I think we've got to learn to be a little more consistent in our approach to this great industry of ours.
Back in the dark ages, all business was one-on-one and 100 percent bespoke. Naturally this was expensive, time-consuming and inefficient.
As experience grew the early insurance companies worked out methodologies for pricing risk that allowed their thought processes to be streamlined and their operations made more efficient. None of this was perfect but it could be done because information had been gathered.
There was a bit of data. Underwriters had made a big step - they had started taking an ever so slightly more scientific view of risk and could have an informed opinion about geographic location, construction type, usage and protections. Once studied, the methodology could be codified and passed along the chain.
This allowed much more business to be written, and left real underwriters with more time to do what they do best - solve the problems of emerging risk. Happily they were never short of work, moving swiftly beyond fire insurance and into the modern world of ever more contingent, complex and casualty-flavoured risk.
The lesson has always been that once a risk becomes better known, its market is usually better served as it streamlines its processes and brings a different sort of capacity provider into play.
For example, there was a time when directors' and officers' (D&O) was a pioneering, seat-of-the-pants type of business class (and at particularly difficult times it can seem like it still is). Yet it was natural that as experience was accrued and claims were paid, confidence would increase and the line should evolve from bespoke to lineslip and from there to binder and proportional treaty. D&O is an awful lot more competitive than it was 30 years ago and our clients are far better served for it.
Now an underwriter can choose to build a portfolio of D&O business through binders and treaties but also try his or her luck out in the open market on bespoke big-ticket stuff. Both are valid forms of underwriting and both seek to achieve the same end - a balanced and diversified book of profitable business. It's just like the difference between individual stock-picking and allocating assets to a selection of funds - both strategies can make good money for the skilled.
In short, portfolio underwriting has always been with us and there is nothing wrong with it.
The shock of the new today is that now it is the brokers that are harnessing the power of information to identify and package interesting portfolios of risk and sell them on to the highest bidders with the best-correlated appetites.
Given the spectacular failure of many unsophisticated broker-led schemes of the past, this may be scary but should not be a problem today. The old deals failed because they loaded on cost without giving anything other than brute aggregation in return.
Today, the extreme firepower and sophistication at the brokers' fingertips can make for a very different proposition for all parties.
Clients are going to get an excellent deal and the market is always free to accept or decline. Ultimately all terms must be commercial or they will eventually cease to be offered.
Those that get over the shock, and start positioning themselves for the coming revolution are likely to be best positioned to reap the benefits. You can't stop the tide so you might as well learn to swim with it.
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Mark Geoghegan,
Editor-in-Chief,
The Insurance Insider