensures appropriate security of the personal data,
including protection against unauthorised or unlawful processing and against
accidental loss, destruction or damage, using appropriate technical or organisational
measures.

Lawful processing: For processing to be lawful under the GDPR, firms need to identify a
lawful basis before they can process personal data and document it. This is significant
because this lawful basis has an effect on an individual’s rights: where a firm relies on
someone’s consent, the individual generally has stronger rights, for example to have their
data deleted.
Consent: Consent under the GDPR must be a freely given, specific, informed and
unambiguous indication of the individual’s wishes. There must be some form of positive opt-
in– consent cannot be inferred from silence, pre-ticked boxes or inactivity, and firms need to
make it simple for people to withdraw consent. Consent must also be separate from other
terms and conditions and be verifiable.
Firms can rely on other lawful bases apart from consent – for example, where processing is
necessary for the purposes of an organisation’s or a third party’s legitimate interests. They
are not required to automatically refresh all existing DPA consents in preparation for the
GDPR, but if a firm relies on individuals’ consent to process their data, it must make sure it
will meet the GDPR standard. If not, firms must either alter the consent mechanisms and
seek fresh GDPR-compliant consent or find an alternative to consent.
 2/14 995/January 2023 Strategic underwriting

Rights: The GDPR creates some new rights for individuals and strengthens some of those
that existed under the DPA. These are:
• The right to be informed.
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• The right of access.

• The right to rectification.
• The right to erasure.
• The right to restrict processing.
• The right to data portability.
• The right to object.
• Rights in relation to automated decision making and profiling.
Accountability and governance: Accountability and transparency are more significant
under the GDPR. Firms are expected to put into place comprehensive but proportionate
governance measures. Good practice tools such as privacy impact assessments and privacy
by design are now legally required in certain circumstances. Practically, this is likely to mean
more policies and procedures for organisations, although many will already have good
governance measures in place.
Breach notification: The GDPR introduces a duty on all organisations to report certain
types of data breach to the relevant supervisory authority, and in some cases to the
individuals affected.
Transfers of personal data to third countries or international organisations: The GDPR
imposes restrictions on the transfer of personal data outside the European Union, to third
countries or international organisations, in order to ensure that the level of protection of
individuals afforded by the GDPR is not undermined.

For reference only

On the Web
ICO guide to the GDPR: bit.ly/2A10ayF

Previously we would not have thought of the USA as being an immature DP jurisdiction, but
insurers who transfer personal data between the EU and USA should note that binding
corporate rules (BCRs) are recognised in GDPR as a means of legitimising intergroup
international data transfers.

Critical reflection
Consider global insurers and insurers with international operations who routinely transfer
data between offices within continents and from one continent to another to operations in
their organisation.
How does an agile, responsive insurer innovatively using big data cope with an immature
DP jurisdiction on one hand while complying with the regulations imposed on them in
more mature jurisdictions?

B1B Data Protection Act 2018

The Data Protection Act 2018 (DPA 2018) came into effect in May 2018, to coincide with
the implementation of the GDPR and the Law Enforcement Directive (LED). It aims to
modernise data protection laws to ensure they are effective in the years to come.
Although the GDPR has direct effect across all EU Member States and organisations have to
comply with it, it does allow Member States limited opportunities to make provisions for how
it applies in their country. In the UK these have been included as part of the DPA 2018. It is
therefore important the GDPR and the DPA 2018 are read side by side.
Chapter 2 Key global insurance issues 2/15

The main elements of the DPA 2018 include the following:

General data processing
• Implement GDPR standards across all general data processing.

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• Provide clarity on the definitions used in the GDPR in the UK context.
• Ensure that sensitive health, social care and education data can continue to be
processed to ensure continued confidentiality in health and safeguarding situations can
be maintained.
• Provide appropriate restrictions to rights to access and delete data to allow certain
processing currently undertaken to continue where there is a strong public policy
justification, including for national security purposes.
• Set the age from which parental consent is not needed to process data online at age 13,
supported by a new age-appropriate design code enforced by the Information
Commissioner.
Regulation and enforcement
• Enact additional powers for the Information Commissioner, who will continue to regulate
and enforce data protection laws.
• Allow the Commissioner to levy higher administrative fines on data controllers and
processors for the most serious data breaches; being up to £17m (€20m) or 4% of global
turnover.
• Empower the Commissioner to bring criminal proceedings for offences where a data
controller or processor alters records with intent to prevent disclosure following a subject
access request.

B2 Big data
The arrival of ‘big data’ permits sophisticated data analysis, which provides for a greater

For reference only

insight and understanding of customers. As a result, big data has become a competitive
issue that will change the way insurance products are designed, priced, underwritten, sold,
marketed, serviced, analysed and reported. The generation of big data has come about
because technological improvements have led to a significant reduction in the cost of data
storage and processing. When the ability to store massive amounts of data is coupled with
increased connectivity around the globe, the result is the capacity to radically drive change
throughout the entire insurance industry and many other industries. But what is big data?
There is no universal agreement on the definition.
Big data is essentially vast amounts of data held in a format that is capable of
being processed and analysed.
Typically, big data is thought of as extremely large data sets that can be computer-analysed
to reveal patterns, trends and associations, especially relating to human behaviour and
interactions. A feature of big data is that it encompasses aggregated information from
multiple internal and external sources. External sources could be industry databases, social
media, government statistics, credit card transactions, sensors and mobile devices – to
name just a few. The huge data repositories that are created are known as data warehouses
or data lakes. Big data is typically characterised as having four characteristics. They are:
• Volume – the urgent need to capture and store increasing amounts of data.
• Velocity – how to modernise all aspects of the insurance value chain from pricing and
claims to marketing and communications in this increasingly connected world.
• Variety – the need to analyse and create value out of unstructured data, like customer
service interactions, tweets and videos.
• Veracity – with around one-third of insurers unsure of their data, data integrity is key.
Eliminating inaccurate data would greatly improve decision-making and lead to improved
results.
In insurance, examples of using big data could be used to pinpoint fraud, up-sell and cross-
sell opportunities.
The amount of data in insurance has expanded rapidly as computing power has become
cheaper and faster, and regulatory and compliance pressures have driven the need for ever-
greater transparency. Over 2.5bn gigabytes of data is generated every day and 80% of it is
unstructured. The world is experiencing a doubling of data every 18 months. Despite the
 2/16 995/January 2023 Strategic underwriting

presence of all this data, FS lags behind other industries in data analytics and deriving
business insight, as illustrated in figure 2.2.

Figure 2.2: Analytics maturity model

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Lack of historical investment, poor data quality and limited commercial imperative have meant
financial services lags other industries in analytics

Nascent Developing Established Advanced Leading

• Data: BU-level data, data management

not a key priority
• People/Talent: Pockets of analytics
excellence but not pervasive
• Initiatives: Multiple targets,
Value

not all of strategic importance

– Lack of global processes
– Limited standardised reporting
• Enterprise approach: Localised analytics, • Data: Relentless pursuit for new
local value data and metrics
– Data viewed as strategic asset
• People/Talent: Strong leaders
behaving analytically and
showing passion for analytical
competition
• Initiatives: Analytics integral to
company strategy
• Enterprise approach: Analytics
• Data: Data virtualisation – identifying
tools and infrastructure
key data domains/central data
extended broadly and deeply
Most companies repositories, 360 customer views
across enterprise
are here • People/Talent: Senior leaders
recognize importance of analytics
and developing analytic capabilities
• Initiatives: Global processes against
small set of strategic targets
• Enterprise approach: Analytics
embedded in all levels of decision

For reference only

making

Analytics maturity

Source: Sault, T. (2015) ‘Current Strategic Issues: Insurance Part 2’ [PowerPoint

presentation]. London: Cass Business School.

Cloud services
Cloud services or cloud computing is a key part of enabling big data and helping to drive
down costs. Cloud computing brings more computing power to organisations by effectively
‘renting’ other peoples’ servers rather than having to buy and operate one’s own IT. Cloud
services refer to a number of different outsourced IT services, such as:
• public cloud – unsecured internet links with mainstream suppliers such as Amazon Web
Services, Google or Rackspace;
• private cloud – provided by a secure data link to a data centre; and
• hybrid cloud – a combination of public and private cloud functionality.
Many types of cloud computing can be used by insurers. The three main types are:
• infrastructure as a service (IaaS);
• platform as a service (PaaS); and
• software as a service (SaaS).
However, due to compliance issues around data security, insurers have been slow to adopt
cloud services. Insurers are alive to the FCA’s requirement that firms take reasonable steps
to avoid undue operational risk, as well as the overarching legislation controlling the use
of data.
Telematics is one way in which customers will generate vast amounts of data for insurers.
Armed with this data, insurers can refine their pricing models and better segment their
customers.
Chapter 2 Key global insurance issues 2/17

Ethical issues
As mentioned in Regulation on page 2/3, the FCA has looked closely into the use of big data
in insurance. In 2016 the FCA published its feedback statement on big data, which stated

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in part:
The FCA found broadly positive consumer outcomes resulted from the use of Big
data. It can be used by firms to transform how consumers deal with insurance
firms, allowing firms to develop new products as well as reducing form-filling,
streamlining sales and claims processes.
The FCA identified two areas where the use of Big data had the potential to leave
some consumers worse off. Big data changes the extent of risk segmentation so
that categories of customers may find it harder to obtain insurance. The FCA is
also concerned about the potential that Big data might enhance firms’ ability to
identify opportunities to charge certain customers more.
The ethical and social concern surrounding big data is that the results of big data analysis
can be used to identify high risks that could be charged higher pricing or refused insurance.
However, most commentators chose to focus on the better risks that will benefit from greater
risk differentiation and lower premiums.
Ethical issues include discrimination and ‘redlining’. United States insurance regulators first
used the term redlining in conjunction with insurers differentiating between residents of
certain areas based on the racial or ethnic makeups of those areas. Today redlining is
defined as:
the practice of denying services, either directly or through selectively raising
prices, to people or businesses of certain areas or risk characteristics.
In recent years, regulators in some jurisdictions have banned the use of certain risk
information for underwriting purposes. The EU Gender Directive is an example of regulators

For reference only

banning gender as a pricing factor. It is notable that premiums for female car drivers
increased when insurers were no longer able to segment their data along gender lines. At
present, insurers are able to discriminate on age. For example, motor fleet policies may
exclude drivers under 25 and over 70.

Research exercise
Research different debates regarding banning (or the threat of banning) the use of risk
information, other than gender.

Critical reflection
What is the likely effect of a ban on the use of certain risk information on specific
insurance products?

Insurance has always been based on data analysis but the advent of big data has opened up
the ability to analyse vast quantities of data to aid the pricing and underwriting process. But
this relatively newfound ability may disadvantage certain individuals or segments of the
population, to the extent of making them uninsurable. Consider life and health insurance and
how the popularity of fitness apps has grown in recent years. The suggestion is that the
makers of wearable fitness technology will soon have more medical data than is contained in
individual’s own medical records. Will these manufacturers look to monetise the value of this
data? Will this data be material information that has to be disclosed to insurers when buying
life or health insurance?

Critical reflection
Will big data drive insurers to only target low risk customers? Might big data lead to an
‘insurance underclass’?

Ownership
One of the restraints on exploiting data is the issue of who owns the data. Big data is not
unique in bringing this issue to the fore, as insurers, MGAs and brokers have periodically
had to resort to the courts over who owns customer information.
 2/18 995/January 2023 Strategic underwriting

B3 Analytics
Data is only useful if it can be manipulated or collated into datasets and properly analysed. If
insurers can mine and interpret their data correctly, they can gain valuable insights into their
Chapter 2

existing customers and potential new customers. Insights might include issues such as why
there is a low renewal retention rate in certain postal districts or whether inflation is being
correctly factored in to long-tail product pricing. Turning data into useful information to drive
business benefit is a challenge for most organisations, including insurers.
Big data analytics can be applied at different stages of the insurance value chain, including:
• financial capital – for capital modelling, reinsurance modelling and investments;
• manufacturing – for underwriting and claims;
• intellectual capital – for pricing models, coverage and risk management issues; and
• distribution – for customer characteristics to assist sales, marketing and customer
relationship management (CRM).
Gathering data can be time consuming as data often resides in multiple insurer systems,
such as pricing models, policy administration systems, claims management systems and
customer databases. Data warehousing is the process employed to bring disparate data
together from different sources. Analysts assist in the preparation of data to get it to a
consistent and sufficient quality so that analysis can take place.
Sophisticated data warehouses are organised into subsets that might revolve around the
needs of senior management, specific departments or product lines, called data marts. Data
marts improve response time by allowing relevant teams access to the type of data they
need to analyse most often.

Consider this…

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How do we learn from our data? How do we gain insights which will help improve
decision-making, whether it be in underwriting, claims or management?

Software like Excel can convert data into visual charts which assist data presentation and aid
understanding. Examples of visual charts include line graphs, bar charts, pie charts, scatter
or cluster graphs and bubble charts.
Insurance actuaries and data analysts have been using more sophisticated analytical
techniques for some years. Examples of these techniques include decision trees, regression
models, forecasting and linear models.
A challenge of using new data sources is that the majority are unstructured, so require new
and emerging analytical techniques to generate insights.

On the Web
Rose, S. White paper: Demystifying Analytics – Proven Analytical Techniques and Best
Practices for Insurers, SAS. Available at: bit.ly/2AzOmFK

In summary, insurers who can harness big data and successfully analyse the data so that it
becomes useful information to the benefit of the business will steal a march on their
competitors. A successful director of underwriting today must have good, experienced data
analysts and actuaries working as a team with product specialists and marketing people who
are skilled at interpreting data. They will be able to improve policy pricing, improve fraud
detection and develop products which attract targeted, segmented customers, to illustrate
just a few of the benefits. However, ethical, societal and regulatory issues along the way will
challenge the road to success.
Chapter 2 Key global insurance issues 2/19

C Technology
Technology has and will continue to allow insurance to develop in a way that promotes

Chapter 2
internal insurer efficiencies and external efficiency in and of the distribution chain. However,
technology requires significant capital investment and, increasingly, a different set of skills.
Technology is radically changing the insurance industry by automating previously manual
tasks and allowing more manipulation and analysis of data than previously thought possible.

C1 Insurance technology
When it comes to technology innovation, the insurance industry is probably 15–20 years
behind the banking industry. Many insurers and brokers were created out of mergers and
acquisitions that have resulted in a mixture of old systems, producing an inefficient
processing infrastructure.
Relatively new insurance organisations can gain competitive advantage through careful
design, execution and use of the latest technology. The new organisations are able to start
their businesses with technology designed around efficient processes and simplified
operating models.
Regulators recognise the importance of a robust IT system and it is clearly identified within
the FCA Handbook and SIMR. There are many examples of banks being fined by regulators
because of IT systems failures.

Be aware
A system that fails will impact consumer confidence and represents a significant
reputational risk that must be borne in mind when considering systems and the customer
interface.

For reference only

C2 Legacy systems
To operate more effectively and efficiently, insurers need to modernise and replace old
legacy systems. Many insurers delay introducing new systems because of their perception
of the high execution risk and monetary costs. These delays affect their process efficiency,
financial performance and adversely impact customer services levels.
Old systems are rarely switched off: while they are inflexible and difficult or impossible to
change, they are usually stable and reliable. This can lead to duplication of systems and the
need to manually rekey information. Old systems often use obsolete code and are bespoke
or heavily customised, without written product specifications. The combined issues make
change difficult. Typically, legacy systems are product-, accounting- or channel-based and
are not capable of supporting a modern customer-centric approach. The highest risk task in
moving from a legacy system to new technology is data migration.
Insurers using legacy systems typically have numerous standalone spreadsheets containing
vital data because the official system of record does not collect required data or cannot
combine data from different parts of the business. Large numbers of unprotected or
unauthorised spreadsheets compromise data integrity and data protection. Drawing data
from numerous systems often results in unreliable MI. A data-driven business like insurance
needs to have a high level of confidence in a single version of truth. Inaccurate data can
cause incorrect decision-making.
When considering new technology, legacy system insurers sometimes realise that, over
time, their operating model has been moulded to fit their old systems. It is advisable to
review and make changes to the operating model before implementing new technology
systems.
Switching from a legacy system to a new system in a single day is likely to be considered too
risky by most insurers for two principal reasons:
• if the project encapsulated the entire company, then it could easily become too large and
unmanageable from a time and cost perspective; and
• the company could be brought to a grinding halt if business-critical glitches are identified
in the new system after the legacy system has been discontinued.
 2/20 995/January 2023 Strategic underwriting

Instead, a common approach is to continue running the old system in parallel until the new
system is operating as it should. Other insurers will look to adopt a series of incremental
improvements within a strategic framework. Through the use of systems orientated
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architecture (SOA) existing systems will remain with new systems being overlaid to facilitate
one-time data input and create a user-friendly screen.

The Co-operative’s general insurance division reported an operating loss of £15.5m for
the first half of 2017 as a result of incurring £10.3m of ‘transformation costs’ after it
entered into a 10-year deal with IBM to replace legacy IT systems. The IT upgrade hit
delays after IBM pulled out of the project.
Source: www.insurancetimes.co.uk/co-op-insurance-loss-deepens-after-reserve-releases-
dry-up/1425082.article?adredir=1

The London Market Group (LMG) – which involves most London trade associations and
stakeholders including Lloyd’s – recognised in 2014 that many overseas customers and
brokers have a mixed experience when doing business with the London Market. Over time
this drives premium away from the London Market causing an adverse impact on the London
cost base.
LMG’s analysis highlighted the tension between the subscription market (one of the key
strengths of London) and the need of participants for information from disparate systems. In
addition to facilitating data flows, premiums and claims, the systems need to handle queries,
agreements and documents. Brokers around the world complain that until there is a simple
interface between all London Market participants it is often easier and cheaper to transact
business in their local markets.
In response to this analysis, LMG launched their target operating model (TOM) five-year
project to include shared central services in a bid to modernise market outcomes and

For reference only

overcome the challenges around customer experience, data, operational efficiencies and
resultant impacts on business flows. The shared services is planned to include automated
and centralised data capture and management.

Research exercise
Read the LMG publications CEO Highlights and The Fact Base. Consider why the London
Market has been losing global market share over many years in view of the development
of foreign local hubs, high cost base in London and foreign business and brokers
choosing to insure with their home insurers.

C3 Technology innovation
Insurers require new and innovative technology in order to adapt, manage and analyse the
terabytes of raw data available in our rapidly changing world. An insurer will have a clear
edge over their competitors if they can offer a system that recognises data already held in
the broker’s system.
InsurTech
New technology will touch every area of insurance. The considerable money and effort being
applied to new insurance technology has coined the term InsurTech. Some of the innovation
will be implemented to solve some of the mostly internal-facing challenges for insurers.
Examples include the need to focus on data integrity, MI, speed to market issues, effective
decision-making and the control, auditability, traceability and accountability of numerous key
spreadsheets.
Further innovation is required to store, manipulate and harness the vast amount of data that
is associated with successfully using big data. Insurance technology needs the capacity to
provide the data in an intelligible form to the users, whether the users are internal (e.g.
underwriters or claims handlers); external service providers (e.g. surveyors, risk consultants,
adjustors, legal advisers); or external stakeholders (e.g. brokers or customers).
Chapter 2 Key global insurance issues 2/21

Internet of things (IoT)

The internet of things (IoT) concerns the ability of everyday physical objects or equipment to
connect and interact with each other through ‘smart technology’. Smart technology uses the

Chapter 2
sensors and chips embedded in objects such as fridges and pipes in ‘smart’ offices, factories
and homes to provide real-time data. The challenge for the insurance industry is that the
benefits of IoT will only be realised if all participants in the insurance value chain are able to
receive, interpret and act on the data being generated by these objects. Much of the current
insurance technology is unable to handle this challenge. Adopters of new technology can
take advantage of the IoT before outside disruptors move into insurers’ space.
Big data and digital strategy
The issue of technology innovation is inextricably linked to the use of big data and digital
strategy. When all three elements are in place, underwriters will be able to dissect and
analyse distinct customer segments, to improve risk selection, pricing and the customer
buying experience. Claims teams will benefit from improved industry fraud databases,
receive real-time loss reports, use drones to view and adjust claims, use information from
social networking sites, GPS data and CCTV footage to save time, money and reduce fraud
or exaggerated claims. Some insurers are already using and benefiting from being early
adopters.
Blockchain
Blockchain is increasingly a topic of conversation in the boardroom and in innovation hubs.
Blockchains permit a secure mutually distributed ledger to be deployed.

On the Web
The following link provides a useful guide to blockchain and its use and implementation in
insurance: medium.com/swlh/blockchain-in-insurance-use-cases-and-implementations-
a42a00ebcd91.

For reference only

Blockchain may have a role to play in modernising markets, by:
• substantially reducing frictional cost;
• facilitating faster processing speeds;
• transforming customer experience; and
• being secure and compliant technology.
While blockchain is not yet established in the insurance industry, banking applications have
been operating for the last few years.

Research exercise
Find and review insurance blockchain applications that are now in the market.

Consider this…
In addition to the examples provided above, what other benefits and changes can you
foresee innovative technology bringing to key insurance functions, not just underwriting
and claims?

C4 Digital
Digital technology provides a new way to connect and communicate with customers and
other participants in the insurance value chain. This study text will not provide many digital
statistics for one simple reason: digital connectivity is evolving so fast that any statistics
would be out-dated and possibly irrelevant by the time you read them.
Adoption rates
To put a perspective on the exponential impact of digital technology consider these adoption
rates to reach 50 million people:
• radio took 38 years;
• TV took 13 years;
• the internet took 4 years; and
• Google+ took just 88 days!
 2/22 995/January 2023 Strategic underwriting

Now consider that in 2017 over 2.4 billion people had a smartphone. That figure represents
around 30% of the global population. Add in all mobile subscriptions (not just smartphones)
and there are as many mobile subscriptions as there are people on our planet. The number
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of connected devices exceeded the global population a decade ago.

Customer expectations
The pace of adoption is still accelerating and with it customers are increasingly demanding a
better, more convenient and simpler buying and service experience. Many non-insurance
industry sectors (e.g. retail) have already raised customers’ expectations by delivering highly
personalised mobile digital propositions, which have contributed to putting the customer in a
powerful position. It is fair to say that digital technology is giving power to customers – power
that they never knew they had.
Will insurers try and introduce robo-advisors, following the lead of investment firms? Insurers
need to look hard at start-up insurers operating on a peer-to-peer basis or crowdfunding
insurers.
Disruptive competition
If the insurance industry does not adapt to this changing world and transform itself, disruptive
competition from non-traditional sources like Google and Apple and innovative start-ups like
Lemonade and Guevara will emerge as the ‘go to’ insurers of the future.
Corporate culture
Some insurers will need to redesign their TOM in order to successfully change their
corporate culture and adapt to the mobile-connected world. The speed of change is
breathtaking and the insurance industry is lagging behind banks in all aspects of mobile
connectivity, including digital strategy, social media and mobile devices.

Research exercise
Look for insurers that can demonstrate a digital strategy. Review the strategy and consider

For reference only

how they might be creating an appealing proposition to Generation X and Generation Y.
A demographic guide to the generations:
• Baby boomers – born between 1946 and 1965;
• Generation X (Gen X) – born between 1966 and 1976; and
• Generation Y (Gen Y) or millennials – born between 1977 and 1994.

Social media
A significant number of insurers have been slow to understand how to use social media and
integrate it into their marketing suite. Insurers engaged with social media will experience
both positive and negative comments. A disgruntled insured can readily express
dissatisfaction to many people via social media channels. This means channels need to be
constantly monitored and responded to promptly.
Smartphones
For retail products there is an increasing awareness that consumers want data in different
mediums. The tension between short, concise digital communications such as those on
Twitter and the requirement for clear, fair and not misleading marketing with all the regulatory
disclosures has not been lost on the market participants and regulators. Increasingly
customers want to engage in real time, at a time of their choice and exchange views with
other consumers online before making buying decisions. In addition to wanting to experience
that enriched customer journey, customers expect to be able to do so on the mobile
technology of their choice.

83% of consumers trust the recommendations of friends; just 14% trust advertising.
Source: Forrester Research

According to a Deloitte 2015 report, Insurance Disrupted, insurers risk losing customers to
new entrants unless they improve their digital game. For example, Deloitte’s report shows
high demand for smartphone general insurance (GI) apps but slow uptake. Not surprisingly,
demand for these apps was highest among the 25–34 year-old bracket at 77% – but appetite
was also strong among the over 55s at 57%. One drawback of using a smartphone to fill out
Chapter 2 Key global insurance issues 2/23

insurance forms is that the typing can be laborious. On the plus side, smartphones give
insurers the chance to improve the customer experience by automating claims data
submissions and provide convenience that a computer cannot.

Chapter 2
On the Web
As highlighted in chapter 1, students are strongly recommended to read Deloitte's 2015
report, Insurance Disrupted: bit.ly/2zdF93L

C5 Disaggregation of the value chain

Technology – and in particular internet technology – means that the traditional operating
model of vertical integration is no longer necessary and may not be the most efficient or
cost-effective way to conduct the functions of an insurance business. The result is
disaggregation of the insurance value chain. TOMs can be redesigned without the
restraints of people and processes all being in the same place. Technology allows customer-
centric insurers to undertake functions from distant locations that, if appropriately and
strategically positioned, can provide extended or around-the-clock service to internal
customers and external customers alike. However, if key functions are separated by time
zones and distance, the challenge of successfully managing remote teams becomes an
essential new skill. On a cautionary note, the cost of technology solutions to facilitate agile
working may outweigh the cost of retaining old systems which often necessitate workers
functioning in expensive city centres. Agile working will be discussed further in Technology
and human interaction on page 5/15.
Technology enables business and service to be:
• transformed;
• outsourced;

For reference only

• joint ventured with other organisations; and
• restructured with strategic alliances.
Virtual insurers may exist in the future where different service providers undertake all the
various functions in the value chain. Some insurers and MGAs have already reduced their
ownership of the value chain down to a few functions, with the remainder outsourced.
Will future companies be structured like this?
• underwriting in London
• IT in Shanghai
• back office in Mumbai
• head office in Bermuda
• call centre in Glasgow?
Source: Roxburgh, C. (2006) Insurance Company of the Future. McKinsey.
The fully virtual insurer transacts all its business on the web.

Critical reflection
What are the essential functions that make up the core of an insurer?
Which functions would you never outsource and why?

Research exercise
Identify and research which insurance organisations have moved furthest away from the
traditional insurance value chain.
 2/24 995/January 2023 Strategic underwriting

D Climate change
Chapter 2

Refer to
Refer to M96, chapter 8, section F3 for information on specialist liability risks

Most observers agree that there is scientific evidence of climate change. Climate change
appears to be driven by global warming. The result is that climate change is causing
increased volatility and changing weather patterns affecting nearly all areas of the world. The
changes in the frequency, severity and locations of extreme weather events are adversely
impacting the insurance industry and challenging many insurers’ traditional modelling
assumptions.
In its May 2014 report Catastrophe modelling and climate change, Lloyd's states that:
Catastrophe modelling technology is now used extensively by insurers,
reinsurers, governments, capital markets and other financial entities. They
are an integral part of any organisation that deals with natural catastrophe risk and
are used most commonly to perform activities such as risk selection and
underwriting, reserving and ratemaking, development of mitigation strategies,
design of risk transfer mechanisms, exposure and aggregate management,
portfolio optimisation, pricing, reinsurance decision-making and capital setting. The
models help to quantify our understanding of the natural world.
Climate change trends may be implicitly built into catastrophe models, given
the heavy use of historical data in constructing them; however these trends
are not necessarily explicitly incorporated into the modelling output.
Uncertainties associated with the estimation of the extent and frequency of the
most extreme events means that the climate change impact can be difficult to

For reference only

account for in risk models.
The impact of climate change may also generate claims to insurance policies where climate
change might not have been an expected exposure. Serious long-term issues can arise
when an exposure is not recognised and allowed for in the pricing during the underwriting
process. For example, the 2015 Volkswagen (VW) emissions scandal may have exposed
their liability policy (if it was extended to cover recall) or a separate recall policy; but perhaps
more significantly from a financial standpoint, it may expose VW’s directors and officers
(D&O) policy to multibillion law suits from VW’s shareholders, regulators and customers in
many different countries. I doubt the D&O underwriter envisaged the possibility of such
a claim.
In December 2015, 197 countries agreed to cut emissions in an effort to keep temperatures
from not rising more than 1.5°C above pre-industrial levels. The richer countries also agreed
to give climate aid to poorer countries. The Paris Agreement on climate change was to
come into force when countries representing at least 55% of total global greenhouse gasses
(GHGs) and 55% of the global population had ratified the Agreement.
In September 2016, China and the USA – the world’s two biggest emitters of GHGs –
announced that they would ratify the Paris Agreement, joining the other 24 countries that had
already ratified the agreement. The UN Framework Convention on Climate Change
announced that the Paris Agreement entered into force on 4 November 2016, 30 days after
the date that the twin 55% thresholds had been met.
Examples of binding national emission cuts were:
• USA to cut GHGs by up to 28% by 2025 compared to 2005 levels; and
• EU to cut GHGs by 40% by 2030 compared to 1990 levels.
In June 2017, President Trump announced that the USA would withdraw from the Paris
Agreement and in August 2017 gave official notice of its withdrawal to the United Nations
Secretary-General. The earliest the USA can withdraw is 4 November 2020. It is still hoped
that the Paris Agreement will bring about rapid and sustained reductions in GHG emissions
and control rising global temperatures.
Speaking at the annual Lloyd’s of London dinner in September 2015 (before the Paris
Agreement was negotiated) the Governor of the Bank of England, Mark Carney, warned
about the financial implications of a changing climate for insurers. Carney said:
Chapter 2 Key global insurance issues 2/25

floods and storms are becoming more costly for insurers. As a result the costs of
insurance for families could rise and in some instances cover could be withdrawn
completely. Shifts in our climate bring potentially profound implications for insurers,

Chapter 2
financial stability and the economy.
The Governor warned of other consequences of climate change, such as the value of
savings and pensions, which could be exposed as a host of industries associated with
pollution face declining share prices. Carney also advised that in banking, billions of pounds
of loans to energy and mining businesses might have to be reassessed and that investors
should demand more transparency about the climate change footprint of businesses. Carney
wants the FSB to encourage G20 countries to make it easier for investors to compare carbon
footprints of different assets allowing insurers and banks to make more informed investment
decisions.
In addition to volatile share prices in the near term, Carney also warned that oil firms and
polluting industries could be hit by lawsuits for compensation in the future. The Governor
said that without action now, global warming is likely to become one of the largest risks to
economic stability. He said: ‘The challenges currently posed by climate change pale in
significance with what might come. Once climate change becomes a defining issue for
financial stability, it may already be too late.’
Climate change is not just the biggest challenge of our time – it is the biggest
challenge of all time.
Sir David King, the UK Special Representative for Climate Change; keynote
speech at annual Chairman’s Dinner for the Carbon Trust 2014
The change in climate will require risks to be reviewed in anticipation of, for example, the
1:50-year event happening more regularly. In addition to the frequency issue, there may be
other unexpected or unanticipated consequences driven by extreme weather events in
the future.

For reference only

Not all climate change results in hot-weather events. Rising temperatures result in moisture
being trapped in the air for longer periods, which results in more intense storms – both rain
and snow. One example is the series of snowstorms that affected New England, USA in
2015. These snowstorms produced record-breaking snowfalls during persistent cold
temperatures making it difficult for municipalities to clear snow from roads. This combination
of events resulted in particularly heavy levels of claims, including complex business
interruption claims.
Some policies now include a ‘climate change’ exclusion, which is designed to exclude all
losses arising as a result of ‘climate change’ or ‘global warming’. To date, such exclusions
have not been upheld by the courts because of a lack of evidence proving climate change as
the proximate cause. Experts have commented that within the next ten years it is likely the
current exclusions with be adapted to achieve their purpose; that is, to find favour with
the courts.

The key to successfully supporting an argument that climate change has directly caused a
particular weather phenomenon, or to reduce or mitigate potential losses caused by climate
change, will be to use advanced analytics on all available data. Big data will make a valuable
contribution to managing climate change risks.
Ultimately the cost of climate change could be passed back to the multinational firms that
caused the climate change through carbon emissions. There have already been such cases
brought in the USA – none as yet successful but the environmental movements are very
keen in following this through. Is this the insurance ‘asbestos’ of tomorrow?

Research exercise
The world’s largest brokers all issue publications discussing extreme weather-related
events. Use these publications to better understand recent climate catastrophes.
 2/26 995/January 2023 Strategic underwriting

D1 Effects of climate change

Climate change touches a vast array of insurance risks that must be carefully studied on a
holistic basis. Areas of the world that can no longer support the local population through food
Chapter 2

production will see mass migration leading to other risks. Crop insurance, solar, wind and
microrenewables are some of the risks that are obviously affected but so too are the
standard perils of fire, flood and storm that are standard first party risks. Risks such as food
crises, water crises, failure of climate change mitigation and adaptation are as integral to
climate change as the oft-cited greater incidence of extreme weather events.
Rising temperatures will make the ice melt in the Antarctic and Greenland and contribute to
increasing sea levels. Sea levels could rise by as much as 25–50cm by 2100. Greater sea
levels will threaten the low-lying coastal areas such as The Netherlands and Bangladesh,
millions of acres of land will be at danger from flooding; causing people to leave their homes.
The rising sea will hugely affect low-lying areas in major global cities. One of the key reasons
that many major global cities are situated on or near the coast is because their prosperity
arose because of shipping trade with the rest of the world. Countries whose coastal regions
have a large population, such as Egypt and China, may have to move whole populations
inland to avoid flooding.
Cities such as Mumbai, Rio de Janeiro and Shanghai, each with populations in excess of
10m people, are vulnerable to the various effects of climate change. The people of these
cities are particularly vulnerable as they are amongst the lowest income per capita in
the world.

On the Web
www.climateandweather.net/global-warming/effects-of-climate-change.html

For reference only

Research exercise
How many times has the London Thames Barrier been closed each year since it became
operational in 1982? Is there a trend in those closures?

Changes in weather will affect many crops grown around the world. Crops such as wheat
and rice grow well in high temperatures, while plants such as maize and sugarcane prefer
cooler climates. Changes in rainfall patterns will also affect how well plants and crops grow.
The effect of a change in the weather on plant growth may lead to some countries not having
enough food. Brazil, parts of Africa, Southeast Asia and China will be affected the most and
many people could be affected by hunger. Other countries will see possibilities of growing
crops all year round, thus increasing production from one to two crops per year.
Crops and foodstuffs traditionally found in one place in the world are growing in new
locations. An example is the wine trade where once it was accepted that grapes for wine
could not be grown successfully above 42 degrees north, meaning the UK was not a wine
region. The UK’s burgeoning wine-growing market evidences how grapes can now be
successfully grown in a previously unsuitable region because of warmer weather.
All across the world there is a big demand for water and in many regions there is not enough
supply, such as the central and eastern Africa. Changes in the climate will alter weather
patterns and bring more rain in some countries, but others will have less rain; in general dry
areas will become drier and wet areas could become wetter.
The insurance industry is closely linked with the stability of our economies and our
ecosystems. If our planet becomes 4°C warmer, it may become uninsurable. This economic
imperative is driving insurers to invest in green technologies that can help reduce global
emissions.
Chapter 2 Key global insurance issues 2/27

D2 Changing weather patterns and increased volatility

Flood damage to UK homes has become such an increasingly frequent occurrence that the
UK Government and insurance industry introduced Flood Re in 2016.

Chapter 2
On the Web
Visit www.floodre.co.uk/ for more information.

The advent of Flood Re in the UK in part addresses the issue of the increasing practice of
building housing on flood plains and other high-risk areas in order to accommodate the
growing population. However, Flood Re does not provide protection to the many corporate,
commercial and industrial developments that are also at increased risk of flooding.
Flood Re aside, it is the poorest people in developing countries who are the most vulnerable
to climate change and they have the least ability to adapt and respond to their changing
environment. In Sub-Saharan Africa alone at least 11.5m people per year are affected by
extreme weather.

Research exercise
Identify three unusual/extreme weather events in three different continents in the last three
years which caused the most insured losses. Consider why other events of similar
magnitude in other places did not cause such large insured losses.

In addition to storms increasing in frequency, droughts are increasing, especially in the

equatorial region.
According to Kurt Karl, former chief economist at Swiss Re, the frequency of both natural
and man-made catastrophes is increasing. The cost of catastrophes is also increasing due in

For reference only

part to more high value buildings, ships, complex plant and machinery and partly because of
the increasing wealth and increased insurance penetration in many of the world’s regions.

D3 Green issues
There is no universally agreed definition of a ‘green economy’, but a pragmatic definition
would be an economy that has low CO2 emissions on a sustainable basis. A green economy
is one that is clean and energy efficient.
Green issues are issues that focus on improving energy efficiency, expand the
use of renewable energy, or support environmental sustainability.
Insurers need to create new products and improve existing ones targeted at climate change
technology and associated services. These products might, for example, include insuring
solar farms including the efficacy achieved benchmarked against the design specification.
Designing products for new equipment or technology can present a challenge, as there will
be no risk history to analyse and model to predict losses in the pricing process.
Insurers are often among the first to be hit by the financial impacts of climate change, so it is
not surprising that most insurers try to mitigate such impacts. Naturally one first thinks about
how to handle climate issues in the underwriting function. But increasingly, a number of
insurers are creating green investment criteria and are no longer investing in industries that
fuel CO2 emissions, such as coal. To create lasting climate change mitigation, the
replacement of high carbon emission intensity power sources, such as conventional fossil
fuels (oil, coal and natural gas), with low-carbon power sources is required.
Insurers will play an important role in sustaining the growth of the renewable sector.
Renewable energy is energy that is generated from sources which are not finite or
exhaustible. For example, wave power, wind power, solar power or geothermal energy are all
renewable energy sources.
In summary, climate change and the green economy impact almost every function within an
insurer, not just the underwriting function. Product development, marketing, claims, actuarial,
pricing and investment are all very much involved.
 2/28 995/January 2023 Strategic underwriting

E Industry consolidation
Why is there so much industry consolidation? What are the drivers for insurance mergers
Chapter 2

and acquisitions? The answer is complex, many issues interrelate and individual
circumstances will dictate. However, there are a number of common drivers, including:
• mature markets;
• capital adequacy;
• technology;
• the need to meet the demands of global customers; and
• intense competition.
Mature markets
Growth in mature markets is difficult to achieve. Mature markets are characterised by
saturation of insurers and brokers in economies where insurance penetration is already high.
In these conditions, organic growth is difficult to achieve. Insurers and brokers will try to
differentiate themselves by building and promoting their brand; however, this is often
ineffective in marking them out from the competition. A sure way of growing in a mature
market is to acquire competitors, which reduces competition and drives economy of scale.
Capital adequacy
The effect of regulators on insurers has made economy of scale matter more now than in the
past. A larger top-line income can help ease the increased costs of regulation. Regulators
are demanding better and more stringent capital adequacy driven by Solvency II. Regulators
do not want a major insurer to fail, after the severe criticism they encountered in the last
decade when banks had to be rescued. In addition, factors such as the frequency and cost
of natural and man-made catastrophes are increasing. This means that the large loss and
catastrophe elements of pricing have to increase, particularly in respect of long-tail lines of

For reference only

business. This results in the requirement for more capital to be held. In addition, many
insurers are still wrestling with the legacy of reserving for latent health issues such as
asbestos, noise-induced hearing loss, lead paint and other toxic substances.
Technology
We learnt in Technology on page 2/19 that technology is enabling insurers to harness the
power of computing, whether analysing data, launching digital channels or exploiting e-
trading opportunities. While the cost of technology has fallen dramatically in real terms over
recent years, size can be an advantage when investing in new technology. Size advantage is
not necessary just due to the cost of technology. A large insurer may have more to gain from
deriving competitive advantage in data mining, pricing, marketing and distribution.
Technology can enable insurers to have the advantage of global scale but still act nimbly,
work in agile ways and behave as if they are local. In the past, big organisations have
suffered from being slow, centralised and cumbersome, whereas the latest generation of
technology can empower local units to operate with the backing of a global parent but
without some of the disadvantages.
The need to meet the demands of global customers
All sophisticated corporate customers, advised by their brokers, insist on strong financial
ratings. Many prestigious accounts sought by brokers are multinational or global in nature.
Thus insurers also have to be global in order to successfully meet the needs of their biggest
customers. In many ways, consolidation and globalisation go hand in hand and so this
discussion is continued in Globalisation on page 2/30.
Intense competition
The recent flood of alternative capital into insurance and reinsurance has altered the
relationship between demand and supply (discussed in Alternative sources of capital on
page 4/12). Despite the growing global demand for insurance, the supply of capital seeking
a return from insurance has outstripped demand and caused intense competition. The result
has been reduced pricing, broader terms and conditions and less customer loyalty to brokers
and insurers. In previous insurance cycles this would have been called a soft market, but
with no obvious end to the prevailing conditions some commentators refer to current market
conditions as the new norm.
Chapter 2 Key global insurance issues 2/29

The arrival of additional capital from new entrants (discussed in New entrants on page 2/
32) has been triggered by poor investment returns elsewhere. New entrants believe that
insurance holds the prospect of better returns and less volatility than their current portfolios.

Chapter 2
Critical reflection
Consider why and how insurance returns are proving to be attractive to new entrants.

As premiums reduce, brokers’ income can reduce, particularly if the majority of their earnings
are derived from commission. The largest broking firms have found alternative ways of
generating income to compensate for reduced commission income. The quickest and
simplest way is often for brokers to pressure insurers to pay higher commission. As a result,
many insurers try not to be too reliant on the largest brokers. However, broker consolidation
has increased broker power and the relative dominance of the biggest brokers.
Are insurers experiencing a perfect storm? As insurers contend with low interest rates and
poor investment returns, premiums are suppressed due to intense competition. When the
increased cost of regulation, the expense of compliance and rising commissions are added,
it is not surprising that insurers can find their earnings under pressure. Senior management
have to look closely at expenses as profits are more difficult to achieve.
Lloyd’s of London
It is interesting to study the Lloyd’s market and notice how many independent managing
agencies have been acquired recently. Many acquisitions have been from foreign buyers
from diverse countries like Brazil, Canada, China, Japan, Qatar and the USA. One of the
main attractions of buying into the Lloyd’s platform is the automatic inclusion in and the
immediacy of benefiting from the comprehensive Lloyd’s trading licences and authorisations
around the world. Intense interest is expected in the acquisition of the last few independent
managing agencies. Once all independents have been bought, the only way of entering

For reference only

Lloyd’s will be to start up a new syndicate. This approach involves submitting to the lengthy
Lloyd’s approval process and complying with Lloyd’s stated intent that new start-ups target
business that is not currently underwritten at Lloyd’s.

Research exercise
Chose a recent acquisition at Lloyd’s and identify the key drivers for the deal.

Insurance companies
Insurance companies have been consolidating for many years, such as:
• General Accident, Commercial Union and Norwich Union were acquired and consolidated
into Aviva.
• RSA is the product of the Royal merger with the Sun Alliance Group.
• AXA has absorbed the GRE (Guardian Royal Exchange) and PPP the health insurer.
• ACE acquired Chubb in 2016. It is interesting that the Chubb name is being used
although ACE was the acquirer.
There are many more examples and each country around the world has its own history of
insurer consolidation. Reinsurers are not immune to the pressure to consolidate, particularly
as a host of new competitors has arrived which has suppressed reinsurance prices. As a
result, reinsurers are either looking at merger or acquisition activity in order to diversify into
insurance or put more emphasis on direct insurance rather than reinsurance.

Critical reflection
In 2015 Zurich made an offer to buy RSA. Why do you think the offer was withdrawn?
What do you think will likely happen to RSA in the future?

Critical reflection
Consider the reasons why ACE chose to drop their own name in favour of Chubb.
 2/30 995/January 2023 Strategic underwriting

Brokers
Consolidation is not just happening to insurers, brokers are consolidating too. Marsh and
Aon, the two truly global brokers, are constantly seeking acquisition targets in order to be
Chapter 2

able to serve all client segments. Global brokers are increasingly targeting small to medium-
sized enterprise (SME) business, which historically they ignored as they focused on national,
regional, multinational and global companies. Typically, if one of the major brokers makes a
significant acquisition then the other does the same to regain equilibrium. Examples of UK
broker mergers or acquisitions are:
• Lockton acquired Alexander Forbes;
• Aon acquired Benfield;
• Marsh acquired Jelf and Bluefin;
• A J Gallagher bought FirstCity and Heath Lambert;
• Willis acquired Millers; and
• Willis and Towers Watson – a merger of equals.
The key driver of UK broker consolidation has been the advent of regulation, which has
caused a dramatic reduction in the number of UK insurance brokerages since 1977. The
Insurance Brokers Registration Council (IBRC) was the first statutory body established under
the Insurance Brokers (Registration) Act 1977. It was responsible for the registration and
training of brokers. The General Insurance Standards Council (GISC) commenced regulating
brokers in 2001 and from 2005 the Financial Services Authority (FSA) assumed
responsibility. The FSA’s role with regard to brokers was taken over by the FCA when the
FCA was established. Over the period 1977–2015 the number of UK brokers has shrunk
from 45,000 to 3,500.
As previously mentioned, broker consolidation has increased the power of the broker. The
big three global broking firms (Marsh, Aon and Willis) control a large percentage of major

For reference only

clients and this concentration – the size and weight of their accounts – has distorted the
market. While a number of insurers would like to reduce their dependence on these brokers,
it is difficult to achieve in many lines of business.

Research exercise
Examine Aon's proposed acquisition of the broker Willis Towers Watson and examine the
rationale for and against the deal.

E1 Globalisation
Globalisation and consolidation are closely connected. Globalisation is being driven by
customers’ needs and enabled by technology – particularly communications technology. The
growth in trading blocs and the creation of new trading areas enables insurers to relatively
easily move from being a national insurer to a multi-territory insurer.
These multinational businesses already have a presence in many countries but going global
means using common delivery systems, processes and support services rather than just
having offices in different countries.
Globalisation is also being helped by the opening up of previously closed markets such as
India and Brazil and by the growth and increasing maturity of emerging insurance markets
like China, India and Asia.
The prize of becoming a global insurer, reinsurer or broker is the ability to meet the needs of
global customers without the necessity of involving other insurers or brokers in countries
where they are not licensed, permitted to trade or even to be present. The ability to meet all
the needs of major customers reduces the risk of competitors creating relationships with your
customers and poaching business.
In Harmonisation of regulation on page 2/7, we discussed how it is virtually impossible to
ensure full compliance of a global programme in all territories due to each country having
their own regulators and national requirements. In recent years, many insurance regulators
are becoming stricter in enforcing non-admitted regulation and taxation on policies written
from abroad.
Chapter 2 Key global insurance issues 2/31

Example 2.1
If a global insurer underwrote 100% of a global programme, then the need for locally
admitted (licensed) policies would be minimised on the basis that the insurer would have

Chapter 2
many licences worldwide. If the insurers of global programmes do not have licences in all
the necessary local jurisdictions in which the insured is domiciled, the group parent
company must instruct local subsidiaries to purchase locally admitted policies. A few
countries allow foreign insurers to insure local risks on a non-admitted basis. Non-
admitted insurers are not licensed or regulated within a particular country or territory.

One of the main challenges in creating a global insurer or broker is the issue of local
regulation, national laws and the peculiarities of each country’s local custom and practice.
• The challenge could be as simple as an insurer that has always presented itself as a
broker market now finding it increasingly difficult to operate in markets where brokers are
not so dominant, such as Germany or Sweden.
• Another example might be how to organise underwriting teams. Anglo-Saxon insurers
typically have specialist underwriters working exclusively on lines like general liability
(GL), D&O, financial institutions (FI) and professional indemnity (PI). This division
between liability subclasses is not usual in the French market, where often a liability
underwriter will handle most liability exposures.
The nuances and characteristics of different countries contribute added complexity to global
insurance entities, compared to other less regulated businesses such as manufacturing.

E2 Convergence
In many mature markets the boundaries between the different segments of financial services
are disappearing. Convergence was made possible by deregulation. The previously

For reference only

separate worlds of banking, securities/investments and insurance are increasingly
converging. Some companies believe it is advantageous to diversify away from their core
area of expertise. There are a number of reasons for this trend. Financial regulation in the
form of Basel III or Solvency II makes diversification attractive as it provides credit in the
solvency capital requirement calculation. Modern technology, whether through innovation or
digitisation, can better support multi-disciplines within the same organisation. Another key
driver is the added value of providing more products and services to your existing customer
base, by simply selling more, cross selling or packaging. If organisations can expand their
revenue base in this way, they should be able to generate economies of scale, which should
result in a lower expense ratio and greater profits. Examples of financial conglomerates
include AXA and ING. Figure 2.3 illustrates how banking, insurance and securities industry
activities create convergence.

Figure 2.3: Convergence

Bancassurer
Financial conglomer-

Banking Insurance
industry industry

Asset
Investment manager
+
Securities Risk manager
industry (ART)

Source: Dickinson, G., cited in Atkins, D. (2015) ‘Current Strategic Issues in Insurance
Part 1’ [PowerPoint presentation]. London: Cass Business School.
 2/32 995/January 2023 Strategic underwriting

Not all attempts at convergence have been successful. Insurance interest in the US Glass–
Steagall Act 1932 and Banking Act 1933 was that the Acts limited what commercial banks
could do by prohibiting them from undertaking ‘speculative’ activities, including insurance.
Chapter 2

So-called speculative activities were left to the domain of investment banks and other
financial firms.
The Glass–Steagall Act 1932 was repealed in 1999 with the stated intent of allowing
financial firms to diversify their product offerings and be better able to operate successfully in
global markets. In fact, some banks already owned an insurance company but the repeal
gave free rein to convergence. The 2008 GFC exposed the stress points in a number of
convergent financial organisations, to the extent that American firms like AIG, Bear Stearns
and Lehman Brothers had to be rescued.
Some observers dispute whether the GFC was related to the Glass–Steagall repeal,
however others believe that it allowed banks to operate in areas which they did not
understand and increased the risk of financial contagion. In any event, it allowed financial
conglomerates to grow to the point that some of them were deemed by the US Government
as ‘too big to fail’.
Countries where convergence is most advanced are Australia, The Netherlands and Spain,
with France and the UK not far behind. It is probably fair to say that the rush to converge has
slowed since 2008.

