I was recently introduced to a book that I highly recommend to all P&C insurance executives: Noise: A Flaw in Human Judgement by Daniel Kahneman, Oliver Sibony and Cass R Sunstein. While it applies to any business, it includes insightful suggestions that can help insurance companies increase profit and grow revenue. In fact, Chapter 2 talks about how inconsistent judgements by underwriting and claims in insurance companies can lead to inaccurate and costly decisions.
Here are a couple of useful quotes from the book.
“If one insurance policy is overpriced and another is underpriced, both errors are costly to the insurance company; one makes it lose business, the other makes it lose money.”
“The goal of judgement is accuracy, not individual expression.”
The premises posed in Noise took me back to the early days in my career when I was a Commercial Lines underwriter.
At times I questioned the direction given in our underwriting training and instructions. For instance, we often had quite a bit of latitude in our pricing, coverage and selection decisions. This flexibility made the job more fun and interesting, but it also made it difficult for me to make underwriting decisions with a high degree of confidence in their accuracy.
Especially at the beginning of my career, I based my decisions more on my perception of how easily I could justify them to my boss. I often operated in an information vacuum, with little ability to see how each decision compared to the aggregate of other decisions I made. I also did not have access to other underwriters’ decisions that might help me as a comparison.
Due to my personality, this extreme uncertainty made me too cautious. For that reason, for the first couple of years I did not help my company—or the agents I worked with—grow like I should have.
Contrast this to some of my fellow trainees, who went the other way. They were sometimes too cavalier with pricing and selection, leading to unnecessary underwriting losses.
Noise made me realize how common this issue remains in the P&C insurance industry.
Even with today’s more sophisticated technology and data availability, underwriting judgement can still be improved. The authors asked executives at a well-run company to estimate, if they randomly selected two of their underwriters to quote on the same submission, just how different would they expect the underwriters’ estimates to be? Most of the executives predicted a reasonable 10% difference. However, the median difference was actually 55%.
This means that most of these underwriters’ decisions would be highly inaccurate and cost their company money—either writing business they shouldn’t or not writing business they should.
This got me thinking about the root causes of inaccuracy, and how we can do better.
In the research that we do at Deep Customer Connections, we measure agents’ perceptions of carriers’ flexibility in underwriting. Underwriting flexibility consists of a combination of:
- How clear the company is about what types of risk they can successfully underwrite (clarity of appetite)
- How consistent and predictable their underwriting decisions are
- How well they listen, collaborate and consider individual circumstances
The goal should be to help individual underwriters make more accurate underwriting decisions, which will improve underwriting profitability while leaving your agents with the impression that you are reasonably flexible. This, in turn, will help you attract and keep better policyholders.
In upcoming articles, we will share ideas on how a carrier might improve the accuracy of their underwriting decisions.
Key Take Away
If you want to increase profit and growth, insights from the book Noise: A Flaw in Human Judgement will help you improve the accuracy of underwriting decisions.
RELATED
Part 2: Barriers to Underwriting Accuracy & Profitable Flexibility
Part 3: How to Improve Underwriting Judgement & Accuracy.