February 2016
Protecting Your Blind Side
Raymond Mazzotta, Principal Consultant

Recently I worked with a client to analyze and solve some significant underwriting problems. Initially the company's CEO was concerned because its loss ratios were higher than its peers' loss ratios. As we often see in these situations, there was a lot of organizational noise about where the problems were. Prior to our involvement, they instituted some quick fixes and waited to see the results. But the CEO had lingering uncertainties: How do I know we're getting better? Are we doing the right things? Are we doing what we say we're doing?

Most people rely on their management reporting systems to answer those questions, but those systems are usually looking in the rearview mirror. Others count on reinsurance reviews, but those only happen once a year and tend to focus on items of interest to the reinsurer. Furthermore, most reinsurers won't be as blunt as an auditor - after all, a carrier is their customer. Managers tend to be too close to the action because they are fighting daily fires. They may form opinions from a limited set of transactions and cannot see the forest for the trees. These traditional approaches tend to fix one symptom at a time and tend to be reactionary or flavor-of-the-month exercises. They don't get deep enough to determine the underlying root causes.

We recommend a more strategic approach, and even then there are options. You can step back and analyze your processes from end to end, or you can jump to the end of the story and look at the finished product through an audit program. The important thing is to start somewhere - and start before your numbers go south. In a world of seemingly endless data, there is no substitute for looking inside an underwriting file. We've found that working backward from an audit or file level can be very informative, if you know what you're looking for. In one situation, we found that underwriters were ordering additional credit information and spending time duplicating work that their predictive models were already doing. This showed us that the financial underwriting guidelines were never adjusted for life in a predictive modeling world. In another situation we found that the acceptable frequency and loss ratio benchmarks were out of date and were improperly categorizing average and below-average risks to be above average. In that particular project we started down the path of looking at their audit program. What we uncovered, however, was a much broader set of issues.

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The ART or Alternative Risk Transfer market - Single Parent and Group Captives, Risk Retention Groups, Pools, Reciprocals and Corporate Self-Insured Programs - has unique challenges for owners, members, and reinsurance partners. Those challenges are typically cross functional, encompassing departments such as finance, investments, underwriting, policy administration, claims, loss control, distribution, and IT.

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