Insurance: Changing the focus from Gross Written Premium to making Underwriting Profit

The newly revived Chartered Insurance Institute of Ghana (CIIG) held its second Educational Conference and Annual General Meeting in Kwahu at the Rock City Hotel from the 18^th – 21^st of September, 2019. This brought over a hundred (100) Insurance professionals together. These Professionals included both the old and young generations. It was such an exciting scene to behold.

It was an opportunity to discuss one of the pertinent issues the insurance industry in Ghana is currently facing. With data presented by the main speaker on the topic, “Quality of Underwriting and Claims Handling and its impact on Underwriting Profit”, only six (6) insurers made underwriting profit last year (2018).

Underwriting profit/Loss was defined by Ing. Solomon Twum Barima, the main speaker as the trading results of insurance activity. It is derived by deducting claims costs and operating expenses from the earned premium of the Underwriter. Positive results indicate underwriting profit whilst a negative result indicates an underwriting loss. The core insurance business activities are underwriting risks and paying claims. According to the main speaker, the quality of underwriting and claims handling are the two major factors that determine the operational efficiency and therefore the profitability of the business.

Consequently, if insurers are not making positive underwriting results, then there is something fundamentally wrong with the execution of their two core operations, that is underwriting and claims handling. I was invited as a discussant on this topic and below is the paper I presented after the main speaker;

Introduction

Let’s take an example of someone who goes to see a doctor; do they force the doctor to rush things or compromise their practices? A patient will wait for a doctor to do his part professionally. Insurance is a means to bring the insured to its original economic position after he has suffered an insurable loss. Insurance gives this assurance. And this is the impression created in the mind of the insuring public. Insurance is a pool of risk and before any risk is accepted into the pool, it needs to be assessed properly.

Some scholars simply define Insurance Underwriting as the link between the completed proposal form and the policy that is issued.

Proposal

underwriting

Policy

Assess the risk coming to the pool

Seek for more information if necessary

Decide whether to accept and if yes at what cost

Determined the terms, conditions and scope of cover to be offered

The above is the underwriting processes but what do we see. Insurers don’t see risk first but rather, see premium (money). They do everything so that the money will not go to another insurer. Whatever is the nature of the risk, it would be accommodated some way or somehow. I am very sure at some point insurers even forget insurance is a pool of risks from various individuals and corporate bodies and people must pay a commensurate premium for their risk.

For instance, if we form a welfare club and we ask each member to pay GHS100.00 each month to cover for compensation for the death of each member’s father. Do you think we will accept someone willing to pay GHS50.00 every month? Even if we will accept the person, will the individual receive the same compensation as those paying GHS100.00? NO! Sorry to say this, but people who are not insurance professionals but are managing welfare clubs do the right thing. Below are some of the wrong practices in terms of underwriting by most insurance companies;

Proposers are not completing proposal forms again and the reason is, we don’t want to keep them waiting
Most completed proposal forms are not even signed by proposers and this form is supposed to be the basis of the contract.
We feel it is a worry to the client to seek additional information, even, copy of their Driving license when underwriting motor insurance.
We do comprehensive insurance for motor vehicles without even inspecting them. Insureds can claim damages that were already there before the policy was incepted.
No Insurer now worries itself by asking for the claims history of proposers again.
We have stopped issuing policy documents to clients. On which basis do we handle claims when there is a loss?
All insurance policies have become standard and the same policy documents are issued to every client but we know that risks are never the same in terms of physical and moral hazards.
Most taxis have switched to the use of LPG which increases the risk exposure but that is none of our business as insurers.
Moral hazards of clients which have to do with their behavior, attitude and character are not considered in underwriting by insurers again.
No Claim Discount and Fleet Discounts do not serve their purposes again. They are just a means to reduce the premium when clients complain about the high cost of the premium.
This seems to be a no-go area but most insurance companies are losing all direct businesses even though they have direct marketing staff who are paid every month to bring businesses. Commissions are paid on every business and this goes to reduce the earned premium. Insurers should take note of the commissions they are paying on their Income and Expenditure account statement.
Some Insurance professionals reduce premiums because the insureds are their family members or friends. Simple question, can your sibling reduce the loan interest rate for you at his bank just because you are his sibling. He cannot do it even if he is the Chief Executive Officer.
People spend huge thousands of money to purchase the vehicle of their choice. They also make provisions for all other expenses in connection with the registration of the vehicle and all other things. The only cost left to negotiate is insurance. Insurers are just at the mercy of clients. Clients determine the amount they want to pay for the risk they are presenting.

Do we do underwriting at all in our various companies? If we do not underwrite businesses, how do we expect to get underwriting profit?

