"We would have real difficulty constructing our products without the technologies available today." says Tom Dickson, Senior Vice President of Bermuda-based Centre Re. When finance and insurance merge as "finite risk," the customized programs that result are an outgrowth of ready access to comprehensive, well-organized data.
The analytical tools available on today's personal computers are transforming the role of the insurance underwriter. Today's most-effective underwriters are skilled in using computer-based financial and statistical analysis tools to shape the basic parameters of risk-financing programs. They are no longer limited to making decisions concerning pricing and acceptability of coverage terms for more standardized traditional insurance products.
Likewise, many risk managers have developed broader expectations when approaching insurance markets. According to Tom Dickson, "clients are thinking in a more sophisticated way. They have modeled their loss patterns and probabilities, established their correct level of risk retention, and are ready to employ modern financial technologies in designing their programs."
The trend away from insurance "commodity products," toward high-value, customized transactions is underlined by Bill Farrell of Reliance National in New York. Using computerized spreadsheets such as Lotus and Excel, and analytical tools such as "@Risk" and "Best Fit," Bill and a small team of underwriters at Reliance National design programs that develop premium volume considerably in excess of industry averages on a per-underwriter basis. In Reliance National's Financial & Specialty Division, a staff of fewer than fifteen are able to handle substantial premium volume by focusing on customized high-value transactions. Such programs are developed using financial modeling and personal computer-based technology. When Bill travels to meet with clients, a portable computer, diskettes, and spreadsheet software take the place of manila folders in his briefcase.
Where do these "new age" underwriters come from? Increasingly, leaders in the field of risk finance are emerging from fields that are seemingly unrelated to insurance in the usual sense. Bill Farrell's path to Reliance included a Ph.D. in Operations Research, positions with two airline companies, Arthur D. Little, and two Wall Street investment banking firms. The other 10+ underwriters in his division include two attorneys, three with actuarial credentials, one previously with the Federal Reserve, and one with a "pure insurance underwriting background."
With such diversity, it is not surprising that "finite risk" products have been designed to address risks thought to be conventionally "uninsurable." According to Bill Farrell, "Our approach focuses on a way of looking at business, rather than any particular line of business." Although nearly 2/3 of the alternative risk business written by Centre Re and Reliance National is reinsurance of high excess limits of insurance carriers in marine, non-marine, and aviation markets, a growing segment of the business pertains to risks that are not conventionally insurable" or in areas where traditional markets have substantially withdrawn, including residual value coverage, professional liability, domestic mortgage insurance, and certain credit exposures. More esoteric subjects of alternative risk insurance include coverage of water flows with regard to the ability to generate power and traffic levels required to generate toll road revenues.
When considering the feasibility of including such risks in a "portfolio" of alternative risk coverages, many of the principles of modern investment portfolio theory are followed. In particular, underwriters try to avoid multiple losses arising from a similar set of conditions or circumstances. According to Bill Farrell, "We carefully consider any correlation between risks that we underwrite."
Looking to the future, technology promises to take an even larger role in changing the face of insurance underwriting and the types of risks written. Using computer spreadsheets as attachments to E-mail, insurers, risk managers, and brokers will be able to collaborate in designing risk-financing models, incorporating the assumptions and parameters provided by each person in the negotiation process. Using available computer conferencing systems, this can be performed interactively, with video images and voice accompanying each participant's entry of data and assumptions onto the computer screen.
Using the Internet, Risk managers will be able to conduct preliminary evaluations of whether a particular method of alternative risk finance would be suited to their company's circumstances. This can be done by viewing examples on an insurer's World Wide Web Page, and then inserting information into on-line forms or program "templates." Simulated results and a graphical presentation then can be viewed during the same on-line session.
Allen Monroe, president of Financial Risk Consultants in Larkspur, California, can be reached by e-mail at email@example.com or (415) 927-8824.
Copyright ( 1995 RISK & INSURANCE. 747 Dresher Road, P.O. Box 980, Horsham, PA 19044-0980. Reproduced with permission of David Shadovitz, Editorial Director (215) 784-0910. Portions of the content herein first appeared in RISK & INSURANCE, in October, 1995.