Let underwriting freedom ring
In 2020, legislators and regulators should be clamoring for more underwriting factors, not less.
Looking to the 2020 legislative sessions, the insurance industry will face a multitude of extraneous factors affecting legislation beyond the words on the page. It’s an election year that will likely be sleepy, without controversy, and seamless in its impact on Americans — said no one ever. Amid the political fireworks expected to go on throughout the year, state legislatures will likely be a litmus test on the mood of the American public. Practically speaking, that means louder voices, more polarizing pieces of legislation, and increased pressures on the business community.
For insurance, 2020 will bring attempts toward tort expansion, legislation aimed at adapting to increasing catastrophic events, and fundamental discussions about how insurance works in America.
Simply defined, insurance is an individual or entity’s ability to transfer its risk in exchange for a premium. In order for insurance to work, the companies bearing that risk have to do three things well:
- Spread the risk they represent across their population of policyholders;
- Have enough money to cover potential losses; and
- Accurately match rates to the risk that is represented.
While those three components may seem simple enough, there are tension points that press upon each that if not addressed appropriately will simply not make insurance feasible. You’ve heard the phrase “you can’t be all things to all people.” Well that’s true in insurance. A single company cannot, and should not, represent everyone for all perils. Policyholders are best served by a healthy insurance market with lots of players offering all kinds of insurance products. This market competition and pressure creates natural outcomes for policyholders to have available the most robust products at the most competitive rates.
Industry cornerstone
There is one critical component needed to successfully spread risk, match rate to risk, maintain adequate reserves, and create a competitive market: Underwriting. It’s also a subject that is an easy target for politicians looking to score quick points with voters because it’s not well understood. Being able to convey the rationale behind underwriting factors will be key in legislatures across the country in 2020.
Underwriting, or assessing a risk and assigning coverage and premium for that risk, is a process made up of multiple factors that are individual to each insurance company. How a company determines which business it can adequately undertake and how much risk it can bear are perhaps most directly tied to that company’s ability to succeed.
Underwriting involves factors or points of data to assist companies toward that decision. Simply put, the more accurate the points of data, the more successfully a company can take on more risk. That means more coverage for more people, a more competitive market, and a safer community.
State legislators are particularly interested in points of data and how these factors match to risk. A person’s number of speeding tickets might be a factor that makes sense intuitively, while that same person’s occupation may not be as obvious as a tool to measuring risk. However, by taking a closer look we can see how a person who drives two hours a day visiting clients signifies a different risk than a person who works from home. So, it may be challenging for a state legislator to be assured that each factor utilized by an insurance company would have that same basis of risk correlation without individually writing a law for each and every one. The good news is: They don’t have to.
States take the lead
Insurance law requires that insurance rates cannot be excessive, inadequate, or unfairly discriminatory. That gives each state’s insurance regulator every inch of regulatory authority they need to ensure underwriting factors are not unfairly discriminatory. Legislatures can be further comforted in the knowledge that the business of insurance is one of the mostly highly regulated and scrutinized businesses in America. That type of regulatory rigor is what ensures that consumers are afforded the very best insurance products in the world, with accurate rates in a market where companies are competing for their business.
Why is it important for regulators to make sure that companies can use as many factors as possible in underwriting their business?
When an insurer uses factors that allow it to improve the accuracy of its ability to assess risk, it can more closely align the price it charges for coverage with the cost of providing that coverage. Insurers that succeed are those that predict claim costs better than their competitors. This market-driven incentive to accurately assess risk ensures that the price of insurance will be commensurate with the level of risk that a particular policyholder presents. That means restricting factors that an insurance company uses results in the riskier individuals being subsidized by safer individuals.
If a homeowners policy cannot contemplate where that home resides geographically, then you can immediately see how an individual with a home 300 miles from the ocean may be paying more than he or she needs to because the company doesn’t know that he/she isn’t at risk for storm surge in the event of a hurricane.
If an auto policy cannot contemplate the age of a driver, one of the most long-used and accepted predictors of loss, then a middle-aged driver may be paying more than the 16-year-old next door who just peeled out of the driveway at 10 p.m. Not every 16-year-old is a poor driver, but the immense study of past claims in the industry shows that as a population, younger drivers do present a higher risk. Therefore, if a company cannot contemplate age then safer driver populations are subsidizing the riskier population.
As we go into the 2020 legislative season, legislators and regulators should be clamoring for more underwriting factors, not less. Insurance isn’t an exact science, but it should endeavor to be. The closer we are able to predict and cover loss, the more likely there will be a policy to cover it. That’s the kind of accuracy that not only protects financial security and property, it saves lives. That’s what we’re in the business of doing.
Erin Collins (ecollins@namic.org) is the assistant vice president of State Affairs at the National Association of Mutual Insurance Companies. These opinions are her own.
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