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I Am an Underwriter (Regardless of the titles and distractions along the way)

I started when I was 20, 30, 40 or some other age.

I was educated in business, nursing, philosophy, abstract mathematics or every thing else imaginable.

I am not an actuary, accountant, or agent and I do not want to be.

I am an underwriter, but honestly, I do not know how I ended up in this occupation.

I use the best judgement to insure I differentiate risk in a fair and equitable fashion.

Underwriters do not get their “jollies” by declining risk, but rather by saying yes to policy issue.

My tools are not witchcraft, chicanery or obstinacy.

My tools are the best available sources of information from medicine, actuarial science, legal and regulatory.

My task is to wear Joseph’s multi coloured coat of experience and extrapolation to make a decision.

I know the answer is a mix of science and common sense, with art only in the delivery.

I know the science must be current and accurate.

The art must be more of the pot I blend the information in than any main ingredient.

Underwriters are neither “fish nor fowl” and have struggled with their identity for decades.

I know the great commercial underwriters worry little about their moniker and lots about the quality of their decision.

I live with the reality that every life I underwrite will eventually get sick, have an accident, have a critical illness, need long term care and then die.

I just do not know when each will occur and never pretend I do.

I read the saddest of medical files and take their secrets to my grave or at least my dementia.

I am not a mind reader, clairvoyant, prognosticator, or perfect predictor of anything beyond the averages.

I have empathy with many and sympathy for most.

I am computer literate but lack modern software or processes to maximize my talents.

I know the age of expert systems is here and is the way of the future, but no one said the future is always for tomorrow.

I am fearful for the jobs of my peers but positive enough to know I and the other best of breed will more than survive.

I and others will succeed; no, excel, in the new regimes ahead.

Now and in the future I can acknowledge the work I do is “professional” and rewarding.

Underwriters now and ever more play a significant role in risk management.

I am an underwriter, plain and simple yet complex and ever morphing.

By Ross A. Morton

Reflecting as he flies from here to there or was it there to here?


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Why Did My Favorite Company Marry That Reinsurer?

Another in the series of articles encouraged by Steve Carlson of Marketing Options. The industry was full of concern for whom and what were reinsurers. I was doing several speeches across Canada on the subject of reinsurance and retrocession. Steve pushed me to give an overview of the industry seldom seen by the distributor. I tried to write an article that outlined how it worked and also strived to be neutral as to which reisnurer was best (there was no best at that time, but there was mediocrity).

Distributors wanted to know why their product manufacturer (insurer) would use a certain reisnurer and thus not have access to the flexibility of many reinsurers. Times changed by the end of the 1990’s most companies used multiple reinsurers to allow for maximum capacity and greatest flexibility in product and risk selection.



Marketing Options

November 1990

If you have been in the life insurance business long enough you can probably remember when you did not know the word reinsurance existed. In those days, if you were employed by a reinsurer, you told the person next to you on the plane that you were an insurance agent or that you were calculating random but known theories of mortality. The first was to ward of unwanted conversation, the second to attract their probing dialogue. Here we are in 1990 with the reinsurers so far out of the closet they almost refuse to go back in even when encourage by insurers. Every agent has heard the word ‘reinsurer’ or those infamous words ‘the reinsurer has declined’.

The life reinsurance industry environment has been one of the unprecedented growth and change that was not predicted in the 1970s. The number of competitors grew as the exclusive reinsurers with head offices or ownership outside of Canada came to dominate those local companies who historically touched on reinsurance via reciprocity (the gentlemanly exchange of business between companies). At the same time, local but smaller Canadian exclusive reinsurers aligned themselves with European or American reinsurers to provide a capacity equivalent to the larger international participants.

Now the reinsurance business in Canada is comprised of about 20% of the sums insured written in a year or the astronomical amount in 1989 of over $15 billion. The reward, or reinsurance premium involved, however does not do justice to the amount of risk since it hovers around the 4% figure. The insurance industry is intelligent in that it reinsures as much risk as possible but is stingy with its premiums.

