With supply of re/insurance significantly outstripping demand in this extended soft market, many
underwriters have become considerably more proactive about the ways they source business.
Although no new distribution categories have displaced the traditional channels of direct sales,
broker production and delegated authorities, the insurers have had to adopt more advanced
methods to assess and rank each, to deduce their relative value. With this approach insurers hope to
concentrate their efforts on the distribution channels, which promise profitable, and growth
business. Garnering a quantitative understanding of the nature of the underlying risks is the key to
delivering actionable insights, which guide the focus towards profitable business.
Perhaps the most significant shift to distribution strategies is the increasing volume of business
funnelling through Managing General Agencies (MGAs) and other intermediaries that accept
business on behalf of insurers under delegated authority. Whilst the precise figures are unknown, it
is evident that delegated authorities are growing in prominence as shown in a Conning & Co. study
of the US MGA market which measured 2014 premium at $33 billion, up from $27 billion in 2012 (a
22% increase). Members of the American Association of Managing General Agents wrote premium
of $25.97 billion last year in the US and Canada, of which $5.12 billion was written into Lloyd’s. An
increasing volume of UK, European, Asian, and Latin American business is also assumed through
This shift in distribution tactics has an impact on risk carriers. They spend more time analysing
portfolios of risk, and less underwriting individual risks. The same effect will arise for carriers
participating in market consortia and facilities targeting specific classes of business. The syndicates
supporting Aon’s new ‘Client Treaty’ which is 20% Lloyd’s following facility are anticipated to assume
between $500mn-$600mn of premium in 2016 from this single contract. Under this facility, cessions
are automatic without referral and accordingly all the underwriting was performed through analytics
of the projected portfolio. According to Aon’s analysis, the portfolio is profitable, and may
outperform that of other brokers.
Another development is the acceleration of internet-based underwriting platforms deployed by
insurers to attract business from regional and often extremely distant brokers. Such platforms
delegate underwriting authority to algorithms, and have the potential to bring swathes of new,
profitable business to insurers who would previously have had no access to risks bound online.
However, most of these streamlined channels remove some or all of the ability of underwriters to
scrutinise individual risks.
Whilst the shift towards delegation of authority may appear to be a loss of control, this evolution
towards delegated authority is not a negative progression. The current soft market is different from
any that came before, as Internet technology is sufficiently advanced to allow unfettered contact
between underwriters and ultimate insureds. This contact allows underwriters to reach brokers and
assureds in otherwise uncharted territory. This can present a substantial opportunity for suppliers to
access niche sector where rates are strong. The LMG have identified the potential of streamlined
distribution channels and through their sponsorship of the Target Operating Model (TOM) are
building a technology network designed to give the London Market an edge in this race to provide
capacity to the global marketplace.
‘underwriters must embrace the opportunity to assume
proactively some of the functions historically provided by brokers’
To sell successfully though such direct channels, underwriters must embrace the opportunity to
assume proactively some of the functions historically provided by brokers. This has been applied to
full effect in the UK motor market where models for automating the pricing and binding of risks are
deployed by insurers onto Confused.com (the Admiral subsidiary).
As costs rise relative to declining premium income, insurers are increasingly outsourcing some of
their usual core responsibility. Whether underwriters are moving away from the client through
delegated authority or closer through web-based placement systems, they are in each case
switching to the assessment of portfolios rather than individual risks.
The methodology behind portfolio underwriting is substantially different to the traditional approach.
Quantitative analysis is essential. The data delivered is vast, and can easily be analysed to assess the
worth of each new channel adopted or under consideration. It can be used not only to determine
pricing and capital allocations, but also to identify those areas of business which offer profitable
expansion and are in keeping with existing corporate plans and business models.
Big-data analytics can also identify uneconomic books of business and marginal distribution
channels. The biggest cost insurers face is likely to be the allocation of capital to unproductive or
unprofitable lines. Such dead capital drives loss and cost ratios directly downwards. Segmental
analysis can help to eliminate this cost. Further, it can do so relatively cheaply. The average marginal
cost of technology for insurance companies – of which analytics is just a portion – is roughly 3.4% of
gross written premium. Investment in technology can bring loss ratios down by identifying attractive
distribution channels and flagging-up those which do not meet their cost of capital.
For insurers, automated segmentation analysis can include business scoring by segmental growth,
profitability, size and ultimate value rankings based on these factors. Such systems provide
underwriting businesses with actionable insights. They can be applied to existing portfolios to steer
companies towards new distribution channels which present the possibility of profitable
diversification and growth. They can also drive marketing campaigns to attract premium from lines
of business or geographies that would benefit the portfolio. This analysis can further inform new
product development, and lead client-facing risk management initiatives.
The banking industry has been transformed by the use of analytics. By harnessing the power of big
data, it segments existing clients and potential customers based on demographic factors both for
marketing campaigns and profitability forecasting. Analytical insights are fed into pricing models,
and used to support credit scoring. Insurance businesses can do the same – and should do, as the
pricing slump deepens, and the way in which insurance products are distributed continues to change