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Pusillanimous Underwriters Don’t Survive?

Two years after the start of the Trudeau years and the whole new appreciation for the red rose, the Canadian life insurance industry was “shopping” substandard or near substandard life insurance applicants to reinsurers for their opinion and price. First in, with lowest price, wins were the predominant rule and today that stays true. Pioneering efforts by Ian Michie and team at M&G Re (a reinsurer once active but now merged into history) in its battle with “sister” company Canadian Re took every opportunity to encourage cedants to send their sub par business to the reinsurer. The reinsurer in turn would surely price the impact of whatever the impairment at a much lower price. Voila, reinsurer happy; cedant happy; agent (surely you jest to speak of brokers in Canada in the 60’s) happy; applicant a policyholder.

The arrival of some rookie European reinsurers heated the battle for not just automatic standard excess insurance but the “sickies” that, as we were to learn, agents had files on in the back room or at least the bottom of the bottom drawer. Late 60’s and early 70’s were full of fascinating stories most of which have to wait the 30 years before publication. But the reinsurance industry had its share of alcoholics (could note understand why anyone would rate someone who drinks a bottle a day), nymphomaniacs (a marketer never to be witnessed again), egotistical doctors (instant “I can take that standard”), actuaries (antiselection, not a pricing consideration) and underwriters (pass one exam that was written in the 1940’s and you too could bind risk for billions), and stupidity. The latter can be said only in hindsight since at the time most of the industry thought the moves to be merely avant-garde or “stepping outside the nine dots”. From the 1998 vantagepoint the nine dots were often nothing more than the 5 stars on a liquor bottle.

Easy, don’t lynch me yet you old folk. The times were great and everybody did drink more and had a different approach to life compared to today’s mineral water craze (will that be sparkling or not, imported or domestic, with sulphur or without). Jeez it was much easier to sit down with the upper echelon of the 70’s and have the kingpin host just say “doubles all ’round”. Within minutes we could be eating. Over the sumptuous red meat meal, talk of starlets, hockey scores, and cars predominated. As if by magic the last five minutes saw a side bar discussion (the 90’s tribute to our vocabulary) on the merits of entering into or expanding the shopping program or perhaps begging for a chance to take some automatic excess.

As usual I digress. The fledgling world of reinsurance was in reality just getting its license to fly so to speak. After decades of only trivial amounts of reinsurance going to “foreign reinsurers” and the predominant amounts going to either the parent company or in trading agreements with other cedants (i.e. Manulife would give some to Sun, Sun would give some to Manulife, Maritime gave to Empire, Empire gave to Dominion, etc). In fact, if my old tattered notes from 1970 are to be believed, less than 4% of all mortality risk was being reinsured outside the aforementioned. The exclusive reinsurers were far from a mainstay in Canada. Compared with today’s approximate 30% plus of all new business mortality risk being reinsured the paltry amounts then seem barely adequate to pay the salaries of all the reinsurance staff. Of the tiny amount of reinsurance perhaps 20 to 25% was facultative shopped business. Today that percentage is about the same.

Even with the full understanding of the volatility of facultative business, the antiselective nature of some participants (honestly, very very very very few) and the poor placement ratio of extra premium decisions, it has blossomed. In 1998 we are witnessing about 4% of all cases being written (not necessarily issued) ending up in the reinsurers offices (yes plural) for individual appraisal. As a bit of background the CLHIA statistics show that during the last decades about 4% of all business is declined and upwards of 4% is issued other than as applied for. Since at this point in time reinsurers have not started bidding the price down on standard business it is safe to assume the ultimate target for the reinsurers is to get to see all 80,000-problem cases per year.

Getting back to the reinsurance underwriter, we see someone who needs to be knowledgeable, innovative, somewhat gregarious, endowed with a strong sense of humour and finally a keen and confident communicator. An underwriter in a ceding company has similar skill sets but each takes on a different weighting. The ability to communicate with the broker trying to get a commission is much more challenging than the reinsurance underwriter calmly chatting about the merits of a particular facultative case with a peer in a ceding company.

The complexity of today’s life insurance world, the extreme pressures of “being profitable”, and the intensity of competition amongst too many reinsurers make the attributes of what I see as the successful reinsurance underwriter very visible yet not always easy to find. Even the constant workload that relentlessly consumes 10 hour work days is beyond the mental stamina of many underwriters. During a typical day the average reinsurance underwriter binds their employer to somewhere between $6 to 12 million of mortality risk (in a year that’s about $1 to 2.5 billion of risk).

The attributes I feel are important may vary from the many scholarly opinions of reinsurance and insurance executives who abound in our industry. To say I have always hired successfully would be wrong. To say I have never hired successfully is only a rumour fueled by jealous competitors. Remember the great words of Harold Ballard “When I want your opinion, I’ll give it to you”.

