Insurance Underwriter Career: Shrewd Critical Thinking

Insurance Underwriter Career: Shrewd Critical Thinking

Insurance Underwriter Career: Shrewd Critical Thinking
By 
Nautilus
Aug 25, 2022
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We’ve all been there. We took a person at face value, a good gut feeling, and a perfunctory assessment only to discover there was more behind the friendly smile, quick handshake, and affable personality. 

And, it may have even come with financial consequences we didn’t see coming. A hard lesson learned, but we emerged wiser.

We value our partners and want to equip you for career path success. Let’s explore insight on critical thinking with scenarios to navigate the complex insurance industry.

Are You a Critical Thinker?

Critical thinking is the deliberate processing of information resulting in a better understanding of a subject and ultimately enabling more informed decisions or solutions. 

To be an effective critical thinker, you must be an active recipient of information. You have to question the data provided, then detect and reconcile inconsistencies in that data. 

You need sharp analytical skills in observation, interpretation, evaluation, inference, and communication. Critical thinking requires seeing both sides of an issue, being open to new evidence, and reaching fact-based conclusions. 

How Do You Build Your Critical Thinking Muscle? 

One of the first things anyone can do to improve their critical thinking is to avoid taking any piece of information at face value. You can start by evaluating what you hear or read, asking questions, and then researching data to form your conclusions. 

A Harvard Business Review article suggests three simple habits to improve your critical thinking:

  • Question your assumptions
  • Reason through logic
  • Seek out diversity of thought and collaboration

As with any skill you want to develop, you need desire, determination, a sound approach to learning, and, above all, the discipline to continuously practice.

Applying Critical Thinking to Underwriting 

Let’s look at a risk to see how critical thinking applies to underwriting. You receive an application for a video rental store and while researching the applicant, you discover these facts: 

  • 12 years in business under the same ownership
  • Noncombustible building: Good construction
  • Elaborate security system installed two years ago
  • 2,000-square-foot store
  • No losses during the last three years
  • Sales tripled during the last two years

You could take the information at face value or you could look deeper. What stands out? 

There are three red flags:

  1. Video rental stores became obsolete with the rise of streaming services.
  2. Tripling sales doesn’t match the downturn in video rental business.
  3. Why would a video rental store need an elaborate security system?

Risks are unique. One apartment is not the same as the next, just as not all artisan contractors are the same. Applications usually are incomplete. 

An underwriter needs the right information, not necessarily more. Because there is more than one way to quote a risk, underwriters have to be creative problem solvers, especially in the E&S market

Analyze Information

Underwriters need to obtain the correct amount of information before making a decision, so they don’t jump to conclusions based on assumptions. If underwriters receive too much information, they need to learn to screen out and ignore material that adds no value to their assessments. 

A challenge in underwriting is distinguishing “nice to know” from “need to know.” Ask yourself: If I receive the information requested, will it change my decision on the risk acceptability, coverage and/or pricing? If yes, you need it. If the answer is no, it is probably a “nice to know.” 

Another way of analyzing information is chunking or linking. How does it fit together? Proper organization of the data allows you to assess the risk accurately. For example, 11 numbers in a row can seem meaningless: 13968520136. However, if they are organized, they make sense: 1 (396) 852-0136. 

As underwriters gather information on a risk, they have to keep it organized and determine what picture it paints. 

Objectivity

To be objective, underwriters need to understand when they are making assumptions or applying bias. As they examine an insurance application, they must be able to interpret and evaluate the information.

For example, what do you see when you first look at a submission? What influences your first impression of the risk? What catches your attention and creates assumptions about that risk?

  • Retailer
  • Insured’s name 
  • Record of losses
  • State
  • Class of business
  • New venture

An assumption is something you think without realizing it. It is an unexamined belief that is treated as true, even though it may not be. 

The more senior underwriters have, the more assumptions they tend to make. It is difficult to recognize when they may be faulty. For example, our personal experience about a particular class of business may be bad, so we decline or find a reason to refuse most risks in that class.

We might make assumptions based on a state where we have experience or a lack thereof, and whether we’re new to working with an agency underwriter or if we trust him or her. In these cases, we may not think objectively.  

The moment we assign meaning to what we perceive, a course is set and we start gathering evidence to support our case. Read these biases and see if you’re prone to any of them. 

