HJÖRDIS GERKE: So Paul, before joining WTW in 2022, you worked for leading global insurance company for over 20 years in commercial underwriting in property and casualty with the last 14 years in portfolio management across digital SME and latterly heading up the mid-corporate property portfolio. You are now a Director at Insurance Consulting and Technology. And in this role, you also focus on the commercial lines markets and, yeah, basically on all topics related to portfolio management.
And Anand, you joined the company in 2021, and you're also a Director at Insurance Consulting and Technology. You have over a decade of general insurance experience, and you especially focus on pricing portfolio management, underwriting, and digital algorithmic trading. So thank you, Paul and Anand. From your experience, what are the main challenges you are seeing commercial insurers have in the context of portfolio management right now?
PAUL HIGHAM: Yeah. Thank you, Hjördis. So I think there's a theme underlying the majority of Commercial Lines insurers portfolio management strategies of supporting risk selection in the most informed and efficient way. So a majority of Commercial Line insurers have genuinely greatly improved their data sets in recent years. This is enabling development of more robust pricing models, and it's opening a window into a greater level of portfolio insight and really understanding the drivers behind performance.
Now the maturity of that I think varies greatly by different segments, different classes of business, across different insurers and different distribution routes. But there are some common themes of it being a hugely complex process. It's complicated by legacy platforms and finding the right balance of deploying resource across fixing backwards of your data and wrangling data sets into usable structures, which brings value to the business. And balancing that against filling in the inevitable gaps in data and assessing the value of and investing in the constant flow of external data, which is new. So there's a real balance to be struck there.
But as insurers improve that granularity of data, they can plan their portfolios in more detail and with more confidence. So a key challenge that I see for insurers is how to surface that insight, and engage underwriters, and influence their decision making in order to realize its benefits and to realize the strategies of each insurer.
ANAND PATEL: Yeah. I think there's really good points there, Paul. And if I just take a step back. I think one of the things that insurers really need to think about in terms of before they get into the details is kind of what do they define by portfolio management, and what does that actually mean to them?
So I think there's certain insurers out there which, as part of that maturity, it's around monitoring business plans and understanding whether from a premium perspective, a pricing perspective, where they are relative to where they expect it to be. But we probably have a more broader sense in terms of what portfolio management involves.
We would envisage that as being the full spectrum of portfolio management, which includes kind of analysis of performance identification of under and overperformance by industry and by segment, which is then really being used to drive business decisions. And so I think it's really important to set out what do you mean by portfolio management? Who's responsible in each of those areas because it's not necessarily the same individual that will perform each of those different tasks. There'll be business planning teams. There'll be senior management in terms of understanding what the overall direction and flow of the business is.
But then there's equally kind of portfolio management for individual filling case underwriters or frontline underwriters, and their requirements will be different. And so I think it's really important to understand what does portfolio management mean, and therefore think through some of those solutions will be.
HJÖRDIS GERKE: And what do you think, how can insurers support and influence underwriter decision-making? Maybe Paul, you want to go first again?
PAUL HIGHAM: Sure, thank you. So really, for me, this is about turning data into insight and looking at then the different ways that you can provide that information to underwriters who are ultimately selecting risks for you as an insurer to deploy your capital to. It comes down to two things to me. It's what you surface and how you surface it.
So it can be probably quite tempting for an insurer to deploy and surface what's readily to hand. But I think it's important to make sure that what you're presenting to an underwriter for their decision making is the right piece of information. It's those key nuggets of information that will really help them make the right decision in terms of selection of risk in line with your portfolio goals.
And then there's the how. So how do you surface the insight that you've garnered at portfolio level and present that to decision-making underwriters to help them utilize an insight and make decisions in line with your portfolio strategy and the insight that you've garnered.
There's a number of ways you can do that, I think. I think you can present underwriters information around how that risk compares to the rest of your portfolio. So does it add value from a predicted profitability perspective? How does it compare with similar risks within your portfolio? Is it better priced, so it would move the price adequacy of the rest of your portfolio in the right direction, or would it detract? Is it in line with risk appetite, and is it in the NatCat profile within the tolerance that you set? And how does that profile compare to similar risks within the portfolio?
I think there's also then something around what's the impact of writing that risk. So if the risk is on the edge of your appetite, would writing that risk mean that you go over the boundaries and tolerances that you've set for yourself? And so for example, on a scale of risk appetite of red, amber, green, if the risk presented sits in your amber category, would writing that risk take you outside of your portfolio tolerances for amber risks?
And if an insurer has three amber risks on their desks, then having this form of insight can help them make an informed decision on the impact to the portfolio of writing 1, 2, or 3 of those risks, and at what terms they should be writing it at? I think this aspect of portfolio management really reduces the potential for surprises, which ultimately is what all portfolio managers want to achieve.
HJÖRDIS GERKE: Thank you, Paul. Would you like to add anything else, Anand?
ANAND PATEL: It's a really big question there in terms of two big challenges that we often kind of hear. So first of all is the senior management level, how does a portfolio owner or a head of underwriting influence and align the staff or the underwriting staff to align with the overall strategy that they want the business to take? That's a common challenge that we hear.
