The Great Underwriting Transformation: From Ugly Duckling to Golden Goose

golden-eggsThe P&C insurance industry is undergoing a radical change, one that’s turning its traditional business model upside-down. For as long as most of us can remember, insurance providers made the bulk of their money from investment income. The industry managed to generate decent Return on Equity (ROE) despite combined ratios above 100. But, along came 2008. The bottom fell out of the economy, unemployment increased, and interest rates tumbled into a steep decline. All of a sudden, an approach that had kept carriers profitable for decades started to unravel. According to an Insurance Information Institute report, a combined ratio of about 100 generated a 16 percent ROE in 1979, whereas in 2012, that ROE dropped to a mere 7 percent. At the same time, the incidence of disasters began to increase. New catastrophic events kept topping the last, with horrific consequences. If you look at combined ratio points associated with catastrophe losses in last few decades, you will find that the CAT loss component of combined ratio has sharply increased, reaching a record high in 2012. These factors and more have propelled a fundamental shift in the way insurance companies approach underwriting. Today, this core function is quickly emerging from the back office shadows into the spotlight, charged with achieving profitable growth. However, to transform underwriting into a profitable growth engine, some fundamental things will have to change.

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