Discipline…and the Lack Thereof

Underwriting indisputably is a major factor in the industry's profitability, and many sources attest to this. At Swiss Re's June 30th U.S. Midyear Economic and Insurance Industry Review and Teleconference, Thomas Holzheu, senior economist for the P&C insurance business, indicated there's been "significant improvement in underwriting," and he believes "profitable underwriting conditions will continue through 2005 in most areas. We foresee moderate growth for the industry as a whole."

Likewise, ISO and the Property Cas-ualty Insurers Association of America at the end of July announced the P&C industry's net gain on underwriting hit a record $7.1 billion in the first three months of 2005–"the largest experienced any quarter since the start of records extending back to 1986."

Can underwriting be further improved (see underwriting features, pages 18 and 26)? Sure, but it'll take work, including refining rules management and workflow and addressing the perennial problem of achieving clean data. Will this happen in a soft market environment? The odds for it near term might not be great, at least given conventional thinking among industry pundits that competition eventually will erode underwriting discipline as it has done in the past. Still, on the P&C side, much will be determined by how far the industry lets prices fall. On the life side, carriers' eyes are on yields. And as usual, profitability in both sectors affects IT spending. But the bottom line is you can't argue with results, and results have shown underwriting discipline mixed with technology is a winning formula.

The flip side is technology mixed with a lack of discipline might not be so good. A recent America Online and Salary.com survey found wasted time at work is costing companies billions of dollars–twice as much time as their employers would expect. The biggest culprit is personal Internet use (44.7 percent). And here's the kicker: Topping the list of the five most time-wasting industries is insurance, with 2.5 hours wasted a day!

Let's say there are 20 workdays a month. Multiply them by 12 months by 2.5 hours a day, and we get 600 hours a year. For lack of a better number, say we apply the $5.15 an hour minimum wage. That amounts to $3,090 annually in waste per employee. Multiply that by the number of employees in the insurance industry. According to the latest data I could find from the Bureau of Labor Statistics, the insurance industry employed about 2.2 million wage and salary workers in 2002.

Let's assume the employment numbers now are ballpark. Then 2.2 million multiplied by $3,090 totals $6.8 billion–which has to be ridiculously low for the insurance industry, since I'd highly doubt average annual compensation would be around the minimum $10,712 a year. So, the actual dollar amount wasted must be staggering.

I admit this may not be an apples-to-apples comparison, but it does put the P&C industry's net gain on underwriting of $7.1 billion into a different light, showing how critical it is for the business to squeeze out every penny of profit possible.

Technology giveth, technology taketh away.

Sharon S. Schwartzman

Editor-in-Chief