INSURERS Association of Zambia (IAZ) president, Shipango Muteto called on the insurance industry to practise prudence in underwriting, in last week’s article.
This was in a buildup statement to next week’s insurance conference in Livingstone.
The call is timely given the stiff rivalry currently prevailing in the insurance industry as every player wants business which sometimes is at the cost of prudent underwriting.
However, stiff rivalry cannot be justified to compromise the underwriting profession, as like any other profession, underwriting has some standards, fundamentals, rules and practices that make it a profession.
Like IAZ executive director Mrs Banda alluded to in last week’s article, we cannot afford to shelf professionalism for immediate benefits which are not sustainable in the long-run.
Any meaningful discussion on underwriting prudence points back to the basics.
These include simple practices such as completion of a proposal form, physical inspection of the subject matter, proper evaluation of risks, following insurance principles, etc. (these and many others are extensively dealt with in my book titled Basics of Insurance,
The Zambian Experience).
When a risk is presented to an underwriter he/she must evaluate/assess, decide whether or not to accept it and if accepting it then decide which terms and conditions to apply.
Evaluation of a risk is a key factor in underwriting because the insurer is bound to any liabilities that may arise by accepting a risk.
If things are done right at underwriting stage chances are that at claims stage there will be a smooth settlement, ceteris paribus.
Underwriting should begin by appreciating a risk which at times require simple to sophisticated methods.
When reinsurers are involved there is a tendency of a back and forth elicitation of information which can be avoided if underwriters on the ground are more prudent.
With the appreciation of the risk comes the benefit of charging the correct premium. This is where many underwriters miss it by focusing on getting the business at all costs regardless of the premium charged.
I understand some customers are very price sensitive but this should not lead the underwriters to compromise the principles of the profession.
Let’s take an example of someone who goes to see a doctor; do they force the doctor to rush things or compromise their practices?
A patient will wait upon a doctor to do his part professionally.
But in insurance sometimes we have allowed clients to ‘fool’ us. I remember this customer who liked the game of playing insurers against each other to his benefit.
He would invite you to quote, shows you the lowest quote; you go and adjust and then shows your lower quote to the other insurer.
This would go on and on until other insurers back off leaving the most desperate one with the lowest premiums.
Such an approach is not just an unethical but dangerous.
An insurer who is compelled to charge premium that is not commensurate is unable to collect sufficient premiums to the pool which may result in struggling to pay claims.
Further with incorrect premiums the insurer is unlikely to attract reputable reinsurers.
If this is the case then should there be a major loss the customer may struggle to recover while the insurer risks losing their reputation.
I had an interesting case one time where a particular customer went to a competitor who offered them lower premiums.
When a loss occurred that insurer struggled to pay and the following year the client came back to me and said they were ready to pay ‘higher’ premiums as long as there was assurance that their claims would be paid.
Insurance premiums constitutes of many components which includes pure risk premium, administration cost, profit among others. Insurers have shareholders who have invested money and at the end of the day expect a return on their investment.
Without prudent underwriting it is difficult to make a profit.
As an underwriter it should not be risk presented that must be accepted, the bigger picture of what constitutes premium coupled with the quality of the risk itself should always be in sight.
The next benefit is that of improving the risk. I recall an experience where one client was known to be a perpetual claimant and his was a loss making account.
I pursued that account and after winning it we sat down with parties involved and suggested some risk improvements.
When these recommendations were implemented the loss-making account turned profitable.
Lastly if customers are to be given proper expert advice then prudent underwriting is not an option. You cannot advise on something you do not correctly understand, remember ‘to insure is to understand’. Comments: webster@picz.co.zm or webster_tj@hotmail.com or on face book search for Insurance Talk-Zambia page or call/text 0977 857 055 (The Author is a Chartered Insurer with more than ten years industry experience)