Advisen FPN

Risk Manager FPN - Wednesday, August 17, 2022

What's Better Than "Price Adequacy" for Long-Tail Exposures? Individual Risk-Based Underwriting, Every Time


What's Better Than "Price Adequacy" for Long-Tail Exposures? Individual Risk-Based Underwriting, Every Time

By Joseph Cellura, Allied World

Over the past few years, commercial casualty pricing has undergone a significant correction, with double-digit price increases becoming the norm across most segments. Now, much is being said about the market achieving price adequacy. However, a closer look at that vernacular is warranted in order to fully understand what is necessary for true sustainability.

Merriam-Webster defines the word adequate as “sufficient for a specific need or requirement.” For casualty underwriting, that need is ensuring the strength and stability to deliver on promises to insureds made today in claims that may not arise for many years to come. Claims that will likely stem from exposures we have not even contemplated today. Remember asbestos? A decade ago, who knew how high nuclear verdicts would rise or the upheaval a global pandemic would cause across the globe?

Adequate pricing conveys the idea of pricing that is sufficient “for now,” for a particular negotiation. That mindset, however, perpetuates mistakes of the past, rather than promoting a marketplace that is sustainable and stable for the long-term. 

With many insurers feeling more confident that past inadequacies have been remediated, this is an opportunity to create a new paradigm in the underwriting of long-tail lines. As an industry, we should consider shifting our mindset to one not focused on immediate adequacy, but on building greater certainty and stability for the long-term. Three considerations are critical to this mindset:


Fundamentals, First and Foremost

Blanketing risk pricing under the notion of “adequate” is contrary to what we do as underwriters. Considering the exposures of a specific business, its operations, locations, and claims experience – examining each risk holistically on its individual merits -- is fundamental to sustainable underwriting. It’s the antithesis of blanket underwriting and the definition of underwriting discipline – and it reduces the need for future corrections.


Look Ahead and Track the Trends

Being on forward-looking footing is critical to sustainable underwriting. This requires looking into the future, considering trend factors and global volatility. It sounds basic, but it can easily be brushed under the rug when “adequacy” is your benchmark.

Many factors point to a continued rise in liability exposures, including inflation, litigation funding and rising medical costs which continue to drive up the severity of jury awards and nuclear verdicts. Plaintiff attorneys will continue to find ways to drive awards higher. Climate change, fueling an unprecedented frequency and severity of extreme weather events, including wildfires, must play into the liability calculus. And while ongoing advances in technology provide opportunities for risk mitigation, they also amplify cyber and network-related liabilities.


Stand Apart with Transparency and Trust

When corrections are no longer part of the equation and preconceived notions of price “adequacy” are put aside, individual risks have the opportunity to shine. Turning the focus to individual risk underwriting is an opportunity for insureds and insurers alike. When the insurer-insured relationship is grounded in trust and transparency, carriers can gain a true understanding of a company’s business practices and risk mitigation investments, current and planned. Insureds and brokers have the opportunity to differentiate their risk, the company’s safety practice and philosophy. At the same time, insurers can – and should – be very transparent about how they arrived at risk pricing. Everyone walks away confident that they have a program priced right, from a carrier that will be there to deliver on their promises today, and years down the road.

While corrections in long-tail risk pricing have been widespread for several years, moving forward, the market has the opportunity to price risks to build a stable and sustainable future, rather than rectifying the past.  As an industry, let’s learn from the lessons of the past and seize this opportunity to ensure pricing that is truly adequate for the long term.

About the author: Joseph Cellura is President of North America Property & Casualty for Allied World. Joseph joined Allied World in 2008 as Senior Vice President, U.S. Casualty located in New York. Joseph has had roles of increasing responsibility and is currently President, North America Property & Casualty. In this role, Joseph is responsible for the production and profitability of the following lines of business: Accident & Health, DBA, Environmental, Excess Casualty, Primary Casualty, Primary Construction, Programs and Property. Prior to joining Allied World, he held various roles at AIG, including responsibilities as a senior manager for the umbrella/excess casualty group, senior management responsibilities in the environmental risk division and leadership responsibilities in the construction practice group. Joseph holds a Bachelor of Science degree from the University of California at Davis and serves on the Board of Directors for the Spencer Educational Foundation, the Educational Alliance Board of Trustees and the New York Advisory Board for the Concussion Legacy Foundation.


This material is provided as a resource for informational purposes only. It is not intended as, nor does it constitute, legal, technical or other professional advice or recommendations. While reasonable attempts have been made to ensure that this information is accurate and current as of its publication date, we make no claims, guarantees, representations or warranties, either express or implied, as to the accuracy, completeness or adequacy of any information contained herein. Consult your professional advisors or legal counsel for guidance on issues specific to you.  Additionally, this material does not address all potential risks and may contain time-sensitive information. No responsibility is assumed to update this material and there is no guarantee or representation that this information will fulfill your specific needs or obligations. This material may not be reproduced or distributed without the express, written permission of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Actual coverage may vary and is subject to policy language as issued. Risk management services are provided by or arranged through AWAC Services Company, a member company of Allied World. © 2022 Allied World Assurance Company Holdings, Ltd. All rights reserved.

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