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Hugh's Views Issue 7: May 28, 2003
There are some insurance agents that I would characterize as good underwriters, to differentiate them from the more basic order-takers and salesmen. From my point of view, underwriting is essentially:
Those insurance agents who do the underwriting for their insurance carriers are in a position to deliver profits or losses to their carriers over time. The good ones maintain profitable books, and are rewarded with high commissions, profit commissions, and performance bonuses. In my view, if that's what keeps the business flowing in, and keeps the insureds covered, these agents are providing a valuable service. I can even swallow the 50-60% expense ratios that all this sometimes results in, for some kinds of labor-intensive program business, if hard-market conditions are being mitigated by the agent as underwriter. In my view, the underwriter ought to be the one rewarded most for the kind of business we are talking about. What kind of business are we talking about? The kind of business that takes a good deal of underwriting skill (as I defined it above), and a lot of hands-on work with the original insureds, which sometimes results in better risk management. In my view, the underwriters of this kind of book of business ought to be the ones to directly benefit the most for its financial result. The capital provider, sometimes erroneously referred to as the ultimate risk-taker, provides the financing for the pool of risks, but the underwriter provides the judgment, the brainpower, and sometimes the basis for business continuity of the group of insureds. What strikes me as a shame is that the agents as underwriters are usually rewarded in the form of commissions or percentages, rather than on the basis of a share in the book of business. Under this system there is a reward for good results, and no reward for bad results - but no penalty, either. That kind of situation creates one kind of motivation to succeed, one that is constantly under threat of short-term interpretation of the long-term result. Wouldn't it be more logical for the underwriter agents to have an equity stake in the book of business, which means they would share in the downside as well as the upside? Time and again, I have seen first-hand how this kind of reward coupled with potential penalties creates a better kind of motivation to succeed over the long term, and dampens short-term enthusiasms or bright ideas. So the points I would have added to the inquiring agent in the exchange above include:
I also think there is a bigger issue to be put on the table here -- the issue of the credibility of the agency that has some "skin in the game" when they approach carriers, reinsurers, or even large potential clients. Which proposal looks better to you: the one backed by a discussion of the growing numbers of clients and millions of dollars of premiums written over the past five years, or the one backed by a disclosure that the agency has a 20% stake in the underlying insurance, which has demonstrated a conservative loss ratio over the past five years? In these times of hard markets, those agents, and groups of agents, who have some of their own underwriting equity ought, in my view, to do better than the simple salesmen. Can't get enough of Hugh's oft-irreverent views? You're in luck! Follow this link to all of Hugh's pearls of wisdom:
Hugh Rosenbaum, one of captive.com's friends and valued contributors, is a freelance consultant. Hugh can be reached by telephone at +4420 8883 6729 or by e-mail at hughro2@yahoo.com. Learn how you can spend a day with Hugh! Visit Hugh's Captive Consulting and Music Websites
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