Research exercise
Identify a financial conglomerate anywhere in the world that was badly hit during the GFC.
Try and analyse why insurance was not able to sufficiently support the banking side of the
business, or whether the banking arm disadvantaged the insurance side.

E3 New entrants

For reference only

The availability of new capital for insurance or reinsurance has largely removed the single
most significant barrier to entry into the industry. Traditionally it was a difficult and lengthy
process to raise the substantial funds required to start a new (re)insurance company. The
(re)insurance industry has become attractive to third party capital, particularly since the GFC,
as traditional investment assets have performed poorly and markets have become
increasingly volatile. This has led investors to other classes of assets. Many of the new
entrants are pension funds that believe they can obtain higher yields in (re)insurance than
conventional bond portfolios. One of the advantages of (re)insurance is that it is considered
to have little or no correlation with investment portfolios in the financial markets. Naturally if
an insurer invests in subprime investments then there is a risk of correlation. The addition of
(re)insurance to a large pension or investment fund can improve the portfolios’ risk/return
profile, as on balance insurance returns can be considered modest but steady.
New entrants choose reinsurance or insurance for different reasons. Short-tail reinsurance
classes like property are typically chosen so that the ability to exit is easier than casualty
business where the exposure and ultimate disposal of liability is a long-term obligation.
Participation in reinsurance is easier to structure on a temporary or limited-time basis
through the development and use of alternative risk transfer mechanisms of sidecars,
industry loss warranties (ILWs), index linked securities (ILSs) and catastrophe bonds. We
discuss these in Alternative risk transfer on page 2/39.
Two key attractions of insurance are:
• access to the float; and
• the distribution network.
Chapter 2 Key global insurance issues 2/33

The float is the aggregate amount of premiums paid by policyholders and held by insurers
until claims occur and are paid. In long-tailed business the length of time before an
underwriting year is closed can be in excess of ten years. Thus insurers can invest the float,

Chapter 2
within regulatory parameters, for investment income in the intervening period. Access to a
distribution network provides the opportunity for a diversified portfolio underwritten and
supported by the effective use of new sources of analytics.
Over a number of years, insurance has proven attractive to banks. One example was RBS’s
launch of Direct Line in the UK. Banks have also targeted life insurance.

Research exercise
Find an example of a bank, anywhere in the world (not RBS) which entered the life market
and examine the key drivers in their business case.

New entrants can be disruptors, as in the example of Google mentioned in What will insurers
look like in the future? on page 1/7.
Aggregators
Online aggregators, or price comparison websites (PCWs), using the internet and a panel of
competing insurers have become new entrants in many countries. Like brokers, their
earnings are commission based. Typically these aggregators do not assume any insurance
risk from their activities, although their interests are aligned with insurers through the use of
profit commission (PC). As with most MGAs, the commission base would typically cover their
normal operating expense. However, PC is the incentive payment and is paid only when
insurers make an underwriting profit. There may be a carry-forward deficit clause in the PC
which factors underwriting losses into the calculation, meaning that no PC will be paid until
underwriting is returned to profit and the prior losses have been recouped. Nevertheless,
depending on their business model, aggregators will not necessarily make a loss if the

For reference only

underwriting is not profitable. This contrasts with the situation faced by the risk-bearing
insurer that will make a loss if the underwriting is unprofitable.
Brokers and MGAs
Brokers have increasingly entered the underwriting arena by forming MGAs. Standalone
MGAs that do not carry on broking in addition to underwriting are also common. Like
aggregators, MGAs share in the profitability of underwriting through PC. Brokers are keen to
earn additional money during the prolonged soft market and adding an MGA to their
structure enables them to access new customers and share in any underwriting profits.
Potential conflicts of interest can arise when brokers also operate as an MGA; this is
considered in Managing general agents (MGAs) on page 6/22. Reinsurers are suffering
from the severely depressed rates in many of their lines of business; as a result they are
keen to offer their capacity to MGAs in an effort to achieve direct distribution and diversify
into insurance.
Brandassurers
Brandassurers have been moving into insurance for some time. They are significant
competitors because of their strong brand and large customer base. These companies aim
to sell principally personal lines insurance, initially by having an established insurer supply
the capacity and expertise, i.e. white labelling. Examples of brandassurers are UK
supermarkets such as Tesco and Sainsbury’s, the Virgin group of companies through its
financial services arm, and affinity groups such as large associations, clubs and employers.
Examples of affinity groups in the UK are the National Trust (NT) and Saga; in the USA they
include the National Rifle Association (NRA) and The Seniors Coalition (TSC). Affinity
groups provide insurance, amongst other member benefits, to create a new revenue stream
and help in retaining and attracting members. In other words, insurance in these situations
delivers sustainable added value.
 2/34 995/January 2023 Strategic underwriting

F Other significant global insurance issues

By definition some issues will be significant for certain insurers and less so for others. The
purpose of this section is to provide a brief description and analysis of a number of further
Chapter 2

global insurance issues.

F1 Fraud
Insurance fraud is a major – and expensive – problem for insurers. In 2016, UK insurers
uncovered 125,000 fraudulent claims worth £1.3bn. The Coalition Against Insurance Fraud
in North America estimates insurance fraud in the US costs $80bn per year.
Commentators suggest that 5–10% of all claims are either fraudulent or exaggerated.
Whiplash claims are an example of claims that are often fraudulent or exaggerated because
it is hard for a doctor to make a definite diagnosis as there are very few overt physical signs.
It is estimated that British drivers submit approximately 1,500 whiplash claims per day,
costing the insurance industry more than £2bn a year. This adds £90 to the average annual
motor insurance premium. The Association of British Insurers (ABI) has campaigned for
reform of the personal injury claims system for many years and welcomes the introduction of
the Civil Liability Act 2018.
Most fraud occurs in claims rather than underwriting, although people do lie when buying a
policy in order to get a cheaper premium.
Quote manipulation fraud has grown more common with the rise in popularity of aggregators
and PCWs. Customers can attempt to game the online systems by finding out what reduces
the premium and then changing their answers to reduce their premium quote. This
manipulation is monitored but it is often a judgment call as to whether someone is making a
genuine comparison – will it make enough of a difference to my premium to go to the effort to
park my car in the garage each night – or whether they are deliberately misleading the

For reference only

insurer.
Technology-based fraud detection systems are becoming more common in the insurance
industry. The systems use analytical and investigation tools that can help prevent fraud both
at the customer’s underwriting and claims touch points.

F2 Emerging risks

From the insurer’s point of view, Lloyd’s has defined an emerging risk as ‘an issue that is
perceived to be potentially significant but which may not be fully understood or allowed for
in insurance terms and conditions, pricing, reserving or capital setting’.
Marsh and McLennan Companies emerging risks reports: www.mmc.com/insights/
emerging-risks.html

Be aware
995 Strategic underwriting is not a liability insurance unit and an explanation of the
principles is beyond the scope of this study text. Nevertheless, a solid knowledge and
understanding of emerging risks is needed in order to successfully operate at a strategic
level within insurance. This section aims to identify key strategic issues relating to
emerging risks that will be of particular relevance to students of this course.
For more information on liability, refer to chapter 8, section F in M96 Liability insurances.

It is important to understand that emerging risks do not only involve new technologies or
processes, but can also involve products or services that may have existed for some years.
A ‘new’ emerging risk
It may sometimes be thought easier to insure a new risk that emerges, for example, 3D
printing. Insurers would need to carry out a risk assessment, draft appropriate policy terms
and conditions, price appropriately and later reserve correctly for claims.
Chapter 2 Key global insurance issues 2/35

However, awareness of a new risk is not the same as fully understanding the risk exposures
that are being presented:
• Is the underwriter covering material damage to the 3D printer or liability for products

Chapter 2
made by the printer?
• Who has the liability: the person who designs the printer, the printer manufacturer, the
software designer, the supplier of raw material for the printer, the printer user or another
party involved in the distribution chain?
• What products made by the printer would an underwriter exclude liability for?
On the other hand, an emerging risk can be a component that is added to existing products.
An example is nanotechnology (nanotech). Nanotech is already in products as diverse as
food, drink, clothing, sunscreen, electronics and tennis rackets. The risks of nanotech are not
yet properly understood. Free nanoparticles are so tiny that they can be ingested or
absorbed by humans. Certain nanoparticles are similar to asbestos fibres and are potentially
toxic. What can a product liability underwriter do in this situation? Importantly, will
competitive market conditions allow underwriters to charge for additional known exposures?
Do you exclude all products containing nanotech? If you did, you would almost certainly be
exiting a huge section of the market, assuming that brokers and risk managers would even
entertain such an exclusion.
It may be many years before nanotech causes claims. This scenario has echoes of
asbestos. How many liability underwriters were concerned about possible health risks arising
from mobile phones when they came on the market in the 1980s? Even now, some 30 years
later, the link between electromagnetic fields (EMF) from mobiles causing cancer is still the
subject of scientific research and debate. At what point in time did insurers exclude or
sublimit cover for claims arising from exposure to EMF? Today an EMF exclusion is
commonplace in continental Europe but not in the UK. If a 1980s policy had been written on
an occurrence basis then there would still be cover for EMF-related claims manifesting

For reference only

today. Best advice would probably be to only issue claims-made policies, aggregate similar
or series claims and manage limits, if EMF is not excluded.
‘Historic’ emerging risk exposure
In the previous paragraph we touched on emerging risks that can arise today in respect of
risks that were underwritten decades ago. Classic examples of materialised emerging risk
exposures from the past are lead paint and asbestos. Although lead paint and asbestos
claims are now unlikely to threaten most insurers’ solvency, they will impact on future
profitability if current reserves are inadequate. Given that asbestos-related deaths are
increasing, regular reserve reviews will be necessary for many years to come. A key element
of uncertainty regarding latent risks is the prevailing sentiment of society and the attitude of
the judiciary at the time these decades-old events are decided. The impact of case law
makes it difficult to accurately quantify liabilities until they are eventually crystallised. This
process can lead to step reserving over many years and generate reserve strengthening that
adversely affects financial results.
Exclude emerging risks?
It might be suggested that underwriters should be proactive and exclude emerging risks until
these risks have been properly quantified and evaluated. This suggestion normally falls
down for several reasons:
• an exclusion has to be specific unless the entire product is excluded, which is
commercially unacceptable;
• competitive market pressures would mean that policies containing such an exclusion
would not be recommended by brokers or purchased by risk managers; and
• how does a prudent underwriter know that a given product may contain a latent exposure
that is currently unrecognised?
One exception to resisting the imposition of a blanket exclusion was the millennium bug
(Y2K). The great majority of the insurance market excluded Y2K in anticipation of chaos at
the turn of the twentieth century. In reality, this one-off event caused hardly any
insurance claims.
Identifying emerging risks
Insurers should use a systematic process to understand emerging risks. Some large insurers
have dedicated research and development units that are tasked with the responsibility of
identifying emerging risks. For example, Lloyd’s has a dedicated emerging risks team. One
 2/36 995/January 2023 Strategic underwriting

of the key tasks is to identify risk before it causes a claim. By examining the characteristics
of the risk and comparing it to known risks, there may be the opportunity to use historical
claims experience to assist in predicting future claims. Predictive and forward-looking
Chapter 2

modelling can be useful tools, particularly in a scenario-based approach. Existing portfolios

then need to be analysed to establish whether the risk is already present and, if so, what
action needs to be taken. Once insurers have identified, quantified and evaluated emerging
risks the usual range of underwriting options are available to them, namely:
• impose an exclusion;
• carve out a sublimit;
• do nothing, i.e. leave the policy wording silent on the issue; and
• create a new specialist product which provides the cover.
It might be that insurers decide to lobby the government with a view to the creation of a new
fund, similar to the Mesothelioma Trust Funds.
Legislation as an emerging risk
Emerging risk can come from the law. Insurers must constantly scan the horizon to identify
proposed new legislation that may impact their business. Early identification can be timely if
insurers wish to lobby governments in an effort to influence the scope or content of bills
before they are enacted into law. Most legislation is prospective and impacts policies
incepting after a certain date. This means that insurers can plan ahead and adapt to the new
situation by amending procedures, changing policy terms and conditions, reviewing pricing
or even withdrawing from a class of business. However, some legislation will apply to all
outstanding as well as future claims from a specified date. An example is changes to the
discount rate used in bodily injury claims. Portfolios such as motor and liability will be hit by a
retrospective cost because the premium on those old policies will prove to be inadequate.
There has been significant new legislation in the UK that has had a direct impact on

For reference only

insurance.

Table 2.1: Examples of recent UK legislation affecting insurance

Consumer Insurance CIDRA brought English consumer law more into line with other European
(Disclosure and jurisdictions with key changes being the replacing of the duty of disclosure with
Representations) Act 2012 the duty to take reasonable care not to make a misrepresentation, and the
(CIDRA) abolition of the basis of the contract clauses. CIDRA shifted the balance of the
law from insurers to consumers.

Insurance Act 2015 (IA 2015) IA 2015 changed commercial insurance law in respect of the duty of disclosure
and misrepresentation, breaches of warranties and remedies for fraudulent
claims. The purpose of the Act was to strike a more even balance between the
interests of the insurer and the insured. IA 2015 applies to non-consumer
contracts only as consumer policies are dealt with under CIDRA.

Insurance Distribution The IDD came into force on 22 February 2016 and has applied in the UK since
Directive (IDD) 1 October 2018, repealing the Insurance Mediation Directive (IMD).
It applies to everyone who sells, advises on, transacts or administers insurance
contracts. It imposes training/continuous professional development (CPD),
product governance and other requirements on insurance brokers, insurers,
financial advisers and reinsurers.

Consumer Rights Act 2015 This Act applies new consumer rights when goods or digital content is faulty
and services are not up to standard or provided without reasonable care and
skill. It also introduced alternative dispute resolution (ADR) for consumer
disputes.

Enterprise Act 2016 This Act created a legal obligation for all insurance claims to be paid within a
reasonable timeframe, with damages to be paid by insurers where a
policyholder suffers additional loss because of an insurer’s unreasonable delay
in payment.

The Third Parties (Rights These regulations came into force in August 2016 and allow recoveries by third
Against Insurers) parties of liabilities from individuals and companies who are insolvent but have
Regulations 2016 insurance in place for the liability.

Emerging risk can come from any source, be it new processes, inventions, lifestyle choices
or technological advances. A non-exhaustive list is shown below.
Chapter 2 Key global insurance issues 2/37

Critical reflection
As you look at the list of risks, consider how some are more developed than others. In
some cases the risk is known but the insurance industry reaction to the exposure is not

Chapter 2
yet mature.
Do you think of these risks as a threat or an opportunity?

• Big data;
• climate change;
• cloud computing;
• cyber;
• driverless (autonomous) cars;
• endocrine disrupting chemicals (EDCs);
• EMF;
• environmental risks;
• fracking;
• genetic engineering;
• global supply chains;
• Google Glass;
• greater life expectancy;
• intellectual property;
• Internet of Things (IoT);
• Meta Spaceglasses (augmented reality);
• nanotechnology;

For reference only

• obesity;
• reputational risk;
• solar flares;
• unmanned aircraft systems (drones);
• wearable technology; and
• 3D printing.

Research exercise
Chose the three items that you know the least about from the list of emerging risks.
Research your selected risks and what impact they might have on insurance.

F3 Changing political, economic, social and legal

landscapes
Insurance is adaptable to every country across the world. Different challenges present
themselves in each country or region and the manner that insurance is designed, marketed,
distributed and sold needs to be adapted to reflect the appropriate landscape.
F3A Political
Change is happening all around the world. People of a certain age never expected to visit
countries behind the Iron Curtain or see the Berlin wall torn down. Often major events
happen quickly. Consider the Arab Spring uprisings that swept across North Africa and the
Middle East in 2011. Increasingly the world seems a more uncertain place. Political events
are becoming of major concern to insurers. Consider the following examples:
• Ukraine and other former Soviet republics;
• Daesh (so-called Islamic State, or IS) extremist attacks;
• terrorism;
• UK Brexit;
• US President Trump; and
• the rise of the far right in many countries.
 2/38 995/January 2023 Strategic underwriting

Many insurance growth opportunities are in politically volatile regions of the world, such as
the Middle East, Africa and Latin America.
During 2017 and 2018, the UK terror threat level was either severe (attack highly likely) or
Chapter 2

critical (attack expected immediately), which is the highest level. In 2019, the main threat is
still Islamist extremism from Al Qaeda, Daesh and associated groups. The UK expects these
and other terrorists to try and cause mass casualties and economic damage. Attacks across
Europe and beyond have been similar in nature to the UK attacks to date.
Europe is facing a persistently high terrorist threat, demonstrated over recent years by
several mass casualty attacks. The start of 2016 saw the highest number of terrorism deaths
in Western Europe since 2004. Many countries are carrying out frequent counter-terrorism
activity, disrupting and stopping attacks being plotted and organised on a regular basis.
UK Brexit is causing significant uncertainty and much of the press coverage dwells on
negative issues. The potential loss of passporting into the EU is of legitimate concern, as is
the wider impact on UK financial services and London’s position as a global financial centre.
However, the LMG does see positive signs arising out of Brexit as the UK Government is
looking for ideas and listening to the views of the insurance industry. It is estimated that
some 700 EU insurers and financial services firms would lose their passporting rights to
operate in the UK, against approximately 200 UK firms passporting into the EU.
Not all political change is bad. During 2016, the UN, the World Bank Group and the
insurance industry formed the Insurance Development Forum (IDF) to incorporate insurance
industry risk measurement knowledge into government disaster reduction and resilience
frameworks. The objective of IDF is to build a more sustainable global insurance market in a
world facing growing natural disasters and climate change. One of its aims is to close the
protection gap in the developing world, where at the present time over 90% of natural
disasters are uninsured. The IDF will advise governments so that they can better deploy
resources to protect people and their property. Research has shown that a 1% increase in

For reference only

insurance penetration can reduce the disaster recovery burden on taxpayers by 22%.
F3B Economic
One of the key drivers of demand for (re)insurance is the state of the economy. Developing
markets have a relatively low but rising insurance penetration. When wages are low then
sums insured will be low, assuming coverage is purchased at all. If disposable income is low,
then insurance is likely to be a low priority except for compulsory insurances such as motor
insurance. As wealth increases then more insurance is purchased, whether because more
possessions are owned, possessions are worth more or coverage is now affordable when
previously it was considered too expensive.
Developing countries typically see the majority of insurance spend being directed to material
damage policies, such as property, cargo and motor. The uptake of liability insurance usually
lags behind property either because legislation is not in place to drive demand or there is a
lack of recourse to the courts. Litigation is often expensive, sometimes unpredictable and in
some countries unusual or against people’s beliefs. Insurers often target developing or
emerging economies as they can sell to first-time buyers, which can be considered
preferable compared to competing with an incumbent insurer. More sophisticated insurance
products can be launched to match the demands of the population as wealth and gross
national product (GNP) increases. Possible downsides to underwriting in these countries are
that the legal framework, judicial attitudes and regulatory approach can often change rapidly,
creating exposure for the first time or increasing exposure where previously it was benign.
Pricing is difficult to calibrate when there is a lack of historical claims data.
Mature economies such as Australia, Japan, North America and Western Europe have
achieved a high level of insurance penetration. While this might be considered desirable, it
also means that insurers find it harder to find growth in these markets because the number
of first-time purchasers will be fewer.
In 2016, the World Bank Group (a member of the IDF) launched the Pandemic Emergency
Financing Facility (PEF) designed to protect the world against deadly pandemics. It is hoped
that this will create an insurance market for pandemic risk insurance.
Chapter 2 Key global insurance issues 2/39

F3C Social
Most governments provide social insurance, typically for unemployment, health and
pensions. Social security will reduce the size and scope of the available commercial

Chapter 2
insurance market or eliminate it entirely. An example of the latter in the personal lines market
is the Insurance Corporation of British Columbia (ICBC) in Canada. ICBC is a provincial
Crown Corporation created to provide universal compulsory car insurance to drivers in
British Columbia. Another example is the UK’s NHS, which self-insures its medical
malpractice liability. This self-insurance clearly removes the bulk of UK medical malpractice
from the commercial insurance market, although reinsurance is purchased.
Societal risks are highly likely to impact insurance in the years ahead. Population
demographics show that certain regions will grow fastest in the next 50 years, such as Africa
followed by emerging Asian countries (excluding China). Large-scale involuntary migration
driven by climate change, political unrest and terrorism will contract some insurance markets
and expand demand in other regions or countries.
F3D Legal
Insurance products have to comply with the law in the country or jurisdiction where the
contract is made. Usually this is a straightforward issue but a number of transactions are
cross-border. An example is a US firm that purchases insurance from a European insurer.
That policy must comply with US State regulations, Federal regulations (if applicable) and
US public policy. Certain US States consider insurance of punitive damages to be against
public policy. Consider if the claim arose in a state that does not allow cover for punitive
damages, but the firm’s main office is domiciled in a state where insurance of punitive
damages is allowed. Clearly we are straying into complex legal issues, which we should
leave to the lawyers. Suffice to say that some claimants will want their claim heard in the
most favourable forum. This practice is known as forum shopping.

F4 Alternative risk transfer

For reference only

The term alternative risk transfer (ART) is used to describe mechanisms to transfer
underwriting risk without purchasing a traditional insurance product. Large customers
typically use ART to:
• access reinsurers without using commercial insurers;
• access capital markets;
• retain potential profit;
• manage new exposures;
• reduce frictional costs; and
• self-fund (part of) their risk in a tax efficient way.
ART has developed because conventional insurance has been unable or unwilling to meet
all the demands of customers, particularly when losses have been too frequent, sometimes
when the market cannot offer sufficient limits and new risks emerge.
Traditionally insurers have responded to catastrophe losses by increasing prices and cutting
back on capacity. While this reaction may be appropriate for an insurer, it does not meet the
needs of their customers. Customers transfer their risk to insurers and do not want to take
the risk of insurers’ capacity suddenly drying up after a major loss. Equally, customers do not
think it appropriate that premiums double in a hard market when their insurance spend may
have been authorised in the previous year’s budget.

Be aware
Estimates can be unreliable, but ART removes a significant amount of premium from the
conventional insurance market. There is no reason why ART will not continue to erode
(re)insurance market share unless (re)insurance can respond to the drivers behind ART.
Insurance needs to find ways to remain relevant by adapting to new and evolving
exposures and meeting the needs of customers.
 2/40 995/January 2023 Strategic underwriting

In the rest of this section we will briefly consider the following forms of ART:
• finite reinsurance;
• insurance derivatives;
Chapter 2

• insurance linked securitisation;

• reinsurance sidecars; and
• captives and mutual.
F4A Finite reinsurance
Finite reinsurance is similar to a conventional reinsurance contract but with one major
difference. The difference is that risk transfer is limited either by stretching the limit over
multiple years or by limiting the maximum possible loss ratio under the contract. Some finite
risks are placed on a retrospective basis as a means of funding the loss after the event.
Finite reinsurance can be questionable as to whether it meets the test of true risk transfer.
For that reason auditors and regulators are alert to these contracts to ensure they are
correctly accounted for in financial statements and that they do not obscure an insurer’s true
financial position.
F4B Insurance derivatives
Insurance derivatives grew out of the financial derivatives and options market as
mechanisms used by companies to protect themselves against future price movements and
interest rates. In (re)insurance these are normally called industry loss warranties (ILWs) and
they became more common after 2005’s Hurricane Katrina. An ILW contract is one that will
pay an agreed amount of money once a certain level of loss has occurred. Typically the
contract trigger is an industry loss as defined and measured by an external organisation.
Property Claims Services, a division of the Insurance Services Office (ISO), is generally the
source for industry loss estimates for US perils. SIGMA, a division of Swiss Re, and Munich

For reference only

Re’s NatCAT Service are often the source for loss estimates outside the US.
F4C Insurance linked securitisation
The banking industry developed securitisation in the mid-1980s as a method of generating
earnings from illiquid assets. Securitisation was typically used by banks to sell the cash flow
generated from bundles of mortgages to free up their own funds. Known as mortgage
backed securities (MBS) they were sold on the capital market, generating cash for the
banks. Investors received the stream of income generated by repayment of the capital and
interest from the mortgage bundles.
Insurance linked securities (ILS) are products of the convergence between the capital
markets and insurance and are highly popular, with estimates of the ILS market in the region
of US$8bn per annum. Insurers use ILS as a capital management tool by transferring risk to
the capital market. ILS are often more attractive to capital markets than shares in an
individual insurer or holding shares in a number of different insurers, by pooling an income
stream generated from insuring millions of risks. In addition, the use of ILS generates cash
upfront for insurers, which improves their capital position.
As part of the UK Government’s plans to make London an international centre for ILS, the
Risk Transformation (Tax) Regulations 2017 came into force in 2017. The Regulations
created a legal structure where insurance special purpose vehicles (ISPVs) are within
Solvency II-compliant protected cell companies (PCC) to provide for faster PRA approvals
and efficient operations.
Catastrophe (cat) bonds
Catastrophe (cat) bonds are a segment of the ILS market and are used to transfer risk to
capital market investors, which in turn frees up reinsurers’ own capital and allows them to
write other business. Additionally it reduces their reinsurance cost. Cat bonds are usually
issued for between three and five years’ duration. Figure 2.4 illustrates how cat bonds work.
Chapter 2 Key global insurance issues 2/41

Figure 2.4: How a catastrophe bond works

Not worth doing for less than £100m

Chapter 2
£250m Issues bond
Cat exposure
Hedge
Insurer ISPV fund

Pays cash

No event
Repays x% for y years + redemption
Event occurs
Bond ‘forgiven’

Time

Insurer may issue bond via an insurance special purpose vehicle

(ISPV), a trust which takes the risk off balance

Source: Atkins, D. (2015) ‘Current Strategic Issues in Insurance Part 1’ [PowerPoint

presentation]. London: Cass Business School.

F4D Reinsurance sidecars

Sidecars are another mechanism to transfer catastrophe risk to investors in respect of
specific exposures. Like other ART mechanisms, they became popular after Hurricane
Katrina. Sidecars are special purpose vehicles (SPVs) to which (re)insurers cede an agreed

For reference only

portfolio. Sidecars are designed to have a limited lifespan to boost a reinsurer’s capacity by
increasing their capital following a major loss or series of losses. Capital market investors
purchase shares in the sidecar and assume the risk and the profit or loss of the specific
portfolio. Sidecars differ from traditional reinsurance treaties in a number of ways, perhaps
the most significant being that the liability of the investors is limited to the amount of funds in
the sidecar. If the sidecar is exhausted, any residual liability will revert to the reinsurer.
F4E Captives and mutuals
The majority of large national, multinational companies and professional services firms and
virtually all global businesses have formed one or more captive insurance companies during
the last 40 years. Originally captives were owned by a single parent and only insured the
parent’s risks. Some captives have diversified into writing third party risks. Mutuals could be
considered captives with multiple parents, or owners. The essential characteristic of a mutual
is that they only insure firms who are also shareholders. Mutual members are typically firms
from the same industry group.
The use of captives reduces the frictional cost of insurance and provides direct access to the
reinsurance market. A captive is an efficient method of retaining a portion of your own risk
and benefiting from any eventual profit. It is usual for captives to be located in tax
advantageous domiciles, often offshore, with Bermuda being the most popular. Bermuda has
a long history as a regulated but business-friendly environment, with good insurance
expertise and sufficient services providers. Bermuda gained equivalence under Solvency II,
which means that Bermuda (re)insurers, captives and mutuals will not be penalised when
writing business in the EU. To date Bermuda and Switzerland are the only non-EU countries
to have been granted equivalence under Solvency II.
• All major industry sectors are users of captives worldwide.
• Total captive premiums worldwide are in excess of US$100bn.
• Mutual market share is estimated at more than 26%.

Research exercise
Investigate the different types of ART currently being used in your market. Do you think
ART is here to stay?
 2/42 995/January 2023 Strategic underwriting

F5 Islamic insurance (Takaful)

Muslims make up 26% of the world's population and there is a need for more Islamic
insurance (Takaful). Insurance penetration is low in predominately Muslim countries and
Chapter 2

the lack of acceptable insurance is holding back economic development. At the present time,
Muslim countries or clients who adhere to Muslim practices and principles are an
underserved market. Takaful represents a solid growth opportunity.
The key reasons why conventional insurance is not widely accepted is that Shariah (Islamic
law) forbids:
• Gharar: uncertainty of contract;
• Maysir: gambling/speculation;
• Riba: usury or interest charged on loans; and
• unethical investment.
Muslim scholars insist that insurance in Islam should be based on principles of mutuality and
cooperation, encompassing the elements of shared responsibility, joint indemnity, common
interest and solidarity.
Takaful complies with Shariah. Takaful policyholders are joint investors with the Takaful
operator (the insurer), who acts as a Mudharib (manager) for the policyholders in return for a
management fee. The fee is to cover the costs of sales, marketing, underwriting and claims
management. Policyholders share in the investment pool’s profits as well as its losses. A
positive return on policies is not guaranteed, as any profit guarantee would be similar to
receiving interest and is prohibited.

Critical reflection
Consider how Takaful provides a risk-free fee to Takaful operators compared with

For reference only

conventional insurers making their profit or loss from the risk-bearing premium. It is
perhaps comparable with a fronting fee, which carries no insurance risk.

There is an increasing demand for a Shariah-compliant insurance system to assist in

underpinning and supporting Muslim economies. This would require:
• raising awareness of the concept of insurance with the Muslim public;
• Takaful regulation;
• a legal framework;
• accounting standards; and
• placement of reTakaful (equivalent to reinsurance).
There is also the additional consideration of facilitating participation by Muslim investors in
operations elsewhere in the world. A significant amount of Muslim finance is available for
investment. Islamic finance is currently growing 50% faster than traditional banking and 2016
global Islamic investments/assets were estimated to exceed £2 trillion, significantly more
than traditional sources. Islamic finance is becoming increasingly sophisticated, to include
the crowdfunding platform Human Crescent, and is expected to reach $3.5 trillion by 2021.
The UK government are keen to progress the development of Takaful to enable Islamic
investment in UK projects. Without Takaful, Islamic investment funds will not participate in
large projects and will invest elsewhere where Takaful is offered to investors. It is therefore
important to address the issues and challenges presented by offering an alternative model
that enables Muslim participation in insurance worldwide.
As an example, Shariah-compliant MGA Cobalt Underwriting has been selected as the
insurer of preference for the UK’s first commercial nationally significant infrastructure project
(NSIP), the proposed London Paramount Entertainment resort in Kent. This is one of an
increasing number of major projects in the UK and Europe which are backed by Middle
Eastern and Islamic investors who require a fully Shariah-compliant investment.

Research exercise
Identify and review a publicly announced project funded by Islamic finance.
Chapter 2 Key global insurance issues 2/43

F6 Insurance industry reputation

It takes 20 years to build a reputation and 5 minutes to ruin it.

Chapter 2
Warren Buffett

The insurance industry faces a considerable challenge regarding its reputation. It is

reasonable to describe most insurance purchases as ‘unenthusiastic’ or a required
necessity. After all, buying a product that provides an intangible ‘promise to pay’ is not
glamorous and in the customer’s mind the purchase can be linked to future negative events.
The way in which we within the industry go about our daily business will reflect what people
think about our honesty, ethics and trustworthiness. Behavioural economics has shown that
our brains have a negative bias and so we need to work extra hard to overcome this
natural bias.
As a result, the insurance industry needs to continually work on improving its image,
performance and behaviour. Everyone in the insurance industry needs to commit to
engendering trust and creating business confidence for customers and society at large.
Let us look at how certain stakeholders might view insurers’ reputations.
Shareholders
According to stock market statistics two global industries have destroyed shareholder value
in recent decades, namely airlines and non-life insurers. However, it is interesting that
despite insurers’ poor investment performance there is still a flood of alternative capital being
deployed into the insurance and reinsurance market. So the question is why is alternative
capital attracted to (re)insurance?
Most alternative capital covers natural catastrophes and is generally targeted at events
outside expected loss, for example, 1:100-year events. This provides uncorrelated

For reference only

diversification for financial markets. The SPVs are efficient and the rate is attractive
compared to the low interest rates available from government bonds. There is also the belief
that the increasing use of new technology is improving the management of capital so that
past poor performance is not likely to occur in the future.
Customers and the public
Customers’ confidence in insurers has been damaged by an uncaring and perhaps
sometimes bureaucratic approach to customer relations. Headline issues such as mis-selling
scandals and the 2004 New York Attorney General Spitzer civil suits against Marsh, AIG and
ACE relating to contingent commissions, bid rigging and pricing collusion, have tarnished the
insurance industry’s image. Typically the only insurance touch points are purchase and
claims. It is during these customer interactions that a perceived lack of transparency,
complex contractual language and technical claims disputes damage the reputation of
insurers. Many insurers do provide excellent customer service throughout the customer
journey but more remains to be done in this area if confidence is to be rebuilt.
One of the ways that insurance can improve customer experiences is to foster talent in the
industry to better serve clients, not just in underwriting but also in claims, policy wording and
sales and marketing.
Insurance needs to do a better job at educating today’s customers that insurance is vital to
all aspects of global society. But to do that insurers need to put the interest of the customers
first, at the heart of their business models and deliver prompt, consistent and understandable
decisions when losses occur and claims are made.
Government and regulators
Recent legislation such as CIDRA, IA 2015, the Consumer Rights Act 2015 and the
Enterprise Act 2016 might not have been necessary but for the poor behaviour of the
insurance industry over many years.
There have been very few UK insurer failures in recent years to concern the regulators and
the advent of Solvency II may further reduce the risk of insolvencies. Much of the focus of
the FCA is on conduct risk, delegated authorities and conflicts of interest, in an effort to
improve insurers’ attitudes to customers and improve customer outcomes.
Regulators are also concerned about data security and many insurers have been fined
because of loss of unencrypted data in recent years.
 2/44 995/January 2023 Strategic underwriting

Intermediaries
Brokers, coverholders and MGAs are included in the FCA’s focus, described above, on
improving customer confidence and outcomes.
Chapter 2

Employees
Employees need to be better educated and technically competent so that they can deliver a
professional customer-centric service. The Chartered Insurance Institute (CII)’s drive for
inclusion and diversity, talent and professionalism is designed to attract the best and
brightest people into insurance, to the benefit of insurers and customers. Increasingly,
insurance people need to come from outside insurance, bringing new skills (honed
elsewhere) into the industry. If risk and compliance people were in high demand in the last
decade, it looks like tech savvy individuals and data analysts will be key to the next decade.

Case study: VW emissions scandal

In 2015 a global emissions scandal engulfed one of the world's largest car manufacturers,
Volkswagen (VW). It was a deliberate and coordinated attempt by VW to deceive the
authorities on a massive scale and sell cars that did not meet environmental standards.
The American Environmental Protection Agency (EPA) found that many VW cars being
sold in the US had devices in diesel engines that could detect when they were being
tested. Subsequently VW admitted that it had cheated the diesel emissions tests. Some
11m cars were fitted with 'defeat device software' that would lower emissions during test
conditions. Actual nitrogen oxide (NOx) emissions could have been as much as 40 times
higher than the levels tested by regulators and advertised to car owners. All the cars will
be recalled and fixed at enormous expense – and VW is facing billions of pounds in fines
and litigation.
A second admission from VW followed when VW announced that the CO2 emissions and
fuel consumption levels of some 800,000 petrol and diesel cars had been manipulated.

For reference only

The UK government calculates vehicle taxes on the basis of CO2 emissions because it is
a greenhouse gas.
As a result of this scandal, many analysts are predicting the demise of diesel technology
in favour of greener alternatives. VW has said that it will redirect its future investment into
cleaner engines and especially electric cars.
While we have issues of pollution, green energy and reputation colliding in this scandal, it
is the unethical corporate behaviour that has so damaged the reputation of Volkswagen. It
will be years before the full financial effects of this scandal can be calculated. VW,
founded in 1937, may find that the 2015 emissions scandal has severely damaged its
reputation as one of the world's leading brand names.

Critical reflection
How would you have handled the VW emissions scandal differently, if you were the
decision maker?
Comment on this quote from Martin Winterkorn (CEO of VW at the time):
‘I’m not aware of any wrongdoing on my part’.
Chapter 2 Key global insurance issues 2/45

Summary
The main ideas covered by this chapter can be summarised as follows:

Chapter 2
• Regulators are paying increased attention to the insurance industry. Insurers must not
only comply with their home domicile regulators but also numerous complex regulations
around the world. They also need to ensure that the correct culture and conduct risk is
embedded in their organisations.
• Data has always been vital to insurance but is now capable of being captured, stored and
analysed in ever-increasing volumes. Big data is driving increasingly sophisticated
analytical techniques.
• New and innovative technology is needed in the insurance industry in order to adapt and
respond to customers in this digitally connected world. Adopters of new technology can
take competitive advantage of the IoT, before outside disruptors move into insurers'
space. Internet technology allows TOMs to be redesigned without everything being in
one place.
• Climate change is probably the biggest global challenge that insurers face. As sea levels
rise, changing weather patterns occur and natural catastrophes increase, serious social
and economic issues need to be addressed and insurance solutions found. Insurers are
playing an important role in the growth of the renewable energy sector and looking to
support clean green investments and divest major greenhouse gas contributing
industries.
• Consolidation in the insurance industry is being driven by intense competition caused by
a flood of alternative capital; the race to capture market share in developing and
emerging countries; stagnant growth in developed countries; technology; regulation and
capital adequacy issues. Consolidation invariably means globalisation in an effort to gain
economies of scale and meet the needs of global customers.

For reference only

• Boundaries between different segments of financial services are disappearing and
convergence is being made possible by deregulation.
• Other significant global insurance issues include emerging risks and the ever-changing
political, economic, social and legal landscapes.
• ART is no longer irrelevant and ILWs, ILS, cat bonds, sidecars and captives/mutuals
remove a significant premium volume from traditional insurers. Islamic insurance
(Takaful) represents a major growth market.
• Insurers need to rebuild customer trust and improve the industry's reputation.
 2/46 995/January 2023 Strategic underwriting

Additional reading
Baluch, F., Mutengand, S. and Parsons, C. (2011) 'Insurance, Systemic Risk and the
Financial Crisis', The Geneva Papers, 36, pp. 126–63. doi: 10.1057/gpp.2010.40 https://
Chapter 2

link.springer.com/article/10.1057/gpp.2010.40.
Carney, M. (2015) 'Breaking the Tragedy of the Horizon climate change and financial
stability', Speech given at Lloyd's of London. Transcript available at: https://bit.ly/2CYyj65.
De Sherbinin, A., Schiller, A. and Pulsipher, A. (2007) 'The vulnerability of global cities to
climate hazards', Environment & Urbanization, 19(1), pp. 39–64. doi:
10.1177/0956247807076725.
Extracting business value from the 4 V's of big data. IBM infographic. Available at: https://
ibm.co/2DcBKa3.
'FCA publishes feedback statement on Big Data Call for Input', press release (2016). FCA.
Available at: https://bit.ly/2DbfbSX.
Hardy, T. (2010) 'Climate change and insurance law', Journal of the British Insurance Law
Association, 123, pp. 50–60.
HM Treasury (2016) Financial Sanctions: Guidance. Office of Financial Sanctions
Implementation (OFSI). Available at: https://bit.ly/2mQeiEF.
Murray, J. (2014) 'Sir David King: "Climate change is not the biggest challenge of our time,
it's the biggest challenge of all time"', Business Green. Available at: https://bit.ly/2DaQ9Uf.
Rose, S. White paper: Demystifying Analytics– Proven Analytical Techniques and Best
Practices for Insurers. SAS. Available at: https://bit.ly/2AzOmFK.
Roxburgh, C. (2006) Insurance Company of the Future. McKinsey.
Swiss Re SONAR (2017) New emerging risk insights: June 2017. Zurich: Swiss Re.

For reference only

Available at: https://bit.ly/2PsmNq2.
Woolard, C. (2015) 'Putting the customer at the centre of the business: is it a long road
ahead for the FCA?', RiskMinds Conference Conduct Forum. Transcript available at:
https://bit.ly/2yIv1ki.
 Chapter 2 Key global insurance issues 2/47

Self-test questions

Chapter 2
1. What do UK regulators mean when they refer to 'setting the tone from the top'?

2. Provide a definition of big data.

3. What do you understand by the term 'virtual insurer'?

4. What are some of the reasons why the cost of catastrophes is increasing?

5. Give three reasons why brokers are consolidating.

6. What is the purpose of a reinsurance sidecar?

You will find the answers at the back of the book

For reference only

For reference only
 Analysing and evaluating
3
insurance issues

Chapter 3
Contents Syllabus learning
outcomes
Introduction
A Strategic management tools 1.2
B Using strategic management tools 1.3
C Economic cycle 1.4
D Insurance cycle 1.4
Summary
E Scenario
Self-test questions

For reference only

Learning objectives
This chapter relates to syllabus section 1.
On completion of this chapter and independent research, you should be able to:
• discuss key strategic management tools and their appropriateness in evaluating global
strategic insurance issues;
• analyse key global strategic insurance issues using appropriate strategic
management tools;
• explain the principles of behavioural economics and apply these to underwriting issues;
• explain how demographics are driving structural change in the global economy;
• discuss the economic cycle; and
• analyse the main factors in the insurance cycle.
 3/2 995/January 2023 Strategic underwriting

Introduction
Extensive research and analysis of key issues is necessary to ensure business confidence
for any strategy. In order to plan, particularly at a strategic level, it is necessary to carry out
extensive analysis of key issues. Once analysed, these issues have to be evaluated so that
the resultant plan addresses all relevant issues. Planning supported by rigorous, organised
research carries credibility and greatly improves the likelihood of a strategy being adopted.
Typically, a strategic underwriting plan is central to securing new capital and maintaining the
supply or allocation of capital. As a consequence, underwriters should fully understand the
Chapter 3

key issues that impact on the success or failure of the plan. While capital may be plentiful at
the present time, there have been times in the past when capital was scarce and insurers
had difficulty in securing sufficient capital.

Research exercise
Research the causes and effects of the liability crisis in the 1980s.

Underwriters need to be acutely aware that their employment is dependent on continually

proving through results that they deserve their capital allocation. An excellent underwriting
track record isn’t sufficient once you reach or aspire to reach a senior level within the
underwriting industry; you also need to be able to create realistic plans and oversee their
execution.
In this chapter we consider some of the many strategic business management tools
available for use in analysing and evaluating key insurance issues. We then look at
examples of how the tools are applied in insurance.
We also briefly look at macroeconomics in terms of the global economic cycle and how

For reference only

demographics and customer behaviour are an important part of the analysis.
Finally, we review the insurance cycle and discuss whether the traditional cycle will reassert
itself in the future. It is important to remember that insurance is subject to a market cycle just
like any other industry – although insurance does have unique aspects and the timing of the
cycle may be different to other cycles.

Key terms
This chapter features explanations of the following ideas:

7-S Framework Balanced scorecard Behavioural Benchmarking

economics (BE)
Boston Matrix Core competency Demographics Driving force
analysis
Economic cycle Financial modelling Gap analysis Insurance cycle
Intellectual expertise PESTLE Porter’s Five Forces Scenario planning
Stakeholder analysis SWOT War games
Chapter 3 Analysing and evaluating insurance issues 3/3

A Strategic management tools

Be aware
995 Strategic underwriting is not a corporate planning unit and grounding in the planning
process in insurance is beyond the scope of this study text. Nevertheless, a more
advanced knowledge of strategic management tools is needed in order to successfully
operate at a strategic level within insurance. This chapter aims to identify key strategic
management tools and their use of particular relevance to students of this unit.

Chapter 3
Refer to chapter 3 in M80 Underwriting practice and chapter 3 in 960 Advanced
underwriting for more information on the role and impact of corporate planning and
strategy.

Strategic management planning is often done with analytical tools. Business strategic
management tools are universal. Companies across the world use the tools to help analyse
their situation and identify key issues that they need to address. More than one hundred
strategy tools are available; some of the best known are included in the list from Cass
Business School shown in table 3.1.

Table 3.1: Common strategic management tools

Porter's Five Forces Analysing the threats of new entrants, supplier power, substitutes, buyer power, and
rivalry between firms to understand the degree of competition in a market (Porter).

Boston Matrix Classifying businesses as question marks, stars, cash cows or dogs to determine the
optimum composition of a portfolio (Boston Consultants).

Benchmarking Comparing activities within the company with the best practice elsewhere to establish
performance measures (Camp).

For reference only

Scenario planning Brainstorming possible scenarios to determine the impact on the company
(Royal Dutch Shell).

Value chain analysis Breaking down the value chain to determine the added value of each element.
Results may lead to decisions to outsource, find partners, exit activity etc. (Porter).

Financial modelling Stochastic modelling to determine the resilience of capital, profits etc. against
external change (established actuarial technique).

Core competency Comparing the company’s competencies with those assessed to be required for
analysis success in the market (Hamel & Prahalad).

SWOT Classifying the key planning issues as internal strengths and weaknesses, and
external opportunities and threats (established planning technique).

Driving force Deciding the ultimate driving force of the company: customer needs, product, know-
how, profit/return etc., in order to determine the future development path. For
example, is the company looking to provide new products for existing customers or
new customers for existing products? (McDonald).

Gap analysis Comparing the desired position with the position if no changes are made. The gap
needs to be filled by the strategy (Argenti).

Seven S Framework Breaking the corporate strategy into seven interrelated elements: strategy,
superordinate goal (i.e. vision), structure, systems, style, staff and skills
(McKinsey & Co.).

PESTLE Using the headings political, economic, social, technology, legal and environmental in
the situation analysis (established planning technique).

Stakeholder analysis Comparing the company’s delivery with the stakeholders’ reasonable expectations.
Can be used as a starting point for a stakeholder charter (Mitchell & Agle).

Balanced scorecard A four-quadrant monitoring matrix for recording progress in implementing strategy. If
used in a cascade this may help align operational objectives and activities with the
strategy (Kaplan & Norton).

War games Testing proposed strategies by managers pretending to be competitors hearing about
them for the first time (military technique).

Source: Adapted from MSc course (2009), Cass Business School, London

We will now look at the tools in more detail. In Using strategic management tools on page 3/
12 we will illustrate the application of these tools with specific insurance examples.
 3/4 995/January 2023 Strategic underwriting

A1 Porter’s Five Forces

Porter's Five Forces tool was developed by Michael Porter of Harvard Business School. It
is a simple way to display the state of competition in a market. See figure 3.1.

Figure 3.1: Porter’s Five Forces

Analyse the market Threat of

under the five headings new entrants
to determine the
Chapter 3

competitive intensity

Supplier Rivalry Buyer

power among power

Threat of
substitutes

On the Web
www.mindtools.com/pages/article/newTMC_08.htm

The five main drivers of competition are analysed:

For reference only

• threat of new entrants;
• buyer power;
• threat of substitutes;
• supplier power; and
• rivalry among existing firms.
The key issues will be listed under each driver, together with an assessment of the risk to
one’s own company.

A2 Boston Matrix
The Boston Matrix is an extremely well-known portfolio management tool developed by
Boston Consultants Group (BCG) several decades ago. It is used to determine how the
various businesses in a company’s portfolio should be managed at different stages of their
maturity. The tool and its variations are still popular and work equally well for a portfolio of
products. The aim is to produce a balanced portfolio of seed corn, stars and cash cows, as
these different types of business may be able to complement each other.
The businesses are plotted on a matrix of market growth versus their own market shares.
Businesses generally start off having a low market share of a growing market. These are
known as seed corn businesses (sometimes referred to as question marks) and are likely to
be cash flow negative (–). They need a lot of cash to be invested in them if they are to
become the stars of the future but are generating little cash in the early years. As the
business cycle progresses, the seed corn matures and hopefully becomes a star. Stars are
successful entities having a high share of a still growing market. They are cash flow neutral
(O) as they are creating cash but also need cash to maintain their position in the market. As
the business cycle moves on, the market slows and stars become cash cows. These are
cash flow positive (+) as they continue to produce cash benefiting from their large size but
have less need for it as growth opportunities are diminishing. The key idea is that cash from
the cash cows can be used to invest in the seed corn. Eventually the cash cow will go into
decline and shrink to become a dog. These are cash flow neutral (O) producing little cash
and needing little as they are dying businesses.
Figure 3.2 shows the characteristics of the different types of business together with the types
of objective they should be given and the leaders they need.
Chapter 3 Analysing and evaluating insurance issues 3/5

Figure 3.2: Boston Matrix

Key: (0) (+) (–) = Cash flow

Star (0) Cash cow (+)

High profitability High profitability
Strong growth prospects Few growth prospects
Net cash flow balance Cash generator
ROI and growth objectives ROI objective
Leaders with strong general Leaders with technical and financial
management skills backgrounds

Chapter 3
Become the future ‘cash cows’ Market changes can result in them
(need cash to maintain position becoming ‘dogs’ (produce cash but
Market share

but also generate cash) have little need for investment)

Seed corn (–) Dog (0)

Low profitability Low profitability
Good growth prospects Few growth prospects
Cash users Net cash flow balance
Growth objective ROI objective
Leaders with marketing and product Leaders with financial backgrounds
development backgrounds Can sometimes be re-engineered
Become the future ‘stars’ into ‘seedcorn’
(need cash to grow but generate Often candidates for disposal
little) (produce and need little cash)

Market growth

For reference only

A3 Benchmarking
Benchmarking is a strategy tool used to compare the performance of a company with the
performance of other companies or perhaps the industry average.

Figure 3.3: Benchmarking

Initiation Data Data Benchmark Action

gathering analysis report plan

Be aware
The aim of using benchmarking is not only to carry out a comparison, but also to learn
from the result and improve your company’s performance. Benchmarking can also be
used to develop and understand competitive advantage.