Mergers and acquisitions that are transpiring in Europe as well as the contraction of the Canadian industry makes for some interesting scenarios that are purely speculative. For example, will the reinsurance industry decrease from over 100 players internationally to a dozen or so reinsurance conglomerates? Will the Canadian insurance industry shrink to 40 companies, or twelve, if you listen to the real pessimists?

The issue of AIDS pricing was truly a means of increasing the charge for reinsurance risk taking – a direction that was surely needed. There was no margin in the reinsurer’s price to cover the additional mortality due to the virus. A healthy market requires a competitive price from the company to the consumer and a competitive price from the reinsurer to the company.

When the final tally comes in the industry has many competitors for the reinsured volumes available. The competitors are one thing above all else, competitive. (The market is only marginally increasing while reinsurers need large volumes to sustain them through the 1990s) A ceding company can coerce a lucrative deal with the reinsurer it can in turn choose one of several alternatives: give the agent higher commissions; lower the price to the potential policyholder; or pocket the margin as profit for its owners. Which is most often chosen is as easy for the novice to pick as it is for the most seasoned veteran of the insurance industry.

The price the reinsurer charges are, in a net sense, much thinner than the price in the rate book. The reinsurer can be charging simply mortality (approaching zero in the early years for some models) with modest additions for expenses (usually zero – the loss leader theory) and profit (try for bank interest rates, if you dare). What the reinsurer is alluding to is the theoretical decree that only the original ceding company has higher expenses and high profit assumptions.

The second most important element in marrying a reinsurer is price… The third most important element is, you’ve guessed it, price.

As a company moves down the list, which does become repetitive, you do reach other elements that go into the decision making process that ends with choosing a reinsurer for the next twelve months. No where on the list is there an item called ‘client relations’. About the closest is the tried and true category of head office underwriting support. This is ranked number one when there is a problem but falls to eighteenth place when all is quiet on the difficult case front.

The support that an agent needs from the underwriter on the difficult case is beyond price because it often has a value that does not equate to dollars but only to peace of mind and confidence. If the agents are well serviced they are less likely to get the unpleasant surprise that a competitor has found a better price. The agent, who is at the forefront, needs to know that the offer he is presenting to the client is the best given the myriad of factors influencing an applicant’s insurability. The reinsurer provides support to that head office underwriter by ensuring the availability of the latest risk classification material. If the case is outside of the normal, then quick, concise assistance should be available to that underwriter.

Traditionally, the support of the reinsurer’s underwriting department was closeted away well beyond the agent’s group. It was possibly considered wrong to have the reinsurance underwriter know anything about the world of the agent. The ivory tower of the reinsurer’s underwriter even had a moat around it. Today we have witnessed these underwriters boldly leaving the tower to venture into the camps of the producers to actually see and hear the realities of today’s jumbo cases and somewhat rated lives. All of a sudden there is an understanding, not total yet, but growing. Agents have even been known to now befriend a reinsurer and vice versa.

Support for the unusual case, be it on a complex financial issue or a specific medical problem, is of utmost importance when choosing the reinsurer. If it is ignored the agent is left with not 95% of cases being issued standard but maybe 85%. That extra one in ten could be costly. To balance the accolades that a great reinsurance underwriter brings to the agent/ceding company relationship is the worry by some head office underwriters that it occasionally goes too far. The reference, of course, is to the reinsurance underwriter who may overstep his role and both jeopardize the integrity of the ceding company underwriter or make and unfulfillable promise to an agent of group of agents.

Does every other element pale in comparison to the foregoing? Yes, says the underwriter. Putting the big picture together, the price and underwriter factors are probably the most important issues between company, reinsurer and agent. The fact that the reinsurer has terrific administrative systems and people is important to the company but a non issue to the agent. If the flow of risk and premium between reinsurer and company is fouled up rarely could it impact the customer or agent.

