Richard Hartley, CEO at Cytora, explains how underwriters can cut the distance between current and target portfolios by addressing three key challenges.
Active portfolio management is a route to superior returns. Conceptually, it enables insurers to react faster to changes in rates and claims, and develop their product offering while curating their risk appetite.
But all too often, the road from current portfolio to target portfolio is a long and winding one. Insurers find it difficult to match frontline underwriting with their portfolio strategy and reflect subtle inflections in risk preference to underwriting execution.
The art of portfolio management lies in choosing which risks to preserve and which to change over time – writing more profitable risks as the market shifts.
Big picture granularity
Understanding what should be preserved and what should be changed is driven by a granular understanding of each risk, both in itself and within the context of the wider portfolio.
This ups the stakes when it comes to new business submissions, since every new risk that the business chooses to underwrite tilts the portfolio.
Writing a risk that loosely fits the strategy may look good enough on paper, but it also represents a missed opportunity to spend the time writing a risk that acutely aligns with the target portfolio.
Scaled across the thousands of risks written each year, these small decisions add up and can be the difference between average and top quartile returns. As the Mckinsey paper “The Journey” concludes, “companywide results are nothing more than the aggregation of thousands of companywide decisions.”
So how do insurance leaders empower underwriting teams to write more of the right risks and tighten that turning circle, so that the distance from present to target shape can be traversed in the smallest possible moves?
To find the answer, insurers need to think about the gap between portfolio strategy and frontline execution a little differently. It’s not just one single issue, it’s made up of three distinct challenges: one cognitive, one logistical and one of communication.
Heterogeneity in practice
First, the cognitive challenge.
There are many dimensions that define the eligibility of a risk and degree of fit to the portfolio. Is it inside or outside appetite, what is the predicted loss ratio, is it winnable given the broker relationship, who should underwrite it?
There is an unavoidable tension between the scientific objectives of portfolio management, seeking ever greater granularity, and the capacity of underwriters to execute, limited by memory and market dynamics.
This problem is pronounced in commercial lines, where risks are extraordinarily heterogeneous. Underwriters need to digest and recall hundreds of pieces of information across multiple dimensions to evaluate the minute details of a risk.
Unlike cars, no two hotels are the same. Both might have fifty rooms, but the risks facing an inner-city hotel with a co-working space and underground parking are very different to those faced by a countryside retreat with an on-site jacuzzi and a bar.
It’s an intellectually intensive process that can take up a significant proportion of underwriting capacity. And while the underwriting strategy may spell out its broad parameters in black and white – more of one thing and less of another – risks exist in shades of grey.
Understanding risks in context
This is compounded by the logistical issue, borne of the inconsistency in industry processes.
Risk submissions are different, contain different information and don’t use the same formatting. As a result, they come in a multitude of inconsistent formats, often in PDFs and over email.
Each submission needs to be manually processed and filtered before the actual underwriting can even begin. Underwriters are required to input and re-key information into their CRM or workbench. It’s an expensive and laborious process that underpins the reason underwriters currently spend 40% of their time on manual admin tasks – not on value-add work.
With key risk information trapped inside PDFs and scattered across multiple internal systems, it’s logistically very difficult to understand how one risk relates to another, and to see each risk in relation to all other risks. But this macro view is necessary for insurers to gain active control over their portfolio.
Moving beyond human intermediation
This brings us to the final challenge of communication.
Out of the thousands of submissions that an insurer encounters, a small proportion will perfectly align with the strategy. The trick to shaping the portfolio is to identify and write as many of these risks as possible.
Yet there is often a gap between what happens at the front of the insurance company (where underwriting takes place) and the back (where portfolio objectives are set). And typically, execution happens in an environment that is de-contextualised from the wider portfolio.
Portfolio managers, while having a strong aggregate view, have limited visibility of the risks flowing into the business while individual underwriters often lack portfolio context. And there is no connective tissue communicating between the two.
Today, human intermediation typically bridges that gap but is always limited in scalability, consistency and granularity. Whenever risks, decision making and portfolio objectives are expressed in different places, in different formats, at different levels of abstraction, there will be deep silos across the organisation, which impair underwriting quality.
Embedding strategy into the software
The common factor underpinning these three challenges is the analogue nature of risk in commercial mid-market insurance. Documents, PDFs and emails are digital, but the risk contained within is not. In other words, complex risks are still inscrutable to machines. That’s the rock bed of the problem, and one that digital risk processing solves.
For example, by digitally processing new business submissions, risks can be evaluated automatically and routed to the right destination, first time. That means underwriters only work on risks that are aligned to strategy, in-appetite and winnable.
Underwriting guidelines and the business plan are embedded into the technology. So an insurer’s portfolio strategy moves from being something that’s locked in documents read once and forgotten, to being codified in software, which insurers can continuously optimise, monitor and review.
This leads to a tighter turning circle, helping to ensure that a higher proportion of bound submissions are closely aligned to strategy. What’s more, it creates a more tangible link between frontline execution and the overall underwriting strategy – ensuring that decisions on when to invest in a broker relationship by writing suboptimal risks are taken strategically, rather than on an ad hoc basis.
Ultimately, it enables insurers to accelerate into the corners on the road towards portfolio optimisation.