A manager who worked for Xerox devised this very versatile tool. The tool can be used in a
variety of ways to review:
• Performance – typically used to benchmark products and services against external
competitors.
• Process – if performance benchmarking shows a gap between your company and the
competition, the next step is often process benchmarking to help identify at a more
granular level the reasons why your product or services are less competitive.
• Strategic – this involves looking at successful companies, either in or outside the
industry, to try to identify and consider incorporating those successful strategies in your
own strategy.
Each of the three uses can be used to compare performance: internally, externally, by
function or by industry best practice.
Internal comparison
An example of internal use is to compare the performance of the 50 offices within the same
global company, measured by specific criteria.
 3/6 995/January 2023 Strategic underwriting

External comparison
External benchmarking can be used to compare one insurer against industry statistics or
other insurers’ published statistics. In insurance, elements that can be compared include
pricing, price adequacy, loss ratios, retention rates, claims, customer satisfaction.
Functional comparison
A functional use could be comparing the performance and efficiency of the finance
department against finance departments in other organisations, whether inside the same
industry or not.
Best practice
Chapter 3

Best practice is sometimes incorporated into generally accepted standards. If these exist and
are relevant, then the company can benchmark itself against these standards.

A4 Scenario planning
Scenario planning is about asking ‘what if’ questions to explore views of the future and the
rationale that support these views. The oil company Shell has used scenario planning as an
integral part of their forward planning since the 1970s. During that time Shell has developed
a global leadership position in industry, with governments and academia.

Research exercise
Use the link below to explore and understand Shell scenarios.
www.shell.com/global/future-energy/scenarios/what-are-scenarios.html
As you explore the scenarios, think how they might help you:
• make decisions now about the future;
• educate and encourage thought leadership; and

For reference only

• plan for uncertainties and unexpected developments.

An example of how scenario planning is used in the insurance industry is Lloyd’s set of
realistic disaster scenarios (RDS). Lloyd’s maintains mandatory RDS to stress test both
individual syndicates and the market as a whole.

On the Web
Details of the Lloyd’s RDSs can be viewed at www.lloyds.com/market-resources/
underwriting/realistic-disaster-scenarios-rds.

A5 Value chain analysis

Value chains were discussed in Value chains on page 1/12.

A6 Financial modelling
A financial model can provide insight into the possible future. Models use various
assumptions, plans and scenarios to predict the amount and resilience of capital, investment
strategies and profitability. Models can be used for the overall financial position and for
specific issues; for example, determining the effect of different reinsurance programmes or
the pricing of a portfolio. All insurers use financial modelling to gain more certainty in their
decision making.
Complex financial models are required by the Prudential Regulation Authority (PRA) to
calculate capital adequacy in conjunction with the Solvency II Directive.

A7 Core competency analysis

The core competency analysis tool was developed by Hamel and Prahalad of London
Business School and is similar in some ways to value chain analysis. It assumes that certain
core competencies are required for a business to succeed. These are identified and are
compared with the existing competencies of one’s own business. This gives the
management an indication of what competencies need to be developed or whether the gap
is so large that it might be better to exit that particular market.
Chapter 3 Analysing and evaluating insurance issues 3/7

Three useful tests for identifying a core competency are that it should:
• provide access to a wide variety of markets;
• contribute significantly to the end-product benefits; and
• be difficult for competitors to emulate.
Hamel and Prahalad felt that a business needed to consider an optimum number of
competencies if the exercises were to be useful – three or four would be too few and 40 is
too many.

Chapter 3
Figure 3.4: Core competency analysis – insurer’s motor business
(example)

Digitisation Increasing competitive

• Social media intensity
• Direct web • Low cost
• Smart contacts • Differentiated or segmented
position
• Brand
• Price comparison websites
• Aggregators
• Affinity

Usage based Changed ways of providing

• Telemetrics on demand motor premiums
Required • IT
competencies • Brand
• Client/channel management
• Repair networks
• Supply chain

For reference only

Branding Niche businesses Technology and data analy-
• Consistent delivery • New products sis
• Public trust • New needs • Flexibility
• Brand management • Driverless vehicles • IT management and change
• Marketing • Segmentation skills
• Changing vehicle technologies

Source: Adapted from the Cass Business School, London.

Figure 3.4 shows an analysis for a motor insurer in a changing market. It identified 26
competencies.

Consider this…
If you were the motor insurer, what decision might you make based on the analysis in
figure 3.4?

A8 SWOT
SWOT is an acronym for strengths, weaknesses, opportunities and threats. The SWOT
analysis headings provide a good framework for reviewing strategy, position and direction of
a company or a single strategy proposition. Completing a SWOT analysis is a simple
process and is a good tool for use in brainstorming and group workshops. SWOT and
PESTLE are largely complementary and are often used together.
Strengths and weaknesses are internal company issues, with opportunities and threats being
external issues.
 3/8 995/January 2023 Strategic underwriting

Table 3.2: SWOT analysis – list the key issues in four boxes
Strengths Weaknesses

• •
• •
• •

Opportunities Threats

• •
Chapter 3

• •
• •

Objectives are identified from the results of the SWOT analysis. Strategic components and
objectives on page 5/7 discusses objectives in more detail.

A9 Driving force
Driving force, or a positive force for change, can be a force outside a company that triggers
a change of strategy in that company or internal forces such as the company’s vision or
mission. External driving forces for insurance include, but are not limited to:
• regulation;
• data;
• technology;
• climate change;
• industry consolidation;
• societal concerns; and

For reference only

• lifestyle issues.
Internal driving forces could include issues such as:
• cost;
• target operating model (TOM);
• product innovation; and
• earnings volatility.
A complete analysis of the insurance industry’s driving forces and the insurer’s own internal
driving forces are necessary before formulating strategy.
Driving forces are opposed by restraining forces, or obstacles to change. When both forces
are analysed together, the process can be described as ‘force field analysis’. Figure 3.5
illustrates the force field.

Figure 3.5: Force field analysis

Driving forces Restraining forces
(positive forces for change) (obstacles to change)
Present
state
or
Desired
state

Source: Kurt Lewin, cited in www.change-management-coach.com/force-field-

analysis.html
Chapter 3 Analysing and evaluating insurance issues 3/9

Research exercise
Search the internet for McDonaldization in connection with driving force. What are the
principles and what has been their impact in the fast food industry and beyond?

A10 Gap analysis

Gap analysis involves comparing a projection of what the company would be like if it carried
on as it is doing at present, with what it would be like if it achieved its objectives. The gap
between ‘where we are’ and ‘where we would like to be’ is called the planning gap (see

Chapter 3
figure 3.6). Any resultant strategy that is decided upon must be designed to bridge the
planning gap. Objectives are identified from the results of the gap analysis. Strategic
components and objectives on page 5/7 discusses objectives in more detail.

Figure 3.6: Gap analysis

Desired

Planning gap

Projected

Compare desired and projected.

For reference only

The strategies have to fill the gap.

A11 7-S Framework

The 7-S Framework tool was developed by the international consultants McKinsey &
Company who asserted that a business strategy does not stand alone; it needs to be
supported by six other areas of planning if it is to be implemented successfully in an
organisation. For ease of reference, each begins with the letter ‘S’ – although to achieve this
neatness the word ‘vision’, meaning vision statement, has become ‘super-ordinate goal’ (see
figure 3.7). When McKinsey assist a client in creating a strategic plan, the report is often
divided into the seven parts corresponding to the seven areas.
 3/10 995/January 2023 Strategic underwriting

Figure 3.7: 7-S Framework – McKinsey & Co.

Managers like to
concentrate on
the ‘hard’ areas
Structure
Chapter 3

Strategy Systems

Super-ordinate
goal
(vision)

Skills Style

Staff
The ‘soft’ areas tend
to be neglected but are
critical for successful
implementation

Source: Cass Business School, London.

For reference only

One of the most interesting aspects of the McKinsey work is that they found that the process
driven or ‘hard’ areas of strategy itself, structure and systems tend to get most attention in a
typical business, whereas the ‘soft’ ones tend to receive less attention. This neglect may
hamper successful implementation. Soft areas include:
• style (culture);
• skills (core competencies);
• staff (personal development, incentivisation, motivation); and
• super-ordinate goal (vision).

Consider this…
'Soft' areas and emotional intelligence
Some commentators have expressed the view that managing the ‘soft’ areas of strategy
requires more emotional intelligence, i.e. an understanding of how people do and will
behave. As women, in particular, have been alleged to possess this ability in a greater
abundance than men, this has been put forward as an argument for increasing the
proportion of women on the board. Do you agree?

On the Web
https://www.mindtools.com/pages/article/newSTR_91.htm

A12 PESTLE
A PESTLE analysis examines the external macro environment that affects a company,
focusing on the following six factors:
Chapter 3 Analysing and evaluating insurance issues 3/11

Political
Environmental
Social
Technological
Economic
Legislative

A PESTLE analysis helps determine how these factors will affect the performance and
activities of a company in the long term. It is often used in collaboration with other strategic

Chapter 3
management tools to give a clear understanding of a situation and related internal and
external factors. PESTLE analysis is simple and quick to use and works well with SWOT and
Porter’s Five Forces.

A13 Stakeholder analysis

A stakeholder is anybody who can affect or is affected by a company or project. Analysing
your stakeholders is vital to the success of your company, or a specific project. Stakeholders
are grouped together and placed in the grid in order of importance. Once the stakeholder
analysis grid has been completed you can focus your efforts on the most important
stakeholders while knowing what needs to be done to meet the other stakeholder
expectations.

Figure 3.8: Stakeholder analysis strategy – power v. interest grid

Meet their needs Key player

• engage and consult on • key players focus
interest area efforts on this group
• try to increase level of • involve in governance/

For reference only

Influence/power of stakeholders

interest decision-making bodies

• aim to move into • engage and consult
right-hand box regularly

Least important Show consideration

• inform via general • make use of interest
communications: through involvement in
newsletters, website, low risk areas
mail shots • keep informed and
• aim to move into consult on interest area
right-hand box • potential supporter/
goodwill ambassador

Interest of stakeholders

Source: Adapted from Eden, C. and Ackermann, F. (1998) Making Strategy: The Journey
of Strategic Management. London: Sage Publications.

A14 Balanced scorecard

A balanced scorecard helps keep managers’ attention on strategic issues and the
management and implementation of strategy, rather than the formulation of the strategy
itself. Balanced scorecards use four headings to track the implementation of strategy:
• financial;
• customer;
• internal business processes; and
• learning and growth.
Since this tool became popular in the 1990s, many versions have been developed to
improve and customise it to specific customer groups.
 3/12 995/January 2023 Strategic underwriting

Figure 3.9: Balanced scorecard

Financial/
Stewardship
‘financial
performance’

Vision Internal
Chapter 3

Customer/
Stakeholder and business
‘satisfaction’ strategy process
‘efficiency’

Organisational
capacity
‘knowledge
and innovation’

Strategic objectives
Strategy map
Performance measures and targets
Strategic initiatives

Source: Adapted from Kaplan, R. S. and Norton, D. P. (1996) ‘Using the Balanced
Scorecard as a Strategic Management System’, Harvard Business Review, 76. Cited in

For reference only

Balanced Scorecard Basics, Balanced Scorecard Institute (BSI), Strategy Management
Group, https://www.balancedscorecard.org/bsc-basics/about-the-balanced-scorecard.

A15 War games

War games are a powerful tool for formulating strategy. Typically a war game is a multiday
simulation exercise run for senior management. The aim is to help people think, plan and
make decisions in a fast-moving future environment. The concept works best in competitive
and transforming industries. There are three teams:
1. One team of managers plays their own company.
2. Another team plays the role of a group of their competitors to represent the market.
3. A third team plays a control role by representing government, regulators or any other
pertinent forces that affect the industry.
War games that are well designed and well executed can be valuable learning experiences
that allow managers to make better strategic decisions. Considerable time and effort should
be invested in researching, planning and organising a war game. The use of experienced
facilitators is recommended to achieve best results.

B Using strategic management tools

In this section we consider how some of the strategic management tools described in
Strategic management tools on page 3/3 are used in practice and how the results should be
evaluated. Each of these tools has its strengths and weaknesses in evaluating global
strategic insurance issues. Strategic planning is not a precise science and knowing which
tool to use in any given situation is a matter of choice and experience. The aim is always to
best identify and explain the issues.

B1 Porter’s Five Forces

Five Forces is useful to help focus the management’s attention on the market but it is rather
high level in nature. An example is shown in figure 3.10.
Chapter 3 Analysing and evaluating insurance issues 3/13

Figure 3.10: Porter’s Five Forces – insurance example

Threat of new
entrants
Affinity
Broker facilities
Digital disruptors
High

Chapter 3
Rivalry
Mature markets
Buyer power
Supplier power Consolidation
More transparency
Soft reinsurance Managing general agents
Aggregators
market (MGAs)
(price comparison
Low Coverholders
websites)
Direct
High
Soft underwriting market
High

Substitutes
Captives
Self-insurance
Alternative risk transfer
(ART)
Moderate

For reference only

B2 Boston Matrix
Figure 3.11 shows a real matrix from an international insurer’s portfolio. The size of the
circles is proportional to the size of the businesses.

Figure 3.11: Boston Matrix – insurer’s European portfolio (example)

Relative size Unprofitable Profitable

Star Cash cow Market

UK share

S D
Large
>10%

C
Medium
G 1–10%
B E

Small
F
0.5–1%
H

G
Very small
A P <0.5%
Seedcorn Dog
Real High Medium Low Negative
market >5% 2–5% 0–2%
growth

Source: Cass Business School, London.

The overlay in figure 3.12 should be superimposed on the matrix to indicate how the
businesses should be treated. Essentially seed corn should be grown or exited (double or
quit), stars defended, cash cows harvested and dogs divested or closed.
 3/14 995/January 2023 Strategic underwriting

Figure 3.12: Actions – superimpose on Boston Matrix

Market
Star Cash cow
share

Large
Defend Defend Cash generation >10%
harvest

Develop Develop Phased

withdrawal Medium
Chapter 3

or hold 1–10%

Double Phased Divest

or withdrawal Small
quit or hold 0.5–1%

Seedcorn Dog Very small

<0.5%
Real High Medium Low Negative
market >5% 2–5% 0–2%
growth

Source: Cass Business School, London.

The Boston Matrix is simple to create and simple to understand – hence its continuing
popularity. Nevertheless, care should be taken when using it in insurance as there is an
underlying assumption that greater size means greater profitability. This is not always the
case in a risk business like insurance.

Consider this…

For reference only

Consider why – for insurers – greater size does not necessarily equate to greater
profitability.

B3 SWOT
Let us assume that an insurer tasks you to produce a paper for the board regarding
establishing an underwriting presence in Australia.

Table 3.3: SWOT analysis – list key issues in four boxes

Strengths Weaknesses

• We have underwriters with experience of writing • We do not have local claims expertise.
Australian risks. • We do not have experience of managing
• We see Australian risks in our home office, so we remote offices.
can be a resource to the new local office. • Our actuaries do not have sufficient Australian data
• We are known in the Australian market because we to assist with pricing, at our normal confidence level.
used to write via a local managing general • How do we make a handful of remote staff feel part
agent (MGA). of our company and inculcate them with our
• We are specialists and will only focus on our niche culture? What happens if the first underwriter hired
business. does not work out?

Opportunities Threats

• There seems to be less local competition in our • To launch our new office, we require the permission
niche business. Overseas insurers write most of of the Australian regulator, APRA. The approval
that business remotely. process is lengthy and we may miss our window of
• Initially, having to use local claims handling and opportunity this year.
finance services will accelerate our territorial • What if our pricing ultimately proves to be
education and provide a support structure for our inadequate, because of a lack of historical data?
underwriters. • Broker power is concentrated in the hands of just a
• Our in-house technology will provide an excellent few firms.
platform to distribute our products. • The average expense ratio is higher than we are
• Our products align well with the Australian healthy used to, due in part to compulsory pension costs.
outdoor lifestyle. (We still need to quantify these costs.)
Chapter 3 Analysing and evaluating insurance issues 3/15

The most significant factors can be incorporated into your underwriting strategy board paper.
The key points to draw from this SWOT might be that your company has home office
experience and expertise and you have suitable technology ready to roll out. However, there
is no getting away from the fact that there are risks to setting up overseas and challenges in
controlling and managing at distance. More work is required regarding set-up timescale and
understanding expense factors.
We now look at the same project using PESTLE to obtain a more comprehensive view of the
chosen territory.

B4 PESTLE

Chapter 3
PESTLE factors are essentially external so completing a PESTLE analysis is often helpful
alongside a SWOT analysis, which considers both internal and external factors. In this
example, PESTLE will help the insurer understand the Australian environment and provide
information to enable them to adapt their current business model to fit the Australian market.
Political factors to consider
Is the government and the political situation stable? Yes – while there have been changes of
government and changes of leadership within political parties the system is fair, transparent
and democratic.
Economic factors to consider
The economy has slowed down recently as it is heavily dependent on China buying its
natural resources. The economy is divided between the natural resources sector and
consumer spending. Before China’s slow down the economy was being driven by exports of
raw materials; now that commodity prices have slumped the economy is more balanced
albeit with less growth. Interest rates are relatively stable and the exchange rate is within the
expected range considering the economic situation.
Australian banks survived the global financial crisis (GFC) better than banks in many other

For reference only

countries and credit and consumer incomes are within developed country norms.
Social factors to consider
Australia’s population growth has slowed following a reduction in immigration, continuing
migration and a drop in the birth rate. The population of Victoria is increasing more than any
other state, in part driven by high property prices in New South Wales (NSW), specifically
Sydney. As a result, the government is predicting that Melbourne will become the most
populous city in Australia in the future.
In general Australians live a healthy outdoor lifestyle and are well educated.
Technological factors to consider
Australia is a large country with a relatively small population so technology is vital in order to
be able to efficiently and cost-effectively distribute insurance products. The Australian tech
sector is considered to be as vibrant and progressive as the US, if not more so. This bodes
well for the digital economy.
Legal factors to consider
There does not appear to be any pending legislation (civil, criminal, social or tax) that would
affect the company either positively or negatively. There is a strong compensation culture
and before tort reform more than a decade ago, NSW had the same number of lawsuits per
head of population as California. However, since tort reform, frequency has reduced
although severity has increased.
Environmental factors to consider
Australia is experiencing increased weather volatility because of climate change, along with
many other countries. The Queensland floods in 2010–11 resulted in 35 deaths and caused
billions of dollars of property damage and other economic losses. On the other hand, bush
fires are relatively common during droughts. Four of the five deadliest bush fires on record in
Australia have been in Victoria. ‘Black Saturday’ in February 2009 caused 173 deaths and
widespread destruction.
Combining the key points to draw from both the SWOT and PESTLE analyses will provide a
good overview of the macroeconomic environment you plan to enter and how your niche
insurance products will fit within the marketplace.
 3/16 995/January 2023 Strategic underwriting

Research exercise
You work for a UK insurance company. Use the PESTLE tool to help analyse the effect of
the UK leaving the EU. Your employer currently writes business in twelve EU countries in
addition to the UK.

C Economic cycle
The economic cycle is the natural fluctuation of the economy between periods of expansion
(growth) and contraction (recession). Since the crash of the 2007–08 global financial crisis,
Chapter 3

the world has seen a slow but uneven return to growth. Recovery prospects remain fragile
and economists are divided on what the future will hold. The European and – to an extent –
global economy experienced a severe financial shock in late 2009 when Greece’s sovereign
debt crisis started. The Eurozone nearly collapsed in 2015 when Greece became the first
developed country to fail to make an International Monetary Fund (IMF) repayment.
At one stage in the last decade the European insurance industry became conversant with
the term PIIGS. This acronym stood for the distressed economies of Portugal, Ireland, Italy,
Greece and Spain. These five European countries all experienced severe sovereign debt
problems and were at various stages at risk of defaulting. Ireland has recovered best of the
group whereas Greece’s economy is still contracting and is suffering from a tough EU
austerity programme. The other three countries are at different stages of recovery bracketed
between the best and worst performers.
China’s slowing growth and a lack of confidence in its headline numbers continues to
dampen global business confidence. Interest rates have been at record lows since early
2009 in most countries. Many central banks across the world have been using quantitative
easing (QE) to inject new money into their economy with the aim of stimulating spending, in
an effort to jump-start the economy. As a result of prolonged central bank intervention,

For reference only

worries persist in some quarters that central banks do not have enough ammunition left in
their financial armoury to solve any future financial crises.
The relationship between the economy and insurance is elastic and pricing in different
territories and classes of business, particularly between short-tailed property lines and long-
tailed casualty lines, can sometimes be at different stages of each of the cycles. The fact that
an economy is doing well does not necessarily mean that the insurance cycle is also
buoyant.
In Economic on page 2/38 we discussed how one of the key drivers of demand was the state
of the economy and briefly highlighted differences between developing, emerging and
mature economies in terms of insurance penetration, immature and mature markets.
Diversification is an important strategy to manage business markets that are at different
points in the economic cycle.
Broadly speaking, insurance grows when the economy is doing well because:
• companies expand, hire employees and sell more product; and
• individuals feel better off when wages increase and unemployment falls, and consumer
demand increases consumption.
Thus demand for corporate and personal insurance is buoyant in good economic periods
and the reverse is true when the economy is in recession or depression.
When the economy is in one of its down cycles, demand reduces because:
• there is less economic activity to insure;
• values are lower;
• revenue is lower; and
• customers have less money to spend so shop around seeking premium reductions.
Liability insurance is particularly sensitive to a recessionary economy. This is because much
is forgiven when the economy is booming but when the economy slows flaws in advice and
execution are often exposed and acted on.
Chapter 3 Analysing and evaluating insurance issues 3/17

The issues facing the insurance market are not fully explained by customer demand alone.
During economic down-cycles, investment income typically reduces which:
• adversely effects immediate profitability; and
• causes longer-term issues with reserve adequacy and future pension liabilities.
Similar issues arise from the effects of rising inflation.
In a recession claims tend to increase, whether because of fraud, arson or bankruptcies.
During a recession companies may cut costs, which can have negative health and safety
implications. Redundancies can prompt employer’s liability claims for wrongful dismissal and

Chapter 3
discrimination; the remaining employees might feel stressed and over worked, which could
increase the accident rate. Cutting the insurance budget can turn out to be a false saving. If
a loss or claim arises when economic times are hard, not having sufficient insurance in place
to fully compensate a business can strain finances and extend the time needed for the
business to recover.
The negative effects of economic down-cycles on insurance can put stress on capital
adequacy. If not quickly recognised and dealt with, for instance by raising more capital (see
Capital management on page 4/10), this could lead to severe financial difficulties.

Research exercise
Plot economic cycles for the last 25 years and superimpose the insurance cycles on the
same chart. Think about the issues that arise when both cycles are down at the
same time.

C1 Demographics
Demographics are driving structural change in the global economy. Mass migration was

For reference only

touched on in Effects of climate change on page 2/26. People living below the poverty line
and people from countries suffering civil unrest increasingly attempt to migrate to Europe
and North America for economic and personal safety reasons. This distinct trend affects
customer segmentation. The growth in immigrant population can help many western
economies, as immigrants’ average age is much lower than the average age in their new
countries. China officially recognised in 2015 that its long-held ‘one child’ policy had
unintended consequences, and increased the limit to two children per couple in an attempt to
rebalance its population.
Different customer segmentation may require new distribution channels, due to cultural
reasons, lifestyle choices or longer life expectancy. For example, generation X and Y are
thought to prefer buying insurance digitally.
The issue of longer life expectancy is imposing strains on government welfare systems,
which is driving demand for life insurance, pensions, health insurance and the provision and
funding of long-term care. The Organisation for Economic Co-operation and Development
(OECD) predicts that by 2030 the ratio of western population in work to the retired will
decline from 3:1 to 1.5:1.
The mature economies of the western world have been seeking out lower-cost countries for
decades. The continual search for cost cutting resulted in countries like China, India and
Mexico hosting offshored back office functions. Offshoring was only partly driven by cost
considerations. Many developed countries did not have enough educated people who could
staff the service centres required by the service economy. As a result, India became popular
for its cheap labour and its vast, growing population containing one of the highest
percentages of the world’s graduates.

C2 Behavioural economics (BE)

The theory of economics assumes that everyone behaves in an unemotional, rational way
and tries to maximise income or profit above everything else. The 1978 Nobel Prize winner
Herbert Simon was considered the first person to adapt the theory of economics to include
the concepts of bounded rationality, bounded willpower and bounded selfishness.
Behavioural economics (BE) was born. A simplistic example of BE is trying to understand
why many people who know they need insurance – and can afford it – somehow never quite
get around to buying cover.
 3/18 995/January 2023 Strategic underwriting

In a 1997 behavioural study by Camerer et al., New York City taxi drivers were observed to
see how long they would drive each day. As the drivers paid a fixed fee to rent their taxis for
twelve hours and got to keep all their revenues, conventional economics dictated that they
would drive for as many of the twelve hours as they could, in order to maximise their
earnings. However, the study showed that drivers wanted to earn a set amount each day:
• they drove for less time on a busy day, ending their shift when they had reached the
amount of money they wanted;
• they drove for more time on slow days in an effort to get their earnings up their target
amount; and
Chapter 3

• if they ended their shift on a slow day without reaching their target, they treated the
missed goal as a loss.
If the theory of economics were correct, the drivers would have worked longer hours on busy
days to maximize profit. This study found that two important behavioural concepts – loss
aversion and mental accounting – came into play and showed how behavioural issues
impact on economics.
There are many other examples that can be used to demonstrate how human behaviour, in
terms of rationality, willpower and selfishness, produces a result that goes against
conventional economics. Consider how much cheaper it would be for a smoker to buy
cartons of cigarettes rather than individual packs. It would be logical to bulk buy to save
money, but many smokers buy single packs so they are not tempted to smoke more than
they would if plentiful supplies were in the house.
The introduction of behaviour into economics is really the blending of psychology and
economics.
BE is the study of human decision-making as a result of the way people feel
and think.

For reference only

According to BE people are not always self-interested and just ‘in it’ for themselves. If people
were like that, no one would give to charity. We often make decisions based on too little
research, because the colour of the logo makes someone feel good or they do not care that
they have been advised not to do something dangerous. People are by their very nature
social animals, they respond positively to issues such as trust and fairness; they are
influenced by society, including not straying too far from social norms.

On the Web
www.economicsonline.co.uk/behavioural_economics/introduction-to-behavioural-
economics.html/

C3 What is the relevance of BE to strategic underwriting?

Let us look at the results of two surveys. The first was conducted by professional services
firm Ernst & Young Global in 2014. It showed that UK insurance customers have more trust
in the banking sector and drug companies than they do in their insurance provider. In light of
the amount of ‘banker bashing’ which has gone on since the GFC it is a very poor result for
insurance to rate lower than banks.
The second survey was carried out by Engine for Trust in Insurance in association with the
CII in 2015. This customer service survey showed that insurance was the worst rated
industry. Two different surveys in different years – both with the same result.
Engine’s research showed that most customers considered openness, honesty and
trustworthiness as important. Conventional economics does not take account of customer’s
feelings but BE shows that emotional trust is of vital importance. Insurers’ customer journeys
need to be designed, and service delivered, in such a way as to be both relevant and helpful
to customers.
Chapter 3 Analysing and evaluating insurance issues 3/19

Example 3.1
In late 2015, an insurer used BE techniques to identify the reasons why customers avoid
reading their motor insurance policy document. They used the information they gained to
redesign their motor policy with the aim of making it easier to understand and more
appealing for customers to read.
The changes were designed to recognise the competing pressures on customers and
accept that many do not have the time or inclination to read their policy. They have
improved the way the information is presented and used straightforward language,
graphics and visual signposts to flag up important information. The result is a much more

Chapter 3
customer friendly document.

Too often insurers draft policies as purely complex technical documents, forgetting or not
caring that their customers do not have in depth insurance knowledge and spare hours to
read and understand their policy. Insurers who transform their TOM and put the customer at
the heart of their business should gain their customers’ trust and strengthen loyalty.
Improved financial results should flow from putting themselves in the customers’ shoes and
viewing the process through customers’ eyes.

C4 What can insurers learn from complaints?

The business case for examining complaints and their root causes is compelling. Complaints
are the driving force of customer dissatisfaction and provide motivation for customers to
change insurers. In contrast, if a customer’s complaint is handled well, customer loyalty can
be increased.
Only a small proportion of unhappy customers take the time and trouble to complain.
Perhaps counter intuitively, if the volume of complaints were to increase, insurers would be
able to analyse complaints data with greater confidence and better identify how and why

For reference only

they dissatisfy their customers and which practices cause confusion and uncertainty.
Understanding complaints matters because many practices can be easily and cheaply
corrected so that complaints do not occur. Examining the root cause of complaints is a useful
tool in service improvement initiatives. It follows that insurers should encourage complaints
and constructive criticism. A business that listens to complaints and learns is a business that
can gain competitive advantage.
The FCA’s recent work on BE illustrates one aspect of customer psychology. A letter from
a business written jointly with the regulator – which in effect offered customers a premium
refund typically worth £20 – solicited a response rate of just 12%. Customer inertia is a
reality and insurers must not exploit this to their commercial advantage.

D Insurance cycle
Paul Ingrey created an imaginary clock over 30 years ago to depict the twelve stages of the
insurance cycle (underwriting cycle), illustrated in figure 3.15. It shows how over time the
market reacts to economics of supply and demand. The clock can be read by starting at any
‘time’. For example, at nine o’clock prices are increasing and by ten o’clock insurers are
firmly in control of the market. By eleven o’clock all insurers are making good profits and the
market is hard. The profits attract new entrants and additional capital until by one o’clock too
much capacity/competition starts to drive prices down. Eventually pricing falls too low and
profits turn into losses and by six o’clock insurers are thinking about withdrawing from
markets or product lines to correct the situation. At the height of the soft market, regulators
or rating agencies raise concerns and capital suppliers reduce or withdraw their support.
This reduction in supply leads on to prices stabilising and then increasing. We are back to
where we started.
 3/20 995/January 2023 Strategic underwriting

Figure 3.13: The underwriting clock

All
companies Euphoria
flourish
Capacity
becomes Pricing starts
expensive to drop
Chapter 3

Prices up
Competition for
sharply
market share

Prices fall
Crunch dramatically;
stable profit

A.M. Best
writes letter Profit
of concern slides
Pricing
cannot go Results
lower horrible

Note: Paul Ingrey developed the ‘underwriting clock’ in 1985 to illustrate the cyclical nature

For reference only

of the (re)insurance industry. This is a useful tool for determining the cycle’s current stage.
A.M. Best is a rating agency.
Source: A.M. Best, cited in ‘Convergence capital triggers behavioural change among
reinsurers’ (2014) Artemis.

Figure 3.14 shows an alternative cycle diagram that originated in Australia. The principle is
the same as the clock in figure 3.13 but some readers may find it easier to relate to its
terminology.

Figure 3.14: The insurance cycle – hard and soft markets

Strong
profits
Capital flows
A seller’s into market
market

Rates rise Rates start

strongly to fall
Hard market
(expensive)

Risk selection
rejects some
Where we Insurers chase
activities and are now? market share
industries
Soft market
(cheap)
Rates go
Market into freefall
capacity eroded

More large events Big storms, poor

and poor Rates start investment returns,
investment returns to rise claims inflation

Source: Australian Insurance Cycle diagram www.scottbroad.com.au/Market_Update.cfm

Chapter 3 Analysing and evaluating insurance issues 3/21

It would be simplistic to look for a direct correlation between the insurance cycle and
insurers’ profits because the profits can be influenced by several other factors. For example:
• investment income;
• investment gains or losses;
• reserve releases or strengthening;
• changes in the underlying mix of business; and
• actions to manage the cycle.
The last two factors make it difficult to see the true correlation between the insurance cycle

Chapter 3
and underwriting results.
A soft market has historically been considered the result of too much competition within the
insurance market. As underwriting losses mount and insurers’ profits reduce or disappear
completely, some insurers may cut back their underwriting or exit certain lines of business in
an endeavour to return to profitability. When the supply of insurance to the market is
reduced, premiums tend to rise and insurers return to profit. At this point in the cycle, called
a hard market, some insurers may broaden their lines of business in an attempt to capture
even more profit, new entrants may join the market, competition increases again and pricing
comes under pressure. As pricing reduces then the market reacts by cutting back or exiting –
and so the cycle continues.
There are at least two issues with that explanation:
• it is too simplistic; and
• it did not mention the demand-side economics.
Let us look briefly at the driving forces behind the insurance cycle.

D1 Demand

For reference only

The demand for insurance is enormous; it has increased significantly over the last 30 years
and is expected to continue to grow in real terms. Growth in insurance is closely aligned to
the amount of economic activity; greater premium volume is generated when the economy is
doing well, as wealth is created. The amount of premium generated varies between
countries because of differences in population size and wealth. Insurance penetration is
used to compare countries by taking total insurance premiums as a percentage of their gross
domestic product (GDP). Mature economies will have a higher penetration percentage while
developing and emerging countries will have lower penetration.

Research exercise
Research the following:
• total of worldwide premiums;
• top ten countries by total premium;
• highest five countries by insurance penetration;
• lowest five countries by insurance penetration; and
• global average penetration percentage for non-life.

Insurance has grown faster than global GDP over the last 30 years. During this period,
insurers have faced competition not just from other insurers but also increasingly from
captives, mutuals, self-insurance – or non-insurance – and alternative risk transfer (ART; see
Alternative risk transfer on page 2/39). So far the commercial market has continued to grow,
despite these insurance ‘substitutes’ capturing premium from insurers.

Critical reflection
Do you think the premiums lost to insurance ‘substitutes’ will ever return to commercial
insurers?
 3/22 995/January 2023 Strategic underwriting

Demand for future growth will come from, but not limited to, the following factors:
• emerging markets such as BRIC countries (Brazil, Russia, India and China);
• Islamic insurance (Takaful);
• climate change; and
• demographic changes.
The timing and pace of demand will vary from country to country and be influenced by the
PESTLE factors. The expected wave of demand after the BRIC countries is thought to be
from the CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.
Chapter 3

D2 Supply
Some of the main factors from the supply side are:
• capital;
• the insurance cycle itself;
• intellectual expertise;
• investment income; and
• interest rates.
D2A Capital
At the present time, insurance capital is relatively easy to obtain. The recent flood of
alternative capital into insurance and particularly reinsurance is a good illustration of how
easy it is to raise capital. It has not always been that way and it may become difficult to raise
capital again. Insurance is a capital-intensive business for insurers and reinsurers. Capital is
not so necessary for insurance brokers as they do not insure risk. Insurers have to raise
capital from time to time for various reasons, for example:

For reference only

• a hard market – when more capital is required in order to support the same, or greater
premium volumes;
• Solvency II capital requirements;
• inadequate historical reserving; and
• catastrophic losses.
D2B The insurance cycle
The cycle itself creates disequilibrium between supply and demand. Reserve releases can
enhance profits to a certain extent to assist profitability during a prolonged soft market, but
such releases must only be allowed because of reserve redundancy. In soft markets,
regulators and rating agencies will highlight the dangers of using reserve releases to prop up
an insurer’s profits. Eventually the supply of reserve releases will slow to a trickle and can
dry up as years of ultracompetitive pricing take their toll.
An illustration of the impact that reserve releases have on insurers’ results can be seen in
data provided for the 2016 top 50 UK insurers ranking by S&P Global Market Intelligence. In
2015 the biggest 50 UK insurers released almost £1bn of reserves, which reduced their
collective combined operating ratio (COR) by 5.9% to 97.8%. Without those reserve
releases, their collective COR underwriting result would have been 103.7%, signifying an
underwriting loss.
Portfolio reserve management is undertaken by actuaries and directed and approved by
senior management. Each year insurers’ actuaries review prior year reserves and decide
whether those reserves need adding to (strengthening) or can be reduced by releasing a
certain amount.
Chapter 3 Analysing and evaluating insurance issues 3/23

Factors taken into account when considering reserves could include:

• proactive claims handling shortening timeframes;
• moving to a best estimate basis;
• the incremental development of each year’s portfolio towards ultimate (i.e. when a
portfolio has ‘closed’);
• inflation assumption;
• mix of business; and
• pressure to boost current year profits.

Chapter 3
Be aware
An example of the need for immediate reserve strengthening – and premium increases –
which affected the UK motor and liability markets was the announcement in February
2017 of the Lord Chancellor’s decision to reduce the personal injury discount rate from
2.5% to –0.75% in March 2017. This decision assumed that claimants were risk-averse
investors and only invested in index-linked gilts. The cut in the discount rate had an
immediate negative impact on insurers motor and liability reserves.
On 15 July 2019, the Lord Chancellor announced that the new Personal Injury Discount
Rate would be set at minus 0.25%. This would be effective for claims settled from 5
August 2019. It applies to England and Wales only; Scotland has the powers to set its
own rate.
Following the reduction of the discount rate for personal injury claims, the UK motor
market net combined ratio (NCR) deteriorated from 100% in 2015 to 109% in 2016. EY
estimated the overall cost of the Ogden rate change to insurers and reinsurers to be
£3.5bn across all lines of business. As the new change was only effective from 5th August
2019, no data has yet been produced to demonstrate the impact of the change.

For reference only

Soft markets cause reduced premium levels that can have the effect of insurers appearing to
be over capitalised, possibly prompting them to look to write more business. A soft market is
exacerbated when this action occurs. Likewise, in a hard market increased premium levels
can force insurers to ration their capital, or take other action such as ceasing to write new
business. These actions will trigger a further hardening of the market.
The nature of accounting and regulatory reporting mean that results are published in arrears
and that time lag can contribute to slow recognition of the necessary underwriting action. As
a generalisation, CEOs, analysts and shareholders look at financial year results while
underwriting managers look at underwriting year and accident year results. A medium- to
long-tailed portfolio can often increase the number of years underwritten before corrective
action is taken. The very nature of insurance pricing is imperfect and coupled with inflation
means that the ultimate cost of policies written is not known at the time risks are priced. The
effect of all these factors tends to mean that when the cycle turns, the turn is by most
standards overdue and hence the delayed turn is an attempt at catch up. Thus the cycle
itself becomes a driving factor.

On the Web
Sigma No 4/2012 Facing the Interest Rate Challenge. Swiss Re.
www.swissre.com/institute/research/sigma-research/sigma-2012-04.html

D2C Intellectual expertise

The loss of intellectual expertise and talent is increasingly a risk to the insurance industry.
We highlight the issue in Is the insurance cycle extinct? on page 3/26, which is particularly
acute in the current prolonged soft market where the majority of underwriters under 40 have
never seen a hard market, let alone an up-turn in the market. In contrast, ageing baby
boomers are starting to retire in ever-increasing numbers and the industry is positioned to
lose a lot of experience and wise heads that have traded through previous multiple cycles.
This combination of longer length insurance cycles – if the cycle is to reassert itself – is
placing younger inexperienced underwriters at the heart of maintaining day-to-day
underwriting discipline. One has to question whether management will take the right action
 3/24 995/January 2023 Strategic underwriting

and enforce it, without extending the cycle by taking inappropriate action such as trying to
maintain market share. The subject of human/intellectual capital is addressed in more detail
in subsequent chapters.
D2D Investment income
Regulators and prudence dictate that insurers must maintain sufficient liquidity; therefore,
much of insurers’ capital and premium is invested on a cautious basis in government bonds
(gilts) and cash or cash equivalent. This prudence contributes to the poor investment returns
when interest rates are low.
Chapter 3

The cautious or conservative investment approach has reduced investment income to the
extent that it has become negligible and is no longer able to compensate for underwriting
losses. In some situations it is possible for an insurer to take on more risk with a minority of
their funds in an effort to increase investment income; however, this approach can lead to
volatility and potentially to regulators imposing a capital loading. With investment returns
difficult to achieve, technical underwriting results need to be profitable. However, there has
been little or no evidence that underwriting rates have increased to compensate for low
investment income.
D2E Interest rates
Interest rates have been at historic lows since 2008, although they were trending downwards
for a number of years before that. The low rates have significantly impacted insurers and
reinsurers in their role as major institutional investors and in their underwriting activities.
Interest and inflation rates will continue to impact insurers, particularly in the longer-tail
classes of business. The impact can be either beneficial, when rates remain low for
extended periods of time, or detrimental when interest and inflation rates rise.
Low interest rates can also have the effect of making non-insurance investors – such as
pension funds – identify alternative investment opportunities. Pension funds have found that

For reference only

they can obtain higher yields in (re)insurance than bonds. Thus, the low interest environment
that causes the insurance industry difficulty actually attracts new and additional capital,
which in turn increases competition.

D3 Managing the cycle (MTC)

The classic way to manage the cycle (MTC) at the nadir of the soft market is to cut capacity
in and/or exit the most unprofitable classes. While on the face of it these actions appear
sensible, let us take a closer look at these actions.
When is the bottom of the market?
In this example, we assume that the insurer is not underwriting for market share but is
committed to making an underwriting profit. The issue is that it is very difficult to identify the
lowest point in the market. Sometimes observers call the low point and yet the market
continues bumping along the bottom for several more years. Of course, if we knew both the
low point and the precise timing of the up-turn, it might be worth waiting for the rates to
increase. It is precisely this type of herd-like behaviour that extends a soft market, as most
insurers do not want to be seen as the first to ‘blink’.
Why do soft markets last so long?
Most insurers have budgets and – particularly in the case of listed insurers – expectations
have been set in advance with investors, analysts and other stakeholders. The underwriter
has to try and meet plan numbers, including the top (gross written premium) and bottom
(profit) lines of a profit and loss (P&L) account. This is difficult, if not extremely challenging,
to achieve. To a prudent underwriter, the choices are to write less business to minimise
losses or continue writing sufficient business through excellent risk selection and disciplined
underwriting to achieve volume targets. If the underwriter decides to try to write better quality
business to achieve volume targets, management is surely going to ask why the underwriter
was not always doing so. In any event, better quality business is usually in such demand that
pricing is very competitive. Some underwriters may increase their average line size in an
effort to maintain their premium income in a falling market. This is an inappropriate reaction
for an underwriter to take and should hopefully be quickly picked up by internal systems and
controls. Written underwriting authorities or guidelines should address line size issues.
Some people within an insurer think that underwriters should not write any business when
rates are too low. Putting aside the tricky issue of defining ‘too low’, most underwriters are
going to feel insecure if they cease underwriting. In effect, ceasing underwriting is the same
Chapter 3 Analysing and evaluating insurance issues 3/25

as exiting a class or product line, which means that the underwriter’s position could be
redundant. Faced with this situation, it is unsurprising that underwriters often try to find a way
to maintain relationships and premium income. One relatively common management
reaction to an extended soft market is to encourage underwriters to seek out areas where
competition is less intense or classes where pricing has not reduced significantly.
Unfortunately this is extremely difficult to execute because every underwriter dreams of
finding an under-served market or product line. If pricing remains high in a particular class of
business, there is a reason. Beware the underwriter who rushes in without doing their due
diligence.

Chapter 3
During a prolonged soft market, it can be difficult for technical underwriters to obtain answers
to all the information they require about a risk. If they ask for additional information in order
to properly underwrite a risk, it is not uncommon to find that they do not get a response.
Brokers generally have an overabundance of insurers competing for the business and may
choose to take their business to other insurers – those who will ask fewer questions and
require less information. It can be difficult to maintain technical competence and disciplined
underwriting at this stage of the insurance cycle. Experience shows that when proposal
forms are very lengthy, brokers and potential insureds may seek insurers that require
completion of shorter forms. A potential knock-on effect is that, although each question on a
proposal form is carefully considered, excessive competition tends to encourage
underwriters to shorten their proposal forms; each remaining question is vital, but some ‘nice
to have’ questions are sacrificed in order not to discourage brokers and customers.
When to walk away?
A term often used is a ‘walk-away price’: a price at which the underwriter will allow the
business to go elsewhere because the premium is considered inadequate. In reality it is
extremely hard to establish a definitive number that represents a walk-away price in respect
of commercial business as much of it is individually priced. It is easier to establish walk-away
prices in short-tailed commodity business, whether it is personal lines, small to medium-

For reference only

sized enterprise (SME) package business or low-hazard minimum premium business which
really only reflects the cost of capital.
Dangers of shrinking the business
One of the issues regarding reducing capacity or exiting classes is that it is not that easy for
insurers to shrink their way to victory, as illustrated by the following example.

Example 3.2
An insurer exits a line of business with the effect of reducing its total premium by 25%.
The underwriting losses from the exited business are reduced or eliminated – but the
allocated costs of the exited business unit have to be assumed by the remaining business
units. This cost reallocation could adversely impact the profitability of the remaining units,
particularly as allocated costs such as HR, finance, actuarial and IT are not likely to
reduce after the closure of one line of business amongst many.
The majority of allocated costs are items such as premises, shared services, etc.
However, the cost of running off the discontinued business will also need to be taken into
account. If it is a long-tail class, then claims may come in for many years or previously
notified claims can take years to settle.

Perhaps more importantly, there are issues other than pure segmented P&L matters to
consider when exiting a line of business. The issue of reputation with both brokers and
customers is important. Brokers are unlikely to trust an insurer that exits lines of business,
only to reenter when market conditions have improved. A broker would struggle to explain to
a client why a particular insurer is recommended if that insurer does not have a stable long-
term track record. Why would a broker return to an insurer who reenters the market at high
rates and is likely to exit when rates reduce?
Flex capacity
The key to MTC is to vary the exposure by flexing capacity throughout the cycle. This can be
done by reducing maximum line size, reducing average line size or perhaps restricting
distribution to supportive brokers, coverholders or MGAs who share the same philosophy for
the need to achieve underwriting profit. In any event, in casualty/liability classes – the long-
tailed classes – it is likely that losses will be recognised several years after the business has
 3/26 995/January 2023 Strategic underwriting

been written. Therefore, it is more practical to reduce capacity in order to retain core
customers and maintain broker relationships, while reducing the maximum possible loss.
Flex reinsurance
Another way of MTC is to buy more reinsurance when the direct and the reinsurance
markets are soft. This action is designed to protect underwriting results from the effects of
‘skinny’ technical pricing at an economical cost. Likewise, in a hard market when profit is in
theory plentiful, less reinsurance can be purchased. In this way, insurers actively manage the
expense of reinsurance to assist in cycle management.
Consider outsourcing
Chapter 3

If certain functions can be outsourced on a variable cost basis, for instance as a percentage
of premium, costs can be controlled in a soft market. This can be a good alternative to
having in-house employees at a fixed cost. Naturally care needs to be taken so that such
outsourced costs do not spiral too high in a hard market.
Use underwriters to source business
As fewer risks tend to be seen by underwriters during a prolonged soft market, it is important
to capitalise on all available resources to help attract business production. Using intelligent,
personable underwriters to go out and meet brokers, MGAs, agents, coverholders, potential
customers and existing customers is a positive way to counter the lack of production flow.
Such underwriters are often very effective, particularly when they are appropriately
supported by the sales and marketing functions. Excellent data analysis and use and
presentation of data results can be a powerful aid to underwriters prospecting in the field.

Quick tips for managing the cycle

Do not:
• follow the herd;

For reference only

• underwrite on available capital;
• underwrite for cash flow; and
• wait for catastrophes to change the cycle.
Do:
• use pricing tools;
• select risks carefully;
• set a walk-away price;
• deploy capital where margins are; and
• get incentives right.

Research exercise
Lloyd's (2006) 360: Managing the Cycle – How the Market Can Take Control.
Insurance Journal (2008): www.insurancejournal.com/news/international/
2008/02/19/87433.htm
Enz, R. (2002) The Insurance Cycle as an Entrepreneurial Challenge. Swiss Re.

D4 Is the insurance cycle extinct?

Generally speaking, rates in the majority of classes of business have been falling since
2006. Naturally your view of when rates started to reduce will be influenced by where you
live in the world, what class of business you underwrite and how disciplined an underwriter
you are. Putting aside these individual factors, the world’s insurance markets have been soft
for the last decade or more without any signs of a hard market returning. Thus the traditional
insurance cycle has either extended in length or potentially become extinct. The debate is
whether people think that the insurance cycle has permanently changed.
Underwriters with less than a decade of experience will probably have never worked in a
hard market. It is feasible that they have never had to sell a premium increase, other than for
a distressed risk. How would these relatively junior underwriters recognise how and when to
push rate? Do junior underwriters believe that today’s pricing is thin or potentially
Chapter 3 Analysing and evaluating insurance issues 3/27

inadequate? Conversely, the majority of experienced underwriters believe that pricing is

marginal at best in most classes today.
Senior management and actuaries will provide guidance and manage portfolios. However,
the average tenure of a chief executive officer (CEO) is four years, so it is likely that a CEO
will not stay at the same insurer to manage the cycle through its component parts. The
average tenure of an underwriter varies tremendously around the world, but five years
probably is not far from the norm. No wonder that some observers comment that insurers
never seem to learn their lessons. Indeed, the tenures might be too short to have an
alignment of interest.

Chapter 3
A property underwriter will know whether he or she has written a profitable book within a
matter of months after the underwriting year-end. However, a liability underwriter may not
see an underwriting year close for four to eight years, depending on the type of business. If
this liability underwriter moves employer after five years, they may never fully understand
what their ultimate loss ratio was. They might also cash bonuses on the short-term
production and then move on leaving others to sort out the claims. This lack of
understanding and the need for appropriate reserving has caused major problems with a
number of insurers in the past.
The superabundance of capital is the prime driver in causing competition, which in turn
suppresses pricing. Losses would need to be in excess of anything seen before in history to
turn the market. A repeat of the 9/11 New York twin towers disaster would not now produce
the knee jerk reaction that insurers had in 2001. Then it was used as a reason to increase
rates, cut capacity and in some quarters, gouge the market. Some observers believe that a
few underwriters took unfair advantage during the hard market immediately after 9/11. When
the market settled and pricing normalised, many brokers ceased doing business with
underwriters that, in their view, had not been professional.

For reference only

Critical reflection
In the global context, how much is the non-life market worth and what catastrophe loss or
series of losses, in your opinion, would be required to cause rates to increase significantly
within a short period of time in virtually all classes?

In summary, the current soft market conditions look as if they will continue. There are few
signs on the horizon as to why the market would turn. If this premise is true, then today’s
challenging market may be the new norm. Only time will tell.

