The Strict Disciples of Discipline

The Strict Disciples of Discipline | Risk & Insurance | Who isn't feeling the pressure of this economy? It is testing businesses in every imaginable way. It may also be taunting businesses to act in ways that go against good judgment and, if not careful, even put future success at risk.

By JOHN GLANCY, chief underwriting officer for XL Insurance

To really pass the test and navigate through a turbulent economy, sticking to proven business discipline is more important than ever, especially for the insurance industry. Adhering to strict, disciplined underwriting may be the carriers' ultimate test of survival.

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Business leaders today would have had to be born before 1910 or so to have had to steer a business through economic conditions even remotely similar with what we are dealing with today. Most business leaders are in uncharted waters right now. While nothing compares to the current economy, the insurance industry need not go back too far in its history to be reminded of what happens when it sways a bit from its underwriting commitment. Unfortunately, our memories can be so fleeting at times.

In the current market, chasing insurance premiums is so tempting.For the industry, maintaining underwriting discipline is critical for long-term success throughout all insurance market cycles and economic conditions. Insurance companies sell their promise to serve and offer financial support to their clients in the event of a loss. It's a promise to pay a claim. To remain true to their claims-paying promise, carriers need quality underwriting results that produce a profit to contribute to companies' financial strengths.

Insurance companies are not going to be rewarded for some of the market-share growth activities that we have seen in the past. Industry analysts, clients, investors and other stakeholders are looking for responsibility in the market. In today's economy, capital is expensive and limited. In order to use their available resources wisely, insurance carriers need to be selective where they will allocate capital. Risk quality and adequate pricing are driving responsible insurer's underwriting decisions and where they use their capital.

If we were to walk a mile in risk managers' shoes today, its clear that deteriorating economic conditions are putting pressure on them in many ways. Balance sheet, staffing and budget restrictions may lead to pressure on maintaining adequate risk management programs. The economy puts pressure on their ability to ensure continued strong quality risk management efforts, perhaps with fewer resources.

While economic conditions may force clients to buy less insurance and restrict their risk management efforts, there may be no material change in exposure. In fact, in rougher economic times, business exposures can result in much greater risk. Oftentimes, fewer resources--whether it is fewer people to carry out day-to-day operations or less money to devote to training or premium--may result in more exposures.

So client cost-savings efforts brought on by today's economy require underwriters to take an even more disciplined review of clients' risks and how their exposures might be changing as a result of the economy.

Economic conditions and current market realities are dictating that businesses re-evaluate how they do business, where they do business and with whom they do business. Insurance companies are no exception. Risk must be properly priced.

April 15, 2009

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