The following article is part two of a three-part commentary written by an insurance company executive which includes an industry critique and reflection on lifelong lessons learned. Part one appeared in the Aug. 9 issue of Insurance Journal magazine. Part three will appear in a September issue.
I learned later in my insurance career that insurance companies tend to meet new situations by reorganizing. The more popular term today is reinvention; some call it “renaissance.” What a wonderful method reinvention can be to create the illusion of progress, especially for the board of directors.
And so … many important reinvention meetings take place. Important insurance professionals in the company, with the aid of highly paid consultants, are very vocal about the past and present wrongs in the company. Lots of talk about lessons learned and the mistakes that will never occur again after the reinvention.
And so, it does happen again … during the next insurance cycle. Soon underwriting losses and poor results will be the rule. Old problems will plague the insurance business again. Is it time for a renaissance? If the board only knew, adversity is like the clouds. It is temporary in a well-managed operation and will move on. There are at least a dozen different ways to manage an insurance organization. They all work! “Have you noticed that?”
Insurance organizations frequently take actions in contradiction to what they really want to do and therefore defeat what they are trying to achieve. I call this the “Growth/Profit Paradox.”
The inability to manage this agreement, not the ability to manage conflict, is the essential system that defines insurance organizations caught in the web of this paradox. One of the typical scenarios: The industry’s recent state of distress can be attributed to insurers placing priority on production over underwriting, that is, putting emphasis on premium growth at the cost of accurate rate analysis. Some may call it rate/risk balance. We all know what this means. Individually, no one wants that to happen!
All of our traditional management books talk about managing subordinates. Managing subordinates does not manage the paradox. Only problem-solving efforts to redirect the organization back to the route it really wants to take will avoid the consequences of these actions. To achieve this, decisions must be made on what is right rather than what is easy. “Have you noticed that?”
This does raise questions as to why companies have tackled very tough challenges, uncovering wrongdoing after the fact, rather than a focusing on prevention.
About Upward Communication
The people at the top set the tone of explicit communication in any organization. Throughout an organization, the climate for communication, and the unwritten rules for patterns of interaction, are shaped by the leaders’ example and by the employees’ perception of what they say and do.
More often, CEOs and their direct reports wrongly assume subordinates have an accurate view of them. What they want to project, and what is actually perceived by others, are frequently not the same. Nobody expects a CEO to always practice what is preached. However, if what is preached is real and sincere, it goes a long way toward setting the tone that others believe they should follow. People tend to rise or fall to the level of their leaders. “Have you noticed that?”
I believe this entire scenario can be improved substantially by the quality of upward communication—some more crudely may describe this as the “whistleblower” effect. The decisions to confront organizational upward communication is today all too difficult and rare by middle management. Nurturing this scenario is a dimension of corporate life that should not be ignored by CEOs. If leaders want to confront the doctrine of upward communication, they must be willing to confront the psychological pain that accomplishes changes in middle management behavior.
There are no shortcuts to help them accomplish such changes. The payoff will not be immediate. Once the process has begun, however, the benefits that will help manage such things, versus the “paradox,” will be cumulative. Given that whistleblowers proved instrumental in uncovering fraud in recent high profile cases, and that such a policy requires no additional staffing, it is surprising our industry hasn’t done so. “Have you noticed that?”
Those managers who choose to confront this reality or its bureaucracy, even if only occasionally, may reflect “peak high experience” that can provide significant meaning to professional work.
About the Regulatory System
Another major influence actively working against the financial success of the industry is the regulatory system. To a large extent, we know human erosion (incompetence) in many companies has brought on the problems in the regulatory system. But this is a situation where legislators and state regulators have overreacted.
For example, in just about all states, legislation and regulation make it nearly impossible to cancel a policy. This also applies to non-renewal or restrictions on most coverages. This certainly limits underwriting discretion with regard to both the contract and risk management for the company.