Summary
The main ideas covered by this chapter can be summarised as follows:
• Extensive research and analysis of key issues are necessary to ensure business
confidence for any strategy. Typically, a strategic underwriting plan is central to securing
new capital and maintaining the supply or allocation of capital.
• Business strategic management tools are universal. Companies across the world use the
tools to help analyse their situation and identify key issues that they need to address.
Each of these tools has its strengths and weaknesses in evaluating global strategic
insurance issues. Strategic planning is not a precise science and knowing which tool to
use in any given situation is a matter of choice and experience.
• The relationship between the economy and insurance is elastic and pricing in different
territories and classes of business can be at different stages of each of the cycles.
• Demand for corporate and personal insurance is buoyant in good economic periods.
• When the economy is in one of its down cycles, demand reduces because there is less
economic activity to insure, values are lower, revenue is lower and hard-pressed
customers seek premium reductions.
• Demographics are driving structural change in the global economy. The issue of longer
life expectancy is imposing strains on government welfare systems, which is driving
demand for life insurance, pensions, health insurance and the provision and funding of
long-term care.
• The theory of economics assumes that everyone behaves in an unemotional, rational
way and tries to maximise income or profit above everything else. The introduction of
 3/28 995/January 2023 Strategic underwriting

behaviour into economics is the blending of psychology and economics. Behavioural

economics (BE) is the study of human decision-making as a result of the way people feel
and think.
• Research shows that most customers considered openness, honesty and trustworthiness
as important. Insurers who put the customer at the heart of their business should gain
their customers' trust and strengthen loyalty. The business case for examining complaints
and their root causes is compelling. If a customer's complaint is handled well, customer
loyalty can be increased.
• The demand for insurance is enormous; it has increased significantly over the last 30
Chapter 3

years and is expected to continue to grow in real terms.

• The insurance cycle itself creates disequilibrium between supply and demand.
• The conservative investment approach has reduced investment income to the extent that
it has become negligible and is no longer able to compensate for underwriting losses.
• The classic way to manage the cycle at the nadir of the soft market is to cut capacity in
and/or exit the most unprofitable classes.
• The traditional insurance cycle has either extended in length or potentially become
extinct. Today's challenging market may be the new norm.

Additional reading
Axling, I. (2017) 'Insurers and reinsurers face £3.5bn Ogden hit, says EY', Insurance Age,
15 June. Available at: https://bit.ly/2Omgyzh.
Culp, C. (2009) 'Catastrophe Reinsurance and Risk Capital in the Wake of the Credit
Crisis', The Journal of Risk Finance, 10(5), pp. 430–59.
Boor, J. (2004) The Impact of the Insurance Economic Cycle on Insurance Pricing.
Casualty Actuarial Society Study Notes.

For reference only

Boor, J. (2000) A Macroeconomic View of the Insurance Marketplace. Casualty Actuarial
Society Exam 5 Study Kit.
Camerer, C. et al. (1997) 'Labor Supply of New York City Cab Drivers: One Day at a Time',
Quarterly Journal of Economics, 11(9), pp. 407–41. doi: 10.1162/003355397555244.
'Convergence capital triggers behavioural change among reinsurers' (2014) Artemis.
Available at: https://bit.ly/2AAK40x.
Enz, R. (2002) The Insurance Cycle as an Entrepreneurial Challenge. Swiss Re, Technical
Publishing. Available at: https://bit.ly/2QbHBiQ.
Kahneman, D. (2012) Thinking, Fast and Slow. London: Penguin Group.
Kahneman, D. and Tversky, A. (1979) 'Prospect Theory: An Analysis of Decision Under
Risk', Econometrica, 47(2), pp. 263–92.
Lloyd's (2006) 360: Managing the Insurance Cycle – How the Market Can Take Control.
Skurnick, D. (1993) The Underwriting Cycle. CAS Underwriting Cycle Seminar.
Sigma No 4/2014 Liability Claim Trends: Emerging Risks and Rebounding Economic
Drivers. Swiss Re, pp. 28–9.
Sigma No 4/2012 Facing the Interest Rate Challenge. Swiss Re.
Sigma No 4/2010 The Impact of Inflation on Insurers. Swiss Re.
UK Ministry of Justice (2017) 'Reforms to compensation payouts announced', 7
September. London: MOJ. Available at: https://bit.ly/2xMt7ki.
Chapter 3 Analysing and evaluating insurance issues 3/29

E Scenario
E1 Question
This question is based on syllabus sections 1.2 and 1.3.
You work for an insurer that has recently announced a new vision and strategy and is looking
to you to help track implementation of the strategy. Senior management request your
suggestions as to:

Chapter 3
1. What, in your opinion, would be the most appropriate strategic management tool to use in
this situation?
2. How to use the most appropriate tool to help monitor implementation.
New vision statement:
To be a customer centric insurer, using the latest technology to deliver best in class service.
Strategy:
To build the organisation around the customer.
To provide excellence in customer friendly personal lines products and services.
Harness the power of the latest technology to empower and retain customers, while
achieving superior internal efficiencies.
To deliver superior financial underwriting results.

E2 How to approach your answer

This question is based on syllabus sections 1.2 and 1.3.

For reference only

Aim
This fictional scenario encompasses issues considered in chapter 3.
Key points of content
You should aim to include the following:
1. Identify the sources of your research.
2. Consider attaching any relevant external reports as appendices to your report.
3. Compare and contrast the strategic management tool you choose with at least one other
relevant tool.
4. Illustrate how the tool will help to monitor implementation – you are allowed to make
assumptions in your answer to supplement the vision and strategy shown above.
5. Suggest relevant key performance indicators (KPIs) to measure and monitor progress.
 3/30 995/January 2023 Strategic underwriting

Self-test questions
1. What is the tool called Porter's Five Forces most useful for?

2. Why is scenario planning sometimes referred to as Shell scenarios?

3. Why must the Boston Matrix be used with caution?

4. Provide two examples of how people do not behave in the way that the theory of
Chapter 3

economics predicts.

5. Name at least four supply side factors in the underwriting cycle.

6. Discuss the term 'walk-away price' and analyse why it is important.

You will find the answers at the back of the book

For reference only

 Underwriting strategy
4
within the external
insurance context

Chapter 4
Contents Syllabus learning
outcomes
Introduction
A The insurance value chain and underwriting strategy 2.1
B Capital 2.2
C Risk appetite 2.3
D Intellectual capital and innovation 2.4
E Conflicting stakeholder interests 2.5

For reference only

Summary
F Scenario
Self-test questions

Learning objectives
This chapter relates to syllabus section 2.
On completion of this chapter and independent research, you should be able to:
• describe some of the forms of business strategies that focus on part of the insurance
value chain and the influence that those strategies have;
• describe the different forms of vertical integration;
• evaluate the insurance industry value chain and its impact on underwriting strategy;
• discuss the relationship between capital and the insurance industry;
• describe the sources of alternative capital and the vehicles used;
• evaluate strategic drivers for risk appetite and their impact on underwriting strategy;
• describe what intellectual capital consists of and how it links with innovation;
• discuss the importance of intellectual capital and innovation to underwriting strategy; and
• evaluate the underwriting value proposition and potential conflict between different
stakeholders.
 4/2 995/January 2023 Strategic underwriting

Introduction
In this chapter, we look at underwriting strategy and how it is affected, shaped and
influenced by factors mainly outside the insurer. We will look at different aspects of the
insurance value chain and how insurers are increasingly focusing on distinct strategies which
can affect different parts of the value chain.
Insurance is a capital-intensive business so it is appropriate that we take a look at capital
and alternative capital.
We then explore the amount and type of underwriting risk that an insurer is willing to target
or accept – known as risk appetite. We look at how an insurer might express and manage its
risk appetite.
Knowledge is the key to business success. Gone are the days when the true value of a
business was purely defined by its physical plant and machinery. A typical successful
business today is one that constantly innovates, embraces new technology and nurtures the
Chapter 4

creative knowledge and skills of its employees. The section on intellectual capital and
innovation seeks to identify and understand these key issues.
Finally, we consider the Companies Act 2006, which encourages company directors to adopt
‘enlightened shareholder value’, and the conflicts that can arise from stakeholders’ separate
interests.

Key terms
This chapter features explanations of the following ideas:

Alternative capital Beta Broker networks Capital asset pricing

model (CAPM)

For reference only

Collateralised Enlightened Innovation Intellectual capital
reinsurance shareholder value
Offshoring Outsourcing Return on capital Risk appetite
employed (ROCE)
Risk tolerance Stakeholder interests Strategic alliances Variance
Vertical integration

A The insurance value chain and

underwriting strategy
We discussed value chains, the insurance value chain and value chain analysis in chapter 1
of this study text. In Disaggregation of the value chain on page 2/23, we looked briefly at how
technology, specifically internet technology, has resulted in value chains being
disaggregated. The insurance industry has been slower than many other industries to adopt
disaggregation; however, insurance companies increasingly believe that it may not be
efficient or effective to maintain every single aspect of the value chain. Let us look at what
insurers and others are saying about change and the value chain:
Chapter 4 Underwriting strategy within the external insurance context 4/3

‘The key issue is future disintegration of the traditional insurance value chain; the
specialist will always beat the generalist on skill and efficiency levels; you have to decide
where to compete.’
Prudential
‘Each stage of the value chain will have to be ruthlessly scrutinised to assess whether
the insurer has got sustainable competitive advantage; if not, find who can do that part of
the business better, and sell it to them; otherwise you will eventually lose out.’
AXA
‘The insurance market environment is undergoing significant change as the evolution of
the Internet removes barriers of time, space and distance.’
IBM
Source: Atkins, D. (2016) ‘Introduction to the Value Chain’ [PowerPoint presentation].
London: Cass Business School.

Chapter 4
It seems certain that the traditional insurer’s view of being a generalist is no longer a strategy
that differentiates the insurer and provides sustainable competitive advantage.

A1 Strategic alliances
Some of the key drivers for creating strategic alliances are:
• access to customers;
• expansion abroad;
• gaining knowledge;
• access to external resources; and
• risk sharing.

For reference only

The drivers can be as varied as the companies themselves.
Strategic alliances can take different forms. Some may be relatively informal, with the
companies perhaps collaborating on a specific research issue. Others may be contractual
(e.g. franchising), while some will involve taking ownership positions in each other’s
company or creating a joint venture (JV) together. A JV is a new jointly owned company,
formed specifically to operate the venture and is separate from the parties’ other companies.
Let us look at three of the most common forms of strategic alliance seen in insurance:
contractual alliance, minority shareholding and JV.
Contractual alliances
A contractual alliance is formed when parties sign a formal contract for a specific purpose.
Aside from that purpose, each party would carry on its business with limited input or
influence from the other party. An example of this is the arrangement that Aviva Life has
in India.
In India, Aviva Life and India Post (the government-operated postal system) formed a
contractual strategic alliance in 2009 to allow Aviva Life policyholders to pay their premiums
at any of the 8,000+ computerised India Post offices. India Post receipts the premiums and
transfers them to Aviva electronically the same day. Aviva entered this alliance in an effort to
make it more convenient for its customers to renew their policies in order to reduce lapse
rates and increase its retention rate (known as ‘persistency’ in life terms). India Post benefits
by having more funds flow through its e-payment system and by providing another reason for
potential customers to visit a post office branch where they may make other purchases at the
same time.
Minority shareholdings
Minority shareholding is another form of strategic alliance and is achieved by taking a
minority shareholding in the other party’s business. Taking a minority ownership position is
more of a long-term commitment than a contractual alliance. Not all minority shareholdings
are considered strategic alliances. Many companies, including insurers, invest in other
sectors as part of their investment strategies; for example, in 2015 China Life Insurance
invested US$200m in the fast-expanding taxi business Uber.
 4/4 995/January 2023 Strategic underwriting

Joint ventures
In 2012, American International Group Inc. (AIG) purchased a minority shareholding in the
Chinese company Property and Casualty Company Limited (PICC P&C). In order to
demonstrate its commitment, AIG agreed that it would not sell more than 25% of its stake in
PICC P&C for a period of five years. In connection with this investment, AIG announced a
non-binding agreement to provide and develop life and property and casualty insurance via a
JV agency distribution company to be owned by AIG and PICC Life. Both PICC P&C and
PICC Life are subsidiaries of People’s Insurance Company of China (PICC) Group.
Interestingly, AIG inserted a condition in the agreement that it could sell its entire
shareholding if the final legal documentation for the proposed JV with PICC Life was not
completed by May 2013. The JV agreement was eventually signed by that date, with AIG
owning 24.9% and PICC Life owning 75.1%. Directorships and management roles were
assigned on the basis of shareholdings. In this way, AIG gained access to the second-largest
global economy with an established local partner, and PICC Life increased its product range
to better serve new and existing customers, and will gain knowledge of those AIG products
over time.
Chapter 4

This AIG example linked a minority investment with a proposed JV. Other examples of JVs
can be found in many sectors in many countries. Another US insurer, The Travelers
Companies, Inc. (Travelers), formed a JV in Brazil with local insurer J. Malucelli in order to
participate in the Brazilian surety market. After a few years Travelers increased its
shareholding in the JV to 49.5% following good financial performance and having achieved
30% market share. While the surety-focused JV remains in place, in late 2015 Travelers
acquired a majority shareholding in J. Malucelli’s P&C division and re-branded the operation
as Travelers. It appears that Travelers used the initial JV to learn about the Brazilian market
by sharing the risk with a trusted local partner and then gradually expanded its ownership
position and its product offering.
A1A Success factors for strategic alliances

For reference only

Ensuring a successful strategic alliance requires much preparation and attention, not only
during the set-up phase but also on an ongoing basis as the strategy and business develops.
Critical success factors include the following requirements:
• documenting the agreed shared vision;
• ensuring that each party regards the alliance as win–win;
• assigning responsibility for the alliance to an appropriate individual within each party;
• keeping channels of communication open and effective;
• having in place agreed rules regarding decision making;
• respecting the other party’s independence;
• ensuring both parties continue to keep their parent companies onside; and
• where appropriate, having a contract between the parties so each one knows what is
expected of them and the other.
If little or no attention is paid to these critical success factors then the chance of failure
increases and the strategic alliance may not thrive or succeed.

A2 Outsourcing
A significant number of companies, including insurers and brokers, resort to
outsourcingfunctions as a result of analysing their value chains. The decision to outsource
is the flipside of deciding to focus on part of the value chain, which we discuss in The
insurance value chain and underwriting strategy on page 4/2.
Let us build on the questions posed in Value chain analysis on page 1/13 – the questions
that a company must ask about each activity in the value chain. A number of issues will
remain once a company has identified an activity as a possible candidate for outsourcing.
The company need to be address these issues before proceeding down the
outsourcing route.
Chapter 4 Underwriting strategy within the external insurance context 4/5

The issues might be:

• Does the activity involve any confidential process, proprietary knowledge or intellectual
know-how?
• Will outsourcing adversely affect customers?
• What regulatory issues would arise from outsourcing?
• Is the activity capable of being undertaken and/or managed remotely?
• Can the activity be undertaken by outside organisations with more specialism?
• Is it cheaper to outsource?
Satisfactory answers should be obtained to these questions before outsourcing is approved.
Advantages and disadvantages of outsourcing
As with all decisions, outsourcing has both advantages and disadvantages. A skilful initial
execution and then rigorous auditing and management will help achieve a successful
outsourced relationship. However, it is important to note that from a customer and regulatory

Chapter 4
perspective the ultimate responsibility stays with the insurer.
The advantages of outsourcing include:
• delegating a function to a specialist external company that is quicker and/or cheaper;
• improved productivity and reduced costs;
• freedom of management and internal resources to concentrate on developing and/or
improving their core activities;
• sharing the risks associated with the outsourced function, including from a business
disaster planning perspective; and
• successfully changing internal fixed costs to volume variable costs.
The disadvantages of outsourcing include:

For reference only

• loss of direct control of that function;
• the potential for reputational damage;
• potential data privacy and data protection issues;
• disgruntled customers who may not like being forced to use call centres or other
companies that cannot or are not authorised to handle complex issues; and
• the loss of employees who used to perform that function internally.
As with the strategic alliances discussed in Strategic alliances on page 4/3, delegating
functions to an outsourced provider requires an ongoing focus on the relationship in order to
retain the advantages. While outsourcing has many attractions, just under half of all
outsourcing is deemed to meet all its objectives. Critical outsourcing success factors include:
• understanding all the implications before committing to outsourcing;
• selecting the right outsourced provider;
• a written, legally advised contract incorporating an agreed service level agreement (SLA);
• ensuring that both parties see the contract as a win–win;
• assigning responsibility for the operation of the contract to an appropriate individual within
each party; and
• disseminating good management information (MI) on a regular basis to monitor results
against the SLA.
A common misconception about outsourced providers is that they are typically call-centre
operators or data-processing companies, etc. However, some (re)insurers (that is, an
organisation that is an insurance company or a reinsurance company) – for example, Swiss
Re – provide insurance industry research, investment management and life insurance
underwriting to other insurers, so becoming an outsourced provider to the insurance industry
in addition to being a reinsurer. Swiss Re has the required skill sets and resources to provide
the same services that it uses internally to external customers. Many insurers, especially
when setting up, outsource claims handling to claims and litigation specialists.
 4/6 995/January 2023 Strategic underwriting

A3 Offshoring
Offshoring is typically thought of as outsourcing to a provider located in a different country.
However, some companies set up their own offshore centres in a different country in order to
take advantage of cheaper employment costs and plentiful technical skills such as actuarial
skills. As with outsourcing, almost any function can be offshored. Internal back office
functions that can be offshored include payroll processing, IT and accounting, whereas
offshored external front office functions are typically call centres and customer support
services.
India is by far the most popular offshore outsourcing country globally. Offshoring accounts for
approximately 20% of all India’s exports and employs millions of Indians. India’s well-
educated outsourcing workforce communicates in English and is available at a much lower
cost than most developed countries.
In 2014 the top five offshoring countries were India, China, Malaysia, Mexico and Indonesia.
The rankings were based on an index for financial attractiveness, people skills and
Chapter 4

availability, and business environment. Technology developments, such as cloud computing,

may dramatically alter the offshore outsourcing landscape, unless providers are able to be
agile and adapt quickly.
Offshoring is not a cure-all and a number of companies have experienced difficulties,
particularly when customers have to do business with overseas call centres. For example,
offshoring may not be customer-centric if callers find it difficult to understand what they are
being told as the employee is not speaking in their natural language. Some insurers have
repatriated customer-facing teams as a result.

A4 Focus on part of the value chain

In What is a value chain? on page 1/12 we learnt that the life insurance industry was more

For reference only

advanced than general insurance in disaggregation of the value chain. As a result of this
disaggregation, many companies within the life sector have focused on just one part of the
value chain. In this section, we mention a few examples of companies that have specialised
in recent years.
Fund management
More than 25 UK life insurers no longer operate their own fund management function. By
2004 two UK closed funds consolidators, Resolution Life and Pearl Group, owned
approximately 35% of all closed funds by number and 48% measured by value of assets.
These closed fund consolidators focused on achieving economies of scale, which enabled
them to achieve significant savings. In 2008 Pearl Group acquired Resolution Life while
continuing to acquire other companies, and in 2010 changed its name to Phoenix Group
Holdings. It remains a public company quoted on the London Stock Exchange (LSE).
Administration
Many third-party administrators (TPAs) specialise in back office administration and customer
service. TPAs are the outsourced companies that undertake the manufacturing function
within life insurers’ value chains. Examples of outsourced companies that perform life
administration for other companies include Capita plc, Vertex Financial Services, Admin Re
(a subsidiary of Swiss Re) and BNY Mellon.
Underwriting
Admin Re also specialise in handling the underwriting of non-core in-force life insurance
portfolios for those insurers that want to focus their attention on other aspects of their
business. There can be many reasons why an insurer might want to outsource a portfolio,
such as:
• regulatory requirements;
• a change in market conditions;
• a change in strategic direction; or
• expense issues.
Run-off
An increasing number of insurers specialise in managing the run-off (also known as legacy
management) of discontinued insurance business. Run-off can encompass a whole
company or specific books of business or divisions. Run-off is a strategic option and one of
Chapter 4 Underwriting strategy within the external insurance context 4/7

the tools used to manage the cycle when improving capital and operational efficiencies. The
Solvency II Directive has been a recent driver in run-off. It is thought that the market for
discontinued insurance for non-life business in Europe amounts to nearly £200bn.
Companies like Riverstone Management Ltd and Enstar Group specialise in run-off whereas
a company such as Berkshire Hathaway is a major run-off insurer as part of their wider
(re)insurance business.
Distribution
According to the Association of British Insurers (ABI), in the beginning of 2020 there were
357 authorised life insurance companies in the UK. During the last few decades, numerous
UK life insurance companies have closed to new business. Included in that number are
several banks (e.g. HSBC, Abbey National and Barclays), which have closed their life
companies and are now only involved in the distribution part of the value chain. Regulatory
issues have played a major part in banks retreating back to their core business.

Research exercise

Chapter 4
Find examples of companies that focus on part of the value chain. Choose companies
which have not been discussed in this study text.

A5 Broker networks
In Industry consolidation on page 2/28, we discussed the pressure of regulation, which has
been a key driver of the reduction in the number of brokers and broker consolidation. Other
driving forces are the increasing average age of owner-brokers, reduced insurer panels,
direct insurance, aggregators and managing general agents (MGAs).
As a result of these forces, broker networks have become an established part of the UK
insurance scene over the last 15 years. Many other countries have also embraced such

For reference only

networks, including Australia and Canada.
Broker networks typically add value by providing enhanced commissions; generating better
insurer service; providing access to markets and supplying multi-discipline support such as
marketing, training and compliance. Some networks assist with start-ups by raising capital
and providing template business plans. Training appears to be a major issue. Historically,
brokers relied on recruiting from insurers, which traditionally had formal training programmes
running throughout their organisations. In more recent years, insurers have cut back on
training and so brokers have had to find alternative ways of becoming knowledgeable and
retaining their expertise.
A number of national brokers, such as Marsh and Willis Towers Watson, have developed
broker networks. Perhaps one of the reasons why local brokers accept national brokers
acting in this role is because the local broker is serving a different customer base with
different product requirements than the big global brokers. However, the global brokers are
increasingly interested in small to medium-sized enterprise (SME) clients and it will be
interesting to see what happens when the global broker and one of its network brokers are
separately invited by a potential customer to bid for its business.
Independent broker networks are also now established, such as COBRA, Purple Partnership
and Towergate, to name but a few. Many brokers see joining a network as similar to
outsourcing, in that they rely on the network to provide certain services while they focus on
serving the customer.

A6 Vertical integration
Integration is a term that describes a firm buying another firm. Horizontal integration occurs
when a firm buys a competitor; it can also perhaps be called a merger or acquisition and the
result is consolidation. But vertical integration, the subject of this section, occurs when a
firm buys another firm in its supply chain. As a product moves from raw material to
manufacturing, then to distributors and on to the customer, it is said to be moving
downstream. Figure 4.1 helps illustrate the concept of forward integration (downstream) and
backward integration (upstream).
 4/8 995/January 2023 Strategic underwriting

Figure 4.1: Forward and backward integration

Forward integration/downstream
Capital provider

Backward integration/upstream
Insurer

Distributor

Customer

In the past, traditional insurers would handle the whole spectrum of functions – from
Chapter 4

customers coming to their office to buy motor or home insurance and inspectors visiting
direct customers and local brokers, through to adjusting claims and fund management.
Insurers were vertically integrated, but only within their internal value chain through all the
separate activities they performed.
Over time, companies ventured out of their value chain and bought a supplier. For example,
Minet (a Lloyd’s broker) bought PCW (a Lloyd’s managing agent) in 1973, which represents
backwards integration. Subsequently, the Lloyd’s Act 1982 banned Lloyd’s brokers and
managing agents from owning stakes in each other.
A6A Forward integration
Gradually integration attempts increased and insurers bought brokers, so insurers moved
down the value chain, known as forward integration. An early example is when The St Paul

For reference only

Companies bought Minet in 1988 (selling it to Aon in 1997). Another example of forward
integration occurred in the 1980s when a number of UK insurers purchased estate agent
firms in order to secure better distribution of mortgage and life insurance. However, the
majority of these ventures were not successful and brokers and insurers retreated to their
core activities.
More recently, the Markerstudy Group is an interesting example of forward integration. Its UK
operations, which focus on marketing and distribution, are based in Kent, while its two
insurance companies (Markerstudy Insurance Company Ltd and Zenith Insurance plc) are
domiciled in Gibraltar. Companies in the Group include insurance companies, insurance
brokers, a claims management company, a national windscreen repair company and a
vehicle hire company. There is the potential for conflicts of interest to arise in these
situations, which should be managed by full disclosure and transparency.

Research exercise
Can you think of an example of an insurer undertaking forward integration?

Shifts in the underwriting value chain

Fundamental shifts are now occurring in the underwriting value chain. The growth of the
direct distribution channels via the internet has made it easier for insurers to access
customers without needing to use brokers. However, at the same time many brokers, MGAs,
aggregators and affinity groups are utilising their distribution power to assume the
underwriting function from insurers for the SME and personal lines sectors.

Be aware
Shifts in the underwriting value chain are blurring the lines between the distributor and
insurer roles and challenging existing business models. Insurers are finding that the
distributors are squeezing their profits, even though they still remain the risk carrier and
capital provider.

There is a belief that the traditional broking chain, which places cover with the direct or
primary insurer through to reinsurers and retrocessionaires, needs to change in order to
reduce frictional cost and help make the market more efficient. If the insurance industry is to
Chapter 4 Underwriting strategy within the external insurance context 4/9

survive the flood of alternative capital mentioned in Industry consolidation on page 2/28
and Capital on page 3/22, then perhaps the concept of vertical integration within broker
distribution could become a reality. Could a global broker in the future place a risk with an
insurer with the broker’s reinsurance treaty assuming the risk in excess of the insurer’s net
retention? In that way the broker could place risks in the direct market on a 100% basis,
rather than on a subscription basis, and own the treaty placed by that broker exclusively for
that broker’s business, without the insurer’s involvement. Would reinsurers ever agree to
sign up to a broker’s treaty rather than the traditional insurer treaties? Only time will tell, but
with the appropriate data it could be possible.

Research exercise
Consider the pitfalls and advantages of the market moving in the direction of broker
treaties.

Vertical integration appears to be relatively popular in the UK private motor market. There

Chapter 4
are a number of examples of either full or partial ownership or contractual relationships
between insurers and aggregators (price comparison websites); insurers and brokers; or
insurers, car repairers and car part suppliers. Some UK motor insurers have subsidiary
companies that own garages and repair centres around the country. It therefore seems
logical that the next step would be to have contracts with parts and paint manufacturers or
suppliers. These contracts would ensure that the needs of the insurer were fully understood
and met by the suppliers, as well as resulting in economies of scale. Vertical integration can
give rise to potential conflicts of interest, a lack of transparency and questions as to whether
the customer is benefiting from the arrangement or whether the agreements benefit the
insurer more than the insured.
A6B Backward integration

For reference only

There is a growing trend for some customer groups and distributors to move upstream in the
value chain: so-called backward integration.
Customer groups, such as the National Trust and Saga in the UK, have backed up the value
chain by assuming the functions concerned with distribution and in some instances,
manufacturing/underwriting.
Distributors
Insurance distribution is changing and participants in the insurance distribution chain can be
called different names in different countries. Distributor is a name often used as an
alternative to intermediary. The term distributor includes:
• brokers – whether retail, wholesale, surplus lines and so on;
• agents;
• MGAs;
• coverholders; and
• aggregators, including price comparison websites (PCWs).
Bancassurance and brandassurance are examples of banks and non-financial well-known
brands becoming distributors.
Brokers/agents/MGAs/coverholders
Brokers are the most common form of intermediary globally, although they are not the
dominant form of distribution in some countries such as Germany. MGAs and brokers that
operate binders on behalf of insurers have made the move upstream into underwriting and,
on occasion, claims. Delegating claims authority is a sensitive area as there is a potential
conflict of interest, especially when there is a profit commission at stake.
Bancassurance
Bancassurance can be defined as banks selling life and general insurance products or
where banks and an insurer form a partnership to sell insurance products. Bancassurance
models range from pure distribution through to manufacturing/underwriting. Some move as
far up the value chain as claims handling, leaving the insurer to provide capacity and buy
reinsurance. Bancassurance is more developed in continental Europe than in the UK,
accounting for some 60% of individual life insurance premiums in countries such as France,
Italy, Portugal and Spain. Bancassurance is less developed in Germany and the UK, where
 4/10 995/January 2023 Strategic underwriting

banks sell simpler investment products, life assurance and mortgage-related term
assurance.
Brandassurance
Brandassurance is similar to bancassurance, with the major difference being that instead of
banks, non-financial services companies (e.g. supermarkets) have entered the insurance
value chain, often carrying out all functions except reinsurance and the supply of capital.
Aggregators/PCWs
To date, most aggregators have stayed within the customer distribution and sales functions.
In the future, it is possible that some may move upstream into manufacturing/underwriting.

B Capital
Be aware
995 Strategic underwriting is not intended to be a complete guide to insurance capital. A
Chapter 4

grounding in capital and solvency requirements is beyond the scope of this study text.
However, a more advanced knowledge of the capital regime is needed in order to
successfully operate at a strategic level within insurance; this section aims to identify key
issues relating to capital that will be of particular relevance to students of this unit.
For more information on the need for capital, sources of capital and capital and solvency
requirements, refer to chapters 1, 4 and 9 in 990 Insurance corporate management,
chapters 1 and 7 in 960 Advanced underwriting and chapter 9 in 992 Risk management in
insurance.

Insurers must maintain a strong balance sheet at all times. Capital is an important segment
of any balance sheet, but particularly so for an insurer. Traditionally, capital for insurers has

For reference only

been sourced from shareholders in some form of share issue, from retained earnings or by
borrowing in the form of either bonds or debentures.

B1 Capital management
Insurers should have a capital management strategy designed to support their underwriting
and business strategy. At present the key element driving the market is capital. We say that
because, as discussed in previous chapters, the supply of capital has outstripped demand
and caused intense competition.
Capital is raised when the insurer is first established and further capital can be raised during
the lifetime of the insurer for different reasons. These reasons can include:
• falling stock markets;
• legacy issues requiring prior year reserve strengthening;
• catastrophic losses;
• acquisitions;
• expansion;
• reducing the cost of debt; and
• meeting or exceeding regulatory solvency requirements.
In addition to raising capital, insurers do, on occasion, return capital when there is a surplus
for which there is no economic need. When discussing return of capital, we do not mean the
payment of sustainable annual dividends (usually paid quarterly or yearly). Annual cash
dividends are one of the ways that investors can generate a return on their investment; the
other way is from an increase in the share price. Some companies allow shareholders to
take their dividends in shares rather than cash. However, not all companies pay a dividend –
particularly high-growth companies. High-growth companies tend to retain their profit as
capital or use it to fund acquisitions, headcount growth or other expansion.

Refer to
Refer to Alternative risk transfer on page 2/39
Chapter 4 Underwriting strategy within the external insurance context 4/11

Insurers may approach their investment bankers to explore various sources of capital
available in the market. Different transactions need to be weighed up and the advantages
and disadvantages carefully considered. Issuing new stock, debt or convertible securities
can raise capital. Alternative capital can be approached with the objective of creating
investment vehicles such as sidecars, catastrophe (cat) bonds or industry loss
warranties (ILWs).
The most common method of returning excess or unwanted capital is by payment of a
special dividend. Unlike annual dividends, special dividends will vary substantially by amount
and frequency; indeed, some companies have never paid a special dividend. Share
repurchase is another method of returning cash to investors; this is when a company makes
an offer to shareholders to tender their shares for purchase by the company.
It is important for any company to hold the right amount of capital. However, as insurance is
a capital-intensive business, insurers must actively manage their capital in order to maximise
total returns for shareholders while at the same time meeting regulators’ capital
requirements. Shareholders and potential investors will analyse the financials to aid their

Chapter 4
decision-making. Two relevant tools are return on capital employed (ROCE) and the
capital asset pricing model (CAPM). Now Solvency II has come into force, CAPM usage is
likely to decline though non-insurer investors may continue to use this tool.
Reinsurance protects capital and, if appropriately purchased, can reduce the amount of
capital required. Solvency II places great emphasis on capital modelling and insurers run
their Solvency II model to determine the effect and financial efficiency of reinsurance before
they buy it.
Return on capital employed (ROCE)
ROCE is a financial ratio that measures profitability and the efficiency of the capital
employed. ROCE is particularly useful when comparing companies in capital-intensive
sectors like insurance. It is also a useful tool to track the trend of a specific company’s

For reference only

performance. Investors prefer to see a consistent ROCE that either remains constant or
grows over time. The ROCE calculation is:

Refer to
For more on EBIT, refer to J10 chapter 12, section C

ROCE = EBIT ÷ capital employed

Note: EBIT = earnings before interest and tax. EBIT is, therefore, operating income or
operating profit.
Simply put, capital employed is total assets less current liabilities. A higher ROCE shows
more efficient use of capital. ROCE should be in excess of the cost of capital and/or
borrowing, otherwise the company will be destroying shareholder capital.
It is relatively common for insurers to set target numbers as part of their risk appetite or in
published financial commentary or data. In the case of ROCE the target number could, for
example, be 12%. In this example, the insurer would be aiming to achieve 12% ROCE
annually. However, recognising that market conditions vary from time to time – because of
the insurance cycle, the economic cycle, interest rates or other factors – insurers tend to
describe the target as aiming to achieve an average of 12% ROCE over a three or five year
period. This allows for soft market conditions when results are likely to be less than 12% to
be off-set against hard market conditions which should generate a higher than average rate
of ROCE.

Research exercise
Find at least one insurer that publishes its ROCE.

Capital asset pricing model (CAPM)

CAPM looks at the relationship between risk and expected market return, and calculates the
return an investor should expect to achieve from investing in a specific share or asset. If the
expected return does not meet or exceed the return calculated by CAPM then the investment
should not be made. The return should compensate an investor for taking on risk, over and
above the return of a risk-free investment.
 4/12 995/January 2023 Strategic underwriting

The CAPM formula is:

required or expected return = risk-free rate + (market return – risk-free rate) × beta
CAPM assumes that a risk-free rate might equate to a ten-year Government bond.
Beta is a measure of the volatility or systematic risk of a share or asset relative to the
market. A beta value of 1 predicts that the share or asset will move in line with the market. A
beta value of less than 1 indicates that investment will be less volatile than the market and a
beta value of more than 1 indicates that the investment will be more volatile. Beta value 2 is
100% more volatile than beta value 1. High beta shares should by definition give high returns
although they will be more volatile.

Research exercise
Find at least one insurer that publishes its beta.
Chapter 4

Be aware
A complete description of Solvency II is beyond the scope of this unit. For more
information, refer to chapter 1, section B in 960 Advanced underwriting.

B2 Alternative sources of capital

The supply of capital in (re)insurance in recent years has been dramatically increasing,
attracted by poor and/or volatile investment returns in other asset classes. Capital markets
appear to have concluded that insurance risk is a separate investable asset class. Most
alternative sources of capital are being attracted to catastrophic risk, particularly natural
catastrophes where the expected outcomes and hence returns can be stochastically
modelled. The flood of capital from the capital markets raises questions regarding its staying

For reference only

power – is it naive? Will it leave as quickly as it arrived in the event of severe unanticipated
losses? Or will yet more capital pour into the industry following catastrophic losses in order
to take advantage of hard market conditions – increased pricing and tighter conditions?
According to Aon's Reinsurance Aggregate for the year ended 2018, alternative capital’s
share in the global reinsurance market fell by 2% during 2018. Aon’s April 2019 Reinsurance
Market Outlook estimates that global reinsurer capital stood at USD585 billion at year-end
2018, down 3% relative to the end of 2017. This figure consisted of US$488bn in traditional
capital and US$97bn in alternative capital. Statistics for alternative risk transfer (ART) do not
appear to be readily available.
The source of traditional capital is (re)insurance company share capital; that is,
shareholders’ equity, retained earnings and debt. Alternative capital comes from financial
markets, hedge funds, pension funds, mutual funds, institutional investors, sovereign wealth
funds etc.
Alternative capital is usually structured differently than simply buying shares. Typically this
new capital is put into specially formed investment vehicles. We discussed some of these
investment vehicles in Alternative risk transfer on page 2/39, and they include sidecars, cat
bonds and ILWs.
In recent years, collateralised reinsurance has become the fastest-growing structure used
in alternative capital. Traditional reinsurers issue a policy without earmarking the limit
committed as business confidence is maintained by their trading reputation and by regulators
and rating agency analysts. Non-traditional reinsurers, such as hedge or pension funds, do
not trade in their usual environment and, therefore, do not engender the same level of
confidence with insurers. As a result, they provide collateral for each policy by placing funds
equal to the limit in escrow to demonstrate that they have the necessary funds to pay claims.
The funds are then conservatively invested in an effort to generate a modest amount of
investment income for the reinsurer.

Research exercise
Research why hedge funds usually launch their reinsurance vehicles in Bermuda.
Chapter 4 Underwriting strategy within the external insurance context 4/13

Figure 4.2 illustrates the rapid growth in collateralised reinsurance.

Figure 4.2: Bond and collateralised market development

100 Catastrophe bonds Sidecars ILWs Collateralized re

80
Limit (USD billion)

60

40

20

0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2012

2013

2014

2015

2016

2017

2018
2011

Chapter 4
Source: Aon Benfield (2017) Reinsurance Market Outlook. 9M refers to results for the first
nine months of 2016.

According to Swiss Re’s ILS Market Update Summary, the types of alternative capital
investor during 2012 were:
• insurance linked securities (ILS) fund (61%);
• asset manager (17%);
• pension fund (14%);
• insurer (4%);
• hedge fund (3%); and

For reference only

• reinsurer (1%).
More up-to-date statistics regarding the types of alternative capital investor are difficult to
obtain. It is thought that sovereign wealth funds, money managers and a number of
specialised funds invest principally in ILSs, with some 13 fund managers each having more
than US$1bn under management. Specialist funds probably comprise some 65% of ILS
investor type, with 25% from money managers. What we do know, is that between 2005 and
2015, the amount of alternative capital that was used increased from approximately $10
billion to $74 billion. This came from a number of sources including: pension funds, hedge
funds, mutual funds and sovereign wealth funds.
The arrival of pension funds is a significant change in the mix of alternative capital investors.
Pension funds have huge funds under management and increasingly they are attracted to
(re)insurance by perceived higher returns than elsewhere and the limited correlation with
other financial markets.

Activity
The Ontario Teachers' Pension Plan (OTPP) was the lead investor in the ANV Group,
which included an insurer, a Lloyd's managing agent and syndicates and a managing
general agency (MGA). In 2015 the OTPP achieved a return on its entire portfolio of 13%
resulting in an increase of net assets of CAN$171.4bn. According to public information,
OTPP has invested more than CAN$150m in ANV Holdings BV, the parent company of
ANV Group. OTPP sold out of ANV in 2016.
Go online and find answers to the following questions:
1. In what year did OTPP become the lead investor in ANV?
2. How did ANV utilise OTPP's funds?
3. Why do you think ANV was comfortable with the source of this alternative capital?
4. Does OTPP have any other (re)insurance investments?
 4/14 995/January 2023 Strategic underwriting

C Risk appetite
The UK Corporate Governance Code states:
The board is responsible for determining the nature and extent of the principal risks it is
willing to take in achieving its strategic objectives. The board should maintain sound risk
management and internal control systems.
Adapted and reproduced from the Financial Reporting Council (FRC), www.frc.org.uk. ©
Financial Reporting Council Ltd (FRC).

The responsibility of establishing an insurer’s risk appetite lies squarely with the board of
directors. In principle, articulating risk appetite in a concise statement should be a relatively
straightforward task. The challenge is that the board needs to be confident it has understood
all the possible outcomes that the risk appetite might produce and has organised the
business accordingly.
Chapter 4

In this study text we are concerned with strategic underwriting and so we will focus on risk
appetite as it relates to underwriting. Of course, insurers must have defined risk appetite with
non-insurance risks in mind as well. These risks include (but are not limited to) credit,
liquidity, regulatory, investment market and operational.
In practice, the process of formalising a risk appetite statement normally starts with a vision
statement – a concise, high-level aspirational description of what the insurer wants to be and
do in the future. An example might be: ‘we aim to become Canada’s leading insurance
provider to family-owned businesses’.
The insurer will then typically draft a mission statement to develop the detail of its vision.
Keeping with the Canadian example, the mission statement might read something like: ‘we

For reference only

will focus on providing property and casualty insurance solutions to Canada’s family-owned
businesses through value-for-money products combined with service excellence through our
dedicated team of agents from coast to coast’.
Risk appetite can be expressed in many ways and each insurer’s statement may be quite
different. Having said that, there are common threads; for example, the Canadian insurer
might state:
• We aim to achieve an underwriting profit in four years out of every five.
• Our maximum net exposure on any one risk shall be not larger than 1% of the
company’s capital.
• Our business should be weighted across Canada, based on the relative
population of each province.
• We shall always buy reinsurance to protect the company against natural
catastrophes.
An insurer’s risk appetite statement will have to be reviewed and agreed by a number of
external stakeholders in addition to the board. Key amongst those external stakeholders are
regulators and the capital provider(s). A risk appetite statement should be reviewed
frequently to measure it against results and to ensure that it remains relevant and is driving
the correct business decisions within the business.
Risk appetite is central to the Solvency II capital adequacy regime, principally through pillar
1. As such, the risk appetite of an insurer needs to be extensively modelled and tested
before a regulator can approve it. In the UK the regulator concerned is the Prudential
Regulation Authority (PRA).
Capital providers have a keen interest in agreeing and understanding the risk appetite of an
insurer they support. In some instances the insurer may be part of a larger group, so the
parent company will be involved in the approval process. This involvement might be
achieved by having representatives of the parent company on the subsidiary’s board. In
other cases, such as invested pension funds or individual Names at Lloyd’s, other ways of
communicating risk appetite will be necessary for these third-party investors.
Chapter 4 Underwriting strategy within the external insurance context 4/15

Risk tolerance and variance

An insurer’s risk appetite depends on its corporate philosophy, as articulated by its vision
statement.

Example 4.1
If an insurer wanted to be the go-to insurer for churches in a particular country, it might
have to be prepared to consider insuring all church buildings, from the smallest village
church to the largest city cathedral. This wide range of risk values may seem hard to
reconcile with the amount and type of risk that the insurer is prepared to take in order to
meet its strategic objectives. It would not make economic sense to carry enough capital to
support writing just a handful of high-value cathedrals when the average church value was
significantly lower. In this situation, a cathedral risk will likely exceed the company’s stated
maximum net exposure on any one risk.
On the face of it, the risk appetite statement would make cathedral risks off-limits to their
underwriters; however, it would be appropriate to insure the cathedral – so maintaining the

Chapter 4
company’s vision – while taking action to lessen the exposure by buying facultative or
treaty reinsurance. In this way, the company’s risk tolerance could be limited to not larger
than the agreed percentage of the company’s capital. However, the strategy of having to
buy large amounts of reinsurance for relatively few risks would disproportionately increase
the expenses ratio and make that insurer’s model less efficient.

Insurers need to constantly measure, monitor and report on their risk tolerance and
variance. Doing this means they can review exceptions and take remedial action, if
necessary, when breaches occur.
Risk variance does not only occur when events go wrong; it can also occur when supposedly
good events are happening.

For reference only

Example 4.2
An insurer plans to increase the size of its marine book by targeting offshore fishing boats.
The plan is to increase the book by 15% over the course of the next twelve months, but
the new business campaign is unexpectedly successful and results in sales increases of
30% during each of the first three months. While the underwriter in charge of the
campaign is delighted, management are concerned. The variance of 100% over the
planned number for new business raises a red flag. As a result of a significant variance to
the plan, questions are asked in an effort to understand why double the planned numbers
of boats are being underwritten. These questions might include:
• Is our pricing too low compared with our competitors?
• Has the market changed in a way that we have not yet understood?
• Have external influences or conditions changed since we created our plan?
• Is our policy wording unnecessarily broad?
• Are these distressed risks that have not been correctly analysed and underwritten?

This example serves to prove that selling too many policies may be just as much an issue as
not selling enough. Tolerances and variances can be plus or minus. Any variance over a
certain amount should be highlighted during regular monitoring.
The risk appetite, risk tolerance and risk capacity of insurers can vary tremendously
depending on the financial strength of the company, what type of business is being
underwritten, the corporate strategy and external factors. Two similar companies could draft
very different risk statements.
 4/16 995/January 2023 Strategic underwriting

To illustrate this point, here is a non-exhaustive list of factors that might affect risk appetite
and tolerance:
• business with claims frequency;
• business with claims severity;
• short-tailed business;
• long-tailed business;
• personal lines or SME business;
• large corporate risks;
• geographic spread;
• willingness of the capital provider to tolerate volatility of results;
• willingness to remain a niche market, specialising in a narrowly defined area;
• a need to grow in order to achieve economies of scale or the benefits of diversification;
• parental plans to grow the company into a global leader within x years; and
Chapter 4

• an aversion to growth abroad.

Consider this…
Thinking about the list of factors that might affect risk appetite and tolerance:
• Can you think of other factors (not listed) that you are aware of from your own
experience working in the insurance industry?
• Can you think of a key sentence that might appear in a risk appetite statement as a
result of some of the listed bullet points?
• How does your employer’s (or an insurer familiar to you) risk appetite differ from
the list?

For reference only

D Intellectual capital and innovation
Countries with developed economies are virtually all based on knowledge, with high use of
technology and connectivity. The prime drivers are intellectual capital and innovation.
Typically intellectual capital and innovation create competitive advantage for companies.
Enlightened companies actively endeavour to foster a culture of learning and self-
improvement to enable employees to become more knowledgeable, and constantly
encourage staff to be creative and innovative.

D1 Intellectual capital
Intellectual capital is commonly defined as the intangible value of a business provided by its
employees’ knowledge, business relationships and business assets together with any
intellectual property such as patents, trademarks and copyrights. Employees' knowledge is
classified as human capital and we will discuss this further in chapter 5.
Business relationships are classified as relational capital and consist of things like brands,
customer relationships and loyalty, distribution channels and contracts, and licences and
other agreements. We cover most of these topics throughout this study text.
Business assets are classified as structural capital, which is subdivided into intellectual
property and infrastructure assets. Infrastructure assets include corporate culture, the
business philosophy, information systems, management processes and so on. Intellectual
capital resides in a number of places within any insurance organisation. Thinking particularly
about an insurer, an MGA or coverholder, the intellectual capital is primarily found in:
• underwriting rating models;
• actuarial pricing models;
• capital and/or internal models;
• management information (MI);
• know-how; and
• customer connections.
Chapter 4 Underwriting strategy within the external insurance context 4/17

Models
Models range from simple spreadsheets created by underwriters to sophisticated
mathematical models created by actuaries. Companies can protect the intellectual property
rights of most of their models by using confidentiality clauses in employment contracts and
copyright. Copyright law provides a legal right to the creator for exclusive use and
distribution. Copyright protects the code but not the function. It is possible that if an
employee moves to another firm and rewrites the code from memory, they may not
necessarily be risking infringement of copyright. However, this is a complex legal issue and
legal advice should be sought. Typical employment contracts, at least in the UK, stipulate
that any intellectual property rights created belong to the employer. However, an underwriter
will retain a lot of knowledge in their brain – and this knowledge cannot be owned or retained
by the employer.
Models, particularly capital models, have become vitally important to insurers because of the
requirements of Solvency II. If insurers have invested considerable amounts of time and
money to build their own internal model (as opposed to using the standard formula) to
assess capital requirements and inform business decisions including pricing and reserving,

Chapter 4
then it is vital to protect this intellectual capital.
Management information (MI)
Management information (MI) can take many different forms such as premium and claims
information, financial information, business plans, broker relationship records, dashboards,
databases, limit profiles etc. In addition to limited copyright protection, the database right in
the UK may protect a database under the Copyright and Rights in Databases
Regulations 1997, but this is a relatively new area and the law is still evolving. Again, the
use of confidentiality clauses in employment contracts is the most appropriate way for an
insurer to protect its MI.
Know-how
Know-how is the knowledge of how to do something efficiently and effectively, often found in

For reference only

employees’ heads, but sometimes in systems and processes. We can think of know-how
within employees as a mental toolkit that the employee carries with them as they move from
one job to another. When employers insist on ‘extensive experience required’ in job
advertisements and profiles, what they are really looking for is a candidate who will arrive
with a large, well-equipped mental toolkit.
Customer connections
Customer connections is a tricky area as it deals with the ownership of clients. This is not
something that the law recognises. In practical terms, the intermediary (the broker, agent or
MGA) typically believes that it owns the customer connection. This area of law has produced
some interesting insurance cases relating to employees poaching customers when moving
from one intermediary to another. An insurer is further upstream in the supply chain, but can
endeavour to take ownership by inserting an appropriate clause in any contract that may
exist between them and the intermediary.
D1A Protecting intellectual capital
Although certain rights may be available under the law in the event of a breach, the most
practical way to protect your intellectual capital is to put precautions in place from the start of
any relationships and continuously monitor those relationships over time. Here is a non-
exhaustive list of practical precautions:
• make sure that all applicable work is copyrighted to the employer;
• educate employees and business partners about confidentiality;
• restrict access to confidential information;
• insert confidentiality clauses in employment contracts and agreements with
intermediaries and other stakeholders;
• record who worked on creating databases and the time and resources involved;
• monitor employees’ behaviour, engagement and motivation levels in an effort to detect
warning signs of disenfranchised or demoralised people; and
• act promptly when an issue arises.
 4/18 995/January 2023 Strategic underwriting

Consider this…
You are the chief underwriting officer of an insurance company. A team of underwriters
resign to set up a new MGA. You are worried about them taking confidential information
with them, including customer details and rating models. Your concern is that they may
attempt to steal your policyholders by undercutting current premium levels. What
precautionary steps could you take to protect your insurance company?

We have highlighted the importance of underwriters’ know-how; we will discuss the closely
related topics of human capital and technology in Human capital and technology on page 5/
9.