And secondly, on the other side, from the frontline underwriting perspective, they often feel that there's different plans, different strategies, changes in pricing, chasing hedges in pricing models being kind of provided to them. So then how do they have a consistent message to go out to with the discussions that they have with their brokers? And so those are two big challenges that are being faced.
And portfolio management really needs to address both of those. And there's different requirements from those two different users at a high level in terms of steering the business required by those senior managers in terms of where is the business against premium? Where is it against in terms of price adequacy? Is the premium being written in the industries, and the segments, and the markets, which are within risk appetite?
As Paul kind of said, what do you do about those risks which are sitting on the borders? Do you offer a particular quote? How aggressive do you go on that quote? There needs to be steer on those decisions. And that's where I think a good portfolio management tool will provide that decision support to the frontline underwriters in a way that it provides context that the portfolio owners and the senior managers setting that strategy aligns to what those frontline underwriters are having to handle on a day to day basis with their brokers.
If there's been a change in strategy, which is common. The performance is never in line with expectations. There's always learnings that are gathered. As that strategy evolves and it changes, it's really important to be able to push down that change in strategy, the rationale for that change in strategy down to frontline underwriters, so that it empowers them to have meaningful discussions with their brokers.
So for example, if prices have gone up in a particular segment because loss activity has changed because frequency trends, claim severity trends have increased in a particular area, providing that insight to frontline underwriters so they can then pass on that message to brokers and justify their change in premiums is really important.
And it changes the negotiation between the underwriter and the broker and shifts the discussion away from just purely price to actually value. Because at that point, what the underwriter is able to do is to provide insight into the customer, to say that these are macro trends that are being observed in the particular industry that you're operating in, and these are the issues that it's creating.
We've learned from our holistic experience that actually, if you implement a certain set of changes. Maybe if you change your QA processes that occur after your manufacturing before your distribution, or you put particular safeguards in place, that can help you mitigate some of these potential claims. And all of a sudden, it changes the dynamic from just being purely about price to actually providing insight and value to the underlying customer.
And so that's really about how you take the learnings from a high level and then push them down to frontline underwriters, such that they have the tools and the nation to be able to add value to the underlying clients.
PAUL HIGHAM: Yeah. Thanks, Anand. And I think the only other point I'd add to that is that the insurers that we see doing this best are also bringing in non-risk features as well. So understanding dynamics around different distribution partners, the different distribution metrics, and bringing that into the conversation, and also bringing it into the prioritization of what sits on an underwriters desk.
If you've got a risk presented to you, which is right in the sweet spot, but it's from a distribution partner that hasn't placed any business with you for 12 months. And next to that, you've got a risk, which is maybe not in the sweet spot. Maybe it sat in the amber segment. But it's from a really supportive broker who is more likely to present you and provide you with that risk.
So bringing that into the conversation, bringing that into the prioritization of an underwriter's work can really help with not just the underwriting performance, but it can also help with your efficiencies and making sure underwriters spending their time on risks, which will add more value to your organization.
ANAND PATEL: I think that's a really good point in terms of prioritization because again, a common challenge for an underwriter is that they may have 20 cases that are sitting on their desk at that point, and which of those do they actually prioritize? And is it a case of first in, first out? Is it a case of actually particular broker who's going to be a bit more pushy, and aggressive, and will start chasing later in the week for a response? Should that one be prioritized? Should new business or renewals be prioritized?
There's lots of different factors that are playing into that sort of underwriters' decision at that point.
And so I think having again the portfolio management tool, which provides guidance and steer to underwriters in terms of which ones to prioritize, bringing into account all of those different features. So for example, if it's a renewal risk, it's likely that it won't take as long to underwrite that risk because the underwriter will be familiar with it. There's less data checks that need to be done.
Whereas if it's a new business, the underwriter will first have to familiarize themselves with that particular case. There may be additional information they need to request from the broker. Then there may be additional QA that's needed on the data that's provided. The time taken to underwrite that risk might also be longer.
Then there's the aspect of actually well how much what contribution will it make to the overall portfolio? If there's a risk, which has a greater propensity to bind, and also it has a greater propensity to make a larger contribution to the overall profitability. Again, that may be a risk that you want your underwriters to be focusing on. And then therefore, having a workflow tool, which is integrated with your portfolio management systems, which actually provides clear in terms of an underwriter, so that when they are presented with those 20 cases, they've got a prioritization to say, OK, you focus on these ones because this will drive the overall portfolio profitability and be aligned to the overall business strategy.
PAUL HIGHAM: No. I completely agree, Anand. I think the only other thing I'd add on the top of that is that the next level for me that what we're seeing in the leading edge insurers is where insurers are bringing a view of the impact on those individual risks of the cost of capital and reinsurance.
So in a mid-market space, that might not be as relevant. But as you go up the echelons into corporate space, well, actually there are individual risks which might move the needle in terms of the cost of capital or cost of reinsurance. And bringing that to the front in an underwriting decision making again is where we're seeing leading insurers really step in that direction.