Below is a typical income statement of insurance companies:

*Gross Written Premium*			20,000.00
Less: Reinsurance Ceded			500.00
Net Written Premium			19,500.00
Change in Unearned Premium			500.00
Earned Premium			19,000.00
Commission Receivable		100.00
Commission Payable		(5,000.00)
Net Commission			(4,900.00)
Claims Paid	5,000.00
Claims Recoveries	200.00
Net Claims Paid		(4,800.00)
Prov. For O/Standing Claims B/F	500.00
Prov. For O/Standing Claims C/F	600.00
Net Prov For Claims		(100.00)
IBNR		(100.00)
Net Claims Incurred			(5,000.00)
Underwriting Results			9,100.00
Total Direct Mgt Expenses			(2,000.00)
Underwriting Gain/(Loss)			7,100.00

There are some components in this income statement that insurance companies can control well to have positive underwriting results. These include the following;

Gross Written Premium

The main income from the insurance core business activity is the gross written premium. A gross written premium is the total amount customers pay for insurance coverage on policies issued by a company during a specific period. The gross written premiums factor in the amount of premium charged for a policy that has already become effective, regardless of what portions have been earned. There are various ways insurance companies undercut or underprice premium and this goes to reduce the gross written premium they should have realised. They do this through;

Reduction of premium rate
Free discounts giving and waiving required Loadings
Change in Risk category ( Art/Tanker underwritten as Own Goods)
Packaged / Group Policies (i.e. Health Staff, Bankers, Security Service, Drivers Unions, etc)

Let’s appreciate this through this example: Art / Tanker, 2003 year of manufacture with sum insured of GHS500, 000.00 @ a rate of 8%. We end up using 4% because we consider the risk category as Own Goods and allow 25% NCD and 15% FD. Age loading is waived. Because we need more vehicles to insure we pay the TM commission rate of 15%.

How much have we lost from this business? And consider if we are insuring 200 of such vehicles.

Actual Premium	Premium Charged thru bad underwriting
GHS 43,726.50	GHS 13,090.63
Premium difference	30,638.87

Total Premium Lost from 200 vehicles through bad underwriting: GHS 6,127,174.00

We should remember that charging a lower premium rate and giving these discounts does not lessen the risk and this means expected claims remain the same or could even be more. When we undercut, what it means is that we need to get more businesses to achieve the same target. By so doing, we also bring a lot of risks into the pool and this means our exposure increases.

Are we competitors? If we are competitors then why are we here together for this conference to find the best way to make our industry grow stronger? Why insurance companies cannot share information among themselves is very strange to me. I have always said that insurers should not see themselves as competitors. No! Our competitors are other institutions that can provide some of the services we are providing now. This calls for unity and cooperation among all the insurers.

Commission Payment

Another cost which is gradually increasing in our books is the commission payable. Most insurance companies do not have direct businesses anymore. We are paying commissions to unauthorized people from the premium we are receiving. Illegal Commission payments are made to the people below;

Employees of Insureds
Staff of Insurers
Brokers have increased their commission rates
Bank Staff who refer businesses to insurers, etc

If this is paid, what will be left to cater for claims and other management expenses? Most Transport Managers, Accountants, and even some insureds are taking commissions on their premiums paid.

Claims Handling

To give a customer quality service in terms of claims, there are two dimensions, made up of “output” and “process”. The output has to do with the actual outcome and the process has to deal with the step-by-step sequence of activities before the outcome.

Insurers are in the business of accepting risks from various individuals or corporate bodies and pay claims to them when there are any insuring losses. Until there is a claim, all that we do is just selling a promise. Insurers sell a promise and trust is more important for insurers than any other type of business. “Promises were a lot like impressions. The second one didn’t count for much.” ― Kristin Hannah.

The benefit the insuring public seek to achieve from insurance is not primarily the payment of claims but the peace of mind, security, protection and the assurance that they would be restored to the same financial position they were before a loss occurred. Insurance also helps individuals to build wealth to meet specific needs in the future. How do you reconcile the peace of mind insurance is supposed to provide and the hassle or stress one has to go through to get this peace of mind. There is a public perception that, insurance companies do not want to pay claims. This is different from, they don’t pay claims. They pay claims but their attitude and the time it takes them before payment is done shows that, they wish they don’t pay. Most have to resort to arbitration or the judicial system before payments are made. The public need trust and confidence in the insurance sector. The only way to get this trust back depends on a lot of activities that insurers need to do. These include;

Simple, Quick, Transparent, Communicative way of paying claims

The National Insurance Commission have published the claims payment guidelines for non-life insurance companies. It is not supposed to take an insurance company more than a month to pay a legitimate claim after all necessary documents have been submitted and claim is admissible.

We have failed as insurance professionals and as insurance industry if:

People do not understand what we sell
People don’t know what they have to do when there is a loss
When people complain about our services
When people feel we are not prepared to pay their claims by demanding so many documents

Claims Recovery

Claims recovery is another way insurance companies could have recouped some money to reduce the cost of claims. But what happens on the ground is rather suggesting otherwise.

Insurances companies delay in the sales of salvage which leads to deterioration and not getting much from it.
Salvage in most cases is left unattended to and theft of some salvage or part at our blind side leads to loss of income.
Client beat down salvage prices with the promise of giving us new businesses
We sell salvage to people we know below the salvage prices

Conclusion

And as the President of the Chartered Insurance Institute of Ghana, Rev. Asante Marfo – Ahenkora rightly said, we have to go back to the basis where all insurance companies were having Chief Underwriting Officers. They were responsible for all underwriting duties. They are supposed to sign off every quotation or underwriting document that goes out from the company. These Officers should also be professionals who should be declared fit and proper by the regulator. They can also be sanction individually by the Chattered Insurance Institute of Ghana when any bad underwriting is detected under their supervision.

Again, Market leaders in terms of financials should also be allowed to quote for the big businesses and co-insure with the smaller ones. This will help in generating more premium and also more premium will stay in the country.

Last but not the least, the focus of the insurance industry should be moved from honouring those with big market share and greater gross written premium to those making underwriting profit and insurers paying more claims and on time as well.

If we cherish our industry as we say, let’s do it now or never!!!!!!

justice@jusbelriskconsult.com