Library: McKinsey – Underwriting talent: Strategies for property and casualty insurers

Executive summary:

In property and casualty (P&C) insurance, it is becoming increasingly important to find expert, judicious underwriting talent that can connect information from disparate fields to risks—especially as risks become more complex and the stakes get higher. However, the structure of the underwriting function at most carriers has not evolved to facilitate this work. The loss environment has changed profoundly as catastrophic events have become more frequent1 and as the economy has become more interconnected. At the same time, technological progress holds enormous promise as a supplement to human underwriting judgment. Effectively engaging with and addressing these trends will require a different kind of underwriting function.

P&C: those carriers who fail to evolve will face talent gaps 

Commercial midmarket, large, and specialitty underwriters should become more like hedge fund portfolio managers. Like hedge fund managers, underwriters are required to be responsive to fast moving changes, to combine technology and sharp judgment to distill diverse trends into individual risks, and to oversee often expansive portfolios. The underwriters who do these things best can create an information advantage and, thereby, an outsize commercial impact by focusing their expert judgment on areas of the greatest opportunity.

Develop your underwriters

Insurers that want to counteract quickly evolving risks should update their talent strategies to attract, develop, and retain the best underwriters. This means not only refining the work underwriters do and how they do it but also developing their skills and helping them progress in their careers. Specifically, insurers should systematically support underwriters’ learning and development, empower them in their day-to-day work with simplified processes and technology-enabled tools to handle increasingly large books of business, measure performance and link it directly to incentives, and provide career paths that allow underwriters to focus on growing their underwriting expertise while progressing to more senior roles. Carriers that do not evolve will face talent gaps and an erosion of underwriting performance.

Underwriting in an increasingly complex world

Risks across P&C lines are becoming more complex, frequent, and severe, threatening carriers’ profitability. This shift makes the work of underwriting more demanding while also raising the stakes. At the same time, low interest rates—averaging 0.5 to 3.8 percent between 2010 and 2021—are putting additional pressure on underwriting performance.2 In this context, it is all the more important to combine judgment with a sharp eye for data and trends to properly select and price risks.

The risks facing underwriters have also evolved. For instance, litigation in the United States has driven up losses for directors and officers (D&O) coverage in casualty lines, and regulations in the European Union and the United States will likely support continued strong demand for cyber insurance. Even the structure of the global economy has changed: the largest publicly traded companies have grown, with the five largest public companies in the United States growing from a total valuation of $1.59 trillion in April 2001 to a valuation of $8.19 trillion in April 2021.

These companies have multinational exposures and increasingly complicated supply chains that contain numerous and diverse risks, including risks related to intangibles such as intellectual property and reputation.

Not all bad news

The changes are not entirely grim. Technological advances promise to fuel underwriting as a science. For instance, the rapidly declining cost of sensors used for the Internet of Things (IoT)—the average cost of an IoT sensor has fallen drastically in the past two decades—will help increase usage and generate more data that can reduce losses. In parallel, image-recognition accuracy rates for computer vision have already exceeded human performance. These tech tools create more—and richer—data points underwriters can use to understand loss potential, approach underwriting in a more analytical way, and supplement their own judgment.

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