Even though actual experience indicates a contract should be altered or terminated, regulatory requirements make it extremely difficult to take appropriate action. Experienced insurance professionals know the result will be risks deserving attention and underwriting action won’t receive it. How about the regulatory blunders caused by the industry’s inability to properly manage credit scoring? Keep in mind industry mismanagement always takes place before over regulation. “Have you noticed that?”
We should all ask—consumers, agents, regulators, legislators, company people—what does this do to the insurance business overall? What about good risks/accounts—the ones that work hard to do things safely and profitably—those that make an effort to increase profit potential? The less companies can protect themselves against poor risks, the less they can do to reward good insureds.
This all seems to eliminate individual risk underwriting. It does little to motivate safety and security. In our economic system, this is one of the major contributions the insurance business could provide to our society. Again the paradox appears. Actions are taken which contradict what we all really want to do, and therefore defeat the very purpose we are all trying to achieve. “Have you noticed that?”
As an industry, we all talk a lot about underwriting. There is field underwriting, agency underwriting, underwriting profit, underwriting results, line underwriters, production underwriters, staff underwriters, resource underwriters, underwriting assistants, automated underwriting, underwriting support systems, underwriting audits, underwriting managers, senior underwriters, supervising underwriters, monoline underwriting, account underwriting, underwriting analysis, underwriting cycles, underwriting guidelines, chartered property/casualty underwriters, etc., etc.
With all this emphasis, why are the financial results in many companies so poor when related to other industries?
First of all, in my view, the supply of good underwriters is low compared to several years ago. It is an art, not a science, that has been avoided by our industry leadership. The typical front-line underwriters have little training by seniors and have been in this industry only a few years. The only thing they know about pricing is that the market drives it. Most of these underwriters have a hard time doing exposure-based underwriting. Few are encouraged to do what they learned in CPCU. “Have you noticed that?”
How about underwriting as an art? At one extreme, some who claim to have observed it over the years have described underwriting as a clerical routine at best. The results of this are that executives have no positive confidence and its practitioners have no real interest. How could any profession be successful that uses a standard of risk measurement and selection, which is interpreted in as many ways as there are companies, multiplied by the number of underwriters in all companies? This scenario does not have any respect for underwriting.
At the other extreme, underwriting has been described as applying an abstract standard of high quality to individual characteristics of risk in an artistic fashion. At best, the old timers tell us, it is precisely that. Unfortunately, today the art is demeaned and neglected to a marketing role. “Have you noticed that?”
There is also the intermediate extreme. Many companies underwrite when they are in trouble or after a large loss occurs. I guess then it must be worth something, yet they do little underwriting when loss ratios are low or before the large loss. As a consequence, these companies receive practically no good from it at all. They have an essentially poor regard for underwriting because they have never learned the art of underwriting and don’t practice it.
Companies that underwrite will do better up and down the line in all departments, all sizes, regional and national companies, than those that don’t. This has always been the case, in good or bad times. Yet, the number of companies that underwrite well in good and bad times is comparatively small. Ask any professional agent—they have seen it all. Most do not carefully select, train, advance, encourage or make full use of underwriters except for marketing their products. In view of the evidence, it is hard to understand why. “Have you noticed that?”
From another perspective, it is not difficult for senior managers to keep regularly refreshed on the major details and trends in our business. Wouldn’t you expect this from a doctor, lawyer or accountant? Consequently, it is surprising that few insurers have any formal periodic interchange of information and ideas between executives and underwriters, and between underwriters and the claims division, the ultimate source of income and outgo. To the outside observer, such a program seems to be the minimum that a company should undertake and maintain.
Some would say they have such programs in effect. A few do! However, so far, few are formal, extensive or frequent. Consequently, the elements that go into decision-making are dispersed, isolated and competitive within various departments of the company. Again, actions are taken in contradiction to what the company really wants to do, and therefore defeats the very purpose the organization is trying to achieve. “Have you noticed that?”
Wallace H. Smith joined National Grange Mutual in 1986 as underwriting vice president. He now serves as assistant underwriting vice president, corporate underwriting. His expected retirement date is Dec. 31, 2004.