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COMMENT The secret world of an underwriter Am I a good or bad risk? And how much do Insurers really make? Leighton Chenery In this edition I will be given you a peek behind the underwriter’s desk and an insight into how they go about making their money. I think that it is fair to say that all of us feel a little bit aggrieved paying out premiums, particularly those of us who don’t make claims. It is certainly true that Insurers are becoming savvier at risk profiling you. So for instance, if you typed “Cheap motor insurance” in your search engine, the chances are that you will be classed as higher risk. If you typed 5,000 miles as your estimated mileage, and then changed it to 2,000 to keep the premiums down, then insurers’ cookies will pick this up and you could potentially be classed as dishonest. Insurers know, for example, that there is a direct correlation between low credit scores and people filing multiple insurance claims. Evidence shows that people who are conscious savers, married with children, are more likely to take better care of their possessions, alarm their home properly and be safer drivers. Interestingly, an individual’s characteristics are often adopted into their business lives, so don’t be surprised when Insurers run credit checks and cross reference Managers/ Directors of Companies with their home, car and life Insurance data. So how does an Underwriter go about his daily Business? Well, any insurer who wants to start the Business of accepting Risk has to raise Capital. As most businesses, they will have financing costs, overheads such as wages, rent, rates, utilities, and they will have to keep minimum amount in the bank (a legal requirement). For every £1,000 of Capital raised, the underwriter will have approximately £160 of overheads and he will now be ready to underwrite risks. In Commercial Insurance, insurers generally do business through an agency or broker and will pay them between 15% and 30% commission. And to give the underwriter protection for unforeseen larges claims (or a series of claims) they will buy what is called Reinsurance. At this stage, the underwriter has already spent anything between £350 and £450 from their original £1,000 Capital. The money left therefore, will be to pay claims and hopefully to make a profit. How insurers make their money £60 £200 £520 £80 £40 £40 £60 Claims Profit, investment & income Cost of capital Liquid capital Overheads Broker commissions Reinsurance To make a profit the underwriter will need to choose his risks very carefully. He will make a risk assessment based upon the Policyholder’s own claims history, and the strength of the Proposer’s Risk Management. He will factor in the trend of his existing portfolio, take into account his own personal experience and then make a forecast. He will also have to take a view on future inflation on repair costs, future changes in law, and future level of injury awards. 40 | KITPLUS - THE TV-BAY MAGAZINE: ISSUE 111 MARCH 2016 TV-BAY111MARCH_Book.indb 40 11/03/2016 17:17