The Secret World of an Underwriter - Am I a good or bad risk?

15 March 2016


How good is an Underwriter's crystal ball? How likely am I to make a claim and how do insurers rate me as a risk? These are questions that most would really like to know and so let's give you a peek behind the Underwriter's desk.

The 1st fact is that Insurers are becoming a lot smarter at risk profiling you. How many of us have innocently typed "Cheap motor insurance" into the search engine? If you have, then Insurers are able to pick this up and you could be classed as a higher risk. If you changed your estimated mileage from 5,000 to 2,000 miles to keep the premiums down, then this is stored and you could be rated as potentially dishonest.

Evidence shows there is a direct correlation between low credit scores and people filing multiple insurance claims. Individuals who are conscious savers, married with children, and alarm their home are more likely to take better care of their possessions and be safer drivers. The statistics tell us that individuals’ adopt those characteristics into their daily business lives, so don't be surprised if Insurers run credit checks and cross reference Managers/ Directors with their home, car and life Insurance data.

How much do insurers make? Surprisingly, not as much as many might believe.

Motor Insurers, for example, have not made an underwriting penny for over 20 Years. Employers & Public Liability Insurers have made an underwriting profit once in 13 years. Overall, approximately 96p is paid out in claims and expenses for every £1 of premium collected.

Below is a typical breakdown of an insurer’s costs, claims, and profit per £1,000 of premium received:

Any insurer who wants to start the business of accepting Risk will have to raise Regulatory Capital (a minimum legal requirement to ensure that they can pay the worst of disasters).

They will have to finance the Capital and just like every Business there will be overheads such as wages, rent, rates, utilities etc..

Insurers generally trade through an agency or broker and will pay between 15% and 30% commission. To give the underwriter protection for unforeseen larger claims (or a series of claims) they will buy what is called Reinsurance. At this stage, the underwriter has already spent anything between £350 and £450 per £1,000 of premium underwritten. Fraud accounts for over 4% of all claims paid out, and the balance will go towards paying the legitimate claims of their policyholders with a small remainder left to hopefully make a profit.

Risk Assessment - in Commercial insurance, the Underwriter will base his premium upon the proposer’s own claims history, and the strength of the proposer’s Risk Management. He will factor in the trend of his existing portfolio, take into account his own personal experience and then make a risk forecast.  A view will need to be taken on future inflation of repair costs, possible changes in law, and the future level of injury awards. Weather is responsible for 25% of property claims and Insurers use sophisticated risk-mapping tools for risks such as flooding and storm. In order to manage claims as quickly and efficiently as possible, Insurers will also need to set up a network of repair suppliers, lawyers and loss adjusters.

Once a premium is agreed the underwriter will issue a Policy and collect the premium. There is usually a time gap between receipt of premium and a payment of claim, so Insurers have time to invest the premiums and hope for an investment return.

Should we care if insurers make a profit? After all aren’t they simply bookmakers?

The answer is we should care. Insurers play a critical part in society and our economy, providing many supportive services and financial security in times of real need. They work to reduce risk across all industries, lobby and contribute to many important issues such as climate change and changes in the Law. They remain a critical vehicle for UK savings and pensions, and manage a pool of assets whose value is equivalent to 1 year’s UK GDP (£1.9 trillion). Additionally, the UK insurance industry employs over 340,000 people.

Many will continue to shop around for lower premiums which have continued to fall for the past 14 years. This cannot, however, continue forever and at some stage the pendulum will swing.  If you are a Company then you can be prepared. An Organisation that can demonstrate that they take Risk seriously and illustrate a culture to invest in Risk Management will mitigate their premium costs in the future.

Categories: Risk Management, Commercial Insurance