Editor's note: In April, Steve Pozzi, senior vice president, chief underwriting officer, Chubb Commercial Insurance; Donald J. Pickens, executive vice president and chief underwriting officer National Markets, Liberty Mutual Group; and John R. Glancy, chief underwriting officer, XL Insurance, sat with Risk & Insurance Editor in Chief Jack Roberts to discuss the state of underwriting today. As part of the wide-ranging discussion, the underwriters talked about the art of underwriting middle market business. An edited version of those comments is reprinted here.
One (issue) we've recently come across is recent exposures to the supply chain area ...
John Glancy: On this point, especially about distribution and the issues around it, it's a global issue and it's not confined anymore to the Pepsis and Coca-Colas of the world. There are small companies in Philadelphia that are importing products from China, from India or whatever, and that whole supply chain and all the risks that are involved in that from the actual manufacturing-- how many recalls have we seen in the last six months, and they are just not all big companies.
Editors: So that makes it more difficult to write middle market business these days?
John Glancy: It's something you always have to be aware about, and understanding the market. What was the risk six months ago is not necessarily the risk now. Some businesses are exactly the same but the tire manufacturer is not the tire manufacturer is not the tire manufacturer.
The market has something to do with it. Probably three or four years ago, when that change took place, because it was a harder market, you could ask those questions. They needed the capacity, they'd grin and bear it, and you'd get the answers. Now, you know these six companies aren't going to ask me the same questions, they're just going to say, "Yes."
Don Pickens: Underwriters are inquisitive by nature, and we don't intend to be difficult to work with. We're not asking questions just to make life miserable. We're asking for a greater understanding, and hopefully with that understanding comes more rate stability and a little bit more consultation. I think the majority of the market prefers stability over up-and-down cycles.
Unfortunately, we live through these cycles, and so understanding which buyers want what is critical. In terms of the global nature and the impact on importing and supply chain, it's important to have a service infrastructure in place to help your client when he calls up and says, "I can't get my truck onto the dock in Singapore." You've got to know what to do in that instance. His job and his company are being questioned, and you have to deliver for him.
Editors: There's been this discussion of the use of models in the underwriting business, yet to me it sounds like the stuff you've been talking about right now doesn't really lend itself to a model per say, and that's it's more the art. That raises the question these days of what is underwriting? Is it a science or an art?
Steve Pozzi: They are not oracles. They change constantly. They change even when something doesn't happen. And when something does happen, they change again. If you are trying to build a long-term business plan and you base it on a model, you're in trouble, because then you're constantly changing. They are business people, too, the people who do the models. They're coming out with new products all the time.
They are trying to sell--what works for you as well as what might not. Predictive modeling is wonderful, but you always fight that urge where you find people who say when a predictive model tells you to stay on an account that has 150 percent loss ratio, because its basic characteristics lend itself to be profitable, you love the model. When it tells you to get off the account that's been completely loss-free for five years but has characteristics that say it's not, well then, it's not a great model.
You never want to be in a position where you're committing suicide to prevent being murdered. So, we're trying to use them correctly but always use them in such a framework that they help us make better underwriting decisions. They don't make the underwriting decisions for us.
They are tools. I can, at home, Google Earth a building down that a model will give me that I pay a lot of money for. It helps you achieve the art is what it does, because every model, every pricing tool we have, every rating piece of machinery or software has a sweet spot, and underwriters can find the sweet spot. Ultimately, the best underwriters, we pay them for their gut. The one that says this is the right risk. That's ultimately what we pay them for long term.
JACK ROBERTS is editor in chief of Risk & Insurance®.
August 1, 2008
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