HJÖRDIS GERKE: But you also quite often hear that insurers are missing plan. Why is that? What are they getting wrong? And how are they dealing with it?
PAUL HIGHAM: I'm not sure that this is about insurers getting things wrong. Unplanned things happen. And ultimately, a plan is a plan. And there's internal, external factors that are resulting in actual results deviating from where you expected them to be. From an internal perspective, you'll lose risks you weren't expecting to. You'll renew risks you weren't expecting to.
From an external perspective, the obvious example might be things like inflation. So how that impacts across different lines of business or beyond the levels insurers would have planned for. So what's achievable now will be very different to what was planned for. There could be unexpected changes in legislation or in case precedents, and that might go up or down. It might be positive. It might be detracting.
I think the key thing for an insurer is to be able to track where they are as things progress through the year. So having some tools which enable you to monitor your performance and also bring in different scenarios. So we were talking earlier about scenario planning for portfolio management. That's as important at the start of the year when you're setting your plan as it is throughout the year. Tracking where you are on a regular basis. Factoring in different scenarios that either occur during the year or you might start to see on the horizon.
So good insurers that we see again at the leading edge are really putting a lot of effort into monitoring different scenarios throughout the year, picking up trends as they happen within their portfolio and flowing that down to different decisions at case level. So if a certain scenario happens, what does that mean to your decisions on the cases that you may well have already strategized for the rest of the year? There might be renewal cases. You've already got a plan for how you want to deal with them.
But if an internal or external factor comes along and changes where you are and changes the landscape, you need to be able to understand what that change in landscape means to the rest of your existing portfolio and what different decisions you might want to make as the year progresses.
ANAND PATEL: Yeah. I would just add. So it's important to have a business plan, which is realistic, achievable, and everybody is engaged with. I think that's a really important sort of foundation to have. I think the point you make around how do you adjust to developments that occur throughout the year, which are kind of substantial development and therefore sort of knock you off course in terms of where you're going.
This is something that often, if it's not handled well, it means that you start to see deviations from plan and then a disengagement from the plan because the environment in which you're now operating is substantially different to the one that you thought you were going to be in. Paul used the example of inflation being higher or lower than you thought it was going to be at the start of that stage.
A different example might be you might have planned to hire a particular underwriting team and therefore, put a certain amount of growth into your plan over the next year. And for whatever reason, you may not have been able to hire that particular team. And therefore, if you still stick to that original plan with the inflated growth figures in there, the remaining underwriting teams will just disengage from it because it contained a level of growth in there which was contingent on a number of scenarios being played out.
And so I think it's really important to consider at what point do you replan and what point do you monitor against that revised plan? Because I think that's a really important feature because once you get to a particular point and there's been a material change in the market, or something which has changed in the business, it just no longer becomes appropriate to still keep monitoring against a historical plan which is no longer relevant.
So I think there's an aspect of replanning and communicating that replan and what the implications of that are, and then monitoring against that. And again, it just comes back to having the right tools in place to be able to do all of that in a really efficient way.
HJÖRDIS GERKE: Thanks for the interesting conversation so far. I think we touched a lot of important points already. But before we come to an end, what would you say are the key takeaways for insurers today? Paul, maybe you want to start again?
PAUL HIGHAM: Sure. Thank you. So I think insurers are at different stages of deploying new tech, whether that's UI interfaces, pricing models, data structures. But I think throughout all of that, it's important just to remember what the purpose of all of those tools and bits of equipment are. It's all about aiding risk selection and deploying capital in the most effective way for your business.
So in non-automated distribution routes where underwriters are making those decisions, it's really important to keep the focus on providing underwriters with the most relevant information you can to help them make the most informed decision that will steer your business towards delivering your plan. That's ultimately what portfolio managers and underwriters will get out of bed for.
So that for me is the key message for me in terms of insurers development through portfolio management, and engaging, and making sure that they've got the right decision support and scenario analysis tools to help them make the most of the data that they're continually developing.
ANAND PATEL: I agree. So I would say that having access to the right tools will certainly help businesses being able to deliver their plans, setting those tools at an appropriate level of granularity that it allows people to engage and for decisions and actions to be taken where remediation is required is really important. And then lastly, I'd probably shift it to think about the customer because at the end of this, all of the performance and the profitability of the company will be delivered based upon the level of customer service and meeting the customer's requirements.
So while price and metrics are really important, I think it's also really important to distil that in terms of making sure that the underlying clients' needs are being met. So thinking through what their changing requirements are and what different coverages they need, what the appropriate policy wording terms and conditions are, and then using your portfolio management to support that.
HJÖRDIS GERKE: Well, thank you both for joining me today and sharing these valuable insights. It was a pleasure. Thank you.
PAUL HIGHAM: Thank you very much.
ANAND PATEL: Thank you.
HJÖRDIS GERKE: And thank you listeners for joining us for this episode. And if you found this interesting, then make sure to join us on future episodes of (Re)thinking Insurance.
Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights section of wtwco.com. This podcast is for general discussion and/or information only. It is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.
