Overcoming Top 5 Challenges to Underwriting Excellence

Guidewire White Paper

Is Underwriting Excellence the Same as Underwriting Discipline?

Throughout the P&C insurance industry’s long history, and across its different lines of business and geographies, a consensus of experts has singled out underwriting excellence as the lynchpin of profitability. Perhaps its most legendary commentator, Warren Buffett, summarizes his own strategy for success at underwriting and pricing discipline: “consistently pricing to make a profit, not to match our most optimistic competitor.”

A McKinsey & Company study quantified the wisdom of this point of view with an analysis of large U.S. P&C carriers. The study evaluated the correlation of Return on Equity (ROE) over a fifteen year period with three different measures: underwriting performance, investment margins, and premium surplus. The study found that underwriting performance was very highly correlated with ROE, while investment margins and surplus were negligibly related. The study also found that of those carriers in the bottom two quintiles of underwriting performance in the 1980’s and early 1990’s, 3 out of 4 had been acquired or went out of business, while top quintile carriers during that period remained industry leaders into the present. Today, there is virtual consensus that no carrier can earn its cost of capital over the long-term through investment performance alone, i.e. without achieving an underwriting profit. So Warren Buffett’s criticism of the industry for “almost invariably operating at an underwriting loss” is well-taken, but what is the solution?

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