D2 Innovation
Innovation can be an overused word, or simply misused at times. In this study text we use
innovation to mean something that involves significant positive change or solves a problem,
and the solution being adopted by the company.
Chapter 4

The insurance industry is not generally thought of as particularly innovative. Many customers
think of insurers as conservative and slightly old-fashioned. Given that the fundamental
purpose of insurance is to offer financial protection when disaster strikes it is entirely
appropriate to be prudent and cautious regarding the insurers’ operating model. Indeed,
company law and regulators – and other stakeholders – want to see carefully managed and
controlled insurance companies, operated within appropriate governance and risk
management systems. However, the insurance industry has to change, internally and
externally, in order to survive. Change is vital for the continuing success of any organisation
and insurers are no exception.
Change or innovation – the introduction of new ideas or methods – is necessary for many
reasons. Some of these reasons include to:

For reference only

• meet the needs of customers;
• respond to changes in legal, economic, political and social trends;
• respond to key global insurance issues;
• remain fit for purpose in the twenty-first century;
• respond to new entrants and competitors; and
• cut costs and increase productivity.
Increasingly, customers are demanding insurance that is transparent, relevant and tailored to
their needs, with fewer exclusions, without small print and without the uncertainty about
whether a claim will be paid because of complex policy terms and conditions. The regulators
are putting an emphasis on conduct risk, the delivery of good customer outcomes and the
fair treatment of customers. According to the Financial Conduct Authority (FCA), firms must
put the customer – the policyholder – at the centre of their business model.
In recent years many governments have recognised the need for better customer protection.
In the UK, for example, four new laws have been introduced since 2012 that address
different aspects of insurance: Consumer Insurance (Disclosure and Representations)
Act 2012 (CIDRA), Insurance Act 2015 (IA 2015), Consumer Rights Act 2015 and
Enterprise Act 2016. Refer to Other significant global insurance issues on page 2/34 for
more on legislation.
Product innovation
New and enhanced products and product improvements are needed to respond to the
demands of customers. Cyber risk policies are a recent example of product innovation –
essentially, a new product that responds to the needs of customers. In a changing world,
products and policy wordings need constant review to ensure that they remain fit for
purpose. Existing wordings can fail to meet customers’ increasing needs or they can expose
the insurer to unintended risks, which were either not known about (asbestos is an historical
example of unknown risk) or not properly assessed and priced. An example of an enhanced
product is a new endorsement providing business interruption cover following hospital or
health clinics being temporarily shut down after infectious disease contamination. Another
example is the suggestion to remove average from policies designed for SMEs.
Some insurers are quite systematic in their approach to product innovation. They track
trends, regularly query profit centres, partner with external experts and gather all their
Chapter 4 Underwriting strategy within the external insurance context 4/19

information together in a specific committee. When insurers establish a unit to dedicate

resources with the aim of creating knowledge and innovation, the unit is often called a
research and development (R&D) department. Some might question how such a formal
process can achieve innovation when the concept of innovation is more often thought to
arise from an individual’s moment of brilliant insight. While it is terrific that individuals do
sometimes come up with flashes of brilliance, most organisations need to put in place an
effective way of encouraging employees to innovate, and that is normally achieved by
creating a team or department tasked with R&D.

Critical reflection
Think of an innovative product your company has introduced recently:
1. In your view, is the product innovative?
2. Is the insurer radically changing the way in which insurance can be distributed and
communicated?
3. Do you have any concerns that the product could be adversely selected against, either

Chapter 4
by customer segment and/or value of insured items?

Distribution and communication

Insurers need to develop new methods of distributing to and communicating with customers;
methods that are designed for a mobile-focused digital world. Insurers need to build closer
relationships with their customers rather than typically only having contact with them at point
of sale and when a claim arises. Why is it that a customer cannot request a change to their
policy via an online portal and be able to track the progress of the request? Why is it that a
customer cannot check their insurances anywhere and anytime in the same way they check
their bank account?
Radical innovation

For reference only

Insurance examples of radical innovation are quite difficult to identify, as insurers generally
improve existing products and make modest changes to their operating models. However,
GEICO in the USA and Direct Line in the UK are good illustrations of radical innovation and
are discussed further in Direct on page 6/18. Both companies used a different operating
model to other insurance companies by using direct marketing and having a strong brand.
They used call centres, targeted narrowly defined customer segments and introduced
dynamic pricing. We discuss dynamic pricing, also known as price optimisation, in Optimal
pricing and price optimisation on page 6/6.

Research exercise
Carry out your own research into GEICO and Direct Line in order to thoroughly
understand the innovations they introduced to the market.

Telematics
Telematics is an example of innovation that is continuing to affect insurance. We mentioned
telematics briefly in Big data on page 2/15: it is usage-based insurance, or more popularly
known as pay as you drive. Telematics involves fitting a GPS ‘black box’ device in the
insured vehicle so the insurer can track the vehicle’s movements. If the premium is directly
related to miles driven then it can be automatically calculated and billed, perhaps monthly.
Using this method, insurers can also analyse the driver’s acceleration, speed, cornering and
braking. The device monitors the amount of time that the car is driven, when it is driven and
knows immediately if the vehicle is involved in an accident. If the policy has been priced on
factors such as when or where the vehicle can be driven, insurers can monitor usage and
amend the premium accordingly. Typically telematics works for high-risk groups, such as
young or inexperienced drivers and drivers with low mileage. Users can even log on to their
insurer’s website to review their driving characteristics and see how well they drive.
Telematics will surely come of age, if and when telematics devices are installed in vehicles
as standard during the manufacturing process.
Insurance disruptors
Innovation in insurance is closely linked to matters discussed in chapter 2, including
technology innovation (Technology innovation on page 2/20), the analytical dissection of big
data (Big data on page 2/15 and Analytics on page 2/18) and digitisation (Digital on page 2/
21). Insurance disruptors will appear and thrive on any segments of the market that are
 4/20 995/January 2023 Strategic underwriting

under-served or ignored by established companies. Major organisations in non-insurance

sectors with data-rich information, superior technology and brand awareness (e.g. Amazon,
Google and Apple) are well-positioned to enter the insurance arena and shake up the state
of affairs. Crowdsourcing and peer-to-peer lending may also transition into the insurance
sector over time. The pace of change is rapid and unrelenting across the world. Insurers
need to continuously adapt to remain fit for purpose.
According to Airmic’s annual survey of risk managers in June 2016, some 59% of its
members said the insurance industry’s failure to innovate was their top concern.
Insurers can no longer decide which product they wish to offer and organise their internal
processes accordingly as they have done in the past. Insurers need to step into their
customers’ shoes, view insurance through their eyes and then redesign their target operating
model (TOM) to meet their customers’ needs. They need to recognise that new technologies
have shifted the power towards the customer.
D2A Challenges of innovation
Chapter 4

Achieving innovation in any industry is challenging. In the insurance industry in particular, the
regulatory regime can cause tension as any developments must put the customer at the
heart of the product design. If there are too many exclusions or any small print then there
could be accusations that the product is not fair or transparent, or that it is too hard for
customers to present a claim.
If the regulators consider the planned loss ratio of a new product to be too low, then they
might raise issues concerning the fair treatment of customers. Insurers are in business to
take risks. Being risk-averse by drafting a restrictive wording that doesn’t provide much cover
or makes it difficult for an insured to bring a successful claim might produce good financial
results for the insurer. However, doing this goes against the interests of the customer and
could attract the attention of the regulators.

For reference only

Some problems with products have arisen because of the way they have been sold. So any
product development plan must consider which customer segment is being targeted and how
the sales will be made. Areas to be examined during development include distribution
channels, and product literature and materials.
Innovation often means moving into the unknown – out of your comfort zone – and taking a
risk. The most important factor in this situation is not to do anything that could ‘bet the
company’ – unveiling a new product that could cause serious financial damage to the
company if the results are unfavourable. The company can control this type of situation in a
number of ways: by limiting the launch to a small segment of the market, including the new
product in existing reinsurance treaties and managing limits conservatively.
In this era of data and analytics, one challenge to overcome is how to create a new product
without the benefit of any historical data. How can an actuary sign off on a proposed pricing
model without any data or history of previous claims or premiums? How are they expected to
react when all the information they have is the underwriter saying that they believe the price
will prove adequate?
Actuaries are an important part of modern general insurance operations. However, there can
sometimes be tension between the underwriter’s expert judgment and the actuarial
approach. The Solvency II regime ensures that models not only have to be used, but they
also have to be validated. The product development process, and every element within it,
has to be capable of being audited. Therefore, each step has to be appropriately
documented.
In the absence of historical data, the actuary has to use other ways of predicting future
losses. Typically this means probability theories and simulation techniques. This is a
sophisticated area and is not within the scope of this study text, but it is appropriate that
underwriters understand the broad principles of actuarial analysis. The most common way
that an underwriter learns about actuarial techniques is by working with actuarial colleagues
over time and learning on the job.
Finally, the culture of an insurance organisation can play a large part in creating the right
environment within which innovations can occur. If innocent mistakes are ridiculed and
different ideas derided, then after a while employees will not put their heads above the
parapet. A culture of rigid control, which does not tolerate individualism or creative thinking,
will stifle innovation. Innovation is vital for a company to thrive in a competitive world and all
Chapter 4 Underwriting strategy within the external insurance context 4/21

companies should nurture the creative knowledge and skills of their employees and treat
them with respect.

E Conflicting stakeholder interests

The Companies Act 2006 encourages directors to adopt what it calls enlightened
shareholder value. This implies that directors need to have regard to other stakeholders
when making their decisions. Section 172 of the Act sets out six factors that represent
responsible business behaviour:

A director of a company must act in the way he considers, in good faith, would be most
likely to promote the success of the company for the benefit of its members as a whole,
and in doing so have regard (amongst other matters) to:
1. the likely consequences of any decision in the long term;
2. the interests of the company’s employees;

Chapter 4
3. the need to foster the company’s business relationships with suppliers, customers
and others;
4. the impact of the company’s operations on the community and the environment;
5. the desirability of the company maintaining a reputation for high standards of business
conduct; and
6. the need to act fairly between members of the company.

Clearly the phrase ‘enlightened shareholder value’ was designed to widen directors’
responsibilities from the previous requirement to act in the best interests of the company, to
the broader responsibility of making decisions that take into consideration the impact on all

For reference only

stakeholders. To an extent, the Act builds on the recent trend in society of expecting
company boards to show responsibility to the wider community. While the idea of considering
all stakeholders resonates well with the public and media, in practice it is extremely difficult
to satisfy conflicting stakeholder interests. Stakeholders have their own agenda and
rationale about why they are connected to a company. Balancing all these different interests
is often difficult or could hinder the ability of a board to make timely, agile decisions.
Nevertheless, in today’s world, companies need to balance stakeholders’ interests in order to
successfully maintain a good reputation. The six typical stakeholders and their interests are
shown in table 4.1.

Table 4.1: Stakeholder model

Stakeholder Examples of interest

Shareholders Return, performance

Customers Quality, value for money, service standards, fairness

Intermediaries Commission, service standards

Employees Fair rewards, training, career progression, health and safety

Public Social responsibility, responsible environmental standards

Government and regulators Tax, VAT, legal and regulatory compliance, open communication

We can all think of examples of what each stakeholder group might value most. But if we
examine one or two examples, a number of other factors come into play.
 4/22 995/January 2023 Strategic underwriting

Example 4.3
The board of an insurer decides to shrink the company’s underwriting portfolio in response
to adverse market conditions. The board will reduce or eliminate the company’s exposure
to risks that are not adequately priced or where the wordings are too broad. The board’s
rationale for taking this action is that it will reduce the likelihood of losing money through
the underwriting function; it may even gain the company a modest underwriting profit, thus
ensuring that the company can survive this period of excessive competition. Taken at face
value, the board’s decisions appear to be entirely appropriate; however, let’s work our way
down the list of stakeholders and try and play out their reactions.
Shareholders
Knowledgeable shareholders who are investing in this insurer for the long term might
consider the board’s decision to be entirely appropriate in the circumstances. However,
their reaction will depend somewhat on the reaction of analysts and the media. If the
decision to cut back is contrary to most other insurers, then the share price may suffer as
short-term investors sell and switch to other insurers – or exit the insurance sector
Chapter 4

completely.
Customers
Most insurance customers want a financially stable insurer, but will often be seduced by
cheap pricing and broad coverage. If taking this action means that all premiums will
increase then many customers will vote with their feet and place their business with other
insurers. Some customers might find out that the company is not willing to renew their
policy. All things considered, it is hard to see how any customer would feel that this action
is in their best interests.
Intermediaries
Coverholders and MGAs may find that the insurer serves notice to cancel their binders, as
they are deemed to be unprofitable or too marginal. Brokers will seek to protect their

For reference only

clients by scouring the market for alternative insurers that will offer more competitive
premiums and coverage. In this context, we will not go down the route of examining
whether a more ‘competitive premium’ is necessarily in the client’s best interests.
Dependent on the underwriting action, brokers might look for a new home for an entire
sector of their client base, believing that the insurer is no longer committed to the class.
Employees
The underwriters at this insurer may become demoralised at being instructed to reduce
the size of their portfolios. Some employees might not want to be employed in an
organisation that is retrenching, perhaps believing that fewer people will be required in the
smaller business. In this type of situation, it can be hard to envisage any career
progression and competitors will be encouraging this viewpoint when trying to recruit. If
the underwriter has a good track record and is well known in the market, they may be
much sought after. Less-experienced or less-ambitious employees will either not consider
the future or not receive offers if they try and move. Underwriters may fear that their
relationships with brokers could suffer, as they will have to say ‘no’ more often.
Public
In reality most members of the public will not hear about this type of action. However,
graduate programmes might be cut back or even cancelled. Local suppliers may lose a
customer as a red line is put through expenses. The insurer may cut out sponsorships,
taxi accounts and trade journal subscriptions.
Government and regulators
The Government wants companies to be successful so that they can create employment
and generate taxes (corporation tax, income tax, social security taxes and insurance
premium taxes). However, the Government recognises the cyclical nature of the economy
and business and takes a high-level macro-view of these issues.
The regulators will probably approve of this action, as they are responsible for
guaranteeing insurers are on a sound prudential footing and that the market as a whole is
financially stable. However, they may have concerns if there is any suggestion that the
insurer is not treating customers fairly. This could arise from providing inadequate notice
of non-renewals or issuing late renewal terms containing premium increases in an effort to
make it difficult for customers to find alternatives in the short time available.
Chapter 4 Underwriting strategy within the external insurance context 4/23

Summary
The main ideas covered by this chapter can be summarised as follows:
• Some of the key drivers for creating strategic alliances are: access to customers,
expansion abroad, gaining knowledge, access to external resources and risk sharing.
Strategic alliances can take a number of different forms.
• A significant number of companies, including insurers, decide to outsource functions as a
result of analysing their value chain. There are advantages and disadvantages to
outsourcing.
• Offshoring is typically thought of as outsourcing to a provider located in a different
country. India is by far the most popular offshore outsourcing country globally.
• The life insurance industry is more advanced than general insurance in disaggregation.
• Broker consolidation and market forces have resulted in broker networks becoming an
established feature of the insurance landscape in many countries, including Australia,

Chapter 4
Canada and the UK.
• Vertical integration occurs when a firm buys another firm in its supply chain. There is a
growing trend for some customer groups and intermediaries to move up the value chain –
known as backward integration. Some insurers are moving down the value chain – known
as forward integration.
• Insurers should have a capital management strategy designed to support their
underwriting and business strategy.
• The supply of capital in (re)insurance in recent years has been dramatically increasing,
partly because capital markets have concluded that insurance risk is a separate
investable asset class.
• Alternative capital comes from financial markets, hedge funds, pension funds, mutual

For reference only

funds, institutional investors, sovereign wealth funds etc.
• The responsibility of establishing an insurer's risk appetite lies squarely with the board of
directors.
• Risk tolerance and variance needs to be constantly measured, monitored and reported
on. In this way, exceptions can be reviewed and remedial action taken, if necessary,
when breaches occur.
• Countries with developed economies are virtually all based on knowledge, with high use
of technology and connectivity. The prime drivers are intellectual capital and innovation.
• Enlightened companies endeavour to foster a culture of learning and self-improvement to
help employees to become more knowledgeable, and constantly encourage staff to be
creative and innovative.
• Change or innovation is necessary, but insurance examples of radical innovation are
quite difficult to identify, as insurers generally improve existing products and make modest
changes to their operating models.
• The phrase 'enlightened shareholder value' in the Companies Act 2006 was designed to
widen directors' responsibilities from the previous requirement to act in the best interests
of the company, to the broader responsibility of making decisions that take into
consideration the impact on all stakeholders.
 4/24 995/January 2023 Strategic underwriting

Additional reading
Aon (2019) Aon's Reinsurance Aggregate: Results for the Year to 31 December 2018.
London: Aon Securities Inc. Available at: http://thoughtleadership.aonbenfield.com/
Documents/201905-ara-fy-2018.pdf?
_ga=2.42889891.789476118.1557996397-1719766864.1552458705.
Aon (2019) Reinsurance Market Outlook. London: Aon Securities Inc. Available at: http://
thoughtleadership.aonbenfield.com/Documents/20190403-ab-analytics-rmo-
april-2019.pdf.
CRO Forum & North American CRO Council (2013) Establishing and Embedding Risk
Appetite: Practitioners' View. Available at: https://bit.ly/2SuDtff.
FitchRatings (2018) Global Reinsurance Guide 2019. Available at: https://
www.globalreinsurance.com/fitchratings-global-reinsurance-guide-2019/1428133.article.
Hartwig, R. and Lynch, J. (2015) Alternative Capital and its Impact on Insurance and
Reinsurance Markets. New York: Insurance Information Institute. Available at: https://bit.ly/
Chapter 4

2yE9Yzi.
Hartwig, R. and Wilkinson, C. (2007) 'An overview of the alternative risk transfer market',
Handbook of International Insurance, 26, pp. 925–52.
Van Rossum, A., de Castries, H. and Mendelsohn, R. (2002) 'The debate on the insurance
value chain', The Geneva Papers on Risk and Insurance, 27(1), pp. 89–101. Available at:
www.jstor.org/stable/41952617.
Wood, D. (2012) 'A primer on insurance-linked securities', WIN Magazine, pp. 22–5.
Available at: https://bit.ly/2Q1qsrH.

For reference only

F Scenario
F1 Question
This question is based on syllabus section 2.2.
You work for an insurance company that is considering the need for additional capital to
enable the company to grow. The chief executive officer (CEO) does not want to raise any
more traditional capital and asks you to provide informal advice, based on your market
knowledge, on what alternative sources of capital should be considered. The CEO plans to
use your initial advice to help them brief the board on this subject. They ask you to cover the
following points:
1. What are the main types of investment vehicles?
2. Who are the potential capital market investors?
3. Provide a balanced review of the alternatives, but stop short of making any
recommendations.
You can speak to your (re)insurance market contacts to aid your research.

F2 How to approach your answer

This question is based on syllabus section 2.2.
Aim
This fictional scenario encompasses issues considered in chapters 2 and 4. Your answer
should demonstrate that you understand the alternative capital market.
Chapter 4 Underwriting strategy within the external insurance context 4/25

Key points of content

You should aim to include the following:
1. Identify the sources of your research, both desk-based and the market contacts you
spoke to.
2. Consider attaching any relevant external reports as appendices to your report.
3. Discuss whether the capital is best delivered as insurance capital or as reinsurance.
4. Describe the advantages and disadvantages of each investment vehicle and each type of
investor.
5. Conclude by saying that this is a specialist area that warrants expert advice from
appropriate external sources.

Chapter 4
For reference only
 4/26 995/January 2023 Strategic underwriting

Self-test questions
1. Identify at least six critical success factors for strategic alliances.

2. Why do you think the UK motor market has a number of examples of vertical
integration?

3. Provide a definition of beta.

4. Describe what collateralised reinsurance is and why it has become a popular

structure for alternative capital.

5. Where does intellectual capital normally reside in an insurer?

6. Briefly describe what is meant by telematics.

Chapter 4

You will find the answers at the back of the book

For reference only

 Underwriting strategy
5
within the internal
insurance context
Contents Syllabus learning
outcomes
Introduction
A Impact of the internal insurance value chain on underwriting strategy 3.2

Chapter 5
B Corporate strategy 3.1
C Portfolio management 3.4
D Human capital and technology 4.2
E Target operating models (TOMs) 4.1

For reference only

Summary
F Scenarios
Self-test questions

Learning objectives
This chapter relates to syllabus sections 3 and 4.
On completion of this chapter and independent research, you should be able to:
• describe some of the different ways that services can be shared throughout an
organisation, and what the benefits and drawbacks can be;
• evaluate the impact of the internal insurance value chain on underwriting strategy;
• discuss how the underwriting strategy fits within the business philosophy and framework;
• evaluate the drivers of portfolio management and their strategic implications;
• analyse the importance of human capital and technology on the underwriting function;
• describe how to mitigate the impact of unconscious bias on behaviour and decision
making; and
• discuss the target operating model options for underwriting strategy and their various
strengths and weaknesses.
 5/2 995/January 2023 Strategic underwriting

Introduction
In this chapter we look at underwriting strategy and how it is affected by factors from within
the insurance organisation itself. Some underwriters might think that they are not concerned
about the structure of the organisation where they work. However, no role is indispensable,
particularly in this period of rapid change and business transformation. Every employee
needs to be committed, engaged and motivated in order to perform at their best. Do not
underestimate how the operating model can affect underwriters’ efficiency and morale.
The increasing use of technology in underwriting is generally considered to be positive.
However, underwriters can sometimes find the task of blending their skill and expert
judgment with technology to be a challenge.
An underwriter might be frustrated by a pricing model and react by making a hasty decision.
Later, in a more reflective mood, they realise that they may not have been objective, perhaps
because of an unconscious bias.
This chapter covers strategy as well as topics related to managing yourself and others. We
urge you, as always, to read extensively on as many of the subjects as possible, as each
subject could fill a book on its own.

Key terms
This chapter features explanations of the following ideas:
Chapter 5

Conflicts Core process Corporate strategy Diversity

transformation
Engagement Human capital Intellectual capital Knowledge
management

For reference only

Knowledge sharing Knowledge worker Manufacturing and Motivation
distribution split
People management Portfolio Remuneration Shared service
management organisations
(SSOs)
Strategic Strategic goals and Target operating Unconscious bias
components and imperatives model (TOM)
objectives
Vision and purpose

A Impact of the internal insurance value

chain on underwriting strategy
Refer to
Refer to M92, chapter 9, section B3C or 990, chapter 4, section D for more on
combined ratio

Many insurance companies have divisions that contain their own service functions. For
example, an insurer may have three separate divisions for personal lines, commercial lines
and life products. Each division contains finance, distribution, IT, HR, operations and
marketing service functions. The cost of service functions can be considerable and has to be
taken into account when setting premiums. It is therefore important to examine the internal
value chain to maximise efficiency while tightly controlling costs and expenses. Insurers with
a lower cost structure can gain commercial advantage because of their lower expense ratio.
Having a lower expense ratio in turn reduces the combined ratio (or combined operating
ratio), indicating a better underwriting performance.
Expenses are a significant item within an insurer’s profit and loss (P&L) account and are
normally the second-largest cost after claims. While claims costs can and should be
Chapter 5 Underwriting strategy within the internal insurance context 5/3

managed, expenses are easier to control because the bulk are internal costs. In a typical
insurer, the largest expense items are usually commission and employee remuneration.

A1 Shared service organisations (SSOs)

The practice of using shared services in their organisations is common to large companies
regardless of which country they are in. Shared services means that internal administrative
service functions – such as finance and IT – are shared by all the internal partners – such as
strategic business units (SBUs) – in an organisation. In effect, shared service
organisations (SSOs) are insourcing parts of their internal value chain. A shared services
unit is an alternative to outsourcing those functions or centralising each function. A unit is
responsible for serving the SBUs as if it were an independent business and charged with
optimising corporate resources.
SSOs are adopted for many reasons. The main reasons are to:
• reduce costs;
• improve timeliness;
• improve service;
• increase efficiency; and
• increase effectiveness.
The improvements driven by SSOs generally benefit the SBUs and the company as a whole
– and should be passed on to the customer.

Chapter 5
SSOs successfully create unity by achieving cost reductions via economies of scale, keeping
all processes within the organisation, applying best practice across the entire organisation
and allowing business management in the SBUs to focus on their core activities. One other
positive possibility is open to SSOs: they can build a business and earn revenue out of
providing services to external companies. For example, Swiss Re has created an outsource

For reference only

provider business serving external customers in addition to providing many of those same
services to internal customers.
An organisation will face obstacles when moving to an SSO, the most significant of which is
likely to be the change management relating to culture. Whenever change takes place in an
organisation, employees have to adapt and adjust to the new structure. However, some
employees in service functions such as finance and IT, for example, may be unused to being
held responsible for performance and having their productivity benchmarked against
outsourcing. The cultural shift in attitude from being part of the ‘back office’ to being in a
competitive, accountable business unit takes time and some employees may not be able to
adapt. As cost reduction is one of the drivers for moving to an SSO, employees may fear for
their jobs as headcount is cut. This atmosphere can dampen employee morale.
An organisation has to be large enough to benefit from moving to an SSO. If the business is
not big enough, the potential cost savings may not outweigh the costs of creating and
managing the shared services unit. Another perhaps surprising obstacle might be a feeling of
a loss of control from the SBUs themselves and central senior management.
In Legacy systems on page 2/19, we touched on the London Market Group’s market
modernising proposal where the target operating model (TOM) project is a core
component. A shared central services hub is at the core of this innovative scheme. Key
drivers for the shared central services hub are one-touch data capture, a market-unified
approach and the provision of greater data insight. The TOM project is designed to reduce
costs and increase efficiencies by allowing direct customer and insurer interactions with the
hub. TOMs are discussed further in Target operating models (TOMs) on page 5/18.

A2 Core process transformation

An increasing number of insurers are transforming their businesses in the search for better
efficiency and to achieve sustainable profitable growth. Transformation is about removing:
• structural inefficiencies;
• overlap; and
• unnecessary process steps.
Key areas of focus have been to streamline processes, improve workflows and change
systems to deliver superior customer service.
 5/4 995/January 2023 Strategic underwriting

To harness the full benefit of this transformation, insurers are redesigning their structures to
share common core processes, or to make more core processes common across all units.
Consistent processes shared on the same platform across all SBUs helps drive out
duplication and cost. Common processes improve quality control, increase the effectiveness
of management information (MI) and increase the validity of key performance
indicators (KPIs).
Core process transformation is about sharing core business processes throughout the
organisation, whether or not SBUs are separately accountable for P&L purposes.

Be aware
Core process transformation is not about sharing services; it concerns sharing the core
activities of the business. For example:
• Distribution and relationship management processes can be shared across all
locations – at least within the same country – and across all customers, whichever
channel they choose to use.
• Consistent customer service management processes can be employed, whether by
sales personnel, front-line underwriters, claims and any other outward-facing services.
• The intellectual capital employed in the methodology and processing models used by
underwriting, claims, research and development (R&D), products, pricing etc. should –
to the extent possible – be shared by all the core insurance specialists.
Chapter 5

• While there may not seem to be much commonality between support services such as
finance, IT, HR, legal, PR and procurement, they should all carry out their core
activities in the same approved style and discipline.

A3 Manufacturing and distribution split

For reference only

In Value chains on page 1/12, we looked at value chains and the insurance value chain in
particular. As a reminder, the theory is that there are three types of business within most
companies: manufacturing, intellectual capital and distribution. When companies undertake
value chain analysis as part of a strategic review, one possible outcome is to separate the
manufacturing business from the distribution business.
There are no obvious current examples of high profile or large insurers separating
manufacturing from distribution but Zurich attempted it in the 1990s. At the time Zurich was
famous as an example of the new e-business models arising from the dotcom boom.
However, the dotcom bubble burst in 2000–01 and Zurich’s board abandoned the
restructuring soon afterwards. Zurich also had enormous losses arising from the 2001
terrorist attack on New York’s World Trade Center. Presumably, Zurich decided to
concentrate on restoring profitability rather than on continuing to restructure the business.
The Zurich model split the organisation into separate manufacturing and distribution
businesses, while the intellectual capital was shared. The major benefit was intended to be
economies of scale in manufacturing. The manufacturing and distribution businesses were
both permitted to supply or sell their products to competitors. The theory was that
manufacturing would focus on scale, specific products and product innovation while selling
their products through as many channels as possible. Distribution would, with all the latest
internet capabilities, focus on customers and offer a full range of products. The two
businesses were linked by a common e-business exchange platform.
It is fascinating to note that the Lloyd’s model, which has been in existence for over 325
years, has always been split between manufacturing, intellectual capital and distribution:
• ‘Names’ at Lloyd’s supply the capital.
• Syndicates manufacture insurance.
• Managing agents represent intellectual capital – and even access ‘manufacturing’ shared
support service functions; for example, centralised market premium and claims
processing.
• Distribution is the domain of brokers, coverholders and managing general
agents (MGAs).
Many non-insurance businesses split manufacturing and distribution. We give just one
example in this section, although you might like to find another and use it as a case study.
Chapter 5 Underwriting strategy within the internal insurance context 5/5

Example 5.1
In 2014, B/E Aerospace Inc. (a manufacturer of aircraft cabin seating, and lighting and
oxygen systems) announced that following a strategic review it was planning to split into
two separate companies. One would manufacture aircraft cabin interior equipment and the
other would distribute those products and perform logistics and technical services for the
aerospace and energy services markets. Amin Khoury, the company’s chairperson and
co-chief executive officer, explained:
‘Separating these highly successful businesses into two industry-leading companies will
allow each to benefit from increased management focus and operational flexibility, as well
as allow the management teams and boards of directors of each business to determine
the optimal capital structure, free cash flow allocation policy, growth strategy,
compensation system and performance measurement metrics.’

B Corporate strategy
When establishing or developing underwriting strategy it is important to align that strategy
with your organisation’s corporate strategy. An underwriting strategy must fit within your
employer’s business philosophy and framework. Just as the overarching corporate strategy
must align with the mission and vision statements, so must the underwriting strategy.
The strategic triangle in figure 5.1 illustrates how vision and purpose are high-level

Chapter 5
components and have a medium or long timescale, moving in the direction that the company
plans to travel. Underneath are the different ‘building blocks’ that become progressively more
detailed and short-term in outlook.
We look at each of these building blocks in the following sections.

For reference only

Figure 5.1: Strategic triangle

Vision
and purpose

Strategic goals
and imperatives

Increasing
level of detail Strategic components
and decreasing and objectives
timescale

Annual business
objectives

Underpinned by agreed
design principles

Source: Sault, T. (2015) Operating Models [PowerPoint presentation]. London: Cass

Business School.
 5/6 995/January 2023 Strategic underwriting

B1 Vision and purpose

The founder – the person(s) who had the idea to start the company – will have articulated
their vision to the original capital suppliers, employees and prospective customers. Over
time, that vision will have been crafted into a high-level aspirational statement that identifies
and communicates what the company wants to achieve in the medium-to-long term. The
vision statement comes first and is the top layer of the triangle and the top-level driver for all
other activity. Refer to What business are we in and why? on page 1/4 for more on vision
statements. This link is critical and although, as stated previously, many companies are
altering how they clarify their business and purpose the principles still remain.
Here is an example of an insurance company’s vision statement:

Our new purpose defines who we are, who our stakeholders are, and the impact we want
to have in the world. It's an evolution. It builds on our legacy and better reflects how we
serve the needs of our customers, employees, partners and society.
We have spent the last 150 years going above and beyond to protect the people who put
their trust in us. We recognize the dramatic changes happening in our societies, whether
driven by climate change or the effects of technology on work and the way we live our
lives. In an era of unprecedented change, we are determined to shape a future in which
we can all thrive.
How we live our culture
Chapter 5

For Zurich, being a responsible and impactful business is more than a story we tell. It's a
principle that informs every action we take. It's who we are. We are guided by our values.
We are optimistic, caring and reliable. With forward thinking, determination and a sense of
togetherness, we bring our purpose to life.
Source: Zurich, https://www.zurich.com/about-us/purpose-and-values.

For reference only

The paragraphs demonstrate how Zurich wish to be seen but also the importance of linking
their purpose (mission) and values to the strategy. This holistic or integrated approach is how
purpose and values are truly embedded within a company.
The different perceptions of, for example, AIG and Fairfax Financial Holdings Limited (FFH)
are interesting to review. AIG is known for its strong, global brand and a high degree of
centralised control. FFH’s insurance and reinsurance companies operate on a decentralised
basis, with autonomous management teams using different trading names. The control
model and leadership styles are virtually at opposite ends of the spectrum. Their vision
statements are likely to be very different.

Research exercise
Find online the vision statements for AIG and FFH (or two other insurers) then compare
and contrast them.
Hint: Fairfax’s might not be called a vision statement.

It is imperative for the company to keep its chosen vision relevant and up to date.

B2 Strategic goals and imperatives

To many people, strategic goals and imperatives are virtually indistinguishable from a
mission statement. The key difference is that a mission statement is a single high-level
statement, whereas the second tier of the strategic triangle typically has a number of
strategic goals. As the process of creating corporate strategy develops – gets down into the
next layer of the triangle – the level of detail increases.
Strategic goals are statements of what the company wants to achieve over the period of the
strategic plan, normally a long-term period (perhaps five or ten years). Writing strategic goals
is a relatively simple task; the skill lies in connecting these goals to the strategic planning
process.
Chapter 5 Underwriting strategy within the internal insurance context 5/7

A corporate strategy should generally have no more than six to eight key strategic goals. In
other words, only imperative or vital goals should be included and they must still be kept at a
high level. Each goal will become more specific as the planning process becomes more
granular in the annual plan.
Here are some examples of strategic goals:
• To be known as the best and most fair underwriting team in our chosen market.
• To be a low-cost insurer by operating a no-frills regime.
• Provide the best customer service with the customer at the heart of our business.
Ultimately, the company needs to measure each goal in order to track the progress it has
made towards achieving them. The people who manage strategic goals need to know what
success will look like. For example, for the goal of becoming the best and most fair
underwriting team in the market, measures might include: number of complaints, speed of
service, loss ratio, benchmarking against the market and customer or broker surveys. The
company might measure success as no more than 1 complaint per 100 quotes or being
rated within the top three underwriting teams in an annual broker survey.

B3 Strategic components and objectives

The third tier of the triangle is strategic components and objectives. At this stage in the
design of a strategic plan, the company should use appropriate strategic management tools
to analyse its positioning and key issues. We discussed many of these tools in Strategic

Chapter 5
management tools on page 3/3 and Using strategic management tools on page 3/12.
Effective use of strategic management tools will enable the company to address key
questions and refine its strategy. This will allow objectives to be produced, which will result in
action items being developed at an operational level.
Objectives will often be based on the results of analysis, such as a SWOT or Gap analysis.

For reference only

Ideally they should be SMART – specific, measurable, actionable, realistic and with a
timescale.

Objective setting
You need to develop a framework of objectives that clearly identify where and what you
want the business to be in the future. These should be supported by policies, values
statements, stakeholder charters etc. that help clarify objectives and provide the structures
within which the strategies to deliver the objectives can be created.
Source: Cass Business School, MSc course, 2009.

Objectives are normally expressed as specific statements that, combined with other
objectives, will help achieve one of the strategic goals. In other words, objectives can be
thought of as subgoals. An example of an objective could be ‘to be recognised as the go-to
market for cyber products in the Middle East market’.

B4 Annual business objectives

Strategic objectives feed into the annual planning process and are broken down into a series
of annual business objectives. Annual business objectives are the many actions that will
need to be executed over the year ahead to help move the company forward and deliver the
strategy. Ultimately, strategy can only be delivered through daily business activities. Annual
business objectives are the most detailed layer in the strategy triangle.
An example of an annual business objective for an underwriter could be ‘to carry out a
review of our cyber products to ensure that they are market-leading and properly adapted to
conform to all the necessary laws, jurisdictions, regulations and market norms of our key
Middle Eastern countries’.
 5/8 995/January 2023 Strategic underwriting

B5 Design principles
Design principles represent the last tier of the strategic triangle. Once the company has
agreed a set of design principles, it can begin work on a review of its ‘as-is’ or current
operating model (COM). Here are some examples of design principles:
• All SBUs to use group services.
• Duplication to be eliminated across the business.
• Processes are to be standardised.
• Increased speed to market for new products.
The culmination of the strategic corporate planning process may turn out to be a route map
leading towards defining a TOM.

Research exercise
Find your company’s vision, strategic goals and objectives and consider these questions:
• How well are they communicated?
• Are they an integral part of how the company operates?
• How could they be improved?
Discuss your findings with your manager or the person responsible for strategy.
Chapter 5

C Portfolio management
Refer to
Refer to 960, chapter 4, section D for detail on portfolio management

For reference only

A basic understanding of portfolio management is assumed in this study text and this
section will introduce additional or complementary thoughts. A good portfolio can take many
different shapes and sizes, although certain truisms exist.
• Alignment: The portfolio must be aligned to the employer’s strategic goals and
objectives, and the underwriting strategy. This may impose limitations or provide
opportunities. For example, a certain country might be ‘off-limits’ because a sister
company has a presence there. Or perhaps there is a desire to broaden the mix of
territories. Other divisions within the same company might influence your behaviour even
though you have autonomy within your area. Prudent underwriting means considering all
available information and not having a silo mentality.
• Profitability: Build a portfolio based on profitability and not market share. It is not a good
strategy to only concentrate on bringing the business in and worry about adjusting or re-
underwriting the book later. By then it is often too late.
• Critical mass: Critical mass is important, but care and time are needed to arrive at
that point.
• Balance: A good portfolio is a balanced portfolio. Having balance means not being
overweight in any one area, be it a class of business or a subsegment of one class. It can
equally mean not being underweight. How to determine balance and weight is, of course,
a matter of expert judgment.
• Diversification: Portfolios should be diversified; this may be by geography, classes of
business etc. The principle is that if you have portfolios around the world they will not all
be hit by the same earthquake. Diversification brings specific benefit when it comes to
calculating capital requirements. Diversification is similar to the concept of balance.
• Costs v. risks: A portfolio manager needs to understand the costs versus the risks of
doing business in every jurisdiction where business is written.
• Comprehensive underwriting strategy: An advantage of growing a portfolio to a certain
size is the ability to actuarially analyse the book with a high degree of confidence.
Another is the simplistic rule of thumb of having more premium income than one potential
maximum loss (that is, maximum line size). Most, if not all, new books will initially carry
the risk of losses exceeding premiums – hence the need for a comprehensive
Chapter 5 Underwriting strategy within the internal insurance context 5/9

underwriting strategy that sets out the various stages and timeline for, in this example, a
new book of business.
• Reinsurance: Strategic design and purchase of reinsurance protection is normally a core
component of a balanced portfolio. Reinsurance decisions can have strategic implications
for capital management.
• Aggregation: Aggregation needs to be tracked and actively managed. This might be
natural perils or aggregation in the cloud for cyber purposes.
• Primary v. excess: Consider the balance of primary versus excess attachment points.
There are advantages and disadvantages to both.
• Long-tail v. short-tail characteristics: Consideration must be given to the different
characteristics of long-tail classes of business versus short-tailed classes, if both are
within the scope of the portfolio.
• Claims inflation: Claims inflation can be a significant factor, especially in long-tailed
classes. Claims inflation needs to be recognised in pricing models and in the reserving
process.
• Insurance v. reinsurance: If the portfolio includes reinsurance as well as direct
insurance then a balance will need to be maintained and justified. Balance does not
necessarily mean equal weight, but rather the informed judgment of what split is
appropriate in all circumstances.
• Monitoring: The portfolio must be constantly monitored, analysed, reported on and
reviewed in order to keep pace with changes, including the wider external factors

Chapter 5
affecting customers, their own risks and the development of the portfolio itself. KPIs need
to be established and regularly tracked every month. KPIs might include such factors as:
– premium monitoring;
– risk-adjusted rate change;

For reference only

– benchmarked price adequacy;
– loss ratios;
– claims frequency against exposure;
– renewal retention rate;
– new business percentages; and
– exposure data.

D Human capital and technology

All organisations require human capital to function. Human capital in an organisation is the
total of all its employees’ knowledge and skills. Knowledge comes in many different forms;
for insurers, knowledge might encompass:
• mathematics;
• actuarial;
• statistics;
• accounting;
• marketing;
• sales;
• law;
• IT;
• claims adjusting;
• policy wordings; and
• underwriting.
Management guru Peter Drucker first used the term knowledge worker in the 1960s: ‘the
man or woman who applies to productive work ideas, concepts and information rather than
manual skill or brawn’. He was pointing to the shift from physical capital to knowledge capital
and knowledge becoming the key to securing employment.
More knowledge workers will be required as the automation of routine tasks and analysis
increases. The number of people employed in insurance will likely decrease; unless people
 5/10 995/January 2023 Strategic underwriting

have the necessary skills, talent or knowledge (usually acquired through education), it will be
almost impossible to retain an interesting and well-paid job.
As technology becomes increasingly important in the insurance industry, knowledge workers
will need to adapt to and be comfortable interacting with whatever technology is used. The
technology could be computers, digital media, virtual or augmented reality, the internet of
things (connection via the internet of computing devices embedded in everyday objects),
artificial intelligence or robots. With the rapid development of modern technology, knowledge
workers must not worry that technology will replace them, but learn to successfully interact
with and interpret the output of technology.
It is important that those involved in the insurance industry understand what core
competencies they need for the coming years. If a human resource management plan is not
already in place that adequately addresses these issues, then one should be drafted as soon
as possible.

D1 Intellectual capital
In Intellectual capital and innovation on page 4/16, we discussed intellectual capital in
relation to innovation. We learnt that one of the key components of intellectual capital is
employees' knowledge. Suitable employees have to be recruited, trained, managed and
paid, motivated, engaged and retained.
The first step in this process is to recruit the brightest and the best. The insurance industry
needs to improve graduate recruitment and diversity to be able to transform and compete
Chapter 5

successfully in today’s digital age. The industry needs to find a way to refresh its image away
from the old conservative, stable, boring image to one that highlights the use of cutting-edge
technology, innovation, and digital transformation and its global importance.
The skills shortage in UK general insurance has reached worrying levels according to the CII
Skills Survey 2015:

For reference only

• the UK skills gap is getting worse, with 20% more insurance companies reporting
shortages than in 2013;
• four in five (81%) general insurance employers are now affected by shortages;
• industry confidence in the UK’s ability to compete globally is falling; and
• insurance companies are now looking outside the sector and ‘growing their own’ to meet
expansion targets.
The survey results say that employers are having particular difficulty filling technical roles,
where specialised knowledge and experience is required. Of those surveyed, 24% say that
the shortages will affect their ability to innovate and/or grow, and a further 22% worry that
service levels will be affected as a result.
Training and development
Over the last 10 to 15 years, training budgets have often been squeezed, graduate
programmes cut or curtailed, comprehensive induction reduced to ‘learn as you go’ and
much expertise and experience lost as baby boomers retire. The industry – our industry –
needs to reverse this trend and, in addition, put more emphasis on continuing professional
development (CPD), which is mandatory for qualified CII members.
There is no place for unenlightened employers to worry that spending money to train
employees just makes them more attractive to other organisations. Intelligent knowledge
workers will naturally gravitate to progressive employers that believe in investing in their
people. A significant contributing factor leading to increased employee turnover can be
insufficient training and self-development opportunities. Simple maths can quite easily
demonstrate how expensive the recruitment process is; how damaging a lack of personnel
continuity is for long-term relationships with brokers and customers; and how long it takes for
new employees to fully understand the new organisation, learn where the levers are and
become fully productive.
Portability
People are the prime driver of controllable cost in insurance. More particularly, all employees
compare and contrast their jobs and employers with friends and family. Employees are
portable. It is possible to promote someone into a more senior position in another country,
but portability can also mean that employees can quit their job. It is a two-way competitive
market; employees are increasingly looking for work–life balance and shunning employers
Chapter 5 Underwriting strategy within the internal insurance context 5/11

that have not yet recognised the different drivers for the younger generations. Employers do
not always hold the stronger position.
Knowledge management
One of the key issues regarding knowledge workers is that their knowledge typically resides
in their heads. Employees are mobile and can change employers. So it is important for
employers to support and encourage knowledge management and a knowledge sharing
culture. Employers do not want employees to hoard their knowledge and allow individuals to
think that ‘information is power’.

Be aware
The goal of employers must be to maintain and to maximise their organisation’s
effectiveness and leverage the value of their knowledge workers.

Knowledge management is a systematic method of using knowledge within an organisation

to improve performance. But before knowledge can be captured it has to be shared by the
person with that knowledge – either in person or by the use of technology – so that other
employees can successfully and quickly navigate their way around the knowledge bank to
find out what they want to know. People often know that someone in their company knows
how to do something, but do not know who it is or how to identify them. Therefore, people
often ‘reinvent the wheel’ simply because they cannot access information that they
know exists.

Chapter 5
People are not normally willing to share their knowledge unless they feel valued, safe and
secure. The employer must create the right culture in their organisation within which sharing
can take place. This is not as easy as announcing this new culture in an office-wide email.
Senior management must buy into this culture and be prepared to share knowledge to
reassure employees that sharing is not only expected but is encouraged and rewarded.

For reference only

Incentives need to be built into the remuneration system in an effort to drive the required
behaviour. Knowledge sharing should be made one of the factors in annual appraisal and
performance reviews. Every employee needs to be motivated to share knowledge and that
will only happen when their organisation’s culture is built on integrity, respect and trust.
Companies can encourage knowledge sharing by:
• promoting collaboration as a work model;
• publicly praising examples of sharing that produced a great result;
• selecting and introducing good, easy-to-use knowledge technology;
• sponsoring a mentoring programme;
• rewarding teamwork over and above solo efforts; and
• breaking down barriers and silos in the organisation.

D2 Unconscious bias
In Behavioural economics (BE) on page 3/17 and What is the relevance of BE to strategic
underwriting? on page 3/18, we briefly looked at behavioural economics (BE) to understand
why customers do not always behave rationally. By rationally, we mean in accordance with
traditional economic theories. We will now explore BE in more detail to see how it could
affect employees' decision-making at work.
Published research in the 1970s by Kahneman and Tversky identified that decision-making
is influenced by factors such as the fact that people dislike making losses more than they like
making gains, and tend to underweigh probabilities. The reason put forward by Kahneman
as to why people do not always make rational decisions was that we have two different
thought process (or decision-making) systems in our brains. We have a quick system for fast
decisions and a slow one for complex decisions.
The system for quick thinking makes decisions automatically and unconsciously. This system
is used for approximately 80% of our decisions. As it is automatic there must be certain
rules, or a methodology, that guides this process. These rules are called biases, nudges or
heuristics. You can probably think of an example of something you do on a daily basis
without conscious awareness.
 5/12 995/January 2023 Strategic underwriting

The system for slow thinking allows for reflection and deliberation when processing complex
or large amounts of information, data or calculations.
Unconscious bias refers to a bias that we are unaware of, and which happens outside of
our control. It is a bias that happens automatically and is triggered by our brain making
incredibly quick judgments and assessments of people and situations without us realising.
Because we are unaware that we have used a bias, it is important to understand how these
thought patterns affect business judgments and decisions. It is known that the beliefs and
values from our families, background, cultural environment and personal experiences
influence what we think about, and how we view ourselves and other people. These biases
can cause us to make decisions that are not objective.

Figure 5.2: Do you think like Mr Spock or Homer Simpson? How

cognitive bias shapes our underwriting decisions
Which of these two lines is longer?
Homer Simpson would probably say
the lower one is longer; Mr Spock
would say they are both the same
length. Mr Spock would be right of
course. (For the sceptics: check with a
ruler.)
However, even when we know that
the lines are the same length, we
Chapter 5

cannot help seeing the lower one as

longer than the top one. This is an
example of cognitive bias – where our
perception is not the same as reality.

Source: Williams, J. (2016) ‘How cognitive bias shapes our underwriting decisions’, Swiss

For reference only

Re Europe S.A. and the Insurance Institute of London (IIL) [Lecture notes].

Here are some common biases:

• gender;
• framing;
• loss aversion;
• norms;
• status quo (current state of things); and
• diversity.
We will discuss each of these biases in this section.
Gender bias
Gender bias is the unequal treatment in employment opportunity and expectations due to
attitudes based on the sex of an employee or group of employees. This can come in the form
of promotion, pay, benefits and treatment,. It is important to note that gender bias exists in all
directions.
For example, two people – one male, one female – could hold the same position in the
workplace, have the same level of responsibility but receive different salaries, bonuses and
benefits.
Framing bias
Framing bias is when people react differently depending on how the question is presented. A
famous experiment involved showing students a film of a car accident and then asked them
how fast the cars were going when they ‘xxxx’ each other. When the question used the
words ‘when they smashed into each other’, the mean estimate of speed was just over
40mph, but when a more passive description was used, such as ‘when they contacted each
other’ the estimate of speed dropped to 32mph. In the students’ minds, the words contacted,
hit, bumped, collided and smashed were progressively aligned to an increase in speed. This
means that a completed claim form that uses particularly expressive words could
subconsciously influence a claims handler. Similarly, an underwriter can be unconsciously
influenced by the way in which a submission is framed.
Chapter 5 Underwriting strategy within the internal insurance context 5/13

Loss aversion bias

Loss aversion bias occurs in situations where people are in a position of profit or loss.
People tend to become risk-averse when they are making a profit, whereas when they are
losing, people will tend to take more risk in an attempt to recover their loss. This means that
an underwriter might be inclined to take an unacceptable risk in an attempt to try and return
an account or a portfolio back into profit.
Norms bias
Norms are where people often do what other people do, or what they feel others might
expect of them. This is often referred to as a herd mentality, when people want to follow the
herd rather than stand out as different. Have you heard an underwriter try to justify their
decision by explaining that the market is doing the same thing, or that they are just following
the market?
Status quo bias
Status quo means the current state of things or the present position. So the status quo bias
is when people automatically opt for continuing as before rather than embracing change.
This bias can hinder an insurance organisation from moving with the times and exploiting
opportunities, and stifle innovation.
Diversity bias
Diversity is recognising that everyone is unique and, although people have a great number of
things in common, we are different in lots of ways. Some differences are more visible than
others and these can include sex, age, background, disability, personality and work style.

Chapter 5
Diversity bias often becomes prominent when recruiting. Because of their bias people are
inclined to hire people that look like them, behave like them and think like them. How does
this affect insurance? Any insurance organisation should benefit from the different
viewpoints, skill sets and backgrounds of a diverse workforce. There must be an advantage
of having an employee mix that reflects the population you’re serving – in order to

For reference only

understand customer needs and behaviour and to successfully interact with them.
Consider the example of setting up a new office in France. Should you send an expatriate
from London to lead the new office or opt for a local French-speaking person who is already
known in that market? As competition to employ the best talent is fierce and insurance is not
a favoured career destination, we must do everything possible to attract the best candidates,
whatever their background. Finally, a diverse workforce should provide the business with a
more rounded and well-reasoned outlook and a better understanding of different cultures.
Unconscious bias can affect underwriting decisions, claims decisions, brokers’ behaviour,
the behaviour of the insurance market and the performance of all insurance organisations.
Ultimately, we can only take action to manage the impact on our behaviour and decision
making if each person is aware of and educated about biases.