  • Anchoring effect is when you become hooked on a number or value and allow your thinking process to be affected by it. Anchoring also can happen when quoting accounts. Let’s say you receive a submission and the agent throws out a $5,000 premium target causing you to think the account is worth $5,000. Is it really? If you underwrite and rate the account with a premium of $20,000, you may question your calculations as if the $5,000 premium is correct. If you think this way, you may have been “anchored” by the initial premium the agent presented. 
  • Gambler’s fallacy is when you put tremendous weight on previous events, believing they’ll somehow influence future outcomes. An example is flipping a coin. If you flip a coin eight times and it lands on heads each time, what are the chances your ninth flip will be tails? It is still 50/50. In underwriting, this bias might be evident when someone says, “This risk hasn’t had a loss yet, so it’s due.” Is the loss potential based solely on past performance, or do other factors indicate a future loss?
  • With Confirmation bias we tend to spot aspects that confirm an already set of beliefs rather than what contradicts them. For example, if our initial impression of a risk is positive, we may recognize those attributes and ignore adverse information. If we want another opinion, we’ll approach someone who thinks like we do. If you want to decline a risk, talk to someone with a different perspective who may be able to think of other ways to offer a quote. 
  • With the Bandwagon effect, you go with the flow and with what others think. For example, if several of your colleagues find a specific retailer difficult to please, instead of joining them, try to think of new ways to engage the agent. It could lead to more revenue. 

How to Apply Logic and Judgment

insurance underwriter career - active underwriting

The last component of critical thinking is applying logic and judgment. Doing this requires underwriting knowledge and reasoning skills. Here are some examples:

Renewal Scenario

As an agent, you are working on a renewal. The carrier has been on the account for a year-and-a-half. While you review a recent inspection, you notice the loss history the underwriter requested never was received. Since the carrier has been on the account so long and has had no losses, you feel there is no need to follow up on the loss information. Do you agree with this logic and decision?

The logic presented suggests the information is no longer needed because it was requested 18 months ago. This kind of conclusion could be faulty. Although it was requested months ago, it still can provide valuable information. Were there any losses? At a minimum, you need confirmation. 

Do you expect frequency or severity from a risk of this nature? Is it a risk that could incur losses that develop over time? Is it a risk that could cause significant bodily injury losses such as brain or spinal cord injury? 

New Submission Scenario

You are underwriting a submission from Ted, one of the newer insurance agents. While the retailer is not new to your office, Ted just joined the agency and is loyal to another MGA – The Smith Agency. You haven’t seen much business from the retailer, so you’re trying to quote everything you can. 

Among the first accounts Ted submits is one The Smith Agency handled previously. Since the application is incomplete, you call Ted. He has limited information. He says he handled the account for years and reassures you it is a good risk. You can tell Ted is getting agitated with your questions, so you quote the account subject to receipt of loss history. Do you agree with this logic and decision?

In this scenario, Ted has experience with the account, so there is no need to get loss history. This logic may be faulty as Ted should have the information. That he is not sharing it seems suspect. The fact that his favorite MGA, The Smith Agency, is not getting the account also is cause for concern. It appears there is more to this risk than meets the eye. The facts don’t add up, and you should push a little further to discover the full story. 

Multiple Location Scenario

You’re underwriting an account with 40 locations. The loss history shows frequency but no loss is greater than $10,000, and the loss locations are no longer on the schedule. Based on this, you’re willing to offer a competitive quote. Do you agree with this decision?

The logic applied is: Because past losses were no greater than $10,000, and at locations no longer on the insurance policy, you don’t need to consider them in underwriting the account. This could be faulty if you don’t ask additional questions. 

First, property losses under $10,000 still can be significant. You need to know the cause of the losses and their actual sizes. Were the losses due to poor housekeeping or poor maintenance of the buildings? If so, these issues could be present at other locations. Only if a damage was caused by an exposure unique to the location could the loss presented be valid. 

Level Up Your Insurance Underwriting Career

When underwriting, remember this can be a complex task that requires gathering a lot of information, so be shrewd by using your critical thinking abilities to create better outcomes. 

This critical thinking primer serves as a well-used and trusted resource for the underwriter to examine their objectiveness as well as evaluate future or current applicants. Review these scenarios to sharpen your analytical thinking skills.

Nautilus Insurance Group products and services are provided through various Surplus Lines insurance company subsidiaries of W. R. Berkley Corporation and offered through licensed Surplus Lines brokers. Not all products and services may be available in all jurisdictions, and the coverage provided by any insurer is subject to the actual terms and conditions of the policies issued. Surplus Lines insurance carriers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. ©2022 Nautilus Insurance Group. All rights reserved.

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