Underwriting for Dummies?
Well, not really. But have you ever really examined how your company is viewed by an insurance underwriter? Conventional underwriting is primarily a look in the rearview mirror: the assumption is that companies with low historical losses will have low losses going forward. I don't think it's quite that simple.
In an article written for the Journal of Workers Compensation, I take a look at underwriting from two perspectives: the conventional approach, and a decidedly "out of the box" look at the best indicators of danger ahead.
Here are a couple of examples of conventional and unconventional underwriting:
A masonry contractor with a relatively clean loss runs and a low experience mod appears to be a great risk. However, the business is so successful they double the workforce in less than two years. It turns out that they have trouble finding good people. They hire strangers who transform the work culture. Their losses go through the roof and their insurer is left holding the bag. Conventional underwriting was unable to detect the problems ahead.
A small manufacturing company has a clean loss history, but the average age of their workers is in the mid-50's. Many of the workers have over 15 years with the company. Is it a good risk? I would be concerned about the lack of transferable skills among the workers, along with the propensity for older bodies to break down. Show me a production line worker with 15 year's experience and I'll show you an MRI full of red flags. I would want to know details of the work culture, the proposed hiring and the ergonomics of this workplace before I made any final underwriting decisions.
What matters most in determining relative risk certainly includes but is by no means limited to past performance. I like to know what's ahead. Any company planning to expand or reduce their workforce might be a marginal risk. In the article I explore some of the factors that seem to be the best prognosticators for success. Your feedback -- indeed, the feedback of our readers who are directly involved in underwriting -- is most welcome.