D3 People management
People are an insurance company’s most valuable resource, so creating the right
environment and understanding how best to manage those people is the key to recruiting,
retaining and developing employees. Headcount is a key driver of cost, whether it is payroll
and associated taxes and benefits, office space or travel and entertainment. People need to
be managed but, particularly with knowledge workers, using the old-style command and
control hierarchies can be counter-productive. Evidence shows that knowledge workers
perform best when they are allowed to continue learning, through education, training, and
interesting and challenging work opportunities. Generally speaking, knowledge workers like
to feel unfettered; they need to be able to ignore corporate boundaries rather than be
restricted by work silos.
Employee engagement
Productivity is determined by a number of factors, but engagement is clearly one of the
most important. What employer would not love to obtain more productivity from its existing
workforce rather than having to increase the expense base and recruit more employees?
Boosting productivity is one of the best ways to maximise profits. According to a Gallup study
entitled State of the Global Workplace (2017), only 15% of employees worldwide were
engaged at work. This means that 85% of employees were either lacking motivation or
were unhappy and unproductive. This does differ greatly based on your geographical region.
 5/14 995/January 2023 Strategic underwriting

On the Web
The full Gallup report can be accessed here: bit.ly/3kzdpMI

Engagement levels vary between workforces, industries and countries. However, while there
are significant variations, low levels of engagement negatively affect productivity. If more
employees were committed to their job and their employer – that is, engaged – they would
be more likely to make a positive contribution to the business. In other words, they would
become more productive. Boosting productivity is an excellent way of increasing profits. If
employees are engaged they can inspire their colleagues and drive the business forward;
producing ideas and being passionate about the business. Engaged employees are happier
and more positive, so helping promote a good image of their company to their contacts,
friends and customers. So how can employers help their employees be more engaged?
Employee engagement surveys
Employee engagement surveys, sometimes called employee attitude surveys, are a tool that
management can use to try to find out what employees think about their organisation and
whether they are engaged at work. These tools can be positive or negative, depending on
how they are presented, perceived and the results played back.
Employees need to be confident that their answers cannot be attributed to them; if the
survey is not perceived as truly anonymous then the results will be misleading or worthless.
It is also important that the results should be fed back as soon as possible. A delay in
communicating the results, or providing insufficient detail, will merely reinforce disaffected
Chapter 5

employees’ attitude that the process was a sham. The true test of authenticity is whether
employees can detect any changes afterwards. Of course, taking action on the results of a
survey of perceptions can be difficult, but there is no point for the employer to embark on the
path of such a survey unless it is prepared to absorb the results and acknowledge that it
needs to make some changes.

For reference only

D4 Motivation and remuneration
Studies have shown that when workers are doing routine or simple tasks, the traditional
carrot and stick approach does increase productivity – when they work harder they know
they will be rewarded. This is when behavioural economics conforms to traditional economic
theories regarding motivation; the idea that workers are primarily motivated by money.
However, the work of psychologists such as Frederick Herzberg and Abraham Maslow in the
twentieth century refined the concept of motivation. In their view money is only a motivator if
the worker is not paid enough. So, what is enough? In Herzberg and Maslow’s opinion it
meant being paid enough to afford the essentials in life. Now, ‘enough’ could be considered
to mean being paid the appropriate rate for the job role.
Most potential employees have a good understanding of what the market rate is for a
particular role in their area of expertise. If the salary offered is too low, then recruitment could
be a problem. If the salary is too high, then people might question what is expected of them
to warrant this. Will they have to work long hours or travel constantly, or is the work
environment so demanding that the ‘extra’ pay is deemed necessary to compensate for
certain factors? Will they be able to balance their work with an active social life? As a
consequence, it is generally accepted that money is best removed from the equation by
paying employees the appropriate amount of money. Or as Maslow put it, once someone
has ‘sufficient’ pay they will not be motivated by small increments (bonuses), but more by
issues such as autonomy, developing themselves, promotions, recognition and being aligned
with their employer’s vision and purpose. Let us look at some of these in more detail below.
Bonuses
If Maslow’s theories are correct, then we may wonder why bonuses are still used as the
primary method of encouraging workers to meet targets and to undertake specific tasks. The
answer may be that it is sensible to control fixed costs, such as pay, and have the flexibility
to pay bonuses when the business can afford to. In other words, if financial results are good,
then bonuses can be paid, but when targets are missed, bonuses are either reduced or not
paid at all.
In the UK there is an emerging challenge to perceived wisdom that bonuses are essential to
motivate staff, at least in the investment management sector. One of the UK’s top fund
managers put all staff on a flat salary in 2016. Neil Woodford of Woodford Investment
Chapter 5 Underwriting strategy within the internal insurance context 5/15

Management (WIM) dismissed bonuses as ‘largely ineffective’ that can lead to ‘wrong
behaviours’.

There is little correlation between bonus and performance and this is backed by
widespread academic evidence. Many studies conclude that bonuses don’t work as a
motivator, as expectation is already built in. Behavioural studies also suggest that bonuses
can lead to short-term decision-making.
Source: Craig Newman, CEO of Woodford Investment Management

To ensure that employees are not worse off, WIM has given them a pay rise in the
transition year.
WIM may have been influenced by Lynn Stout’s 2014 research paper, Killing Conscience:
The Unintended Behavioral Consequences of ‘Pay for Performance’. Stout found that the
more chief executives get paid, the worse their companies perform over the next three years.
She also found that workplaces that rely on bonuses promote selfishness and opportunism,
with the end result being more uncooperative, unethical and illegal employee behaviour.
Alignment
If we assume that bonuses will continue, then they should be aligned with the long-term
interests, vision and purpose of the insurer. While underwriters might prefer to be awarded
bonuses based on volume, it is results that matter. It may be appropriate in some

Chapter 5
circumstances for underwriters to have part of their bonus related to top-line income,
because if risks are not underwritten there is no potential for underwriting profit. However,
most insurers put significant weight on profitability to ensure underwriting discipline is
maintained. In fact, many insurers base all bonuses on the overall profitability of the
business.

For reference only

The issue is understanding when the business has been profitable. For short-tailed lines like
property the ultimate loss ratio (ULR) will be known within a percentage point or two within
six months of year-end, but with long-tail casualty classes the ULR might not settle for six
years. The accepted way of dealing with this is to pay bonuses over time so that
underwriters have to stay with their employer in order to continue collecting the balance of
previous years’ bonuses. For example, this might mean that a bonus is paid in portions of
one-third, over three years. To some extent, while this deferment can work well, it is negated
by the practice of employers paying compensation for lost bonuses or stock options when
recruiting new employees.
Autonomy and development
To give knowledge workers autonomy, managers need to take a step back and allow
employees to organise their work as they see fit, within reason. It is counter-productive to not
only tell a knowledge worker what needs to be done, but also follow up the instruction by
telling the person exactly how the task should be done. This form of management is called
micromanagement and it has no place in working with people who are educated, highly
skilled, information-orientated – in other words, knowledge workers. Being micromanaged is
demotivating; it dents self-confidence and ultimately frustrates both parties. The manager
needs to let go of the details and allow the person to do their job. The manager needs to
become less insecure and learn to delegate; not abdicate, but delegate. People will grow
and thrive if they are given the proper training and guidance. Managers need to develop a
coaching or mentoring style in order to obtain the best out of their employees.
Recognition
People like being praised and enjoy recognition of their success. Praise costs nothing –
rather like a smile. Praise does not have to be made public; a spontaneous private word is
normally very effective. So why do many managers still persist in saying things like ‘that’s
their job, that’s what they get paid to do’ rather than giving encouragement or acknowledging
a job well done? Is it associated with the phenomenon where people are ten times more
likely to tell friends and family about a negative experience than a positive one?

D5 Technology and human interaction

Automation is not restricted to insurance; it is a global development arising from digitisation
and machine learning. Machine learning is the modern science of finding patterns in data in
an automated manner using sophisticated methods and algorithms.
 5/16 995/January 2023 Strategic underwriting

Insurance workforce trends

A McKinsey article entitled Automating the Insurance Industry states:

A more digital world will place a premium on some skills while reducing the need for
others…our most probable outcome for insurers sees up to 25 percent of full-time
positions consolidated or reduced over the next ten years.
Source: Johansson, S. and Vogelgesang, S. (2016) ‘Automating the insurance industry’,
McKinsey Quarterly. © McKinsey.

Figure 5.3: Insurance-industry workforce (% of full-time equivalents)

100
Potential drop of
Product development, up to 25%
21
marketing and sales support
75

20
Operations 46
Chapter 5

33

IT 15
12
Administrative support 18
10

For reference only

2015 2025
(estimated) (forecast)

Source: Johansson, S. and Vogelgesang, S. (2016) ‘Automating the insurance industry’,

McKinsey Quarterly. © McKinsey. Data based on Western European insurers.

Figure 5.3 shows that the forecast drop in employee numbers by 2025 is concentrated in
operations and administrative support. In those two areas alone one in three jobs will be cut,
compared with the average reduction of one in four jobs in the insurance industry. This
forecast assumes that these jobs will be lost because many of the routine clerical and
processing tasks currently done manually will be automated by technology. As we saw in
Intellectual capital on page 5/10, the emphasis during this period of rapid change will be on
employing knowledge workers who have the skills to work side by side with technology, and
become much more intelligent at interpreting and using the data to design new or improved
products, services and methods of distribution – fit for the digital era. As Steve Jobs said:
‘Technology is nothing. What’s important is that you have a faith in people, that they’re
basically good and smart, and if you give them tools, they’ll do wonderful things with them.’
Harnessing technology: WillPLACE
We have many examples of how the insurance industry is already harnessing technology.
The global insurance broker Willis Towers Watson introduced WillPLACE, its global
placement and analytics platform, in 2012. However, before systems like WillPLACE existed,
thousands of brokers used to use their personal knowledge of the insurance market to place
customers’ business with a massive range of domestic and foreign insurers, Lloyd’s
syndicates, MGAs and coverholders. This time-honoured system caused brokers several
critical problems:
• management had no control over where or why business was being placed where it was;
• placement with such a wide range of carriers brought complexities to their operations and
support functions, such as policy documentation, credit control, settlements, audit, and
quality and consistency;
• commission rates were quite diverse; and
• profit commission was negotiated on an individual placement basis so it was difficult for
management to know when a payment was due and how much it would be.
Chapter 5 Underwriting strategy within the internal insurance context 5/17

Of course, major brokers had certain systems in place – it was not uncontrolled – but the
business was not institutionalised and it was difficult to manage. Business was often placed
with the broker’s friend at the local insurance company, which was not generally a problem
so long as the insurance company was on the broker’s security list.
Willis Towers Watson’s solution to this business challenge was to introduce WillPLACE,
which is essentially a technological management information platform. The database uses
algorithms to match up customers’ requirements with insurers’ risk appetites. The
system allows:
• customers to rank their priorities, such as price, claims service, and insurers’
financial rating;
• insurers to register and describe their risk appetites in different classes of business and
geographical areas; and
• Willis brokers to add notations regarding their relationships with the different insurers.
The use of WillPLACE is mandatory for Willis Towers Watson brokers, although the reasons
for either the broker or the customer not accepting the recommended match have to be
recorded. The customer probably sees this system as a free, value-added service. Willis
Towers Watson charges additional fees to participating insurers and justifies the fee by
supplying insurers with regular reports that benchmark service standards and the reasons
why business was won or lost. Insurers that do not wish to pay these additional fees are not
likely to retain their Willis Towers Watson business in the medium term unless their product is
unique or the customer insists on remaining with that insurer.

Chapter 5
Harnessing technology: GRIP
Other major brokers have also introduced innovative technology-based solutions. Aon Global
Risk Insight Platform (GRIP) was launched in 2008 and now claims to be the world’s largest
proprietary database of insurance placement data. One of the services that a GRIP insurer
can access (for a fee) is the ability to see Aon business in advance of the renewal date, in

For reference only

order that the insurer can identify and pre-underwrite target business.
Concerns
Insurers have concerns about being asked to pay additional fees to access big brokers’
business because of the negative impact on their acquisition costs. In contrast, the benefits
for the big brokers – generating extra revenue and reducing the number of insurers with
whom they transact business – are clear to see. Broking platforms represent the increasing
trend to move business into blocks with preferred markets, or panels. The impact of doing
this is a reduction in the amount of open market business, which must be a concern to
underwriters.
Insurers face considerable pressure to pay increased commission or fees during this
prolonged period of suppressed pricing. The regulators are taking more interest in what is
potentially a lack of transparency over broker earnings. We will have to wait and see if
regulatory action will be taken.
There are so many other examples of how the insurance industry is harnessing technology
that it is difficult to know where to begin. Perhaps the following example about telematics,
discussed in Innovation on page 4/18, will start you thinking and encourage you to carry out
your own research on this topic.
Harnessing technology: telematics
Telematics, or usage-based insurance/pay as you drive, has been in use for several years
and was discussed in Innovation on page 4/18. The original objective of finding a way to
insure high-risk drivers at affordable prices has been achieved, but with the added benefit to
insureds, insurers and society of a reduction in the number of accidents. There is evidence
to show that telematics drivers take more care when they drive as they know that their
actions are being recorded.
Telematics evidence has also been used to identify and successfully defend claims arising
from suspected staged accidents. In 2016, lawyers representing Insure the Box in the UK
obtained telematics data that showed a collision had occurred some distance from that
alleged by six claimants. Investigations revealed a cluster of collisions with significant
similarities between 2009 and 2011. The sequence of claims was broken as a result of the
investigation with savings in excess of £250,000.
 5/18 995/January 2023 Strategic underwriting

The drawback of telematics is the requirement for a black box to be installed in each insured
car. If and when car manufacturers build cars with black boxes fitted as standard equipment,
the uptake of telematics should increase. However, one insurer has unveiled a similar
scheme, but without needing a black box. Aviva in the UK has a free app that people can
download onto their smartphone to record how they drive. The better the app rates the
driving – the bigger the premium discount. As an extra incentive, premium discounts can be
earned monthly, rather than having to wait for the full year.
What is clear is that knowledge workers should not see the increased use of technology as a
threat. In fact, the reverse is true; technology frees them up to carry out more interesting and
demanding roles – roles that machines are currently unable to handle. Exactly how much
human activity will be replaced by automation and machine learning is something that only
time will tell. Technology is fast and accurate at certain tasks but humans are still necessary
to make and operate it.

I fear the day that technology will surpass our human interaction. The world will have a
generation of idiots.
Albert Einstein

Agile working
Agile working was briefly mentioned in Disaggregation of the value chain on page 2/23 and
involves designing a working environment, like an insurer’s office, to facilitate cost and space
Chapter 5

efficiency and productive, collaborative working. The expression ‘activity-based working’

refers to agile working.

While working practices have moved into the information age, office design is still in the
industrial age. Office utilisation rates may be shrinking, but the costs continue to rise: a

For reference only

single workstation in a central London office costs companies £14,000 a year, according
to DTZ the property consultancy.
Twentyman, J. (2014) ‘Space is the final frontier for offices in era of mobile work’,
Financial Times, 23 February.

With disaggregation of the value chain, it is no longer necessary for knowledge workers to be
based in expensive city centre offices. For those that need office space, the expense of
retaining a dedicated desk for everyone is unnecessary when today’s technology means
that, increasingly, knowledge workers can work anywhere. It makes sense to look again at
office space and layout when many knowledge workers spend much of their time working
from home, visiting brokers, customers, overseas branches and loss adjusters and so on.
Traditional offices have too many private offices allocated on status or seniority, often taking
natural light from the interior open plan area used for more junior employees. Alternatively,
there may be too much open plan working, allowing little privacy for calls, without areas for
quiet uninterrupted working for tasks requiring concentration and a lack of meeting rooms.
Under agile working, the space in offices is allocated according to the tasks being performed.
But agile working goes much further than just redesigning offices, it means enabling
employees to choose how, where and when they want to work by harnessing
communications and technology. It is more than flexible working or telecommuting. At its
best, agile working attempts to remove all barriers that stop work getting done.

E Target operating models (TOMs)

The primary purpose of a target operating model (TOM) is to represent – at a high level –
how a company will be organised to more efficiently and effectively deliver the company’s
vision and strategy. TOMs are useful for both new company start-ups and companies that
have been trading for many years. When a company is already in business, the existing way
in which it is organised is called the ‘as is’ or current operating model (COM).
A TOM allows people to visualise the way a company will be organised from a range of
perspectives across the value chain as every significant element of business activity is
represented. Key components of a TOM are people, process and technology. Not
surprisingly, as each business is different and there is a broad range of strategies, operating
Chapter 5 Underwriting strategy within the internal insurance context 5/19

models can vary widely. The key is to recognise the different operating models that can be
used and understand the advantages and disadvantages of each model. A TOM should start
with the business strategy, review the COM and adapt the structure of the company so that it
is consistent with that strategy and is better able to deal with changes or developments in the
company’s market.
A TOM is the business’s architecture, including the ‘hard’ and ‘soft’ elements of design. Hard
elements include the legal structure, subsidiaries, divisions and departments. Soft elements
include customer focus, culture and how decisions will be made and executed.
Figure 5.4 illustrates how a TOM links to vision and strategy and moves on to the design of
the organisation.

Figure 5.4: Target operating model at a glance

Vision
and strategy

Target
operating model
hip
rs
de

Chapter 5
ea

Organisation
dl

design
an
re
ltu
Cu

Technology

For reference only

Process
People

Governance
and reporting

Source: Deloitte (2014) Target Operating Model at a Glance.

© Deloitte Luxembourg, 2014.

Vision and strategy

Analyse the vision and strategy of the organisation so that the business goals are aligned to
the strategy, such as:
• customer service.
• cost reduction.
• international expansion.
• greater agility.
Target operating model
Define the principles and operating model:
• End-to-end value chain.
• Front office/back office.
• Outsourcing/shared services.
• Interfaces/hand offs.
Organisation design
Define the organisation that will deliver the strategy:
• Organisation structures.
• Role responsibilities, skills and capabilities.
• Role performance measures KPIs.
 5/20 995/January 2023 Strategic underwriting

Technology
Identify what technology is needed to deliver your products and services to your customers
through your chosen channels, optimising your processes.
Process
Define the business and functional processes to support the business objectives
People
Define the level and capability of people required to meet the objectives and serve the
customers:
• How many people to you need?
• How do you remunerate them?
• With what skills and knowledge?
• What ways of working and what culture do you need?
Governance and reporting
Define the governance arrangements and reporting requirements to run the organisation in
an efficient and effective way.
The operating model provides the means by which strategy is implemented. It is designed to
align strategy with actual performance.
Underwriting is the central function for insurance companies. While the board should
consider all activities performed within the insurance company, underwriting is the core
Chapter 5

reason why the insurer exists. Other functions, such as finance, IT, HR and marketing, are
support functions and exist to serve the ‘underwriting’ company. This is not to say that good-
quality support functions are not vital, but rather that underwriting should be at the heart of
an insurer.
Operating models are influenced by the marketplace in which they operate and by the

For reference only

ownership of the organisation. For example:
• There are insurance companies that are owned by a charity, such as UK-based
Ecclesiastical. Ecclesiastical’s goal is to be the most trusted and ethical specialist
financial services group, giving £50m to charity over three years. Clearly the drivers for
Ecclesiastical are different from an insurance company listed on the stock exchange.
• Some financial mutuals are owned by their customers, or members, and were specifically
formed to meet the insurance needs of their customers. Types of financial mutuals
include friendly societies and mutual insurers. UK examples include Cornish Mutual,
Dentists’ Provident, Railway Enginemen’s Assurance Society Ltd and the Veterinary
Defence Society.
Operating models are typically reviewed when it becomes clear to senior management that
the organisation needs to react or adjust to changes in their marketplace. These change
drivers can be external to the organisation or internal.

Table 5.1: Examples of external and internal change drivers

External drivers include: Internal drivers include:

Competition Poor business performance

Technology Expansion/growth

Regulatory New vision and strategy

Customers Expense control

Capital suppliers Risk management

Economic conditions Personnel issues

Chapter 5 Underwriting strategy within the internal insurance context 5/21

In the next sections we will look at six operating models:

• functional/process model;
• product strategic business unit (SBU) model;
• customer SBU model;
• distribution SBU model;
• product and functional matrix model; and
• customer and functional matrix model.

Be aware
There are four prime drivers for the design of an operating model:
• function;
• product;
• customer; and
• distribution.

E1 Functional/process model
The functional/process model probably represents the traditional insurer model where the
strategic business units (SBUs), departments or divisions are organised around the functions

Chapter 5
or processes. Each unit is focused on either revenue or cost with little or no overlap of
responsibilities. The functional/process model provides for strong control over regulatory, risk
management and governance issues, although this control may be considered by some
within the organisation as not being sufficiently commercial in its approach.
In this model, underwriting sits within the product management SBU. This is likely to be a

For reference only

centralised full service underwriting team that handles the underwriting process from initial
enquiry through quoting, binding and policy issuance. As the entire premium income will be
generated in the product management SBU, underwriters will probably be considered to be
at the heart of this insurer.

Figure 5.5: Functional/process model

The board

Finance/ Product Customer Operations Network or

IT/HR management management distribution
and marketing

Product 1 Product 2

Product 3 Product 4

Source: Adapted from Sault, T. (2015) Operating Models [PowerPoint presentation].

London: Cass Business School.

Strength
The strength of this model is the centralised focus on each function or process. This focus
means each unit should be a centre of excellence, with resultant costs benefits. For
example, all the marketing is housed in the same unit, creating an economy of scale and a
high level of expertise. Customers have an SBU dedicated to them – but if it does not
cooperate well with other SBUs then the customer unit may find it has limited powers and
influence.
 5/22 995/January 2023 Strategic underwriting

Weaknesses
The weaknesses of this model include the potential for ‘silo mentality’ when each unit
operates in isolation and without regard for other units. Taken to the extreme, this can create
gaps or build barriers between units that can frustrate customers, brokers, people and
processes. Units could become inflexible and only be concerned with how they perform their
function. As units are not in control of all components of the P&L account there may be little
or no accountability for making a profit. If the company is very big, individual units might be
unmanageably large.

E2 Product SBU model

In the product SBU model, each unit is organised around a product (or range of products)
and is responsible for the product right through its lifecycle. Each unit is responsible for its
P&L account. Operations services are normally embedded in each unit so that each unit is
self-sufficient.

Figure 5.6: Product SBU model

The board

Product 1 Product 2 Product 3

Chapter 5

Marketing Finance/ Marketing Finance/ Marketing Finance/

IT/HR IT/HR IT/HR

For reference only

Operations Network or Operations Network or Operations Network or
distribution distribution distribution

Source: Sault, T. (2015) Operating Models [PowerPoint presentation]. London: Cass

Business School.

Naturally, underwriting is divided between the different product centres – leading to potential
loss of cohesion and consistency. However, underwriters are product specialists.
Strengths
The strengths of this model are strong profit centre accountability and a 100% focus on one
product (or line of products).
Weaknesses
The weaknesses of this model are similar to those found in the functional/process model.
These include the danger of a silo mentality developing, with limited communication or
cooperation between each product SBU. Brokers and customers needing several different
products may end up frustrated when they do not have one single point of contact. With
multiple operations services within the same organisation – each located within a product
SBU – there is no benefit from an economy of scale.
Chapter 5 Underwriting strategy within the internal insurance context 5/23

E3 Customer SBU model

The customer SBU model builds its SBUs around customer groups with all other functions
housed in each SBU providing dedicated service to that particular group. This model is
customer centric, as it puts the customer at the heart of everything the insurer does. See
figure 5.7.

Figure 5.7: Customer SBU model

The board

Customer group 1 Customer group 2 Customer group 3

(e.g. consumers) (e.g. small (e.g. corporates)

Marketing Finance/ Marketing Finance/ Marketing Finance/

IT/HR IT/HR IT/HR

Operations Network or Operations Network or Operations Network or

Chapter 5
distribution distribution distribution

Product Product Product

development development development

Source: Sault, T. (2015) Operating Models [PowerPoint presentation]. London: Cass

For reference only

Business School.

In this model underwriters are either in the customer group SBU or in product development,
or perhaps both. Underwriters placed in the core customer group would typically be in a
customer-facing role, carrying out relatively standard quoting, binding for new business and
renewals; underwriters embedded in product development would probably be more engaged
in technical underwriting, referrals and portfolio responsibilities.
Strengths
The strengths of this model are profit centre accountability and a 100% focus on one group
of customers.
Weaknesses
The weaknesses of this model include the duplication of operations and other services, and
the tendency to revert to a silo mentality and treat other units as outsiders – sometimes
interfering outsiders.
 5/24 995/January 2023 Strategic underwriting

E4 Distribution SBU model

The distribution SBU model has its SBUs organised around distribution channels.

Figure 5.8: Distribution SBU model

The board

Channel 1 Channel 2 Channel 3

(e.g. direct) (e.g. branch network) (e.g. regulated

Marketing Finance/ Marketing Finance/ Marketing Finance/

IT/HR IT/HR IT/HR

Product Operations Product Operations Product Operations

development development development

Source: Sault, T. (2015) Operating Models [PowerPoint presentation]. London: Cass

Chapter 5

Business School.

In this model, underwriters will likely be divided between distribution channels and product
development, similar to the customer SBU model. The difference is that some underwriters
might be dealing directly with customers whereas others might be solely working with
brokers.

For reference only

Strengths
The strengths of this model are profit centre accountability and a 100% focus on one
particular method of distribution.
Weaknesses
The weaknesses of this model include potential for inter-channel clash or competition if a
customer goes direct for a quote and approaches a broker. Focusing solely on distribution
channels duplicates service functions and can lead to barrier-building over time between
SBUs. The customer is not only deemed less important than the method of sale, but the
insurer will find it harder to understand its customer base because it is fragmented
between SBUs.

E5 Product and functional matrix model

The product and functional matrix model organises its SBUs around a product or range of
products. Each SBU is responsible for its P&L account. Support services are shared across
all SBUs. Support staff may be embedded within an SBU or centrally located, but wherever
they reside they have dual reporting lines to their function and the product SBU.
Chapter 5 Underwriting strategy within the internal insurance context 5/25

Figure 5.9: Product and functional matrix model

The board

Product Product Product Product

Functional/ Marketing
service
personnel Network or
may be distribution
co-located
or located Operations
within
product units
(with dual IT
reporting
lines)
Finance and
administration
Human
resources

Chapter 5
Source: Sault, T. (2015) Operating Models [PowerPoint presentation]. London: Cass
Business School.

Underwriters are in each product SBU, with the same benefits and disadvantages of the
product SBU model we looked at previously.

For reference only

Strengths
The strengths of this model are that it should remove any organisational barriers between
SBUs and the support service functions should not be duplicated.
Weakness
A key weakness of this model is that it is not customer focused. Brokers and customers with
several different products may find it frustrating to have to contact different SBUs in their
insurance programme. As with all matrixes, employees can feel pulled in different directions
and having two managers can prove difficult to handle.

E6 Customer and functional matrix model

The customer and functional matrix model puts the customer at the centre of the
organisation. Each customer group SBU is responsible for its P&L account. Support
functions are shared across all SBUs with support staff either embedded within an SBU or
centrally located, as with the product and functional matrix model in figure 5.9. See
figure 5.10.
 5/26 995/January 2023 Strategic underwriting

Figure 5.10: Customer and functional matrix model

The board

Customer Customer Customer Customer

group 1 group 2 group 3 group 4
Functional/ Marketing
service
personnel Network and
may be distribution
co-located
or located Operations
within
customer
groups (with IT
dual
reporting Finance and
lines) administration
Human
resources
Product
Chapter 5

management

Source: Sault, T. (2015) Operating Models [PowerPoint presentation]. London: Cass

Business School.

Underwriters sit in each customer group SBU, with the same advantages and disadvantages

For reference only

as the product SBU model we looked at earlier.
Strengths
The strengths of this model include its customer-focused nature, how it should remove any
organisational barriers between SBUs and that the support functions and services should not
be duplicated.
Weakness
The weaknesses of this model include the creative tension staff can experience in dealing
with dual reporting and the potential for poor accountability.

Research exercise
Insurers are moving away from the traditional approach of the functional/process model.
Research several different insurance organisations and identify the operating models they
use. How are company models changing?

E7 Potential conflicts between functions

A number of different operating models can be used, each with their advantages and
disadvantages. Legitimate conflicts can arise between the different functions and these
conflicts need to be addressed and managed. We list some examples of potential conflicts
here, although you may be able to think of further examples:
• Product innovation may be hindered by business systems not prioritising required
changes.
• Customer management requires a new relational database to assist marketing in the
launch of a new campaign but the finance team blocks the request on cost grounds.
• Claims warn a particular product team that they are experiencing difficulty defending
certain claims and request wording changes to reduce losses. However, the products
team insists that their wording is market-leading, and is the only reason why they are
underwriting increased volumes of business.
• Brokers report that the direct unit is undercutting the insurer’s broker prices and so
brokers are losing business. If this continues, brokers will no longer support the company.
Chapter 5 Underwriting strategy within the internal insurance context 5/27

Summary
The main ideas covered by this chapter can be summarised as follows:
• Shared services means that all internal partners (e.g. SBUs) in an organisation share
internal administrative service functions (e.g. finance and IT).
• Core process transformation is about sharing core business processes through the
organisation. Consistent processes shared on the same platform across all SBUs helps
drive out duplication and cost.
• A possible outcome of value chain analysis as part of a strategic review, is to separate
the manufacturing from the distribution business.
• The Lloyd's of London model has always been split between manufacturing, intellectual
capital and distribution.
• A vision statement identifies and communicates what the company wants to achieve in
the medium-to-long term. The vision statement is the driver for all other corporate activity.
• Strategic goals are statements of what the company wants to achieve over the long-term
period of the strategic plan. There should be no more than six to eight key strategic goals.
• The corporate planning process involves several strategic components. Effective use of
appropriate strategic management tools will enable delivery of the strategy. Objectives
and operational-level action items will be developed. Objectives can be thought of as
subgoals.

Chapter 5
• The portfolio must be aligned to the employer's strategic goals and objectives, and the
underwriting strategy. This may impose limitations or open up opportunities.
• All organisations require human capital to function. Human capital in an organisation is
the total of all its employees' knowledge and skills.
• As technology becomes increasingly important in the insurance industry, knowledge

For reference only

workers will need to adapt to and be comfortable interacting with whatever technology
is used.
• Most knowledge is held in knowledge workers' heads. Employees are mobile and can
change employers, so it is important for employers to support and encourage knowledge
management and a knowledge-sharing culture.
• Unconscious bias is the automatic bias that the brain uses to make quick decisions.
Because we are unaware that we have used a bias, it is important to understand how
these thought patterns affect business judgments and decisions.
• People are an insurance company's most valuable resource, so creating the right
environment and understanding how best to manage those people is the key to recruiting,
retaining and developing employees.
• Engagement is one of the most important factors that determine productivity. Boosting
productivity is one of the best ways to maximise profits.
• It is generally accepted that employees should be paid an appropriate amount of money.
Sufficiently paid workers are more motivated by issues such as autonomy, developing
themselves, promotions, personal recognition and being aligned with their employer's
vision and purpose.
• Knowledge workers should not see the increased use of technology as a threat. In fact,
the reverse is true; technology frees them up to carry out more interesting and
demanding roles.
• The primary purpose of a target operating model (TOM) is to represent, at a high level,
how a company will be organised to more efficiently and effectively deliver the company's
vision and strategy.
• A TOM allows people to visualise the way a company will be organised from a range of
perspectives across the value chain.
• The functional model probably represents the traditional insurer model where the SBUs
are organised around the functions. Each unit is focused on either revenue or cost with
little or no overlap of responsibilities.
• The product model is organised around a product or range of products. Operations
services are normally embedded in each unit so that each unit is self-sufficient. • The
customer model builds its SBUs around customer groups with all other functions
providing dedicated service to that particular group. This model is customer-centric.
 5/28 995/January 2023 Strategic underwriting

• The distribution model has its SBUs organised around distribution channels.
• The product and functional matrix model organises its SBUs around a product or range of
products, with support services shared across all SBUs. Dual reporting lines to the
function line and the product line exist.
• The customer and functional matrix model puts the customer at the centre of the
organisation. Support staff are organised in the same way as the product and functional
matrix model.

Additional reading
Bohnet, I. (2016) What Works: Gender Equality by Design. Harvard University Press.
Chartered Insurance Institute (2015) Skills Survey 2015: Surveying the Future. London:
CII. Available at: https://bit.ly/2PzIZhT.
Deloitte (2014) Target Operating Model at a Glance. Luxembourg: Deloitte. Available at:
https://bit.ly/2QbW91W.
Gallup (2013) State of the Global Workplace. Available at: https://bit.ly/2IOxGN5. *
Johansson, S. and Vogelgesang, U. (2016) 'Automating the insurance industry', McKinsey
Quarterly. Available at: https://mck.co/1RTlhHY.
Kahneman, D. (2012) Thinking, Fast and Slow. London: Penguin Group.
McLean, A. and Trump, W. (2013) 'What the Insurance Industry Can Learn from
Chapter 5

Behavioural Economics', Swiss Re.

Pedley, D. (2015) 'The CII view: The Importance of Winning the War for Talent', Insurance
Times, 27 July 2015. Available at: https://bit.ly/2JrrkDJ.
Stout, L. (2014) 'Killing Conscience: The Unintended Behavioral Consequences of "Pay

For reference only

for Performance"', Journal of Corporation Law, 39(1). Available at: https://bit.ly/2P1A9du.
* Site requires a form to be completed for access

F Scenarios
F1 Question 1
This question is based on syllabus sections 2.3 and 4.2.
You are an underwriting team leader, managing a team of 16 employees. Human resources
(HR) have asked you to join a small working party to help address the issue of poor morale
and lack of engagement that has been identified in the insurer's firm wide employee survey.
You have been asked to come to the first meeting prepared to take the lead in suggesting
how the issues arose and how they might be improved or resolved, within the underwriting
unit you are responsible for. You will be given access to the survey results to enable you to
make a productive contribution.

F2 Question 2
This question is based on syllabus sections 1.1, 2.4 and 3.4.
You are the head of liability underwriting at a leading Lloyd's syndicate. The chair of the
syndicate's underwriting committee has asked you what action, if any, can be taken now to
future proof the liability products in your portfolio from the adverse effects of emerging risks.
You are asked to ensure that your response is a standalone report, understandable to non-
liability specialists.
Chapter 5 Underwriting strategy within the internal insurance context 5/29

F3 How to approach your answer: question 1

This question is based on syllabus sections 2.3 and 4.2.
Aim
This fictional scenario encompasses issues considered in chapters 4 and 5.
Key points of content
You should aim to include the following:
1. Research the results of the employee survey and compare whether the results for
underwriting are significantly different to that of other units within the insurer.
2. Identify any structural issues that impact morale in relation to how the company and its
functions are organised.
3. Analyse the culture of the company and suggest potential changes that would positively
impact morale.
4. Evaluate what changes you could make within your underwriting unit to improve morale
and productivity.

F4 How to approach your answer: question 2

This question is based on syllabus sections 1.1, 2.4 and 3.4.
Aim

Chapter 5
This fictional scenario encompasses issues considered in chapters 1, 2, 4 and 5. Your
answer should demonstrate that you understand: portfolio management and what strategic
implications may result from changes; a key global insurance issue, such as emerging risks;
and the application of innovative intellectual capital, i.e. employee know-how.
Key points of content

For reference only

You should aim to include the following:
1. Define what you mean by the term 'emerging risks'.
2. Consider utilising a case study to illustrate how a historical 'emerging risk' adversely
impacted insurers in the past.
3. Suggest what the company (or liability team) might do as an ongoing process to identify,
quantify and evaluate emerging risks.
4. Outline the underwriting options available in relation to emerging risks.
5. Consider whether it was possible to amend the current underwriting strategy to mitigate
the company's exposure to some emerging risks going forward.
 5/30 995/January 2023 Strategic underwriting

Self-test questions
1. Identify three benefits of and two possible obstacles to becoming an SSO.

2. Explain the importance of core process transformation.

3. Identify four KPIs that can be used to monitor portfolios.

4. Discuss two examples of how unconscious bias might affect business judgments and
decisions.

5. Why is it important to try and keep employees engaged?

6. Give three examples of external drivers and three examples of internal drivers that
can cause an organisation to review its operating model.
You will find the answers at the back of the book
Chapter 5

For reference only

 Underwriting and other
6
functions within the
business
Contents Syllabus learning
outcomes
Introduction
A Underwriting 3.3
B Interrelationship between underwriting and other business functions 3.3
C Distribution 3.5
D Marketing 3.3
Summary

For reference only

E Scenario

Chapter 6
Self-test questions

Learning objectives
This chapter relates to syllabus section 3.
On completion of this chapter and independent research, you should be able to:
• explain why risk selection is so important;
• discuss underwriters’ use of expert judgment in conjunction with pricing models;
• explain price optimisation and discuss the ethical issues surrounding it;
• analyse the relationships between the underwriting function and other functions within the
business;
• analyse the interrelationship between the distribution strategy and the underwriting
strategy; and
• discuss marketing strategy and the components within the marketing mix.
 6/2 995/January 2023 Strategic underwriting

Introduction
In this chapter we look at select issues concerning underwriting and how underwriting works
with other functions within an insurer from the underwriter’s perspective. The
interrelationship between underwriting and other functions depends to some extent on the
operating model used within the organisation. Critically, the key to good governance and
accountability is to know which function is the principal owner of each task and to understand
the hard and soft relationships which combine to bring about good results.
The purpose of the section on underwriting is to highlight and discuss relevant issues; it is
not the intention to provide a comprehensive underwriting study text. Sections on distribution
and marketing are included to provide a holistic view of underwriting, even though many
insurers have separate distribution and marketing functions employing professional
marketers. It is also a reminder that distribution is a part of the insurance value chain.

Key terms
This chapter features explanations of the following ideas:

Actuarial Affinity groups Aggregators Bancassurance

Brand Broker consolidation Claims Compliance
Customer dynamics Expert judgment Management Managing general
information (MI) agents (MGAs)
Marketing Price optimisation Pricing models Reinsurance
Risk analysis Risk management Risk selection

For reference only

A Underwriting
Chapter 6

Chapter 1 provided the following definition of insurance underwriting:

the selection, analysis and setting of terms, including pricing and coverage, of a
risk or risks under an insurance policy.
Underwriting is fundamental to every risk-bearing insurance organisation. It may be stating
the obvious, but the underwriting function should be central to all insurers. Underwriting risk
is not necessarily the dominant risk type for every insurer. The risks of reserving, investment
or credit might be higher than underwriting risk, depending on the nature of the insurance
products underwritten, the maturity of the insurer and many other factors. Some general
insurers include all the following risk types within their definition of insurance risk:
• underwriting (pricing and risk selection);
• catastrophe;
• reserving;
• reinsurance; and
• claims.

Be aware
An insurer’s board should understand the fact that the underwriting function is core and all
other functions are support functions that would not exist without underwriting. Nothing in
the previous sentence should imply that the support functions are not important, merely
that they are there because of the business being underwritten.

Some insurers, for example, Berkshire Hathaway or Fairfax Financial Holdings, are as
equally interested in the investment function as they are in underwriting. In these examples,
the investment function depends on underwriting to provide the float – the money to invest –
but the investment function is regarded as a profit centre in its own right. Perhaps more
typically, an insurer’s investment function is designed to invest prudently to ensure that
policyholder funds and retained capital is stable and secure.
Chapter 6 Underwriting and other functions within the business 6/3

A1 Risk selection
Risk selection has always been a key part of the underwriting function. In mass-market
underwriting, risk selection and analysis may be more about customer segmentation or risk
categorisation. When underwriting bespoke risks at Lloyd's or elsewhere, selection is often
made on a risk-by-risk basis.
Even an automated system functions according to the risk selection set out by the
underwriter’s criteria. For example, when writing a book of homeowner’s insurance, a
computer program might be written to handle selection as part of a web-based system. But
that program would merely be selecting and pricing the type of risk that the underwriter has
determined should be targeted. The selection criteria could be age of property, postcode and
proximity to water or a flood plain. The important point is that only certain risks are selected –
only those which meet the underwriter’s criteria.
Risk selection may be much more subjective in commercial lines at a bespoke level. Let us
consider satellite risk and imagine for a moment that you can decide which part of the risk
you want to insure:
• Do you want the launch risk, the launch plus the first year of orbit or established
orbit only?
• Are you only interested in launches from certain sites, which rocket manufacturer and/or
satellite manufacturer has the best technology and reliability?
• What is the value at risk?
The questions can go on; the important issue is that a risk is selected and analysed.
A legitimate question might be why is risk selection being given so much importance? After
all, a phrase sometimes heard in the insurance market is that ‘there is a price for every risk’.
In the opinion of this writer, there are three main reasons why risk selection is key:

For reference only

• homogeneous risks;

Chapter 6
• transparency; and
• ultracompetitive market conditions.
Homogeneous risks: Unless one sets out to build a book of substandard risks, it does not
make sense to allow distressed risks into your portfolio. The aim should be to create books
of homogeneous risks, as far as possible. Target risks that fit one’s appetite – no outliers.
Refer also to Portfolio management on page 5/8 for diversification and portfolio
management.
Transparency: The underwriting strategy should be clear and transparent so that senior
management, reinsurers, regulators and other stakeholders understand and agree what you
plan to do. Stakeholders can and do review, compare and audit results against the original
strategy.
Ultracompetitive market conditions: In Insurance cycle on page 3/19 on the insurance
cycle, we identified the issue of the superabundance of capital as the prime driver in creating
the competition that leads to suppressed pricing. In current market conditions, if the
traditional cycle has become extinct and the ultrasoft market continues, it will be extremely
difficult for underwriters to charge sufficient premium to provide for more than the thinnest of
profit margins – with no margin for error. At best, the theory that a poor risk can be
‘improved’ by charging more premium is questionable. Several factors contribute to making a
risk substandard and not all can be corrected by premium, deductible or wording changes.
Poor risk-management, unethical management, dubious business practices or moral hazard
are but a few reasons why the ‘lure’ of more premium should not overcome the ‘bad smell’ of
a poor risk. In summary, if an underwriter is putting risks on the books for prices which may
be 30% down from say, two years ago, they must be confident that each risk selected is one
that they want on risk – because at best the underwriting profit margin will be small and at
worst the underwriting loss could be disastrous. Underwriters are the gatekeepers, not
bank tellers.

Disciplined underwriting in today’s supercompetitive market means selecting only the best
risks in your chosen segment.
 6/4 995/January 2023 Strategic underwriting

A2 Risk analysis
Part of the risk analysis process requires underwriters to analyse each risk or to group risks
together into segments and analyse the segments. Risk analysis has two parts:
• expert judgment; and
• risk modelling, including pricing models.
A2A Expert judgment
Underwriters use their expert judgment to decide whether a risk is acceptable. Expert
judgment comes from a combination of academic study and practical experience. As an
example, underwriters who have a background in engineering may be best qualified to
underwrite engineering insurance such as cranes, lifts and pressure vessels. It is necessary
to understand the processes, the critical features and the correct uses of the equipment. But
an engineering background alone is not sufficient. The individual needs to be trained as an
underwriter, ideally by undertaking CII study courses and exams and by learning through on
the job training from experienced underwriters. Much knowledge can be learnt through study
but building on that knowledge by gaining practical experience from working closely with
qualified senior underwriters is invaluable.
Underwriters analyse risks that fall within the underwriting strategy. Typically, a front-line
underwriter will not have seen a high level corporate document and will be guided by written
underwriting guidelines which have been developed from the strategy, specifically for their
team. The underwriter will decide if the risk characteristics are acceptable by identifying
material factors and exposures then evaluating them. In addition to using their expert
judgment, experienced underwriters will use external tools and information sources to
research and aid their decision making. For example, a financial institutions (FI) underwriter
might look at systems such as Advisen, Factiva and The Banker together with analysts’
reports. One effect of the UK Insurance Act 2015 (IA 2015) may be to encourage more use

For reference only

of external sources of information during the underwriting process.
Chapter 6

Underwriters thoroughly review all the information provided, whether in the form of a
bespoke submission or completed proposal forms. The claims experience of every risk forms
a material part of all submissions and proposal forms. Claims experience is an insurance
industry term used to describe a full record of all claims, circumstances, disciplinary
proceedings, regulatory investigations and so on. The expression ‘full record’ means that the
claims experience must include all matters, regardless of whether or not they are insured,
covered or paid.
During the placement process the broker and the potential insured should provide all
material information necessary for an underwriter to understand the subject matter and the
risk that he or she is being asked to consider insuring. No distinction should be made as to
whether the situation is new business, the renewal of a policy or a variation.
For existing customers, the underwriter should discuss any prior claims with their claims
team as part of the renewal evaluation process and check that premiums have been paid
and are up to date.
A2B Risk modelling
This study text will focus more on pricing models rather than the catastrophe models, flood
models or economic capital models that are predominately used by actuaries or specialist
modelling teams. That said, it is appropriate for underwriters to understand and work with
actuarial colleagues on a macro approach to analyse books of business, portfolios or
sometimes large individual risks – particularly those with large amounts of exposure data.
Analysis at the macro level allows for the gathering of external data and benchmarking that
will provide an improved confidence in the resulting models. In some instances, big data may
be sourced and analysed.
Analysis of claims and claims trends allows loss ratios to be divided into components;
namely attritional, large and catastrophe losses. Likewise, analysis of specific industry
segments enables the loss characteristics of each segment to be properly understood and
appropriate loss ratios established. An example of a loss characteristic is the length of time
between the date of claim and ultimate resolution. If on average a medical malpractice claim
takes eight years from being reported to insurers until the file is closed, then models can be
Chapter 6 Underwriting and other functions within the business 6/5

modified to allow for trending and developing today’s claims to what they will cost in eight
years’ time.
Risk modelling forms the basis for designing and populating pricing models, in order to rate
individual risks.
A2C Pricing models
Pricing models are used by underwriters to provide a consistent premium methodology for
every risk. Pricing models can vary widely from country to country, for different lines of
business or from insurer to insurer, but they are all designed to do the same task.
Underwriters or actuaries can design pricing models; if underwriters create them, the models
need to be validated by pricing actuaries. Each model must be calibrated to the business
plan ultimate loss ratio (ULR) for that particular line of business. Ideally the model should
record both the plan ULR and the modelled ULR after the underwriter has applied expert
judgment and adjusted the terms for the risk.
Typically, models will calculate premium on a unit of exposure relevant to the risk class. The
unit could be as varied as property values, revenues or the number of partners. The
important point is to record the exposure in a consistent manner.
The model usually goes down one or two levels below the headline number and splits the
exposure information into a more granular basis. Each piece of data entered is allocated a
rate or modifier to refine the premium. On a property risk the unit of measure would be value,
with data entered regarding locations, construction and physical protections (e.g. sprinkler
system or security guards and type of use). If incorrect information is entered or if
information is omitted, then the pricing will not match the exposures they are intending to
insure. It is therefore vitally important to ensure that full and correct information is collated
and entered into the model.
Pricing models may have links to a wide range of databases, such as Companies House in

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Chapter 6
the UK, court records, disciplinary bodies, incident records, credit check or industry
specific sites.
A2D Terms and conditions
Before providing a written quotation to the broker, the next step is to decide the:
• terms and conditions;
• exclusions;
• limitations; and
• any subjectivities.
Subjectivities are questions which must be answered to the underwriter’s satisfaction before
the underwriter will agree to go on risk. On occasion underwriters will consider going on risk
subject to certain conditions being met within a specified time period. For example, subject to
receiving a satisfactory signed and dated proposal form within seven days.
Terms and conditions essentially mean the policy. A policy consists of a schedule and a
wording. The policy schedule will contain all the variable information concerning the risk,
such as:
• name;
• address;
• premium;
• deductible;
• tax;
• sum insured or limit; and
• period of insurance and so on.
It is possible to have a policy without a schedule. However, it is much simpler and easier for
wordings to be predrafted then any unique or variable information added in a schedule or by
endorsement; this way, the wording is not inadvertently corrupted endeavouring to
incorporate information into the body of the wording.
Most insurers use their own, proprietary wordings. This approach allows for quality control,
consistency, branding and more certainty in underwriting and claims handling. Underwriters
 6/6 995/January 2023 Strategic underwriting

will usually quote for a risk subject to their own wording. It is good practice to provide the
proposed wording with the quotation in order to promote contract certainty. In many cases
the intermediary already has the insurer’s standard wording and underwriters may refer to it
by name or number.
It is common for sophisticated insurance buyers to develop their own wordings, in
conjunction with their broker and insurer. Such a wording would typically be used even when
the buyer was changing to another insurer. Thus in that situation, the underwriter would have
to carefully review the wording to check that they are prepared to grant coverage based on a
wording which they might not have seen before.
Several major broking firms have invested significant time and resources into developing
exclusive wordings for their clients. In those instances, brokers will often insist on insurers’
quoting on their exclusive wording. Because the broker has drafted the wording on behalf of
the insured, the insurer must carefully understand and evaluate the exposures and coverage
grants involved.
A2E Underwriter rationale
One of the final tasks an underwriter must do is to write a rationale on why they underwrote
the risk. This rationale is important as it provides evidence of the key risks and the analysis,
particularly for bespoke and complex risks. It is of value in the following situations:
• to consider intent and any potential defences in the event of a claim;
• to see whether there are any lessons to be learned after a claim;
• for reinsurance audits;
• for internal peer review and independent peer review;
• for training and quality management purposes;
• for regulatory purposes; and

For reference only

• evidencing operating within underwriting authority.
Chapter 6

The provisions of the UK Insurance Act 2015 probably increase the importance of having
detailed underwriting notes, rationales and appropriate underwriting guidelines on file.