The unfettered commitment of the reinsurer to the life reinsurance business and to the particular company is an element to consider but of only trivial consequence to the agent. The agent should have the confidence to the reinsurer is involved for the long term and takes time to stay abreast of agent issues, but that’s it.

There are two remaining elements a life company considers when selecting a reinsurer and both could be at the top of the list but both could be deemed so fundamental that they are present without being listed. The two elements are related since very rarely do you have the one without the other. Top performing people work in an environment that knows the financial stability is behind them since it is they who risk personal reputation by implying something that is not there. Financially stable reinsurance companies can attract the best people to protect that stability and enhance it. You simply can’t have on without the other. The marriage of the best reinsurance people with the mightiest of reinsurance giants, either stand alone companies or networks of diverse interest, gives peace of mind to the ceding company.

There has been much said about the financial weakness of the life reinsurers. Unfortunately most of the rumor is make believe or wishful thinking by in secure individuals or dubious competitors. No life reinsurer was involved in the reinsurance difficulties of the non life industry. As a rough guess, less than 4% of Canadian reinsurance volume is with unlicensed or unaccredited reinsurers. The last two or three million of $30 million case must be covered somewhere. To the best of my knowledge, the primary reinsurers operating in Canada are all federally licensed or accredited, thus meeting the financial requirements and scrutiny of the Department of Insurance and it’s army of auditors.

Go with a reinsurer to lunch and draw your own conclusions about their value to the industry. It would be hard to imagine anyone concluding anything other than they are great people doing an exemplary job in a confusing industry. Remember to base your judgment on price (who pays the bill?), price (who offers to pay the bill?), price (the restaurant chosen), the underwriting support (the number of times the word ‘standard’ is used), administration (did the reinsurer eat lunch using utensils in the proper order?), commitment ( the number of times he/she fell asleep), financial stability (did the maitre’d politely return the reinsurer’s credit card and ask for cash?) and people (was it a real smile or was it painted on?).

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“It sure is a boring summer with nothing exciting happening in our business”, said the old timer who likes to feel the vibes of change. He of course was talking about the sleepy life insurance industry. He also has become so accustomed to rapid and exaggerated change plus unwelcome headlines that he no longer labels the now routine noteworthy.

Lets start with the KPMG Ethics Survey 2000 that I have read snippets of but since I am too frugal with my time I have not read every word. For those interested in the survey it is available at .It is full of all the great statistics of how ethics are not being nurtured and few companies give this a priority. My first reaction was to resurrect the “semper ubi, sub ubi” article from MO’s archives. Then I said to myself that that windmill has already been challenged. On questioning a friend of mine who is close to the MBA circuit and continuing education for executives I learn that ethics courses are in such great demand people are being turned away. I thought the ethics of an organization were instilled in new employees by the old guard and the leader. Has this become so specialized that it is now outsourced?

If one (the proverbial employee of nondescript features) has not learnt enviable ethics before entering the workforce can one ever learn? If one has not learnt ethical values from one’s first leaders can one ever learn? If the actions and verbal utterances of one’s current leader are not reflective and definitive of true ethical behavior can one ever learn?

Can a daylong course on ethics and a certificate hung on the wall equate to an insurers integrity being of high ethical standards? Something like two thirds of companies said they are implementing practices but there is some concern for the amount of time to fulfill those practices. Of the responding companies some 42% have a senior level manager that has the ethics conundrum under their list of to do’s. Training in ethics is provided by about 39% of the companies in KPMG’s survey. I am sure no company is spending more time than the Royal Bank conglomerate who just had the bad fortune of being at the very public end of intense scrutiny over in my opinion ethical behavior! Just imagine what has not been uncovered in our financial services industry. I take heart in the KPMG survey that included about 1.5% life insurers and I will imagine they are all on the higher ground.

