Pricing and underwriting are critical aspects for the effective functioning of the property/casualty insurance industry. Successful companies recognize the need for a strong connection between these areas and how one may impact the other. This connection can include having actuaries working in the underwriting function.

Based on my experience and observations, there are a number of positives that both actuaries and underwriters can achieve from this close connection. Conversely, there are also some challenges that may need to be overcome. Let’s take a look at both sides.

The Benefits

Property and casualty insurance, especially personal lines automobile, is a highly competitive business and has only grown more so over the past several years.

While essential in the pricing role, actuaries can bring a unique perspective to underwriting that can result in success for the company. These include but are not limited to:

• Increased use of data and analytics.
• Increased operational efficiency.
• Improved risk selection.
• Increased use of catastrophe modeling.
• Better strategic alignment.
• Better connection of underwriting guidelines and pricing.

Digging deeper into these aspects, depending on the line of business, underwriting at times may rely too much on intuition or “gut feel.” While many underwriters have a deep knowledge of the insurance industry, they can benefit from augmenting that knowledge with the power of data and analytics. This is where actuaries can contribute directly, particularly with their ability to understand and analyze data. Examples are doing deep analyses of the business being written and business being quoted but not converted into policies. Also, using analytics to understand the resulting frequency, severity and loss ratios of business written at a refined level can prove useful in defining underwriting guidelines and selection criteria.

Taking this a step further, actuaries can also contribute to the underwriting function by using predictive models to evaluate expected future risk levels—helping to improve their risk selection processes for new business and to identify policies on which to take reunderwriting action.

Actuaries can contribute their analytical expertise to introduce or expand the use of catastrophe models as part of underwriting guidelines. This is an additional way for companies to leverage actuaries’ analytical expertise to enhance sophistication of risk selection methodologies.

Finally, it’s critical that both underwriting and pricing strategies are aligned. Actuaries that are embedded in the underwriting function, especially at the leadership level, can provide a critical link to help ensure business that is selected or retained has appropriate price levels available. This link can help an insurance company grow profitably.

While the underwriting function can benefit from including actuaries, I have also personally experienced that there are many benefits for actuaries who have the opportunity to be part of underwriting. First, this is a way for the actuary to get a better understanding of underwriting operations. While many actuaries interact with underwriters in some manner during the course of their work, there is no substitute for being right in the mix. It’s like taking a foreign language class versus actually living in the foreign country. Being directly part of the conversations and strategy setting was invaluable and provided me a new and expanded perspective.

Being able to tap into decades of expertise from underwriters and underwriting leadership is a way for actuaries to expand their knowledge of the business and gain valuable historical perspective, different from what they have gained from their actuarial function. This can also translate into helping actuaries better understand and analyze data, see trends in different ways, and ultimately be a better and more well-rounded actuary. Finally, working in the underwriting function can also provide actuaries a way to connect to customers on a closer level than they may have in their actuarial role. Spending time with front-line underwriters in various functions (new business underwriting, reunderwriting, call centers, etc.) provides a way to connect the decisions that an actuary makes to the impact on individual customers. Having that perspective is invaluable.

The Challenges

In spite of all the benefits, there are also challenges that can and will likely be encountered by both actuaries and underwriters when actuaries are brought in to the underwriting function. While increased use of data and analytics can greatly improve the underwriting process and enhance the jobs performed by underwriters, it can and often is seen as a way for underwriters to be replaced. It is true that some rote functions can be eliminated. But just as has been demonstrated in many industries over time, this is a way to make the company stronger—by allowing the underwriter to perform more complex tasks and enriching their jobs. That can be a major change management initiative, however. Also, underwriters will likely need to learn new skills related to data and analytics. Depending on backgrounds, this may be challenging but well worth the effort, in my opinion, both for the individual underwriter’s future success as well as that of the company.

The actuary will also encounter several challenges becoming part of the underwriting function. While actuaries are generally well-respected for their knowledge of data and mathematics, they may need to show that they know “the business.” The way actuarial work interacts with many functional areas within a company—underwriting, claims, marketing, IT, etc.—an actuary does have the ability to gain a very strong foundational knowledge of the insurance business. But the perception may exist that actuaries are just number-crunchers. Showing that they know the business is a key early step to gain credibility.

Working in an underwriting function can also challenge an actuary’s communication skills. While underwriters are experts in their field, they are not typically experts in data, analytics or modeling. So, the actuary will need to explain his or her work in a clear way that is consumable by audiences that are not as technical. And taking this a step further, actuaries will also need to show the value of using data and analytics to underwriters and underwriting leadership.

Convincing underwriters they should change can be a lengthy process and will involve many conversations and examples. It also may mean that the ultimate solution will need to be phased in, allowing the change management process to work as positive steps are taken to use data and analytics more fully.

Finally, an additional challenge an actuary may face is the “gray area” that is a part of underwriting. While for filed rates, all of the same inputs will yield the same result (price), for underwriting, the notion that judgment can come into play means that, even following the data and analytics, results ultimately could be different in different situations. This also gets into the concept of how much judgment should be included in a decision—how much a model provides the decision versus a recommendation that the underwriter takes into account in the final result. This concept of analytics or modeling existing in the realm of judgment can be quite a change for many actuaries, though it is also a great opportunity to test how confident they are in their models and acknowledge potential shortcomings.

In the end, for an insurance company to be highly successful, underwriting and pricing must be in lockstep from a strategic and tactical standpoint. What better way to help make this happen than by having actuaries be part of the underwriting function? In doing so, both actuaries and underwriters stand to gain significant knowledge of the other discipline, which only further strengthens employees and the company. So, as an actuary, if you get a chance to apply your skills to an underwriting team, my advice is to take that leap.