Premium growth, underwriting return and segment analysis

Abstract

PurposeMany insurance companies vigorously pursue top‐line growth, even though it has the potential to develop unprofitably over time. The time lag (or tail) between when insurance is sold and when claims are paid generates risks unique to insurance companies. Furthermore, the insurance market is both mature and efficient (i.e. its level of competitive risk is very high), which means that profitable opportunities are both rare and untenable unless protected by competitive advantage. There is currently no practical measure available (of which the authors are aware) at the business unit level to evaluate insurance premium growth in the face of the industry's risks, impairing executives' ability to assess segment opportunities (and hazards), thus hampering strategic decision making. The purpose of this paper is to introduce a practical measure developed by the authors called Underwriting Return (UWR) which aims at helping to alleviate this situation.Design/methodology/approachThe paper introduces UWR which was developed during the course and scope of the authors' work in the insurance industry, and their research into applying value‐based management to that industry.FindingsThe paper finds that UWR is a practical measure that property and casualty executives can use at the business unit level to help quantify market segments to grow, hold, harvest and abandon.Originality/valueA variety of strategic analysis tools, such as the popular Boston Consulting Group matrix, are utilized today. In general, the application of such tools is hampered by an imprecision of measurement but each can add a level of insight to executives' resource allocation options. UWR can further aid insurance executives in strategic analysis by helping to quantify in which segments to compete, and which ones to abandon. The paper demonstrates the utility of the measure in an example based on an actual analysis.

An introduction to the Enterprise Risk Scorecard

“…Far too often performance receives a disproportionate amount of managerial time and attention; an unintended consequence of which is the neglect of risk management and unwise levels of risk taking. This seems to have been the case with firms like Enron, Adelphia and Parmalat, as well as with lesser‐known cases such as PHICO Insurance Company (Calandro and Flynn, 2005).…”

What accounts for the high underwriting losses in the Ghanaian insurance industry?

“…Our findings support the positions of Chugh et al (1987), Charumathi (2012), and Burca and Batrînca (2014) that growth in written premiums does not necessarily contribute to high performance. Some insurers vigorously pursue top-line growth in premiums, despite the possibility that it can be unprofitable over time (Calandro and Flynn, 2005). Aggressive underwriting, according to Nissim (2010), Charumathi (2012), and Burca and Batrînca (2014), can lead to significant losses and as argued by Chen and Wong (2004), is self-destructive because it is a crucial factor, as noted by Kim et al (1995), of insurers' insolvency.…”

“…Underwriting risk is when the insurance prices are not enough to cater for claims and operating expenses (Calandro and Flynn, 2005;Alhassan et al, 2015), and this results in the payment of disproportionately higher claims for the premiums an insurer receives or the charging of smaller premiums for the risks it has agreed to absorb (Santomero and Babbel, 1997). Following the literature (Santomero and Babbel, 1997;Calandro and Flynn, 2005), we calculate underwriting risk as the excess of the sum of insurance claims and operating expenses over the net earned premiums. We used a dummy variable which takes the value of one (1) if claims and underwriting expenses exceed net earned premiums and zero (0) if otherwise.…”

“…The risk that insurance premiums may not be sufficient to cover insurance claims and operating expenses – underwriting risk – (Calandro and Flynn, 2005), can have adverse consequences on an insurer's financial performance. This may be influenced by actuary risk that the insurer pays disproportionately higher claims for the premiums it receives or charges too little premiums for the risks it has agreed to absorb (Santomero and Babbel, 1997).…”

Enterprise Risk Management, Performance Measurement Systems and Organizational Performance in Malaysian Public Listed Firms

“…Moreover, risk management and performance measurement are two activities that are undertaken by different people in different departments within an organization (Sammer, 2006). By keeping ERM and PMS control systems separate, managers will be able to balance the time and attention they spend on each and hence unwise levels of risk taking would not occur which was the case in the fall of well-known organizations such as Enron and Adelphia and Parmalat (Calandro Jr & Flynn, 2005).Certainly, ERM and PMS are inherently dissimilar functions, companies will be capable to more effectively dialogue about making those tough trade-offs decisions. With the information generated from each system, a balanced view of the enterprise's activities will be provided where managers can manipulate to create value at the acceptable level of risk over time.…”