Underwriting Management
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Introduction
In todays modern business world, the perception of typical business firm such as large-scale manufacturing organisation with thousands workers and managers is no longer fitting in todays market. Business nowadays operates in all kinds of areas including manufacturing, retailing, banking and other financial services, transport, medicine, law, media and last but not least, insurance. However, insurance business code of conduct works differently from normal commercial industry as they are normally govern by the countrys financial regulator similarly to financial services providers. For example, in United Kingdom they have Financial Services Authority (FSA) and in Malaysia, Insurance is regulated by Bank Negara Malaysia (BNM).
Although their code of conduct is different but as long as the insurance company has a business model running as the backbone, they are affected by the constant state of flux by the global economy, changes in domestic economy, management failure in understanding the economy and the market and difficulties in maximizing the available resources efficiently. In order to deal with all these issues, there are six business principal functions that we need to look into which are Innovation, Production, Marketing, Human Resource Management, Financial and Accounting and Compliance with Regulations. To further reflect on these business principle functions, we will zoom into Underwriting Management via Monitoring Results to identify how it can provide the top management with a comprehensive picture of the current market and how their organisation is performing.
Under this topic, we will further it breakdown into three sections which are “reasons for monitoring underwriting skills”, “uses for information derived from monitoring” and “how benchmarking is used when monitoring results”. At the end of this discussion, we hope to identify the importance of Underwriting Management in Insurance Companys business objective which is both financially and strategically.
Uses of Monitoring Results
Like any other company, underwriters in Insurance Company are required to provide forecast and plans for a new financial year to set out their objectives and mission. But when environment changes, the underwriters forecast have to change accordingly to suits in and will also lead them to change on their planning too. Most of the time, environment changes are unpredictable and it comes without a warning like catastrophe incidents such as flood which can cause a set of chain reaction that gives severe loss claims to Insurers.
For example, if the flood affected plantation fields, it causes the farmers to lose their harvest or even damaged their crops which will end up Insurer paying up claims a huge claim for those they insured. Sub-sequently, there will be a shortage of supply of these particular crops (onions for instance), where the prices of these onions will increased dramatically and the Insured will increase the sum insured. On Insurers perspective, despite of the sudden increment in sum insured they might not able to adjust much on the premium rates as the rest of the competitors in the market are hunger for business to recover the claim losses that they have paid out. This is because an Insurance Companys profitability is measured by:
Earned premium plus related investment income
Business acquisition and administration expenses, reinsurance premiums, commission payable, levies, costs, or membership of market organisations, claims payments and the cost of handling claims.
Therefore, it is important for the underwriters to continuously comparing actual performance to compare performance achieved with budget targets. As discussed above, the setting of performance objectives for insurance accounts presents substantial problems and challenges which it is crucial for the underwriter to appraise progress at regular and frequent intervals to detect variances. After the appraisement, the underwriter would need to:
a) Prepare periodic budget reports that compare actual results with planned objectives.
b) Analyzing the differences to determine their causes.
c) Taking appropriate corrective action.
d) Modifying future plans, if necessary
to assist the underwriters anticipate eventualities and prepare for achieving the ultimate goals.
Larger insurance organisation will monitor performance at several levels and/or locations as they would have branches all around the country or within a specific region of the world like Europe region for example. The extend of this will vary according to organisational structures, division of responsibilities, nature of departments and other units, special project activities and a number of other internal factors. There are also external factors like economic cycles, weather-related cycles and seasonal influence which they will need to take in consideration as in different region or country these external factors will affect their performance as well. Therefore, they will target specific budget areas and for the same results, it will be monitored by a number of different individuals for markedly different reasons (internal and external factors) which will vary from examining the total picture presented to focusing on one or more narrow specific areas of interest or concern.
Most of the insurance organisation runs on bureaucratic corporate culture where employees are appointed and promoted according to their performance and most staffs targets are central to their working activities. These targets could be very high for the business centre or individual personnel itself. For example, the entire business centre may be set to achieve the target gross premium of GBP 100 million and an agent / departmental head to achieve ten percent (10%) of the targeted total gross premium. Targets set by the management are always higher than the previous year and to keep the staff motivated as mentioned their performances are monitored based on an appraisement system where the staffs salary increment and bonuses are based on the appraisement results (achievement on their targets). One of the fundamental reasons giving the incentives based on their performance is to sub-consciously having the staff generating a commitment achieving their goals and targets. In these circumstances, if the system is correctly devised and applied, it can be a powerful motivator for staff and monitoring results plays a key role in communicating progress and finding out the root causes for those who did not achieve.