A3 Optimal pricing and price optimisation

Tension exists between market share and profitability in the insurance industry. In theory,
more customers equal more premiums and therefore more profit. However, in insurance this
relationship is elastic. In insurance manufacturing speak: the cost of insurance is not known
when it is sold at the ‘factory gate’. It is therefore important to build critical mass so that there
is a sufficient fund of premium to pay expected claim costs, it is difficult to grow the top line
and the bottom line at the same time.
Premiums must be competitive enough to attract a volume of new customers. If premiums
are increased, then retention rates will suffer as existing customers leave to secure cheaper
premiums elsewhere. Adverse selection can occur when premiums are increased across the
board without segmentation. If good risks leave and find cheaper cover elsewhere, the
portfolio may be left with lower quality risks, where the actual premium is still below technical
price. If the portfolio is not large enough, the cost base – consisting of direct costs and
allocated costs – will make the portfolio unprofitable.
Underwriters traditionally used a quantitative process as a base before applying their expert
judgment. Insurers priced risks using a pricing model designed to cover the cost of expected
claims, the insurer’s costs and a profit margin. A pricing model largely consisted of risk-
based rating factors applied to an exposure rate. If the risk was long tailed, inflation was
added. If the risk was experience rated and long tailed, then the expected claims cost would
be developed, trended and inflated.
Nowadays more data is being collected, in particular by price comparison websites (PCWs),
that quickly builds into large data sets and can be efficiently dissected and analysed.
Price elasticity of demand (PED)
The extra data collected allows insurers to vary premiums relative to customers’ ability to pay
– or more correctly, willingness to pay. In some ways, this is not a new development; it is
similar to charging what the market will bear – but now with a researched baseline of
information rather than a broad estimate. No underwriter wants to ‘leave money on the table’.
The difficulty was that the underwriter did not know what the customer would be prepared to
Chapter 6 Underwriting and other functions within the business 6/7

pay for the product. If the price was £100 but the customer would have paid £110, then the
insurer has sold the product for £10 below what could have been achieved. The difference
between £100 and £110 is the price elasticity of demand (PED). To some extent PED has
been taken into account at a class-of-business level or on a portfolio basis, although not
everyone might have thought about it in that manner. The huge advance has been that new
technology and analytics have created the ability to estimate individual customers’ PEDs.
Today, the increase in data and sophisticated modelling permits price optimisation, also
known as dynamic pricing. This means that insurers can more successfully estimate
customers’ price elasticity, which gives them the opportunity to increase the price to the
maximum that a customer will pay. If the price is too high, the customer walks away and
finds another insurer; if the price is too low, then the insurer either makes a loss or ‘leaves
money on the table’.
Some specialist lines of business may not lend themselves to optimal pricing at the moment,
but with increasing data analytics it might be possible in the future. At the present time, price
optimisation is perhaps more relevant to mass-market personal lines products.
Ethical issues
Price optimisation raises ethical issues because it provides what might be considered a
windfall for insurers; money that is not strictly necessary for that risk. Optimised pricing
moves away from being risk-based to what the market will bear. This method of pricing has
occurred since time immemorial, but only in relatively rare occasions by individual
underwriters exploiting distressed situations. Such an example might include aviation
underwriters after the 9/11 terror attack on the USA. With today’s pricing models,
optimisation is being built in to the rate engine for quote purposes. As with all pricing models,
there must be a minimum price for the risk, sometimes referred to as a ‘walk-away’ price.
Price optimisation has been around in the USA for longer than elsewhere, so perhaps it is
not surprising that US insurance regulators have become very interested in this development

For reference only

– and a significant number of states have ruled that price optimisation is illegal. In October

Chapter 6
2019, the FCA have produced an interim report, looking at the general insurance practices to
ensure that insurance (and its pricing) works well and delivers positive outcomes for
customers.

On the Web
Students are recommended to read the CII's 2016 Thinkpiece, Price Optimisation for
Insurance. bit.ly/32ZiZjn.
The FCA's interim report can be accessed here: www.fca.org.uk/publication/market-
studies/ms18-1-2-interim-report.pdf.

Research exercise
Investigate whether price optimisation occurs in your workplace or marketplace. Consider
whether optimisation is ethical.

A4 Reinsurance
The flood of alternative capital moving into reinsurance has caused reinsurance prices to
significantly reduce in the last few years. The steep declines in reinsurance pricing mainly
occurred in 2013–14. By 2017 reinsurance pricing was still declining but at a reduced rate.
Aon's April 2019 Reinsurance Market Outlook notes that reinsurance capital stood at US
$585bn at the end of 2018, down three percent compared to the end of 2017. This included
US$97bn of alternative capital (an increase of 9%).
Typically, alternative capital is put into specially formed investment vehicles such as
sidecars, catastrophe (cat) bonds, collateralised reinsurance and industry loss warranties
(ILWs). Inevitably this makes reinsurance the natural home for this capital. However, the
plentiful supply of reinsurance impacts the direct insurance market by reducing insurers’ cost
of reinsurance. Likewise, when reinsurance capacity is scarce the tightening, or potentially
the lack of available reinsurance, can be a significant factor in helping turn the direct market.
The reinsurance industry has reacted to the reduced pricing by shifting capital towards
insurance and away from reinsurance. Therefore, the squeeze in reinsurance pricing is
 6/8 995/January 2023 Strategic underwriting

driving more competition in the insurance sector. Reinsurers without an insurer in the group
have been busy forming insurance companies or Lloyd’s syndicates in an effort to bring
balance and counteract the loss of premium income.

Research exercise
Berkshire Hathaway formed Berkshire Hathaway Specialty Insurance (BHSI) in June
2013. This is a good example of a reinsurer shifting capital towards insurance. Research
what has been written about BHSI.

On the other hand, insurers have been able to take advantage of lower reinsurance costs.
The savings have generally been retained to boost profitability, but there is also evidence of
the purchase of increased reinsurance limits. Insurer reinsurance appetite can be markedly
different in different companies. However, the trend over the last decade has been for
insurers to retain more risk and reduce their reliance on reinsurance. This trend has been
driven by several factors, including:
• insurer consolidation;
• higher retentions; and
• insurance groups participating on their own treaties.
Insurers – particularly those with significant long-tail books – will vary the amount of
reinsurance they buy during the hard and soft market cycles. These insurers may cut back
on the amount of reinsurance purchased when their market is hard and increase the amount
when their market is soft. This may appear counterintuitive from a cost prospective, but when
direct market prices are higher than technical pricing then the probability of needing
reinsurance is lessened and vice versa. If the direct market is hard and the reinsurance
market is also hard, both the need for and the cost of reinsurance is reduced.

For reference only

The reinsurance cycle might be at a different position to the insurance cycle. Usually
Chapter 6

reinsurance is ahead of the insurance cycle as hardening or softening reinsurance rates lead
to the same impact on the insurance market.

Be aware
In February 2017, the UK Government announced a cut in the personal injury discount
rate to –0.75%. The cut had a large negative impact on (re)insurers. In The insurance
cycle on page 3/22 we gave an update, as the new discount rate of –25% was effective
from 5 August 2019.
Students should monitor the situation and review the insurance industry’s estimates of the
aggregate reserve reductions and the proposed scale of any resultant premium reductions
if and when the rate changes.

B Interrelationship between underwriting and

other business functions
There was a time when underwriters were left alone to underwrite. Perhaps management
took the view that underwriters’ time was best spent creating relationships, reviewing
submissions, meeting customers, quoting and renewing business. It may still be like that in
some insurers, but on balance the way that business functions interrelate has changed and
underwriters no longer operate in isolation.
Best practice demands that all business functions operate on a flexible, collegiate basis. No
one unit can do its job without the cooperation of, and assistance from, the rest of the
business. Often a project or process involves different functions contributing in order to
achieve the final outcome. Sometimes information or data will be passed between functions
via software or an information technology (IT) system, but many communications will involve
voice calls, email messages and meetings, either face to face or on screen.
Insurance differs from one country to the next and insurers’ operating models can be very
different. Many of the issues discussed in this study text have touched on functions that do
not directly fall within the definition of underwriting, such as technology, actuarial, human
resources and distribution. However, this study text takes a holistic view of underwriting to
Chapter 6 Underwriting and other functions within the business 6/9

include functions that may be housed in different departments in an insurer. Let us look at
several relevant functions to see how they may, or should, interrelate with underwriting. We
can do this by identifying links between functions and seeing how effective interrelationships
can create synergy between different functions.

B1 Technology
The underwriting function and the technology team should be looking to work closely and
collaboratively together to move the business forward on a sound footing. For an aspiring
underwriter, the chief information officer and/or head of IT should be a key relationship.
Technology has played a significant part in underwriting for years. For example, underwriting
and claims systems, policy production systems, pricing models and dashboards.
Underwriters need to be aware that the pace of change is rapidly increasing and they must
be alert to change and embrace it. Increased automation and better, faster analytics will
remove many of the routine administrative and processing tasks from underwriters’ daily
lives. These developments will free up underwriters to carry out higher-value work such as
external-facing activities like relationships, sales and marketing.
New technological developments do not simply arrive at an underwriter’s desk. Underwriters
need to work closely with the rest of the business to help design, create and implement new
technologies that will assist underwriting going forward. Involvement in the developments
brings a feeling of ownership and enables the human dimension of change transformation.
There may be opportunities to suggest or recommend the adoption of certain technologies to
improve quality or speed of service in your class of business. This could include the use of
drones to check properties before going on risk, linking with social media sites to check
customer satisfaction rates or working with fraud prevention systems to access the likelihood
of fraud before going on risk.
There will be times when you, as an underwriter, will be told that your firm is thinking of

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Chapter 6
implementing new software to bring benefits to the business. This is your opportunity to get
involved. Volunteer to be on the project steering group and ensure that you, as the business
owner and end-user, provide intellectual capital to the new system.

Be aware
Systems developed in partnership between the technology team and underwriter users
are much more likely to do what is intended, deliver the efficiencies and be adopted by the
end-users.

What might feel like getting involved with a project outside your comfort zone, or outside the
boundaries of your function, should prove to be good for your employer and good for you.
Insurers that are able to capitalise on new technology must modernise in conjunction with
their underwriters: without underwriters the full benefits that technology can bring will never
materialise. In turn, underwriters must understand and accept that their roles are changing.
To be a successful in the future, underwriters must:
• be fully involved in market-facing relationships and sales;
• use all available technology; and
• focus less on the internal technical roles that they used to perform because technology
will increasingly be performing the majority of those roles.

B2 Management information (MI)

The underwriting team may be as much a user of management information (MI) as they
are a supplier of MI. MI is not just for senior management.

Be aware
Underwriting is primarily about the analysis of data and knowing how to interpret it. Data
quality, control and integrity are vital and this has been formally recognised in the
Solvency II regime.
 6/10 995/January 2023 Strategic underwriting

Solvency II requires that data should be accessible, accurate, timely and capable of
delivering decisions. It is widely accepted that fully understanding and correctly interpreting
MI is one of the keys to success.
Much of the skill in producing useful MI relates to the organisation of the underlying database
and the way the data is presented. Typically, an MI tool draws data from the database and
then the data is organised. People learn and absorb information in different ways. Some
people find it easier to look at numerical tables whereas others prefer more visual
presentations (e.g. graphs and charts). It is worth remembering that data is raw fact,
whereas information is data placed in context.

Data is not information,

Information is not knowledge,
Knowledge is not understanding,
Understanding is not wisdom.
Cliff Stoll and Gary Schubert

Older-style reporting required coding, which meant that the data was presented in a fixed
way. It was slow and expensive to change. The format and content had to be specified in
advance. Today’s systems are much more flexible and user friendly. Users, including
underwriters, have the freedom to navigate and drill down or across the data. Users should
be trained to use MI tools so that they can produce bespoke reports when required, although
it is more efficient to automatically produce a suite of routine reports to be sent by email at
daily, weekly or monthly frequencies. Modern MI reporting systems are capable of being
exported or incorporated into other systems. Many underwriters receive their MI via a screen
dashboard that can be configured to display the information that they require and in the

For reference only

format they find most useful.
Chapter 6

Underwriters who display a thirst for information should become keen devourers of MI, be
influential in keeping their reports relevant and act on the insights they provide. The
underwriting function will want information, which assists the following activities:
• pricing and selection of risks;
• monitoring accumulations;
• monitoring growth and profitability;
• controlling and monitoring expenses;
• reinsurance protection; and
• exposure management.
The more the MI function knows about the information that underwriting requires, the more
useful they can be in packaging and presenting MI in a readily accessible and acceptable
manner. This is important, as it is inefficient for underwriters to have to spend time
manipulating MI before they can use it. It therefore benefits both functions to invest the time
and energy to establish their respective needs and requirements.

B3 Actuarial
Underwriters and actuaries are both involved in pricing risks so should try to develop a close
working relationship. The actuarial function is also involved in claims reserving, capital
calculations, Solvency II and much more than just the pricing and programme-modelling
aspects which are the focus of this study text. Solvency II is a major responsibility for the
actuarial team as they own the internal or standard model, which lies at the heart of business
planning and the own risk and solvency assessment (ORSA) process. Several actuarial
functions feed into pricing, such as capital allocation and reserving. It is important for both
parties to understand what they have accountability for and how the interrelationship is
designed to work.
Typically, actuaries are required to create and validate all pricing models. Pricing models are
sometimes created by underwriters, based on their prior experience. All models have to be
calibrated to plan loss ratios. The majority of risks are priced through a model, with the
underwriter adjusting the resultant price, terms and conditions within controlled parameters.
Chapter 6 Underwriting and other functions within the business 6/11

Some large, complex or claims-driven accounts may fall outside the scope of a standard
model. These risks may be passed to actuaries for individual pricing, before going back to
the underwriter for review. Similarly, some models may be inappropriate for a minority of
risks and underwriters will have to apply their judgment and market knowledge to rate
those risks.
Good communication between both parties is important to enable constructive challenge and
debate to occur. The actuary generally approaches pricing from a purely technical
mathematical position. To increase the confidence and credibility of actuarial output,
sufficient data must be available. An underwriter will use much of the same exposure data
that actuaries use and introduce qualitative factors and apply their expert judgment to assess
and adjust the appropriate premium. While the underwriter is typically the more commercially
orientated of the two, an underwriter also needs to understand basic actuarial techniques in
order to understand – and on occasion challenge or override – actuarial recommendations.
Different insurers place different emphasis on how actuarial resources are utilised. In some
organisations, actuaries are seen more as a back-office function, with underwriters having
the authority to make their own decisions as long as they can justify why they have not fully
followed what the actuaries put forward. Other insurers place more credence and authority
on actuarial analysis: actuaries might be embedded in underwriting teams, attend broker or
customer meetings where appropriate and generally be much more visible in the front line. In
these circumstances the two disciplines would expect to work together in a more
collaborative manner.
In addition to their work on pricing models and individual account pricing, actuaries have a
central role to play in reviewing books of business, portfolios, binders and the overall
business plan. Their analysis and critical review are extremely useful to senior underwriters,
who might be charged with correcting a loss-making line of business, or growing a product
segment.

For reference only

B4 Human resources (HR)

Chapter 6
Human capital issues were discussed in Human capital and technology on page 5/9. With
human capital being of such importance within insurance, people management is a key skill
for every manager. If you were running a busy underwriting department, a significant amount
of time will be spent on people issues.
You will be keen to ensure that your employees are properly inducted into the organisation
as soon as they join, are signed up for all appropriate training and development courses and
receive the correct remuneration. In addition, if new hires are required for any reason, you
will want to be involved in the recruitment process. A certain amount of staff turnover is good
for any business; too much or hardly any can both be a problem. A good manager needs to
have a succession plan in order to be prepared for the day when a key person gives notice
to leave.
It makes business sense to have good lines of communication and an excellent working
relationship with the human resources (HR) team. While the head of HR is tasked with the
effective utilisation of human resources throughout the whole organisation, they can only
operate effectively in tandem with the leaders of all the other functions.
HR, perhaps above all other functions, is fundamental to a human capital-intensive industry
such as insurance. With the business increasingly dependent on knowledge workers, there
needs to be a genuine partnership approach between HR and underwriting. If you talk to
underwriting managers, one of the oft-heard remarks is that people management is a time-
intensive part of their role. Human capital is one of the key differentiators between insurers.

Be aware
Most insurance organisations will try to differentiate themselves by saying that they have
the best people, best products and superior customer service. You can only attract,
motivate and retain the best people if you work in close cooperation with the HR function.
 6/12 995/January 2023 Strategic underwriting

B5 Claims
The head of claims is responsible for claims management. While the claims team is
normally separately organised and managed, there should be close cooperation between
claims and underwriting. Experienced claims handlers may feel able to offer an opinion or
observation on a particular risk. This could vary from a relatively minor policy wording issue
through to a recommendation that the underwriter should consider non-renewing the risk.
The claims team find out a lot of information regarding customer operations and activities
during a major claim investigation. Underwriters – particularly new or junior underwriters –
would be well advised to nurture a good working relationship with their opposite number in
the claims team, especially if the claims handler has been in place for a considerable time.
It is common for underwriters to attend claims committee meetings, as it is important that
underwriters:
• understand the claims process;
• know about significant claims; and
• look to see whether there are any underwriting lessons to be learnt.
The head of underwriting may be a permanent member of that committee. Sitting in and
observing at these claims meetings can be a real education, learning about fraudulent
claims, claims reserving philosophy, ex gratia payments and much more.
Separation between claims and underwriting is important and underwriters should not have
any claims authority. However, there is much benefit to closely working together.
Underwriters need to know and understand the claims experience of their customers, their
portfolio. In many insurers, renewal terms cannot be offered unless and until both
departments have reviewed the claims record. A good claims professional is an asset to an
insurer and can be usefully deployed in customer-facing meetings, in meetings with brokers
and during other externally facing events.

For reference only

Chapter 6

Depending on the operating model and the dynamics of the business being written, some
insurers will embed claims representation into underwriting teams to add value in business-
as-usual situations. This approach enhances the cooperation between the two functions,
although the reporting lines would most likely remain unaltered.
Claims personnel may or may not be legally qualified; the insurer’s claims philosophy will
determine what skills and competencies are best for their particular business mix. If a
number of the claims team are qualified solicitors, the general counsel/legal role may be
appropriately scaled back to acknowledge the greater depth of professional training in
claims. Nevertheless, experienced claims handlers are able to provide support and advice to
underwriters regarding policy wordings, the main sources of claims and common coverage
or country specific issues.

B6 General counsel/legal
The general counsel’s office – or legal department – provide day-to-day advice and support
to the business on all legal matters. Underwriters may have protocols to follow in certain
situations such as when they evaluate the case for a new delegated underwriting authority
binder, policy wordings or the increasingly common phenomena of having to agree to a non-
disclosure agreement (NDA) before the broker will provide a submission.
A good internal legal resource will proactively contribute to a wider variety of matters that
affect underwriting, for example:
• product development;
• policy interpretation discussions;
• contract reviews; and
• coverholder consortium issues.
It is important the underwriters know who has the ultimate decision-making power when
documents are being drafted or revised. Typically, the underwriting team has ownership but
internal protocols may require sign-off by legal before that document can be released.
Chapter 6 Underwriting and other functions within the business 6/13

Be aware
It is therefore important that underwriters understand key legal issues and concerns.
Equally, it is necessary that the legal team understands the distinction between
commercial issues and expert underwriting judgment versus legal issues.

In an extreme example of why mutual understanding is necessary between legal, potentially

claims and underwriting, the legal team could draft a policy that is simply unmarketable –
although perfectly legal. As always, it is beneficial to invest the time and effort in creating a
good working relationship before being thrust into pressured negotiations.

B7 Risk management
Many large insurers have a chief risk officer (CRO) responsible for risk management and
most boards have a risk committee. In most jurisdictions regulators require risk management
to be embedded into the organisation. For example, in the UK the Prudential Regulation
Authority (PRA)'s Handbook provides detailed guidance on prudential risks, which it
describes as those that may reduce the financial resources of a firm. The risk categories
include insurance, credit, market, liquidity, emerging and operational and group risks.
Risk management is the responsibility of everyone, including underwriters. The risk
management team’s role is to challenge and provide insight across the business. They
depend on the people carrying out the day-to-day business to inform them of – and to an
extent to educate and alert them to – issues as they arise.

Be aware
First line of defence: the business itself, including directors, business unit managers,
department heads and underwriters.

For reference only

Second line of defence: risk management as defined widely to include legal, compliance,

Chapter 6
IT security and so on.
Third and final line of defence: internal audit together with external audit and regulation.

The risk team have responsibility for an insurer’s ORSA. While the visible output of the
ORSA process is a document, ORSA is an ongoing process that the risk team coordinate
and compile from every function within the insurer. Solvency II requires insurers to
continuously update their ORSA. Lloyd’s define ORSA as:
the entirety of the processes and procedures employed to identify, assess,
monitor, manage, and report the short and long term risks a (re)insurance
undertaking faces or may face and to determine the own funds necessary to
ensure that the undertaking’s overall solvency needs are met at all times.
Insurers are in the risk business, but that does not mean that they will tolerate uncalculated
risks or risks that fall outside their risk appetite. All possible risks are identified and shown in
the risk register along with a risk owner. An underwriter is unlikely to be a risk owner,
although the head of underwriting would own several risks. Examples of underwriting risks
could be:
• risks excluded by the reinsurance treaty;
• policy limits in excess of X million; and
• breaching aggregation limits.
The head of underwriting might also be a control owner; for example, actuarial might be the
risk owner for pricing adequacy but the head of underwriting could be the control owner.
The risk management team provides oversight that the controls are in place and working.
Individual underwriters will work with the risk management team in certain situations, such as
when designing new products, discussing coverholder audit reports and helping brainstorm
and scan the horizon for emerging risks.
 6/14 995/January 2023 Strategic underwriting

B8 Compliance
Compliance used to be treated as a subset of either legal or risk. More recently, regulatory
issues have become more prominent in most jurisdictions and compliance has emerged as a
distinct function, requiring specialist knowledge and an increasing level of professionalism. In
the UK and elsewhere, competition for compliance employees has grown dramatically. A
survey in the USA by PwC showed that 86% of insurance executives say their company has
a chief compliance officer (CCO). This seems to confirm that the insurance industry is
responding to the increased complexities of the regulatory environment. The same survey
reported that 52% said compliance is a separate function and 38% said it is part of the legal
function. Forty-nine percent said compliance reports to the general counsel or head of legal.
As explained in Regulation on page 2/3, regulation in most developed countries has
significantly increased since the global financial crisis (GFC), which has led to more expense
and resource being dedicated to the compliance arena. A small number of large insurers are
designated globally systemic important insurers (G-SIIs). The Financial Stability Board (FSB)
publishes an updated list of G-SIIs each November.

Research exercise
Find out the names of the current G-SIIs, identify how and why they are designated G-SIIs
and what policy measures are to be applied to them in 2019.

The compliance team must constantly monitor their regulators’ websites to be aware of
consultation papers, forthcoming legislation and administrative orders and the like. To ensure
that an insurer remains compliant with all applicable laws, rules and regulations can be
extremely challenging in today’s fast moving environment, particularly if the insurer operates
in several jurisdictions.

For reference only

Recent rules, themed reviews and legislation impacting the insurance industry in the UK
Chapter 6

have included:
• international sanctions to include Her Majesty’s Treasury, the United Nations, European
Union and the USA’s Office of Foreign Assets Control (see International sanctions on
page 2/4);
• Money Laundering Regulations 2017;
• Terrorism Act 2006;
• Proceeds of Crime Act 2002 (Amendment) Regulations 2007;
• Employers Liability Tracing Office (ELTO);
• Bribery Act 2010;
• Bank of England and Financial Services Act 2016;
• EU General Data Protection Regulation (GDPR);
• Data Protection Act 2018;
• Senior Managers and Certification Regime (SM&CR);
• client money rules for insurance intermediaries; and
• FCA June 2015 Thematic Review, Delegated Authority: Outsourcing in the General
Insurance Market.
Naturally, in addition to managing the insurer’s compliance regime, the compliance team will
remain focused on maintaining an open and transparent relationship with its regulators.
Compliance is a factor in Solvency II and in that respect parts of an insurer’s ORSA need to
be contributed to and reviewed by the compliance function.
One of the most common ways that underwriters interact with compliance is through logging
customer complaints and recording gifts and hospitality in the log. Increasingly underwriters
receive regular training from compliance personnel in respect of all new regulations, to keep
abreast of all developments.
The key for underwriting to get the best out of the compliance function is to invest sufficient
time to establish a good working relationship. Compliance should not be regarded as the
function which says ‘no’ to underwriting opportunities and frustrates the business. However,
compliance, like underwriters, has to say no from time to time. As such, there should be an
understanding that the compliance function is there to stop underwriters exposing the insurer
Chapter 6 Underwriting and other functions within the business 6/15

(and potentially themselves) from falling foul of regulatory issues – as well as endeavouring
to assist the business by helping craft solutions to worthwhile opportunities.

B9 Marketing
Marketing can perform a variety of functions depending on the insurer's operating model. In
some insurers, marketing might encompass responsibility for geographical markets,
customer segments, product distribution and sales. In other models, a central marketing
team might oversee marketing analysis, brand management and promotions, while strategic
business units (SBUs) handle other market functions themselves.
It is important for underwriters to understand what the marketing function can do to help
underwriting. The two functions must effectively interface to ensure that each party knows
what the other is planning; it is too late once events have been launched. Marketing might be
planning a digital marketing campaign, TV advertising or a customer satisfaction survey.

Be aware
It is essential that underwriting and other business functions are fully aligned with the
marketing message and prepared to respond to any rapid increase in activity generated
by the work of the marketing team.

A simplistic example of why the marketing and underwriting functions must fully understand
each other’s roles can be illustrated as follows.

Example 6.1
Following supportive actuarial analysis, the marketing team targets a certain segment
containing 10,000 potential customers. It must be recognised that underwriters may only
quote, say, 60% of customers that apply and the quote-to-bind rate could be 40%. This

For reference only

Chapter 6
means that if 4,000 targeted customers applied for cover, 960 policies would be bound.
Both functions need to understand whether the campaign was a success and in doing so,
help refine future campaigns.

The marketing function may be responsible for customer relationship management (CRM)
and underwriting will benefit from taking time to understand the data and statistics that a
good CRM system will produce.
In addition to the flow of information and ideas that the marketing team generate,
underwriting can and should put forward proposals for marketing to investigate and consider.
Underwriting-led marketing initiatives might include requesting a competitor survey and
analysis; or perhaps suggest that underwriters provide a series of informative articles which
marketing place into specific trade publications to build on recent successes or provide
expert commentary on notable events.
In the current soft market conditions, underwriters can no longer afford to sit and wait for
business to arrive at their desk. Underwriters can be insurers’ best marketers, reaching out
to the participants of their distribution chain and helping them to source business.

B10 Finance
The fundamental purpose of a commercial business enterprise is to create a successful (i.e.
profitable) business which maximises long-term shareholder value. It should not be a
surprise that the finance function lead by the chief financial officer (CFO) is integral to the
financial well-being of an insurer. Insurance accounting is complex and distribution chains
can be long. When global programmes, multinational insureds or coverholders are involved,
overseas tax schedules and premium collection sometimes become problematic. For all
these reasons and more, finance and underwriting need to ensure a high level of
cooperation and understanding of each other’s function. It is wise that finance are involved at
an early stage when underwriters are creating new relationships with brokers, managing
general agents (MGAs), reinsurers and coverholders, as it is important that credit checks
and financial due diligence are undertaken before terms of business agreements (TOBAs) or
binders are considered.
Many insurers’ finance functions will include managing the investment portfolio or managing
the relationship of their external investment advisor(s). The duty of being prudent with
 6/16 995/January 2023 Strategic underwriting

policyholders’ funds and other monies is vital to ensure liquidity and financial stability.
Imprudent investments can severely damage an insurer’s balance sheet at the best of times.
In a challenging economic environment, prudent investments may be the difference between
being downgraded by financial rating agencies or worse.
Normally the underwriting data needed by finance is automatically transferred by an
underwriting system into the finance team’s technical accounting system. However, queries,
errors requiring adjustments and matters like policy cancellations all contribute to the need
for close liaison. Finance will be involved with transactions with reinsurers, along with the
reinsurance team. Prudent insurers monitor reinsurers’ aged receivables closely, as the
aggregate amount involved can become significant. It is common for limits to be placed on
how much exposure an insurer will tolerate from individual reinsurers.
In some insurers, the finance team will prepare regulatory returns which underwriting may
have to crosscheck prior to submission. Typically, finance will chase brokers to expedite
premium payments to ensure terms of trade are complied with. Sometimes it can be more
productive for the original underwriter to work with the placing broker in an effort to solve
credit control issues, rather than finance deal with their counterparts in the broker’s
accounting department. Unfortunately, some underwriters do not pay much attention to the
impact that cash flow can have on an insurer and do not give credit control the attention it
deserves.

Critical reflection
Consider the advantages of involving an underwriter in the finance function, perhaps as a
member of the broker credit committee. Identify four or more advantages.

Due to the huge advances in technology, systems will often provide most of the information
needed to coordinate between functions. For example, the underwriting system should

For reference only

record if the premium has been paid, as underwriters should not offer renewal terms if the
Chapter 6

previous year’s premium is still outstanding. The claims team should always check that
premium has been paid before making any payments to the insured.
It is also important for underwriters to be financially literate and able to find their way around
a set of accounts. Finance can assist with requests for training. Financial lines underwriters
might consider approaching an appropriate person in finance when they need a little extra
help in understanding a customer’s accounting treatment of an unusual transaction in their
annual report and accounts.

C Distribution
Refer to
Refer to 945, chapter 5 and 960, chapter 3, section D for a background on distribution

The underwriting strategy will determine distribution strategy. At its simplest level, distribution
is a support function that supervises, enables and facilitates the underwriting (manufactured)
product reaching the customer via an agreed set of channels. That is not to demote
distribution’s important function, but to emphasise that the prime driver for a distribution
strategy is the underwriting strategy.
Marketing and distribution are often considered as one function, with distribution being a
subset of marketing. However, marketing is a profession whereas distribution is the process
of moving goods or services from the manufacturing source to customers.
Across the globe, insurance has developed and become more sophisticated – whether in
terms of underwriting expertise, prudential capital requirements or better regulatory
supervision. Most insurance markets are thriving and growing but individual market
participants have to fight for every piece of business in fiercely competitive markets. It is no
use an insurer having superior products and good customer service if they cannot connect
and engage with a pool of potential customers.
Chapter 6 Underwriting and other functions within the business 6/17

Distribution is a key issue for existing insurers and new entrants. In New entrants on page 2/
32, we discussed new entrants and the fact that the influx of new capital into insurance has
largely removed the most significant entry barrier to our industry. Capital is no longer scarce
and difficult to obtain. Distribution is one of the major attractions to new insurance entrants.
Distribution for existing insurers is being driven by changing customer dynamics, such as
the convenience of digital access and the number of diverse channels available to
customers.
For participants in the London Market, insurance companies, Lloyd’s and brokers,
distribution has always been vital. A large percentage of London Market business originates
from outside the UK and Ireland. Perhaps to a larger extent than national markets, London
has more dependency on an efficient distribution system. Access to the London Market is
achieved predominantly through brokers, with the balance from managing general agents
(MGAs) and local underwriting offices owned by London insurers. Only on rare occasions
does a customer go direct to an insurer to underwrite their risk.
The London Market is currently the largest global hub for commercial and specialty risks. In
commercial insurance, London is nearly four times bigger than Bermuda, eleven times
bigger than Zurich and fifteen times bigger than Singapore. The US commercial market is
larger in size than London, but there is not a market hub. In reinsurance terms, London ranks
below Germany, Bermuda and Switzerland.
The London Market’s share of the global market has been falling since World War II and in
recent years distribution issues are challenging its historic position, such as:
• customers increasingly buying insurance in their local market;
• reduced premium flows from emerging markets;
• more capital and underwriting expertise in local markets reduces the need for business to
access the London Market;

For reference only

• a loss of reinsurance market share; and

Chapter 6
• the increased share of premiums written by mutuals, captives and alternative risk
transfer (ART).
The task for the London Market is to develop its distribution network, which would allow
London to compete more effectively around the world.

C1 Key distribution issues

A well-researched and appropriate insurer distribution strategy should address key questions
surrounding distribution channels (brokers; agents; direct; aggregators or affinity groups).
Questions would include:
1. Which channels does the insurer regard as most attractive?
• market leaders;
• fastest growing;
• largest;
• most profitable.
2. Can the insurer work with those channels?
• what are the necessary key factors to ensure success?
• how would this impact the insurer?
• would any of the channels conflict?
• is the insurer correctly positioned and ready to act?
3. Where should the insurer focus?
• which geographical areas?
• which products?
• could the insurer compete?
• what does the insurer need to do to successfully compete?
 6/18 995/January 2023 Strategic underwriting

C2 Changing customer dynamics

Many organisations have conducted surveys that purport to examine the changes in
insurance customer dynamics.
Insurers that adapt to changing market dynamics by simplifying their own organisation will
stand more chance of being successful. Insurers need to focus on efficiency and
effectiveness to cut time to market and their cost structure. Emphasis must be put on product
compliance and regulatory issues in every market in which they participate. Conduct risk
must be improved and embedded into each insurer.
To remain successful, insurers need to be smarter at segmenting their target customer
groups. It is no longer appropriate to think of broker customers and affinity customers, as
customers can and do switch channels. Insurers must drill deeper and identify exactly which
customers they want to secure and retain.
In conjunction with smarter customer segmentation, insurers need to embrace big data and
use advanced analytics to:
• rethink how they should be organised;
• improve and individualise policy pricing; and
• develop better designed products which will met the needs of their targeted customers.
Insurers also need to embrace technology as a way of enhancing the value of their products.
Lastly – but not least – insurers must get digital. They need to develop a digital strategy and
make friends with and followers out of their customers.

On the Web
Students are recommended to read the Capgemini article: Changing business dynamics
drive insurers to a marketplace model. www.capgemini.com/2019/09/changing-business-

For reference only

Chapter 6

dynamics-drive-insurers-to-a-marketplace-model/

C3 Personal lines
More than one-third of UK personal lines customers buy their motor, home and travel
insurance via the internet or by phone, direct with an insurer, affinity or aggregator. This
trend looks set to increase in the future. Aggregators now control about 70% of all motor new
business in the UK. The affinity channel – where a well-known brand and an insurer are in
partnership – is also growing, but agents and non-national brokers are losing personal lines
market share. National brokers and telebrokers appear to be holding their own. The personal
lines market is becoming increasingly fragmented as insurer customer segmentation
becomes more sophisticated and customers themselves focus more on price and
convenience. Let us take a brief look at some of the important personal lines channels:
• direct;
• aggregators;
• affinity; and
• bancassurance.
C3A Direct
Insurers have always had some direct business, with customers coming into insurers’
offices to buy home or motor cover over the counter. However, true direct models only
arrived with GEICO in the USA and the 1985 launch of Direct Line in the UK. These two
early adopters used the latest technology in terms of call distribution systems, laser printing
and automatically rated products to convert customers to buying insurance on the phone. In
most cases, the phone has now given way to the internet. Direct writers aim to produce a
high volume and sell simple low-cost products. The key to being a successful direct insurer
is to achieve economies of scale. In the UK, five insurers write 63% of direct business.
The Direct Line Group has expanded into commercial insurance for small and medium-sized
enterprises (SMEs) and in 2015 had around 700,000 commercial policies in force. This is on
top of a 14% share of the UK motor market, 17% of the UK home market and over 8m
rescue and other personal lines policies. The Group includes Direct Line, Churchill, Privilege
Chapter 6 Underwriting and other functions within the business 6/19

and partner brands: RBS, Nationwide (home only), NatWest, Prudential and Sainsbury’s.
The Group sells:
• online;
• via aggregators;
• by phone; and
• through their partners.
Interestingly, they also sell their commercial policies through brokers. It appears that the line
between direct, aggregators, broker and other channels has already become blurred.
Direct insurance is not a universal remedy. The model has distinct advantages but also
drawbacks.

Table 6.1: Advantages and disadvantages of direct insurance

Advantages Disadvantages

No commission payable to brokers Commodity products only

No premium collection issues as premiums paid before High upfront set-up costs
cover commences

Customers feel ownership Continuously high advertising and marketing costs

(advertising spend is probably equivalent to what
commissions would have been)

Ability to cross-sell products Only a very strong brand will survive

Flexibility in customer segmentation and pricing Large scale necessary

Potential for increased retention rate Operational technology must be up to the minute

Sophisticated pricing and modelling

For reference only

Chapter 6
C3B Aggregators
Aggregators, or price comparison websites (PCWs), have become popular since the early
2000s. Aggregators usually offer a wide range of products in the financial services arena to
include:
• general insurance;
• life insurance;
• utilities;
• travel (including flights, hotels and car hire); and
• money (including credit cards, mortgages and loans).
Aggregators’ aim is to be a one-stop online shop that is interesting and fun – in what
traditionally has been regarded as a serious, dry subject. By creating a strong, fun brand
they hope to attract customers and secure their loyalty.
The trend in the use of the internet for insurance purposes in the UK and Europe is solidly
upward. This trend is allowing aggregators to dominate distribution in personal lines. Many
people benchmark insurance by using aggregator sites even if they ultimately buy cover
through a different channel. Insurance price comparison is a growing and valuable market.
In the UK, the top four aggregators make up 90% of all aggregator sales. These major
aggregators spend significant amounts of money on advertising and technology in order to
compete. They are constantly looking to secure their position by enhancing service and find
new sources of revenue. Insurers pay aggregators on a pay-per-click basis and a fee per
converted policy.
Aggregators are part of the digital age where customers do not value traditional sources of
insurance advice, preferring to take control and do it themselves online. Aggregators are
tapping into this trend and are offering the speed, price, products and transparency that
digital customers want. Most importantly, the major aggregators have built strong brands that
customers trust.
 6/20 995/January 2023 Strategic underwriting

Research exercise
Learn as much as you can about the leading aggregators, such as:
• comparethemarket.com
• Confused.com
• MoneySuperMarket.com
• gocompare.com
Ask yourself these questions and more:
1. How do they use social media to build connections with customers and collect
customer data?
2. How do they build trust?
3. How and why do they use humour and fun?
4. How do meerkats and a dog relate to insurance? Why does this approach work?
5. Why are aggregators not as popular in other countries?

The key advantages and disadvantages of aggregators are listed in table 6.2.

Table 6.2: Advantages and disadvantages of aggregators

Advantages Disadvantages

Significant growth trajectory High advertising and marketing costs (TV campaigns
are expensive)

UK customers switch insurers more than other countries Susceptible to fraud

Provides customer choice and market access Model based on customer churn, which is not in

For reference only

insurers’ interest
Chapter 6

Customer convenience The Competition and Markets Authority (CMA) and the
FCA are monitoring whether aggregators are misleading
customers by using deceptive practices

Allows significant customer data to be collected Needs a strong aggregator brand and a strong insurer
brand

Large scale necessary

C3C Affinity groups

Affinity groups encompass a wide range of organisations from retailers, motoring bodies,
utilities, travel companies, professional associations and many more. Affinity groups tend to
be regarded favourably by their members, and this trust is a positive influence that
encourages members to buy insurance from their group.
Insurance provides affinity groups with another dimension and broadens their offering and
revenues. Not all groups have been successful in linking with insurers. Did you know that in
the UK, the Salvation Army sells home insurance? Others, such as Saga in the UK are
perhaps now as well known for their insurance as they are for their holidays and magazine.

Critical reflection
Would you buy insurance from the affinity groups you belong to? If not, why not?
If you already buy insurance from an affinity group, think about the reasons why that
channel won your support as opposed to other available channels.

C3D Bancassurance
Bancassurance can be defined as banks selling life and personal lines insurance, or where
banks and an insurer form a partnership to sell insurance products. Life insurance is the
most popular product.
Bancassurance is a significant distribution channel for life insurance in continental Europe.
For example, among the largest life insurance markets most products were sold via
bancassurance in Italy (79% of gross written premiums, GWP) and France (64% of GWP),
Chapter 6 Underwriting and other functions within the business 6/21

according to a 2016 report by Insurance Europe. Bancassurance distribution in respect of

non-life products in Italy and France drops to between 3–13%.
The strategic rationale for bancassurance is strong for both the banks and insurers. Insurers
tap into the bank’s large customer base and so gain distribution that would otherwise require
investment in acquisitions or a network of offices. In countries where bancassurance is the
dominant channel, insurers need to create partnerships with banks in order to obtain or
maintain market share. From a customer perspective, bancassurance is a trusted source of
personal insurance, with easy access and convenient local branches. In some countries,
such as the UK, banks do not enjoy such a good reputation following the GFC and mis-
selling issues like payment protection insurance (PPI).
Over the years, insurance has proven to be a significant source of commission revenue for
banks. Selling insurance allows banks to provide a full range of financial services to their
customers, which maximises their brand value, deepens their customer relationships and
enhances earnings. Bancassurance provides a diverse revenue stream for banks and
typically secures a block of revenue for both parties for several years.

C4 Commercial lines
Commercial lines markets tend to be split between the specialty markets; for example,
Lloyd’s and big international insurers such as AIG, Allianz, Chubb, QBE and Zurich.

Research exercise
Research commercial insurance market share statistics for your country or region. Find
out who the major insurers are: is there a clear-cut leader? Consider whether the statistics
are detailed enough to provide evidence at a product line level.

Most commercial lines insurers face many of the same global issues discussed in chapter 2,

For reference only

such as regulation, technology, industry consolidation and competition and so on.

Chapter 6
The key drivers in the distribution of commercial lines are:
• broker consolidation;
• broker networks;
• MGAs; and
• direct SMEs.
C4A Broker consolidation
Consolidation in the insurance industry has shifted the balance of power and profit towards
the distributor. Brokers are dominant in commercial lines distribution in most countries, so
some insurers are buying brokers to not only control distribution but also to recapture profit.
This growing trend of insurers has been discussed earlier in this study text, both in terms of
industry consolidation in Industry consolidation on page 2/28 and forward integration in the
value chain in The insurance value chain and underwriting strategy on page 4/2.
The prolonged soft market has squeezed brokers’ profits and encouraged them to look at
new potential revenue streams or mergers and acquisitions in an effort to achieve
economies of scale to reduce costs. The cost of new technology and data analytics is more
affordable, all other things being equal, within a larger organisation.

Be aware
As broker consolidation continues, insurers are left with less choice in broker distribution
at a point in time when access to distribution is key to success.

C4B Broker networks

Increasingly, small brokers are joining broker networks as a substitute for economies of
scale. By banding together, brokers can attempt to gain improved market access and,
potentially, improve products and/or pricing by being able to offer a greater volume of
business to insurers. Broker networks were more fully discussed in Broker networks on page
4/7.
 6/22 995/January 2023 Strategic underwriting

C4C Managing general agents (MGAs)

Delegated authority
After appropriate due diligence has been carried out, insurers can supply an MGA with
insurance capacity and grant delegated authority to quote, accept and bind risks on the
insurers’ behalf. Usually delegated authority is focused on underwriting but MGAs can be
granted claims handling authority too. Their authority may be unlimited under the terms of
the binding agreement (binder) or it may be restricted within certain parameters.
Occasionally authority is restricted to a prior submit basis, where the MGA sends the
submission to insurers, perhaps with a suggested rating, and the insurer prepares the
quotation. The MGA is allowed to bind the risk if there are no alterations from the
underwriter’s quote. MGAs can work in several ways including having binding authorities for
the majority of risks but with some clear referral criteria to the insurer.
Market share
MGAs write more than 10% of the UK’s general insurance market premium income. MGAs
have been a feature of the US market for many years and about 15% of Lloyd’s premium
comes from American MGAs. Approximately 33% of Lloyd’s worldwide premium comes from
either MGAs or coverholders. MGAs are also firmly established in several other countries
such as Canada, South Africa and Australia. MGAs have become popular in many countries
recently, as insurers’ search for bigger and better lines of distribution continues apace.
Regulation
MGAs are classed as intermediaries for regulatory purposes as they are part of the
wholesale distribution insurance network. From a UK regulatory perspective, the insurer
remains ultimately responsible for the business written by an MGA and insurers should
undertake regular audits to protect their position and reputation.
Why use an MGA?
Insurers use MGAs in situations where they do not want to, or cannot, set up their own

For reference only

distribution channels. In some ways, MGAs are in effect insurers’ branch offices. Many
Chapter 6

insurers find supporting an MGA to be an efficient way of handling volume SME business.
Some insurers may delegate authority to an MGA because the insurer does not have the
subject matter underwriting expertise in-house while the MGA does have the required
specialist underwriters. Whether it is wise for an insurer to write lines of business without
the necessary expertise is a matter of opinion and would need to be considered on a case-
by-case basis. Insurers sometimes acquire an MGA in order to bring proven and profitable
expertise in-house after a successful trading relationship has been established. These
acquisitions may be fully integrated into the insurer, become a branch office or continue
operating as a standalone business.
Brokers turn to MGAs when faced with something out of their usual experience or when an
MGA has a particular scheme the broker wants to access. MGAs are typically focused on
specialty lines and obtain their business from brokers.
Customers typically find MGAs offer choice, competition and sometimes different and
innovative products.
Alignment of interest
It is important to ensure that the MGA’s interests are correctly aligned to the insurers’. If the
MGA is only paid commission, then the incentive is to write a high volume of risks, without
necessarily worrying about profitability. Of course, if results are unacceptable then the
insurer will cancel or non-renew the binder, causing the MGA to have to find replacement
capacity. If the business is long tailed, the MGA may have been able to continue the binder
for several years before the losses crystallise. The usual solution is to pay sufficient
commission to cover the MGA’s basic running costs and agree a profit commission (PC)
clause so that if the business is profitable, the MGA gets a share of the profit. The PC clause
will contain the calculation on a scale linked to the binder’s combined operating ratio.
Insurers will normally set reserves to ensure that there is no conflict of interest by the MGA.
Typical PC calculations for long-tailed business are carried out after 24 or 36 months and
incorporate a deficit clause which prevents PC being paid out one year if previous years
have been unprofitable and vice versa. The MGA wants to earn PC so that they can increase
their profitability. The annual payment of PC should be a happy event for both parties as it
means that the business is profitable.
Chapter 6 Underwriting and other functions within the business 6/23

Conflicts of interest
A recent trend has been brokers setting up MGAs, often with a different name to create the
image of an independent relationship. However, MGAs work best from an insurer’s point of
view when they are exclusively focused on underwriting and not involved with broking. MGAs
need to continually earn the insurer’s trust. Brokers that can sign off (accept) on a risk – or
‘hold the pen’ – are subject to conflicting pressures; they might have the ability to provide
their customer with a supercompetitive quote by using their binder but ultimately if their
underwriting is not sufficiently disciplined, results will suffer and insurers will lose patience.
Several forces are pulling delegated authority and MGAs in different directions:
• The time and cost of complying with increasing regulation may reduce some insurers’
interest in delegating authority.
• Acting for several insurers for the same products can expose an MGA to the potential
issues of inducements, mis-selling and poor advice.
• Subdelegation from an MGA to a broker or another MGA can create conflicts.
• Conduct rules apply when an MGA sells direct to the customer.
• There is a need to ring-fence an MGA that is owned by a broker and hold the MGA as a
separate legal entity with different staff, business plans, governance, controls and data
barriers.
• Some insurers are creating specialised teams to handle MGA channel business.
• Alternative capital has started to supply capital to MGAs.
• MGAs are consolidating and in the process becoming more sophisticated, efficient and
professional.
• There is increasing demand from underwriters considering leaving their employers and
interested in setting up as an MGA, because they believe that insurers have become too
bureaucratic and the rewards are not related to performance. Setting up an MGA can

For reference only

create real value for its owners.

Chapter 6
C4D Direct SME
Direct on page 6/18 discussed that the Direct Line Group has expanded out from personal
lines into SME commercial insurance. Several other direct insurers have followed into small
commoditised commercial lines products.

C5 Changing face of distribution

Fundamental shifts in the underwriting value chain are occurring. The traditional power of the
insurer is diminishing as brokers reduce the number of insurers they are prepared to do
business with. Increasingly, brokers are creating panels of insurers, facilities and quota-
share arrangements, all designed to cut time and expense in an effort to boost their
profitability. Many of these facilities increase brokers’ earnings, whether through enhanced
commissions, fees for performance analysis and early sight of renewal lists, or profit
commission. Brokers are suffering from the administrative burden and cost of increased
regulation, the continuing soft market with the resultant reduction in premiums/commissions
and the erosion of parts of their customer base due to the success of direct markets and
aggregators.
Insurers have to make difficult decisions about whether they should become panel and/or
facility insurers. Insurers that join facilities face additional commissions and fees for the
privilege of gaining access to a pool of business. Even if insurers do sign up, they often have
to bid for a minimum amount of business and secure it; otherwise brokers will remove them
from the facility at the next review point. Committing to a facility can mean agreeing to
service level agreements (SLAs) relating to speed of service, hit ratios and so on. If an
insurer decides not to join, they see a permanent reduction in deal flow from that source. As
more business is being swallowed up in facilities, preferred markets, binders and so on, the
flow of open market business reduces and an element of antiselection is introduced as
certain customer segments disappear from view.
As a result of these developments, securing appropriate lines of distribution has become a
priority for insurers. The changing role of insurers and distributors is challenging existing
business models as the line between them gets increasingly blurred.
 6/24 995/January 2023 Strategic underwriting

Critical reflection
How would you classify Towergate in the UK? Is Towergate a broker, an MGA, a
consolidator or an insurer? Or is it all of these combined? Do we need to start thinking
about redefining/renaming the component parts of the insurance value chain?

Are insurers consigned to be merely suppliers of capital and their business model will be to
supply capital to others in the value chain that will perform most of the functions that they
used to do?
Traditional placement methods will probably continue for large commercial and corporate
business. Personal lines and SME commercial business is being commoditised and sold
digitally, affecting price and convenience. Brokers are looking to scale up and insurers are
establishing or buying brokers and MGAs for their distribution. Watch this space.

D Marketing
Be aware
A grounding in marketing is beyond the scope of this unit. This chapter aims to identify key
aspects of marketing of particular relevance to students of 995 Strategic underwriting.

The Chartered Institute of Marketing (CIM) defines marketing as:

The management process responsible for identifying, anticipating and satisfying
customer requirements profitably.
This means that marketing is a diverse area with different specialisations.

