Risk Assessments: the Critical Heart of Underwriting

Underwriters must do their homework and those who do that will generally have solid results.

Insurers, by definition, are in the business of risk. Hence, risk assessment is a critical aspect of day-to-day operations. That said; it always helps when the risk being presented is done so in a clear manner.  It is a fact that most insured’s are proud of their businesses – they know their exposures better than anyone else. It therefore follows that having direct access to the insured generally provides an insurer with the best way to see firsthand the risks being considered. Underwriters who have work experience in the field, also benefits the risk assessment process. Unfortunately, with so many naïve insurers in the mix, all looking for income, risk assessment is often overlooked for quick income. It all adds up to disaster for insurer and insured alike.
The insurer can assess and evaluate risk, but it is the owners who are the first line of fire to lessen that risk. For example, safety management must be seen from top-to-bottom in any organization. A well trained management team capable of communicating a culture of solid safety management to the core workforce is a good place to start. This includes keeping up on the latest loss prevention techniques, training seminars and having zero tolerance for those who do not take heed to what could keep them and their co-workers alive. The best operators are the ones who take extreme pride in what they do.  Accepting less than the very highest standards simply will not work for the long haul.  Luck will run out eventually.

Underwriting Criteria
There is no one single criteria that would give an underwriter absolute assurance that the risk is acceptable. But, this starts with certifiable historical data. Too much or too little information can be equally confusing.  Older tonnage is not a disqualification, but being old and neglected certainly is. Using quality field surveyors, engineers and industry knowledgeable talent helps an underwriter to consider the risk in the best context possible. The last thing an underwriter should do is make decisions based on salesmanship without taking into account all aspects of the risk. Underwriters must do their homework and those who do that will generally have solid results.
Many important variables influence the decision to either write policies or give favorable rates, when we do. No one value is more important that the others but some of the key values the savvy underwriter looks for include:
 

• Experience & Staying Power: a prospect that has been in business for 5+ years. Exposing an insurer’s capacity on a new venture is problematic. The expansion of vessel ownership for new owners is a positive trend, but there is a learning curve for many of these new companies. Insuring new vessel owners is considered, but we are careful in our assessment of their experience. 
• Certifiable Loss Record: We prefer to see a loss record generated by a respected marine underwriter. Unfortunately there are a number of insurers who have no track record managing marine claims. Close inspection of the claims record often reveals sketchy data and poorly kept records. Claims personnel should have extensive experience handling all types of maritime claims and should know what is likely to be a reasonable outcome.
• Employee Benefits: When an insured spends wisely providing benefits such as medical, 401K and pays their people on the higher end of the pay scale, we believe that will ensure a happy work force. The better insureds consider such benefits a necessity. This in turn promotes low turnover.
• Knowledgeable Management: Most insureds know their business. However, having a solid support staff coupled with experienced senior management allows the insured to make informed decisions and grow their company. This aspect of the business should be vetted as closely as the equipment itself and the people who operate that equipment. 
• Well maintained equipment: Look for vessels that are clean and well maintained. If a vessel owner scrimps on vessel maintenance and older vessels look their age, almost assuredly that owner will cut corners that will come back to haunt them.

The Role of the Underwriter
The term underwriter is used loosely in today’s marketplace. There are some solid well trained and mature underwriters left in the business, but underwriters are not the ones operating the insured’s business. Nevertheless, an underwriter interested in a long term relationship will not fail to have a direct frank discussion with the insured and continue that communication throughout their relationship. Every account looks good on paper notwithstanding the respective loss record. Digging beneath the paper surface is imperative. The goal for any reputable underwriter is to visit all insured’s annually – in person and using their field assessment representatives. 
Field assessments are something we at Continental Underwriters do year in and year out. But, it would be a mistake to focus only on the less-than-stellar performing accounts. In fact, good performing accounts can become a blue print for those lesser performing insureds.  It is then that a serious underwriter can share constructive ways for other insureds to improve their results.  It is with this holistic approach that we hope to share what works, rather than look at only the negative side of a vessel owner’s operations.
 
Evolving with Inland Operators
At one time – a very long time ago – Continental Underwriters carefully limited writing policies for inland towboat operators because of their unreliability and poor track record and lack of safety management systems. But that was then; this is now. Today, Continental Underwriters is one of the most prolific brown water underwriters in the business. To that end, the American Waterways Organization (AWO) has had a big effect – a positive one – in the brown water sector. The SubM Towing rules promise much of the same, especially for that sector of the market not yet on board with the AWO protocols. But, safety is a given regardless of the safety management systems being used.
We rate accounts on a number of criteria. We are hopeful that the U.S. Coast Guard will adopt a meaningful safety management system that all serious owners can readily accept and implement. We also know that the inland towing industry has been working very hard with the Coast Guard to establish regulations that are not seen as routine, but can be used to save lives, prevent injuries and minimize the loss to vessels. Safety seems like a very simple process but when you deal with people, weather and equipment, most anything can happen despite the best safety management system.

Eliminate the Unknown, Mitigate the Risk
We consider all elements of marine insurance risky. However, insuring the unknown is always a challenge. Insuring the interests of loss of life, illness and injury where judges and juries can award huge monetary awards is very perplexing for an insurer. Professional insurers know all too well how fast a good year can turn bad with such unknowns. And, for example, the U.S. court system is all over the map, depending on where a claim is being litigated.
While a close and long term relationship is critical to long term success for both the insured and for the insurer writing the policies, sometimes this isn’t possible in the beginning. Insurers usually get their information from an application. Relying exclusively on that document does not paint an accurate picture of an insured’s operation. At Continental, we drill down and ask peer groups what they know about an account. The input of surveyors, attorneys and other industry professionals is valuable, as is the ability to compare older submissions with the one in hand. Underwriting is not simply pulling a rate from a rate book; it involves the keen sense of what is being presented and asking the right questions in order to be able to arrive at a decision to put a price on the table.
At the end of the day, insurers do not reduce risk for clients other than by restricting coverage, which usually doesn’t work. A good way to help a serious insured improve their results is to partner with them in risk sharing. Without exception, insureds who opt for higher retention will make sure that they do everything possible to save their bottom line. Helping an insured understand risk reward will help that insured understand that insurance should be used for catastrophic losses and not as a maintenance policy. A thorough risk assessment will make that very clear.

(As published in the 2Q 2014 edition of Maritime Professional - www.maritimeprofessional.com)