Low-interest rates mean that P&C leadership teams are facing increasing pressure to generate heftier margins from their underwriting operations. More at http://gt-us.co/1japuAu

1. Matthew Tierney, Principal, Business Advisory Services,
Grant Thornton LLP
Joseph F. Morris, Founder and President, P&C Insurance
Company Strategies, LLC
When it comes to maximizing underwriting revenue,
many property and casualty (P&C) insurance
companies are missing some key ingredients. Many
firms — even the large international P&C companies
— do not generate the data or metrics they need to
monitor and manage their underwriting operations
effectively. In other cases, insurers are choosing to
focus only on written premium volume and calendar
year combined ratios, which are only part of the story.
As we look ahead, it will be critical for companies to
generate increased margins from underwriting since
low-interest rates mean investment operations will
contribute less toward total return on equity (ROE).
It wasn’t that long ago that a P&C insurance
company could generate 75% of its ROE goal
from its investment portfolio. For example, if a
company’s ROE goal is 12%, 9% would be produced
from investments and 3% from the underwriting
operations. To produce a 3% underwriting return,
a company could write to a 98-100 combined ratio,
depending on a company’s operating and investment
leverage. In today’s low-interest rate environment,
a company will need its underwriting operation to
produce approximately 50% of its ROE goal —
which translates into a 90-92 combined ratio.
5 P&C underwriting metrics
to increase profitability
The two roads to new business
1. Direct underwriting — Insurance carriers that source
their own business
2. Indirect/program business — Insurance carriers that
empower others to write business on their behalf:
– The insurance carrier makes an agreement with a
managing general agent (MGA) to source policies for
the carrier
– The MGA can underwrite and price business on its own
and issue on the carrier’s paper
– The carrier must rely on the MGA’s systems and metrics
In short, getting a handle on underwriting metrics
can significantly boost profitability. How an insurer
sources business must be a part of any improvement
initiatives as well. To improve profitability on
underwriting margins, insurers must calculate and
analyze five key metrics on at least a monthly basis.

2. Metric No. 1: New business success rate
Success means writing new business. Understanding
where new business comes from means developing
and analyzing metrics to identify where the P&C
insurer has been successful (or unsuccessful) in
writing new business in the past. Some key guideposts
are measuring submission activity through to new
business premium and average new business account
size written. In addition, it is critical that these metrics
be generated at an underwriter, agent, line of business
and product level to fully understand where the
insurer’s operating performance is exceeding or falling
short of expectations.
Metric No. 2: Renewal retention statistics
Growing a company’s premium volume begins with
retaining existing clients. Insurance companies should
measure their ability to retain existing clients on
both an account and premium basis. For example, by
measuring both accounts and premiums, a company
will be able to determine if they are more or less
successful in retaining large versus small clients.
Similarly, other measures can be used to identify the
most profitable customers. The metrics should reflect
more than just volume — the quality of the business
can be even more important.
5 P&C underwriting metrics to increase profitability
Current year Prior year % increase
Submissions received 10,000 11,500 15.0%
Quotes 7,000 8,300 18.6%
Quote ratio 70.0% 72.2%
New business bound 2,200 2,750 25.0%
Hit ratio 31.4% 33.1%
Bound to submission ratio 22.0% 23.9%
New business premium $7,700,000 $11,200,000 45.5%
Average new business account size $3,500 $4,073 16.4%
Example: New business success rate report
A gap analysis can identify target
improvement areas
Grant Thornton LLP often works with insurers to analyze
operational platforms and/or systems to get them to a
target underwriting model. We recommend performing a
gap analysis that benchmarks the company’s underwriting
operations with best-in-class companies and processes —
the gaps that emerge can be isolated, and relevant strategies
can be built. In most cases examining and acting upon the
five metrics we discuss here will assist in this process.
2