For reference only

We saw previously that distribution is closely associated with marketing in many
Chapter 6

organisations. There is a school of thought that sales and marketing also belong together.
Whatever the construct of the organisation, it is clear that organisations – including insurers
– which create close ties between the sales and marketing functions should be better
internally aligned with the chosen strategy and, therefore, better positioned to drive the
business forward.
It is also clear that customers’ behaviours are changing, values are evolving and insurers
need to change, adapt and improve to obtain or retain competitive advantage. The reality of
the twenty-first century with digitalisation, globalisation and industry consolidation means that
insurers need to develop and maintain beneficial relationships with their customers.
Traditional management theories talked about cost leadership, which bought the customer’s
loyalty so long as the insurer’s premium was lower than competitor’s premiums. But this
limited loyalty did not extend beyond price to product quality, quality service or the insurer
itself. Marketing is about creating strong customer relationships. Figure 6.1 shows the
sources of competitive advantage and how this assists the customer relationship.

Figure 6.1: Progression of various sources of competitive advantage

in relation to strength of customer relationship
Cost Product quality Support services Personalised Value
leadership based based marketing co-creation
differentiation differentiation (niche strategy)

Weak customer Strong customer

relationship relationship

Source: Gurau, C. (2007) ‘Porter’s Generic Strategies: A Re-interpretation from a

Relationship Marketing Perspective’, The Marketing Review, (7)44, pp. 369–83.

The ultimate shift that many insurers need to consider – although many have already
adopted this change – is the move away from organising themselves around products and
towards a customer-centric orientation. In short, to organise the business around the
customer and put the customer at the heart of everything. This focus on the customer and
Chapter 6 Underwriting and other functions within the business 6/25

delivery of good customer outcomes is front and centre of the FCA’s agenda of fair treatment
of customers mentioned in Focus on the customer on page 2/5.

D1 Marketing strategy
Marketing strategy, like most strategies, must evolve over time in order to remain relevant
and fit for purpose. Marketing strategy principally focuses on the customer; insurers need to
address a series of questions on forming their strategy, which we will consider below.

Be aware
It is important that underwriters are represented and/or consulted on key strategic
marketing issues. Marketing should work with the other business functions to ensure that
they remain fully aligned with and within the overall business strategy – including
underwriting.

Where is the insurer now?

Insurers need to conduct internal and external analysis to establish a baseline of the current
position. The analysis would involve the use of a number of the strategic management tools
described in chapter 3, such as Porter’s Five Forces and PESTLE.
Where does the insurer want to be?
The vision and mission statements should be reviewed and understood. The vision
describes the future direction of the insurer and the mission describes its purpose. Corporate
objectives should also be reviewed and strategic marketing objectives developed which align
with the overall strategy. Strategic marketing objectives might include:
• developing the insurer’s brand;
• focusing on specific customer segments; or

For reference only

• widening promotional channels by using social media.

Chapter 6
How does the insurer get there?
Do we do more of the same and attempt to increase market share? The other end of the
spectrum is to diversify into new products, regions or customer groups. Diversification can be
considered high risk because of that move into new products, regions or customer groups.
Although the rewards can be significant there is a danger that management can focus too
much on the new areas and not give enough time and attention to the existing business. Do
we highlight ethical issues or a commitment to corporate social responsibilities (CSR) in an
effort to create differentiation and competitive advantage?

D2 Market research
Market research is an activity that marketers perform to understand and learn about both
your distributors and your customers’ thoughts and behaviours regarding insurers’ products
and services. Knowing your customer (KYC) is becoming fundamental to an increasing
number of regulators. Once an insurer truly understands its customer base, it can make
better decisions in the future, create or improve products, improve service standards and
respond to constructive criticism. Market research can be used to test new products before
launch, gain the informed view of their distributors and measure the effectiveness of sales
and marketing campaigns.

D3 Marketing communications
There are many ways to communicate with your distributors and customers. This is an area
that may involve working closely with advertising specialists, internally or from an outside
agency. The communication medium may be written, audio, graphic or on screen.
One of the key objectives in communication is to help build relationships with customers to
assist in generating distributor and customer loyalty with the aim of creating long-term
relationships. There is significant extra value in renewal business, compared to the cost of
customer churn and having to win new business.
One of the best ways of communicating is a combination of online and personal service
known as live webchat. This is when the web is being used for routine self-service but the
customer can get live assistance by voice or online chat from a customer service
representative. Live assistance provides the potential for underwriters to be involved either
directly or, perhaps, working with customer service representatives.
 6/26 995/January 2023 Strategic underwriting

In Digital on page 2/21, we looked at digital technology and how important it is to have a
digital strategy. Digital marketing means using digital technologies, to include the internet,
social media, mobile phones, tablets and other developing digital media. Internet marketing
can involve:
• online advertising;
• text messaging;
• blogging;
• email campaigns; and
• optimising the insurer’s website.
Social media marketing uses channels such as Facebook, Pinterest, LinkedIn, Twitter and
Instagram amongst others. Facebook is a huge potential social media opportunity with more
than 1.86 billion monthly active users as of February 2017.

Research exercise
Social media is such a fast-moving environment that it is important to stay current on all
the latest statistics. Find out the monthly user statistics for Pinterest, LinkedIn, Twitter and
Instagram and compare their size relative to Facebook.

The use of pictures and visual images is particularly effective on social media. For example,
surveys show that Twitter content with images receives twice as many views as text only
posts. The key to social media is to build an audience – followers – to gain brand recognition
and find ways of interacting with them. If followers take part in quizzes or competitions then
they become engaged with you, which in turn increases your brand exposure.
To be successful, digital marketing needs to incorporate techniques such as search engine
optimisation (SEO). SEO is concerned with increasing the visibility of, for example, your

For reference only

website in search engine results. By ensuring the presence of key words, phrases or specific
Chapter 6

content and the way they are structured, search engines understand and recognise them
and move the website higher up the list of search results. The ultimate aim is to be found on
the first page of search results, if not in the top three to five.

D4 Brand
Brand, name, image and reputation are key issues for both parties to insurance transactions.
They all speak directly to trust. Insurance is a promise to pay and so an insurer’s brand
needs to engender confidence in the integrity of that promise. Properly used, these
intangible assets can be immensely valuable in promoting customer loyalty and insurer
reputation. According to the Brand Finance Global 500 ranking, Allianz has consolidated its
position as the world’s most valuable insurance brand for the third consecutive year. Allianz’s
brand is valued at €18.6bn, the only insurer in the top 50 of the world’s strongest brands
in 2016.
Strong brands can also positively influence prospective customers, employees, investors
and professional service providers. Brands help shape perceptions and generate demand for
products. A strong brand can be a differentiator and assist premium pricing.
It is interesting to consider the position of some organisations that operate under two brands.
Each Lloyd’s syndicate has its own brand which it promotes and manages, but they carry on
business under the Lloyd’s brand as well. Some syndicates use stationery such as business
cards and letterhead with two logos – their own and Lloyd’s. Could this cause confusion on
occasion? Which brand is stronger? Most customers know that they are insured at Lloyd’s
but might have difficulty knowing which syndicate was involved.
Chapter 6 Underwriting and other functions within the business 6/27

Critical reflection
AIG’s global property–casualty business changed its name to Chartis in 2009 after AIG
was hit by the subprime mortgage crisis in 2008; in 2012 Chartis announced it would
revert to the AIG brand name.
• What did you and your colleagues think when AIG renamed as Chartis?
• Did you joke about it, did you keep saying ‘AIG, I mean whatever they’re called now’
with a smile on your face to colleagues, brokers and customers as a subtle reminder of
their problems?
• Would they have been in a better position if they had not changed their name and did
Chartis compound the error by switching back to AIG after such a short time?
• How much did the global rebranding cost – economically and in brand value?

Increasingly, insurers are creating or promoting their brand by using a fun persona. Churchill
created the British bulldog character and uses YouTube, Twitter, Facebook, iPhone apps and
a Flickr photo gallery so that the brand can interact with potential and current customers.

Research exercise
Research the meerkats of comparethemarket.com. Why has it become an insurance
brand that even children love?

D5 Direct
Direct marketing is about making direct contact with customers or potential customers and
is driven by data. Ideally the messages are pertinent and personalised to each customer and
contain a specific call to action. This might be ticking a box online, using a quick response

For reference only

(QR) code or buying a product at a special price by using a promotional code. A wide variety

Chapter 6
of media is used for direct marketing campaigns including letters, texts, phone, online and
TV. Much of the skill is in choosing the right media to communicate with the target audience.
Direct marketing is the equivalent of using a rifle to target individuals in contrast to the
scattergun approach of mainstream media advertising. One of the great benefits of direct
marketing is the ability to quantify the economics of campaigns. One of the drawbacks is that
many people will see direct marketing communications as junk or spam.

D6 Advertising
An advertising strategy is vital to ensure that your customers or potential customers hear
about the company and its products and want to buy your products. Advertising is just one
part of the marketing communications mix. Generally advertising is a mass media approach,
relatively untargeted and difficult to measure its effectiveness. It is best for generating
awareness of your brand.
Advertising can be an effective way of communicating with a large number of customers. A
typical advertising strategy will be formulated by determining the following:
• your objective;
• if advertising is the most cost-effective way of achieving that objective;
• how much money to spend;
• the identity of your segment of the market;
• which media matches your needs;
• the timing of the campaign; and
• how to measure the campaign’s effectiveness.
Programmatic marketing is a clever and relatively new twist in digital marketing.
Programmatic is about using data to advertise more intelligently. Advertising campaigns can
be centred on a specific event or location, with exact timing to segmented audiences.
Advertising agencies use maths, engineering and analytics to set parameters for the
programmatic campaigns, then computers automatically buy advertising space on websites
in real-time auctions.
 6/28 995/January 2023 Strategic underwriting

Example 6.2
The event could be the annual Monte Carlo Reinsurance Rendezvous in September, the
world’s premiere reinsurance conference and networking event. The advert could be a
video that a reinsurer might send to the mobiles and laptops of brokers attending the
Rendezvous. Of course, this scenario might not be as much fun as the Kronenbourg
online advertising campaign in 2014, which used real-time temperature data to target only
those people it calculated would be most susceptible to a refreshing beer.

Spending on programmatic marketing is destined to increase exponentially in the next

few years.

On the Web
Smart Insights® guide to programmatic marketing: bit.ly/2zlQlLM

Adblocking is an increasing challenge to advertisers. In the UK, 20% of adults use software
to block adverts, rising to 47% in the 18–24 year-old age group. Adblocking may well have a
negative effect on programmatic advertising. However, this trend has not seen significant
growth over the last few years.

D7 Public relations (PR)

Public relations (PR) is a specialised subset of marketing communication that seeks to
manage media coverage for client companies. PR agencies will use the best of traditional
and new digital techniques to create campaigns to make a positive difference to their clients.
Much of PR work draws on combining rational thought and emotional impact to ensure
success.

For reference only

Many people may have seen traditional press releases issued by PR agencies on behalf of
Chapter 6

their clients, perhaps regarding opening new offices, new joiners or new products. The
critical part of PR is to conduct damage limitation and rebuild their clients’ reputations after
damaging publicity hits the media. The more routine job of PR is to enhance a company’s
reputation by finding relevant, positive stories to communicate to the company’s
stakeholders, customers and often the population at large.

Summary
The main ideas covered by this chapter can be summarised as follows:
• Underwriting is fundamental to every risk-bearing insurance organisation.
• Risk selection has always been a key part of the underwriting function. In mass market
underwriting, risk selection may be more about customer segmentation or risk
categorisation.
• Part of the risk analysis process requires underwriters to analyse each risk or to group
risks together into segments and analyse the segments. Risk analysis has two parts:
expert judgment and risk modelling
• An increase in data collection and sophisticated modelling permits price optimisation: to
vary premiums relative to customers' willingness to pay.
• Best practice demands that all business functions operate on a flexible, collegiate basis.
No one unit can do its job without the cooperation of, and assistance from, the rest of the
business.
• Underwriters need to work closely with the rest of the business to help design, create and
implement new technologies that will assist underwriting going forward. Involvement in
the developments brings a feeling of ownership and enables the human dimension of
change transformation.
• Underwriting is primarily about the analysis of data and knowing how to interpret it. It is
widely accepted that fully understanding and correctly interpreting MI is one of the keys to
success.
• Underwriters and actuaries should try to develop a close working relationship, as they are
both involved in pricing risks. Several actuarial functions feed into pricing, such as capital
Chapter 6 Underwriting and other functions within the business 6/29

allocation and reserving. It is important for both parties to understand what they have
accountability for and how the interrelationship is designed to work.
• People management is a key skill for every manager. If you were running a busy
underwriting department, a significant amount of time would most likely be spent on
people issues.
• The head of claims is responsible for claims management and the claims team is
normally separately organised and managed, there should be close cooperation between
claims and underwriters
• A good internal legal resource will proactively contribute to a wide range of matters that
affect underwriting; for example, product development, policy interpretation discussions,
contract reviews and coverholder consortium issues.
• Risk management is the responsibility of everyone, including underwriters. The risk
management team's role is to challenge and provide insight across the business. They
depend on the people carrying out the day-to-day business to inform, educate and alert
them to issues as they arise.
• Regulatory issues have become more prominent in most jurisdictions and compliance
has emerged as a distinct function, requiring specialist knowledge and professionalism.
• It is important for underwriting to understand what the marketing function can do to help
underwriting. The two functions must effectively interface to ensure that each party knows
what the other is planning. Underwriting can and should put forward proposals for
marketing to investigate and consider.
• The finance function is integral to the successful business of an insurer. Insurance
accounting can be complex with long distribution chains; when global programmes,
multinational insureds or coverholders are involved, overseas tax schedules and premium
collection sometimes become problematic. Finance and underwriting need to have a high
level of cooperation and understanding of each other's function.

For reference only

• Distribution is a key issue facing insurers. For example, the London Market share of the

Chapter 6
global market has been falling since World War II and distribution issues are challenging
its historic position.
• Insurers need to embrace big data and use advanced analytics to rethink how they
should be organised, improve and individualise policy pricing and to develop better
designed products which will meet the needs of their targeted customers. • More than
one-third of UK personal lines customers buy their motor, home and travel insurance via
the internet or by phone, direct with an insurer, affinity or aggregator. This trend looks set
to increase.
• Aggregators are part of the digital age where customers prefer to take control and do it
themselves online. Aggregators tap into this trend and are offering the speed, price,
products and transparency that digital customers want. The major aggregators have built
trusted strong brands.
• In commercial lines the key drivers of change in distribution are broker consolidation,
broker networks and MGAs. Broker consolidation means that the balance of power and
profit has shifted towards the distributor. • MGAs have become very popular in many
countries, as insurers search for more distribution.
• Brokers are creating panels of insurers, facilities and quota-share arrangements to boost
profitability. The changing role of insurers and distributors is challenging existing business
models as the line between them gets increasingly blurred.
• Marketing is the management process responsible for identifying, anticipating and
satisfying customer requirements profitably.
• Social media marketing uses channels such as Facebook to build an audience to gain
brand recognition and interact with in order to increase brand exposure.
• Brand, name, image and reputation are key issues for both parties to insurance
transactions. They all speak directly to trust.
• Direct marketing is about making direct contact with customers or potential customers.
Ideally the messages are pertinent and personalised to each customer and contain a
specific call to action.
• Advertising is just one part of the marketing communications mix. Generally advertising is
a mass media approach, relatively untargeted and difficult to measure its effectiveness. It
is best for generating awareness of your brand.
 6/30 995/January 2023 Strategic underwriting

• Programmatic marketing is a relatively new twist in digital marketing, which uses data to
advertise more intelligently. Advertising campaigns can be centred on a specific event or
location, with exact timing to segmented audiences.
• Public relations is a specialised subset of marketing communication that seeks to
manage media coverage for client companies.

Additional reading
CIM (2015) 7 Ps: A Brief Summary of Marketing and How it Works. Available at:
www.cim.co.uk/files/7ps.pdf.
FCA (2015) Thematic Review – Delegated authority: Outsourcing in the general insurance
market. Available at: www.fca.org.uk/publication/thematic-reviews/tr15-07.pdf.
Insurance Europe (2018) European Insurance in Figures. Available at:
www.insuranceeurope.eu/statistics.
Gurau, C. (2007) 'Porter's Generic Strategies: A Re-interpretation from a Relationship
Marketing Perspective', The Marketing Review, (7)44, pp. 369–83. doi:
10.1362/146934707X251128.
Minty, D. (2016) 'Price Optimisation for Insurance Optimising Price; Destroying Value?',
Think Piece 122, CII. Available at: https://bit.ly/2EVv4il.
Schumpeter (2012) 'Taking the Long View: The Pursuit of Shareholder Value is Attracting
Criticism – Not All of it Foolish', The Economist, 24 November 2012. Available at: https://
econ.st/2ACIoUA.

E Scenario

For reference only

Chapter 6

E1 Question
This question is based on syllabus sections 2.1 and 3.5.
You are the head of personal lines for a long established, traditional insurance company.
Your chief underwriting officer (CUO) has become concerned that the company is losing
personal lines market share in its home territory. He is insistent that strong underwriting
discipline and control is maintained, but requests a discussion paper on how best to consider
a cost-effective move into one or two other nearby countries.
Your paper to the CUO should including the following:
1. How personal lines customers want to buy insurance.
2. Potential outsourcing.
3. The advantages and disadvantages of the main distribution channels used in personal
lines.
There is no need to make any recommendations at this stage.

E2 How to approach your answer

This question is based on syllabus sections 2.1 and 3.5.
Aim
This fictional scenario encompasses issues considered in chapters 4 and 6. Your answer
should demonstrate that you understand changing customer dynamics and personal lines
distribution.
Chapter 6 Underwriting and other functions within the business 6/31

Key points of content

You should aim to include the following:
1. Research and identify the characteristics of the personal lines marketplace in one or two
nearby countries.
2. Research and identify the most successful personal lines distribution channels used.
3. Discuss which distribution channels you think would be most suitable for your company.
4. Discuss key issues which would arise when operating in a different country, such as
language, law, customer services and claims handling.
5. Identify which business function might best be outsourced.

For reference only

Chapter 6
 6/32 995/January 2023 Strategic underwriting

Self-test questions
1. Why is risk selection key?

2. What is price optimisation?

3. Analyse why the underwriting function must work appropriately and professionally
with the management information (MI) function within the insurer in order to
maximise underwriting profit.

4. Why is the challenge of distribution particularly important to the London Market at the
present time?

5. Explain some of the current issues affecting MGAs.

6. Explain what digital marketing means.

7. Analyse how the underwriting strategy impacts the distribution strategy.

You will find the answers at the back of the book

For reference only

Chapter 6
 i

Chapter 1
self-test answers
1 Microinsurance can help meet the needs of low-income populations by providing
affordable relevant cover for perils such as crop failure and loss of livestock. Without
insurance, families living in poverty experience great difficulty when their crops fail or
when their livestock dies. Microinsurance payments provide the funds to replace
livestock or buy food, clothing and medicine. While this type of insurance supports
individuals and families, the cumulative effect also helps a country's economy become
more resilient and capable of growth and prosperity.
2 The different businesses and their respective drivers in Porter's value chain are:
manufacturing, driven by economies of scale; intellectual capital, driven by know-how
and speed to market; and distribution, driven by economies of scope.
3 Value chain analysis is useful for working out how a company can maximise value for
its customers by breaking down and examining each activity and the links between
them. Once the value chain has been broken down, each activity is subjected to a
series of questions that help identify a company's core competencies and competitive
advantages.
4 The five business functions of the insurance value chain are financial capital,
manufacturing, intellectual capital, distribution and customers.
5 A vision statement is a high-level aspirational tool used to identify and communicate
the company's goals and objectives, whereas a mission statement defines why the
company exists and its purpose.

For reference only

ii 995/January 2023 Strategic underwriting

Chapter 2
self-test answers
1 The FCA is increasingly looking at the cultural characteristics of firms following the
move away from prescriptive rules to high-level principles. They believe that culture is
a key driver of behaviour, either good or bad. They want firms to focus on good
customer outcomes. The FCA believes that setting the tone of a firm's culture is about
creating the right values, expecting and encouraging good behaviour. If the CEO and
other members of senior management exhibit the right values in their day-to-day
behaviour then they will set the right tone for the top of the firm. Seeing the top
leadership demonstrate the right values by their actions should help drive that same
good behaviour through the entire firm.
2 There is no universal agreed definition of what is meant by big data. Generally big
data is the term used for massive amounts of data, with such volume or complexity
that processing the data is not possible by traditional database techniques.
3 A virtual insurer is a risk-bearing entity that outsources the functions normally
associated with being an insurer to the same or different service providers. The fully
virtual insurer transacts all its business on the web and reduces its part in the value
chain to the supply of capital and the organisation and monitoring of the business
process outsourcing (BPO).
4 The cost of catastrophes is increasing because of higher values, more complex
processing plants such as oil refineries, the global interconnectivity of supply chains
and terrorism. Industrial and economic development is often situated in high risk

For reference only

areas. The increased level of insurance penetration is also a factor as is wealth.
5 Brokers are consolidating:
• because of the cost of regulation;
• so that they can serve more client segments; and
• to benefit from economies of scale and use the weight of their larger account to
leverage better deals from insurers.
6 A reinsurance sidecar is a special purpose vehicle (SPV) that is formed by investors,
typically for a limited lifespan, to provide extra capital to reinsurers in respect of
agreed portfolios. Investors' liability is limited to the amount of capital in the sidecar.
 iii

Chapter 3
self-test answers
1 Five Forces is useful for providing a high-level view of the market competitiveness and
where the balance of power lies.
2 Shell Oil has been developing and using scenario planning for more than forty years.
Their research is market leading and relied on by governments, academics and major
commercial businesses around the world.
3 There is nothing inherently wrong with the Boston Matrix; indeed it is simple to use
and understand. However, its underlying assumption is that bigger size means more
profitability. This assumption does not necessarily apply to insurers as underwriting is
more complex than simply accepting a volume of risks.
4 One example is smokers who deliberately buy a single pack of cigarettes at a time
rather than buy a carton. They choose to pay more for their cigarettes as a way of
rationing and reducing the instant availability of cigarettes because they know that
cigarettes are harmful to their health. A second example is people who donate money
to charity and thus reduce their wealth. Economics says that people are selfish, but
clearly when donating to charity people are thinking of others above themselves.
5 Capital, intellectual expertise, investment income, interest rates and the underwriting
cycle itself.
6 The phrase 'walk-away price' means the price at which an underwriter is prepared to
lose a piece of business. It is the price that an underwriter is not prepared to go below.
In reality, it is sometimes extremely difficult to know where to draw the line.

For reference only

A walk-away price is an important control in maintaining underwriting discipline; it does
not allow underwriters to write business which is expected to result in an underwriting
loss. In some instances, a walk-away price may be the same as a minimum premium.
A walk-away price and a minimum premium reflect a premium level below which it is
not economic to take on risks.
iv 995/January 2023 Strategic underwriting

Chapter 4
self-test answers
1 Critical success factors for strategic alliances include:
• documenting the agreed shared vision;
• ensuring that each party regards the alliance as win–win;
• having agreed rules in place for decision making;
• ensuring open and effective communication channels;
• recognising and respecting the other party's independence;
• assigning an appropriate person from each party to be responsible for the alliance;
• where appropriate, having a contract between the parties so each one knows what
is expected of them and the other; and
• ensuring that both parties keep their parent companies onside.
2 The UK motor market is attracted to the concept of vertical integration because so
much of its claims activity concerns the narrow and relatively specialised material-
damage area of vehicle repairs. The case for a multi-line insurer to integrate is less
compelling, as it typically doesn't have the same ability to control repair costs so
closely. It can make sense for a specialist motor insurer to integrate with repair
companies, garage owners, windscreen replacement companies and possibly
breakdown and/or parts-delivery companies so as to control as much of the value
chain as possible.

For reference only

3 Beta is a measure of the volatility or systemic risk of a share, stock or asset relative to
the market. So, using an example of a share in the UK FTSE 100, the FTSE index has
a beta value of 1, which means that an individual share in the FTSE 100 that has a
beta value of 1.3 is 30% more volatile, or risky, compared with all the shares that
together make up the FTSE 100 index.
4 Collateralised reinsurance has become the fastest-growing structure for alternative
capital entering the reinsurance arena. If a collateralised reinsurance treaty has a limit
of, say, £10 million, then the reinsurer will put £10 million into escrow for the period of
the treaty to provide security that the funds are available to pay valid claims.
Collateralisation increases the insurer's confidence about the alternative capital's
ability to honour the contract. A collateralised reinsurer is content because the
different structure separates it from traditional reinsurers, which allows it to enter and
exit the market as it wishes. The structures typically have some tax advantages
flowing to US capital providers.
5 Intellectual capital normally resides in:
• underwriting rating models;
• actuarial pricing models;
• capital or internal models;
• management information;
• know-how; and
• customer connections.
6 Telematics is usage-based insurance, more popularly known as pay as you drive. It
involves fitting a GPS device to a vehicle to track its movements. The tracking enables
the insurer to charge the premium on a pay-as-you-drive basis, perhaps charging
adjustable monthly premiums depending on how many miles were driven the previous
month.
 v

Chapter 5
self-test answers
1 Some of the potential benefits of moving to an SSO are a reduction in costs, improved
timeliness and service levels, and increased efficiency and effectiveness. Reluctance
to change and the failure to adapt to a culture of accountability are two obstacles.
2 Core process transformation is important because in today's competitive world, it is
vital to streamline the business by cutting out unnecessary costs, redundant
processes and structural inefficiencies. By sharing the core processes and activities of
the business and making them consistent, the aim is that businesses can improve
quality control, increase the effectiveness of management information and increase
the validity of KPIs.
3 KPIs should be established in order to monitor all portfolios. These KPIs must be
tracked, analysed, reported on and reviewed, typically on a monthly basis. KPIs might
include:
• premium monitoring;
• risk-adjusted rate change;
• benchmarked price adequacy;
• loss ratios;
• claims frequency against exposure;
• renewal retention rate;

For reference only

• new business percentages; and
• exposure data.
4 • An underwriter has some concerns over a risk but is reassured that the rest of the
market is satisfied with the risk and has committed to the renewal. In fact, the
underwriter showed good judgment and should have voiced those concerns rather
than go along with the herd. The underwriter was influenced by the norms bias, i.e.
going along with everyone else and not rocking the boat.
• A visitor remarks that she is surprised to find that the underwriting department is
entirely staffed with males. The department head makes what he hopes are
suitably conciliatory remarks, but later is forced to admit to his manager that he is
uncomfortable with employing women because he believes they have an emotional
approach to business. The manager suggests that the department head goes on
an equality and diversity course because of his inability to mitigate his gender bias.
5 Engaged employees are productive employees; boosting productivity is an excellent
way of increasing profits. If employees are engaged they can inspire their colleagues
and drive the business forward; producing ideas and being passionate about the
business. Engaged employees are happier and more positive, so helping promote a
good image of their company to their contacts, friends and customers.
6 Three examples of external drivers:
• A business might decide to review its operating model because of new entrants to
the market that start eating into its market share.
• New technology might come to the attention of the board, which could open up
new and different distribution channels.
• Alternative sources of capital approach the business and express an interest in
investing, but only if they are segregated from the existing structure.
Three examples of internal drivers:
• In the current poor market conditions, the board decides to shrink the business to
improve the quality of the portfolio and cut expenses by 30%.
• Three underwriting teams resign in the same week, jeopardising the stability of the
core product lines.
• The new CEO decides to take the company in another direction and reorganises
the business accordingly.
vi 995/January 2023 Strategic underwriting

Chapter 6
self-test answers
1 Risk selection is key because books of business should be built with homogeneous
risks. Risks underwritten need to accord with the strategy and plans of the business.
In times of extremely competitive market conditions, it is sometimes difficult to charge
sufficient premium. Disciplined underwriting in today's supercompetitive market means
only selecting only the best risks in your chosen segment.
2 Price optimisation is effectively charging what the market will bear, assuming that that
price is higher than underwriters would normally charge. Today's big data and superior
modelling can allow insurers to successfully estimate customers' price elasticity and
so enables them to increase the price but not enough that the customer walks away.
3 The overall performance of an insurer will not be as efficient or effective if underwriters
do not operate on a flexible, collegiate basis. Insurers' operating models, functional
units and employees' roles and duties vary broadly. However, no one unit can perform
its role without some form of assistance or cooperation from all other business
functions. This need to work together is a two-way street.
As the saying goes: data is not information, information is data placed in context. This
means that to gain competitive underwriting advantage from data, underwriting has to
invest sufficient time and resources to understand the data and correctly interpret it. It
may be that underwriting would like additional data to be captured, or that data is
being captured but is not contained in standard management reporting packs. Unless
underwriting actively engages with the MI function, the MI function will not know that

For reference only

their reports do not contain the required MI or present the MI in the most useful or
understandable format. By establishing and maintaining an excellent working
relationship with MI, underwriting will benefit from the expertise within MI, skills such
as quick and accurate data manipulation, teaching underwriting short cuts and other
efficient ways to gain information from analysing data so that underwriting becomes
better informed. This in turn should result in improved underwriting decisions and
ultimately lead to maximising underwriting profit.
4 The London Market's share of global premium has been falling for many years and
has now begun to be a major issue. London relies on much more than pure UK
business and is still the world's largest commercial and specialty risks hub. But this
ranking will not remain unless London develops its distribution network to reverse the
trend of business being placed in national markets.
5 MGAs have become increasingly popular methods of distribution in the insurance
market in recent years. In part is it being driven by insurers' need to secure lines of
distribution in many countries and the superabundance of capital which is looking for a
home in the insurance market. For example, reinsurers are no longer content to obtain
their income from insurance treaties and are seeing MGAs as an important source of
distribution which takes them nearer to the customer. However, regulators have
identified delegated authority as a key concern and the time and cost of increasing
regulation could adversely impact insurers. Another demand factor is that there seems
to be an increase in the number of underwriters who wish to join or set up their own
MGA. Insurer consolidation, tougher regulation and increasing bureaucracy probably
drive this.
6 Digital marketing is the marketing of products using digital channels such as the
internet, social media and texts, rather than traditional marketing methods such as
print advertising.
 vii

7 The underwriting strategy will determine distribution strategy. At its simplest level,
distribution is a support function that supervises, enables and facilitates the
underwriting (manufactured) product reaching the customer via an agreed set of
channels. That is not to demote distribution's important function, but to emphasise that
the prime driver for a distribution strategy is the underwriting strategy. For example, if
the underwriting strategy is purely in relation to personal lines insurances, the
distribution strategy must focus on the best ways of communicating and reaching
target customers. To drill down into the underwriting strategy further, if the products
are designed for a certain customer segment, perhaps millennials, then the distribution
strategy must recognise the target segment and devise the most appropriate methods
of identifying and satisfying their requirements. In the above example, the most likely
distribution channels would be digital, so direct by use of internet via an aggregator or
social media to involve mobile telephony. On the other hand, if the underwriting
strategy is concerned with commercial speciality lines products, distribution needs to
focus on brokers and MGAs.

For reference only

For reference only
 ix

Legislation
A M
Adequacy Decision 2000/520/EC (USA), 2B1 Money Laundering Regulations 2017, 6B8

B P
Bank of England and Financial Services Act Proceeds of Crime Act 2002 (Amendment)
2016, 2A, 6B8 Regulations 2007, 6B8
Banking Act 1933 (USA), 2E2
Brazilian Council of Private Insurance
Resolution No. 322 (20 July 2015), 2A6
R
Brazilian Council of Private Insurance Risk Management and Own Risk and
Resolution No. 325 (30 July 2015), 2A6 Solvency Assessment Model Act (#505)
Bribery Act 2010, 6B8 (USA), 2A7
Risk Transformation (Tax) Regulations 2017,
C 2F4C

Civil Liability Act 2018, 2F1

Companies Act 2006, 4E
S
Consumer Insurance (Disclosure and Services Directive 2006/123/EC, 2A8
Representations) Act 2012 (CIDRA), 2F2, Solvency II Directive, 2A5, 2A6, 2A7, 3A6,
4D2 4A4, 4B1, 4D2A, 6B2, 6B7
Consumer Rights Act 2015, 2F2, 4D2
Copyright and Rights in Databases
Regulations 1997, 4D1 T
Terrorism Act 2006, 6B8

For reference only

D The Third Parties (Rights Against Insurers)
Regulations 2016, 2F2
Data Protection Act 1998 (DPA 1998), 2B1A
Data Protection Act 2018 (DPA 2018), 2B1B,
6B8

E
Enterprise Act 2016, 2F2, 4D2

F
Financial Services Act 2012, 2A

G
Gender Directive, 2B2
General Data Protection Regulation (GDPR),
2B1A, 6B8
Glass–Steagall Act 1932 (USA), 2E2

I
Indian Insurance Laws (Amendment) Act
2015, 2A6
Insurance Act 2015 (IA 2015), 2F2, 4D2, 6A2A
Insurance Brokers (Registration) Act 1977,
2E
Insurance Distribution Directive (IDD), 2F2

L
Law Enforcement Directive (LED), 2B1B
Lloyd’s Act 1982, 4A6
x 995/January 2023 Strategic underwriting

For reference only

 xi

Index
A C
accountability, 2C3 capital, 3A6, 3C, 3D2A, 4B
actuarial, 6B3 alternative sources, 4B2
advertising, 6B9, 6C3B, 6D3, 6D6 capital adequacy, 2E, 3A6, 3C, 4C
affinity, 2E3, 6C1, 6C3 collateralised reinsurance, 4B2, 6A4
affinity groups, 6C3C financial, 1D1, 1D3A
aggregators, 2E3, 6A3, 6C1, 6C3, 6C3A, 6C3B, financial modelling, 3A6
6C5 human, 5D, 6B4
alternative capital, 2F6, 3D2, 3D2A, 4A6A, intellectual, 1D1, 1D3C, 5A2, 5D1
6A4 See also alternative capital
collateralised reinsurance, 4B2 capital asset pricing model (CAPM), 4B1
industry consolidation, 2E capital management, 4B1
managing general agents (MGAs), 6C4C technology, 2F6
alternative risk transfer (ART), 1C2A, 6C captives, 2F4, 2F4C, 2F4E, 3D1, 6C
captives and mutuals, 2F4E catastrophe (cat) bonds, 2F4C, 4B1, 4B2, 6A4
derivatives, 2F4B catastrophe modelling, 2D
finite reinsurance, 2F4A changes
forms, 2F4 economic, 2F3
insurance linked securitisation, 2F4C legal, 2F3
sidecars, 2F4D political, 2F3
uses, 2F4 social, 2F3
analytics, 2B2, 2B3, 2D claims, 6A2A, 6A3, 6B5
annual business objectives, 5B4 fraud, 2F1
Association of Insurance and Risk Managers climate change
in Industry and Commerce (Airmic) big data, 2D
concerns, 1C2C catastrophe models, 2D

For reference only

changing weather patterns, 2D2
driver for insurance, 3D1
B effects, 2D1
backward integration (upstream), 4A6, 4A6B green issues, 2D3
balanced scorecard, 3A14 cognitive bias, 5D2
bancassurance, 4A6B, 6C3, 6C3D collateralised reinsurance, 4B2, 6A4
behavioural economics (BE), 5D2 commercial lines, 6C4
impact on underwriting strategy, 3C3 broker consolidation, 6C4
loss aversion, 3C2 broker networks, 6C4B
mental accounting, 3C2 distribution, 6C5
unconscious bias, 5D2 managing general agents (MGAs), 6C4C
benchmarking, 3A3 commercial risks
beta, 4B1 insufficient limits, 1C2A
big data, 2B2 complaints, 3C4
analytics, 2B3 compliance, 6B8, 6C2
climate change, 2D conduct risk, 2A4
cloud services, 2B2 conflicting stakeholder interests
digital strategy, 2C3 enlightened shareholder value, 4E
ethical issues, 2B2 conflicts of interest, 2E3, 4E, 5E7, 6C4A, 6C4C
ownership, 2B2 consolidation, 2A7
regulatory risks, 2A3 broker, 2E, 4A5, 6C4, 6C4A, 6C4B
telematics, 2B2 drivers, 2E
Boston Matrix, 3A2, 3B2 industry, 2E, 6C4A
brand, 6B9, 6C3, 6D4 consumer protection, 2A7
aggregators, 6C3B convergence, 2E2
bancassurance, 6C3D core competency analysis, 3A7
marketing strategy, 6D1 core process transformation, 5A2
brandassurance, 4A6B intellectual capital, 5A2
brandassurers, 2E3 corporate strategy, 5B
Brexit, 2A7, 2B1A annual business objectives, 5B4
broker consolidation, 2E, 4A5, 6C4, 6C4A, design principles, 5B5
6C4B strategic components and objectives, 5B3
broker networks, 4A5, 6C4, 6C4A, 6C4B strategic goals and imperatives, 5B2
brokers, 2E3 vision and purpose, 5B1
business, 1B1 current operating model (COM), 5B5
key issues, 1B2 customer and functional matrix model, 5E6
customer dynamics, 6C, 6C2
customer SBU model, 5E3
customers
xii 995/January 2023 Strategic underwriting

customers expert judgment, 6A2, 6A2C, 6B3

(continued) risk analysis, 6A2A
low-income, 1C2B
F
D
fair treatment of customers, 2A, 2A4, 4D2, 6D
data, 2B finance, 6B10
analytics, 2B2, 2B3 financial capital, 1D3A
big data, 2B2 driver, 1D3A
management information (MI), 6B2 Financial Conduct Authority (FCA), 2A
privacy, 2B1 financial modelling, 3A6
protection, 2B1 Financial Reporting Council (FRC), 4C
data collection Financial Stability Board (FSB), 2A8, 2D, 6B8
price comparison websites (PCWs), 6A3 finite reinsurance, 2F4, 2F4A
data protection (DP), 2B1 force field analysis, 3A9
demand, 3C, 3D1 forward integration, 4A6, 6C4A
alternative risk transfer (ART), 3D1 forward integration (downstream), 4A6, 4A6A
captives, 3D1 fraud, 2F1
future growth, 3D1 frictional cost, 1C3, 2C3, 2F4E, 4A6A
insurance cycle, 3D1 functional/process model, 5E1
demographics, 3C1, 3D1
derivatives, 2F4, 2F4B
See also industry loss warranties (ILWs)
G
design principles, 5B5 gap analysis, 3A10
digital technology general counsel/legal, 6B6, 6B8
disruptive competition, 2C4 global development, 1C1
social media, 2C4 global financial crisis, 2A1
direct, 6A3, 6C, 6C3A global insurance issues
advantages and disadvantages, 6C3A alternative risk transfer (ART), 2F4
broker consolidation, driver, 4A5 emerging risks, 2F2
conflicts, 5E7 fraud, 2F1

For reference only

distribution, 1B2, 1D3D, 2E3, 4A5, 4A6A, 6C1, industry reputation, 2F6
6C3A, 6C5 Islamic insurance (Takaful), 2F5
impact of reinsurance, 6A4 politics, economic, social and legal, 2F3
marketing, 4D2, 6D5 globalisation, 2E1
personal lines, 6C3, 6C3A
reinsurers, 2E3
SME, 6C4, 6C4D H
disruptors, 1B5, 2C3, 2E3, 4D2
human capital, 5D, 6B4
distribution, 1D1, 1D3D, 6B9, 6C, 6D
motivation, 5D4
broker consolidation, 4A5, 6C4A
people management, 5D3
changing face, 6C5
remuneration, 5D4
commercial lines, 6C4
technology, 5D5
customer dynamics, 6C2, 6C3A
unconscious bias, 5D2
driver, 1D3D
human resources (HR), 6B4
key issues, 6C1
London Market, 6C
managing general agents (MGAs), 6C I
personal lines, 6C3
strategy, 6C industry consolidation, 2E
distribution SBU model, 5E4 brokers, 2E, 6C4, 6C4A, 6C4B
distributors, 4A6B, 6C, 6C4A capital adequacy, 2E
See also distribution competition, 2E
diversity, 5D1 convergence, 2E2
downstream, See forward integration drivers, 2E
driving forces, 3A9 globalisation, 2E1
dynamic pricing, See price optimisation Lloyd’s of London, 2E
new entrants, 2E3
technology, 2E
E industry loss warranties (ILWs), 2F4, 2F4B,
4B1, 4B2, 6A4
economic cycle, 3C
Information Commissioner’s Office (ICO), 2B1
emotional intelligence, 3A11
innovation, 4D
employee engagement, 5D3
brand, 4D2
employee motivation, 5D3
challenges, 4D2A
alignment, 5D4
direct marketing, 4D2
autonomy and development, 5D4
product innovation, 4D2
bonuses, 5D4
radical innovation, 4D2
recognition, 5D4
telematics, 4D2
enlightened shareholder value, 4E
 xiii

InsTech, 2C3 L
insurance cycle, 3D, 3D2B
demand, 3C, 3D1 legacy systems, 2C2
drivers, 3D licences, 2A8
managing the cycle (MTC), 3D3 Lloyd’s of London, 1B5, 2A8, 6A4
supply, 3D2 London Market, 6C
underwriting experience, 3D4
insurance demand, See demand
insurance disruptors, See disruptors
M
insurance fraud, 2F1 management information (MI), 6B2
insurance industry managing general agents (MGAs), 2E3, 6C4C
reputation, 2F6 conflicts of interest, 6C4C
Insurance Industry Working Group (IIWG), 1B5 Lloyd’s of London, 6C4C
insurance linked securities (ILS), 2F4C London Market, 6C
catastrophe (cat) bonds, 2F4C managing the cycle (MTC), 3D3
insurance linked securitisation, 2F4, 2F4C manufacturing, 1D1, 1D3B
insurance supply, 3D2 driver, 1D3B
insurance value chain, 1D1, 1D3, 2B3, 4A scale, 1D3B
analysis, 4A manufacturing and distribution split
backward integration (upstream), 4A6B Lloyd’s of London, 5A3
core process transformation, 5A2 Zurich model, 5A3
customer, 1D3E market research, 6D2
digital technology, 2C4 marketing, 6C, 6C3A, 6C3B, 6D
disaggregation, 2C5 advertising, 6D6
forward integration (downstream), 4A6A brand, 6D4
impact on underwriting strategy, 5A communications, 6D3
internal, 5A customer relationship management (CRM),
internet of things (IoT), 2C3 6B9
manufacturing and distribution split, 5A3 direct, 6D5
offshoring, 4A3 market research, 6D2
outsourcing, 4A2 programmatic, 6D6

For reference only

shared service organisations (SSOs), 5A1 public relations (PR), 6D7
strategic alliances, 4A1 strategy, 6D1
underwriting strategy, 4A marketing strategy, 6D1
vertical integration, 4A6 mission statement, 1B1, 4C
See also value chain
insurance value proposition, 1C, 1C1, 1C3
integration N
backward, 4A6B
new entrants, 2A8, 2C4, 6C
forward, 4A6A
alternative risk transfer (ART), 2E3
vertical, 4A6
brandassurers, 2E3
intellectual capital, 1D3C, 4D, 5A2, 5D1, 6B1
brokers, 2E3
customer connections, 4D1
managing general agents (MGAs), 2E3
driver, 1D3C
price comparison websites (PCWs), 2E3
know-how, 4D1
new technology, 2C3
management information (MI), 4D1
models, 4D1
protecting, 4D1A O
intellectual expertise, 3D2C
interest rates, 3D2E offshoring, 3C1, 4A3
intermediary, 4A6B operating structures, 1B4
See also distributors optimal pricing , See price optimisation
internet of things (IoT), 2C3 outsourcing, 3D3, 4A2, 4A3, 4A5
investment income, 3D2D own risk and solvency assessment (ORSA),
Islamic insurance (Takaful), 2F5, 3D1 2A7, 6B3, 6B7, 6B8
Shariah, 2F5
P
K passporting, 2A8
knowing your customer (KYC), 6D2 people management, 5D3
knowledge employee engagement, 5D3
management, 5D1 personal injury discount rate, 3D2B
sharing, 5D1 reinsurance, 6A4
worker, 5D personal lines, 6C3
knowledge worker, 5D channels, 6C3
technology, 5D PESTLE, 3A12, 3B4, 6D1
Porter’s Five Forces, 3A1, 3B1, 6D1
portfolio management, 5C
xiv 995/January 2023 Strategic underwriting

price comparison websites (PCWs), 2E3, 6A3, Senior Insurance Managers Regime (SIMR)
6C3B accountability, 2A5
See also aggregators Senior Managers and Certification Regime
price elasticity of demand (PED), 6A3 (SM&CR), 2A5, 6B8
price optimisation, 4D2, 6A3 shared service organisations (SSOs), 5A1
ethical issues, 6A3 target operating model (TOM), 5A1
price elasticity of demand (PED), 6A3 Shell scenarios, 3A4
pricing models, 6A2, 6A2C, 6B3 sidecars, 2F4D, 4B1, 4B2, 6A4
product and functional matrix model, 5E5 social media, 6D3
product SBU model, 5E2 stakeholder analysis, 3A13
programmatic marketing, 6D6 strategic alliances, 4A1
Prudential Regulation Authority (PRA), 2A, success factors, 4A1A
3A6 strategic components and objectives, 5B3
Handbook, 6B7 strategic goals and imperatives, 5B2
public relations (PR), 6D7 strategic management tool
value chain analysis, 1D1
strategic management tools, 3A
R 7-S Framework, 3A11
realistic disaster scenarios (RDS), 3A4 balanced scorecard, 3A14
regulation, 2A, 2A7 benchmarking, 3A3
accountability, 2A5 Boston Matrix, 3A2
conduct risk, 2A4 core competency analysis, 3A7
fair treatment of customers, 2A4 driving forces, 3A9
global financial crisis, 2A1 financial modelling, 3A6
harmonisation, 2A6 force field analysis, 3A9
identification of regulatory risks, 2A3 gap analysis, 3A10
licences, 2A8 PESTLE, 3A12, 6D1
sanctions, 2A2 Porter’s Five Forces, 3A1, 6D1
regulatory risks, 2A3 scenario planning, 3A4
reinsurance, 2E3, 6A2E, 6A4, 6C stakeholder analysis, 3A13
alternative capital, 2E, 4B2, 6A4 SWOT, 3A8

For reference only

capital management, 4B1 using, 3B
captives and mutuals, 2F4E value chain analysis, 1D2, 3A5
collateralised, 4B2, 6A4 war games, 3A15
impact on direct insurance, 6A4 strategic management tools, using, 3B
London Market, 6A4 Boston Matrix, 3B2
managing the cycle (MTC), 3D3 PESTLE, 3B4
personal injury discount rate, 6A4 Porter’s Five Forces, 3B1
portfolio management, 5C SWOT, 3B3
sidecars, 2F4D strategic marketing objectives, 6D1
underwriter rationale, 6A2E strategic planning tools, See strategic
reinsurance sidecars, See sidecars management tools
remuneration, 5A, 5D4 strategic theme map, 1B3
reputation, 2C1, 3D3 strategic underwriting, 1A, 1B3, 1B5
risk, 1C2C behavioural economics (BE), 3C3
return on capital employed (ROCE), 1D1, 4B1 strategy
risk analysis, 6A2 corporate, 5B
expert judgment, 6A2 driving forces, 3A9
pricing models, 6A2 formation, 1B
risk modelling, 6A2 marketing, 6D1
risk appetite, 4C supply, 3D2
risk management, 6B7 SWOT, 3A8, 3B3
risk modelling, 6A2B
risk selection, 6A1 T
homogeneous risks, 6A1
market conditions, 6A1 Takaful, See Islamic insurance
transparency, 6A1 target operating models (TOMs), 5E
risk tolerance and variance, 4C customer and functional matrix model, 5E6
customer SBU model, 5E3
distribution SBU model, 5E4
S functional/process model, 5E1
sales, 1D3D potential conflicts, 5E7
sanctions, 2A2 product and functional matrix model, 5E5
scenario planning, 3A4 product SBU model, 5E2
Lloyd’s realistic disaster scenarios (RDS), 3A4 technology, 5D, 6B1, 6C3A
Shell scenarios, 3A4 and underwriters, 6B
Schrems v. Data Protection Commissioner capital management, 2F6
(2015), 2B1 catastrophe modelling, 2D
search engine optimisation (SEO), 6D3 consolidation driver, 2E
 xv

technology (continued) value chain (continued)

cost, 2B2, 6C4A disaggregation, 1B5, 2C5
data migration, 2C2 manufacturing and distribution split, 5A3
digital, 2C4, 6C2, 6C3B shared service organisations (SSOs), 5A1
disruptive, 1B5 target operating models (TOMs), 5E
human interaction, 5D5 See also insurance value chain
impact on value chain, 1D1, 2C5 values statement, 1B1
in marketing, 6D3 vertical integration, 4A6
innovation, 2C1, 2C3 virtual insurer, 2C5
legacy systems, 2C2 vision and purpose, 5B1
price elasticity of demand (PED), 6A3 vision statement, 1A, 1B1, 4C
technology and human interaction, 5D5
technology innovation, 2C1, 2C3
big data, 2C3
W
blockchain, 2C3 war games, 3A15
digital strategy, 2C3
InsTech, 2C3
internet of things (IoT), 2C3 Z
telematics, 5D5
Zurich model, 5A3
terms and conditions, 6A2, 6A2D
trade blocs, 2A8

U
unconscious bias, 5D2
underwriter rationale, 6A2E
underwriting, 1A, 6A
platforms, 1B4
price optimisation, 6A3
reinsurance, 6A4
risk analysis, 6A2

For reference only

risk selection, 6A1
underwriter rationale, 6A2E
See also underwriting strategy
underwriting clock, 3D
underwriting cycle, See insurance cycle
underwriting interrelationship, 6B
actuarial, 6B3
claims, 6B5
compliance, 6B8
finance, 6B10
general counsel/legal, 6B6
human resources (HR), 6B4
management information (MI), 6B2
marketing, 6B9
risk management, 6B7
technology, 6B1
underwriting strategy, 1A, 4A2
behavioural economics (BE), 3C3
capital, 4B
intellectual, 4D
conflicting stakeholder interests, 4E
corporate strategy, 5B
human capital, 5D
innovation, 4D
insurance value chain, 4A
intellectual capital, 4D
internal insurance value chain, 5A
portfolio management, 5C
risk appetite, 4C
target operating models (TOMs), 5E
technology, 5D
upstream, See backward integration

V
value chain, 1D, 1D1, 1D3, 2B3, 2C3, 2C4
analysis, 1D2, 3A, 3A5
definition, 1D1
xvi 995/January 2023 Strategic underwriting

For reference only