It is the design part of my job that I find particularly satisfying. Taking an unusual exposure and designing a policy for it is always rewarding, particularly if I can help other potential customers with the same unaddressed exposure!
Increasingly though, I find that thinking about risk from the insurer’s perspective is more rewarding. It is not that I don’t think about what an insurer is going to look for when designing a new policy – you have to or you have no chance of succeeding.
I mean thinking like an underwriter when managing a portfolio; really, I mean thinking like an underwriting risk manager, because it is the design of the risk management framework around underwriting a portfolio that is fascinating.
The best approach I have seen – described very crudely – has three main elements, though there are many more detailed components within each. The roles in the three elements are performed by actuaries, underwriters and analysts.
The actuaries look into the past performance of the portfolio – or of proxy portfolios – and try to see what the past can tell them about the future performance of the portfolio.
The analyst looks forward and – I said this was crude – looks out for the icebergs that might cause the portfolio catastrophic loss. They also look for less dramatic changes in the external environment, to see the general direction the portfolio might head, for example, in risk selection, coverage and pricing terms.
It is the underwriter’s job to focus on the here and now and to contribute what he is seeing in the market day to day to the past and future analysis and – most important – to deploy the collective knowledge to every day transactions.
I came across this article a few days ago. With my analysts head on, it reminded me of a Canadian programme I used to handle in London (in a former life…) – new home warranty in the Prairies and BC.
The main point of the article was a discussion about how long some buyers are having to wait for the delayed completion of their new condos. What interested me however, is that the article seems to be highlighting two leading indicators of one of the key risks in any new home warranty programme.
First, the risk.
Depending on which set of figures you look at, most new home warranty claims occur within 12 or 24 months of the new home being taken over by its new owner. And most of the claims concern the fit and finish of the property. In some portfolios in some years, these losses can be anything up to 80% of the losses, so mitigating them can produce a significant benefit.
More important, these claims aren’t what a new home warranty should be about; to deal with a major structural issue or design defect – like the water ingress problems in BC some years ago. This means that mitigating these losses is essential because, otherwise, the underwriter has no margin to deal with the most significant exposure in the portfolio.
Now, the two leading indicators.
The article describes how the gap between promised delivery dates and actual delivery dates is now often more than a year, sometimes 18 months. Now, not every developer will cut corners when they are so far behind in their schedules but, given the knock on effect this could be having on their cash flow, you have to suspect that the temptation might be there… Checking a developers actual v. promised delivery dates looks to me like an obvious way of monitoring this.
The article also discusses the demographics of the construction industry. It talks about how many are employed in the industry at a given time and how this peaks as the property market heats up. Now, it is one of the best known risks in the new home warranty business that the hotter the property market, the more un-qualified developers and trades enter the industry and the more frequent and severe the fit and finish claims become. It would therefore be worth investigating if there is a number or percentage of construction related workers compared to all those employed, that corresponds to “too many, not good enough trades”?
Of course, the further challenge then is to manage the tension between extended delivery times and “too many not good enough trades” and to do so, bearing in mind that the leading nature of the indicators is pointing to a potential increase in claims in two or three years time. But that is when a really good underwriter makes their money – deploying uncertain knowledge, that might be as helpful to their customers as to them, without endangering the portfolio or loosing too many of his better customers.
Just so you know what I see when I read the business pages…