3. Metric No. 3: Pricing
With the wide range of rating algorithms and classes
and lines of business, building a data-driven rate
monitoring database and reporting mechanism is the
most challenging metric for an insurance company to
generate. Yet, there is no metric more important in
determining if an insurance company is on target to
achieve its underwriting margins than how its book of
business is priced compared to manual rate levels and
rates charged on the expiring book of business.
When developing pricing metrics, comparisons
need to track price levels for new business separate
from renewals and changes in its manual rate levels
separate from changes in judgmental (discretionary)
price levels. Pricing levels should also be measured
by underwriter, agent, line of business and product,
and include additional coverages, not just base rate
changes. Also, price levels should be adjusted for
changes in limits of liability and deductibles.
5 PC underwriting metrics to increase profitability
Like new business, the renewal retention statistics
should be produced at an underwriter, agent, line
of business and product level to fully understand
where the company’s retention results are exceeding
or falling short of expectations. The denominator for
the retention ratio calculation should be the expiring
number of accounts and corresponding expiring
premium immediately before the expiration month.
The numerator for the retention ratio calculation
should be the number of accounts renewed and the
corresponding renewal premium, excluding price and
exposure changes at renewal.
Any further analysis should take your distribution
channels into account. Oftentimes the metrics related
to direct and/or indirect business can increase your
ability to analyze the retention ratios even further.
The metrics should reflect more than
just volume — the quality of the
business can be even more important.
Prior year Current year
Counts Premium Counts Premium
Expiring available for renewal 5,750 $23,000,000 7,143 $30,000,000
Renewed 4,350 $18,000,000 5,500 $21,000,000
Renewal retention ratio 75.7% 78.3% 77.0% 70.0%
Example: Renewal retention ratio report
Prior year Current year % increase
Manual
rate
level
Discretionary
modifications
Actual
price
level
Manual
rate
level
Discretionary
modifications
Actual
price
level
Manual
rate
level
Discretionary
modifications
Actual
price
level
New business 1.0 0.865 0.865 1.075 0.880 0.946 7.50% 1.73% 7.63%
Renewals 1.0 0.920 0.920 1.075 0.940 1.011 7.50% 2.17% 7.67%
Total 1.0 0.900 0.900 1.075 0.918 0.986 7.50% 1.94% 7.65%
Example: Price-level report
3

4. Metric No. 4: Execution of claims best practices
If you asked a PC insurance CEO or chief claims
officer to describe their claims best practices, they
might list the following:
• Assignment and early contact
• Coverage confirmation and analysis
• Investigation
• Evaluation
• Reserving
• Litigation management
• Negotiation and disposition
• Subrogation, special investigations unit and
salvage/recovery
• Reinsurance and notification
• File management and documentation
However, if you ask these same executives to produce
a financial report that lists metrics that monitor the
level of execution of these claims best practices, few
would have metrics to share with you.
Each of these claims best practices can be measured,
and ultimately, these measurements would indicate if a
company is overpaying claims. For example, assignment
and early contact can be measured in three areas:
1. Time between the date of loss and the date the
claim was reported to the company
2. Time between report date of the claim and date
assigned to the claim examiner
3. Time between date of assignment and date
that examiner contacted all applicable parties
for the claim
Some of these claims best practices will be difficult to
quantify by way of an automated report. However,
quality assurance reviews could be used to supplement
quantitative metrics in this area.
No matter what strategy the insurer uses, speeding
up the process is a clear best practice. Historical data
supports that the longer the time frames, the more
likely the examiner will need to pay a higher amount
to close the claim file.
5 PC underwriting metrics to increase profitability
There must be an appropriate level of granularity from
both indirect and direct business for pricing — the
ultimate goal for any insurer is a uniform platform
to run those pricing metrics. This is not always
possible because of aging legacy systems, which can be
financially prohibitive to replace. For many insurers,
it seems more palatable to maintain the existing
underwriting, policy issuance and claims systems. This
leaves them in a quandary — not getting the data they
need, but believing their situation is less painful than
making a major investment of time and money in new,
up-to-date systems.
Many insurers haven’t considered viable “bridge
solutions,” which are designed to squeeze more
out of existing systems without major investments.
When purchasing new technology is not feasible,
management should fully explore this option.
No matter what strategy the insurer
uses, speeding up the process is a
clear best practice.
4