Before the ink had dried on the above paragraphs I am stunned by the news my industry has taken a body blow to the kidneys with the Transamerica immediate and complete disclosure of their problems with a few staff. Could anything have been done in the midst of the burdensome acquisition of one company by another that would have at all costs maintained the sanctity of Transamerica’s reputation? Possibly not. The compliment goes to the leadership who immediately went public, took remedial action, avoided the pitfalls of mendacity and limited damage as best they could in the circumstances.

Dull summer? Not a chance. Our financial services industry has had a wake up call and the onus is on all participants to elevate ethical behavior to a priority. Training courses may keep the issue alive and actually instill the no nonsense importance of ethical conduct but if you have in your midst someone(s) whose ethical instructions in early life training leave a lot to be desired “you gotta problem mista”. Finding the rotten apple in a barrel of red Delicious only happens when you hand wash each apple.

In sharp contradictory contrast to the ethics survey is the Queen’s University School of Business survey of participating CEOs in Ontario. Of the top 12 challenges facing CEOs on the Queen’s list the only one that can be stretched to include ethics is the challenge of finding staff that possess the right personal qualities in addition to their technical skill.

This study would have warranted days if not weeks of public and private scrutiny had it been in the “old days”. Today it is just another study of our accepted practices that lean heavily on performance judged by numbers here and now, versus long-term implications of ethical versus unethical behavior. This should not be taken as ho hum! Rudimentary ethics emerges like zymurgy. Over decades and even centuries our “norm” has been forged like the fermentation of wine. Is being forthright always the same as never telling a lie? Is exaggeration in the same leak as abuse of information? Is a conflict of interest always a conflict of interest or does it depend on the consequences? I remain a student of the ethics debacle and hope that in time any doubt about the definition ebbs, which would mean I have found the holy grail (or at least someone let me glance it while there was still time). With age and an ever increasing scope of acquaintances I learn that the definition is now more elusive than ever since there remains no one definition of business ethical behavior. If there were would there be any employees in the tobacco business?

The prize awaits the person who can guarantee a test to weed out the ethical behavior that is not in compliance with the leaders which one hopes is in harmony with the Board and its traditions. The problem is whose ethical behavior is the model since it is on may occasions so subjective. We certainly do not want to leave it to the press to decide.

Next we have the more mundane within the insurance vill. The merger first here in our Canadian community of CU and NU (sort a sounds like canoe), which then transformed into parents saying sell the whole thing. Add to that the potential but soon stop of the sale of C.N.A. life operations globally, ING continuing to acquire NA companies especially Aetna’s financial services side and you have lots of excitement. Talk heats up that Canada and Clarica will be devoured by the likes of any number of large European mega companies in less than 30 months. Banks can come into the US life market. Royal Bank buys into the US life industry. Underwriters are being given signing bonuses of considerable sums plus salaries that finally distinguish them from senior clerks. Pricing actuaries who can make a product price plummet and a reinsurer pay dearly for the privilege of acquiring the risk are in demand that exceeds the demand for a Stanley Cup team in Toronto. Reinsurers are happy that so much risk is being transferred to them since it is their specialty.

News has come out that some of the insurance Web site sites are still not making money. Enormous losses abound but optimism runs rampant. The expectations are that everybody will be enthusiastically searching out sites to buy life insurance. The summer is full of growing e-commerce optimism for the public consumption but finally from under the terrible income statements comes the first glimmer of concern that life insurance is sold not bought.

A small string of words in The Poisonwood Bible on page 309 sort of sums up our life industry as we head towards the end of summer. In fact not even I could have written and been edited into such a distinctive combination of words.

“I am telling you what I’m telling you. Don’t try to make life a mathematics problem with yourself in the centre and everything coming out equal. When you are good, bad things can still happen. And if you are bad, you can still be lucky.”

We certainly have become numb to change and so blasé that even the pundits are bored. Guess we need to make some greater bad happen.