As succinctly as I can be I will try to describe what I think are the good attributes of the star reinsurance underwriters throughout the almost thirty years I have been witness to the risk selection process in our industry. Reaction will be from the “Who are our underwriters?” by some senior executives to “Never met a good underwriter yet, let alone a star!” by some brokers. There are after all many a consistencies in our business that never diminish in value.

Knowledge plays less of a role than I initially thought given that it is more often the ability to shape knowledge into solutions that measure a human. In fact marine scientist Dr. Joe MacInnis said “The larger the island of knowledge, the longer the shoreline of wonder.” The original underwriter was burdened with only rudimentary information and relied an others to contribute the knowledge — medical advisors, actuaries, lawyers, financial consultants, and marketing directors. As costs and scarcity of advisors took hold the dependence on one underwriter to make a decision based on a spectrum of knowledge beyond any one degree became commonplace. Underwriters attended seminars, tended to come to occupation with a university degree (never seemed to matter in what as even my abstract math degree worked), found a new set of exams under the auspices of the Academy of Life Underwriting, CLU courses, formal mentoring programs and time spent reading claims! But at the end of the day it was the “wonder” about the individual case that made for successful application of knowledge.

Innovation is so easy to talk about but so hard to witness in every day life. When a case arrives at a reinsurer it 99% of the time has a problem attached, be it medical, aviation, occupation, avocation or financial. The underwriter in the cedant has discovered the problem, now the reinsurer’s underwriter must find a solution. One of the most famous underwriters of the last 50 years, Charlie Will, penned or at least immortalized the words “Does it make sense.” Looking hard for all the good things about the case that soften the impact of the impairments to standard issue, the reinsurance underwriter is trying to make a decision that makes sense. There are times that even with extremes of innovation at hand there is still the decline because it does not make sense. The greatest challenge for the underwriter is to not just say no, since that was the initial option at the insurer.

Gregarious characters survive in underwriting because they thrive on all the flocks of brokers, marketers, actuaries, claims personnel and others who flock around to either encourage leniency (almost clemency at times), lunacy, meeting unprecedented mortality assumptions, failure (brings more work to claims area) , and of course lowest cost producer. There is always someone or perhaps a team hovering over the underwriter to see that it is done right, which is a moving target. If you are not gregarious by nature watch out for the stares will wear you down. Of course, since there is always an “of course”, being too gregarious can shorten ones career as entertaining the flock takes precedence over getting the work done.

Laughter is always the best medicine. Read twenty sick cases in a day about every possible impairment and body part and you are ready for release. Release is in good nature humour or running to your doctor with the symptoms of the day. Barely 24 months go by and we see one or more neophytes leave underwriting because they have sympathetic illnesses directly related to the days reading. The underwriters who can poke gut wrenching laughter from their colleagues are super. Those who can find humour in the sickest of cases also break the spell of impaired underwriting. The somber individual does not survive the cut. If you are not clever with the use of humour, you better be a klutz that attracts laughter with every guffaw.

Communication is the key to success in many occupations, perhaps all. The reinsurer has to communicate well within their company to try and enlist all resources in building the solution for the client. Getting the message through the myriad of obstacles to the broker via the cedant is often a hair-pulling extravaganza. You know what you need but can you communicate well enough to the cedant underwriter so they in turn can communicate the message to the broker. Most of the time it works but in about 5% of cases it fails. Reinsurer error. I have yet to discern early in an underwriter’s career who will be the super communicators. The maturity element has a lot to do with it as does the self-confidence that comes often years into the program.

A lot of what makes the reinsurance underwriter successful in a never diminishingly competitive industry can apply to the underwriters in any ceding company. The biggest differential is the nature of the biggest issues I have always heard about. In the insurer it is often the seemingly constant battles with brokers or agents over trivial items or even the repetitive nature of each challenge that provokes departure or worse, disdain for the job. In the reinsurer it is the never ending files of impaired lives that are always wanting standard and the fact underwriting has for decades been the whipping boy (today it should person but I cannot even pen the words whipping girl) for reinsurance decline in new business or loss of a automatic treaty. Never any applause but always lots of cryptic criticism.

With the advent of machines taking over underwriting and margins narrowing underwriting will change again but the root issues will follow once the broker realizes he is talking to a machine. No one will think of the standard lives according to a machine but those spit out, as rejects will now be back to human intervention. Today’s facultative leadership in the likes of RGA is an example of the torch being handed to the new leader in facultative decisions. As much as the company I work for feels confident in its risk selection, it would always relish ways of sharing that creative task with the insurers. We have to get that talent and authority to underwrite back in the ceding companies to partner the reinsurer more on substandard. As that happens it will be even more profound that pusillanimous underwriters need not apply to either of the insurer or reinsurer. Become an actuary or claims executive.