5. Additionally, by limiting losses to a frequency layer,
it allows insurers to understand how the occurrence
or absence of large losses affects current profitability.
Finally, by excluding unallocated LAE (the costs of
a company’s in-house claims staff), this metric helps
insurers zero in on all external costs of the claim
adjustment process. Like the metrics described earlier,
companies should generate accident year loss and
allocated LAE ratios at the underwriter, agent, line
of business and product level, and the reports should
include the three latest accident years in order to
review trends over time.
5 PC underwriting metrics to increase profitability
Metric No. 5: Accident year limited loss and
allocated loss adjustment expense ratio
Limiting losses to a frequency level in an accident
year loss and allocated loss adjustment expense (LAE)
ratio is the best way to evaluate the performance of an
underwriting operation. An accident year approach
is better than a calendar year approach because prior
year reserve changes are properly reflected in their
appropriate accident year.
Accident year limited loss and allocated LAE ratio ($100,000 loss limit)
(Dollars in thousands)
Earned
premium
Paid losses
and
allocated
LAE
Outstanding
reserves
Reported
losses and
allocated
LAE
IBNR
reserves
Losses and
allocated
LAE
incurred
Loss and
allocated
LAE limited
ratio
Liability (Target ratio = 38.0%):
2011 accident year $4,250 $950 $550 $1,500 $325 $1,825 42.9%
2012 accident year $5,500 $300 $1,050 $1,350 $650 $2,000 36.4%
2013 accident year $5,750 $115 $800 $915 $1,200 $2,115 36.8%
2011–2013 accident year $15,500 $1,365 $2,400 $3,765 $2,175 $5,940 38.3%
Property (Target ratio = 22.5%):
2011 accident year $2,500 $250 —- $250 $75 $325 13.0%
2012 accident year $3,250 $350 $80 $430 $125 $555 17.1%
2013 accident year $4,750 $100 $750 $850 $500 $1,350 28.4%
2011–2013 accident year $10,500 $700 $830 $1,530 $700 $2,230 21.2%
Total:
2011 accident year $6,750 $1,200 $550 $1,750 $400 $2,150 31.9%
2012 accident year $8,750 $650 $1,130 $1,780 $775 $2,555 29.2%
2013 accident year $10,500 $215 $1,550 $1,765 $1,700 $3,465 33.0%
2011–2013 accident year $26,000 $2,065 $3,230 $5,295 $2,875 $8,170 31.4%
Example: Accident year loss ratio report
In the above example, a target loss ratio of 38.0% for liability was determined as follows:
Combined ratio to achieve a 12% ROE 92.0
Less:
Underwriting expense ratio (32.0)
Unallocated LAE ratio (3.0)
Excess loss allocated LAE ratio above the frequency layer (19.0)
Targeted loss and allocated LAE ratio 38.0
5

6. Contacts
Matthew Tierney
Principal, Business
Advisory Services
Grant Thornton LLP
T 215.701.8822
E matthew.tierney@us.gt.com
Joseph F. Morris
Founder and President
PC Insurance Company
Strategies, LLC
T 215.901.0334
E jmorris@pcicstrategies.com
5 PC underwriting metrics to increase profitability
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Conclusion
Continued low-interest rates mean that PC
leadership teams are facing mounting pressure to
generate heftier margins from their underwriting
operations. Now more than ever, these firms will need
to generate the right data and metrics to help them
determine what’s profitable and what’s not.
Look for more Grant Thornton thought
leadership at:
http://www.grantthornton.com/industries/financial-services/
insurance.aspx.
Other recent articles have included:
“Federal Insurance Office issues initial report proposing major
insurance industry changes”
http://www.grantthornton.com/issues/library/articles/
financial-services/2013/INS/12-FIO-report.aspx
“Finding value in ORSA”
http://www.grantthornton.com/issues/library/articles/
financial-services/2013/INS/07-Finding-value-ORSA.aspx
This article is adapted from an original version appearing in the Wholesale Insurance News magazine of the American Association of Managing General Agents.
Continued low-interest rates mean that
PC leadership teams are facing mounting
pressure to generate heftier margins from their
underwriting operations.