Underwriting: discipline and engagement


Bermuda Re

Kevin O’Donnell, executive vice president and global chief underwriting officer at RenaissanceRe Holdings, talks about the underwriting role and the need for conservative engagement in the current soft environment.

Have current strong levels of capitalisation and the soft market led to a temptation to take on riskier lines and business? How, as a chief underwriting officer, have you sought to balance the demands of risk management and expectations for growth/diversification?

When it comes to managing and thinking about risk, RenaissanceRe’s culture is unique. We have an unwavering commitment to underwriting discipline and to ‘staying the course’, regardless of the market environment. With such a strong culture and the benefit of having experienced competitive markets before, we know our strategy works and have the discipline to focus on our risk before we focus on our premium.Being the chief underwriting officer at RenaissanceRe is the best job in the world, because from top to bottom, we all share the same view: we value building a great portfolio above chasing premium.

At what point should a chief underwriting officer intervene as a softening market drives down pricing?

I don’t see my role as one of intervention. I think of it as constant engagement and coaching. We have great systems that allow us to review our portfolios on demand, so as a team, we are always informed about our level of risk and return. This transparency allows us to constantly balance and shape our portfolios, and my role is to help our underwriters focus on which risks we may want to add. My role also involves making sure we remain aligned in our view of risk. I think it is important that our underwriters approach risk and pricing in the same way, and give clients and partners consistent answers. I view fostering this unified vision as a key responsibility.

Many players have indicated that they are looking to diversify their portfolios. From an underwriting perspective, what essential insights, information and personnel need to be in place/considered before taking on new lines and geographies?

Very simply, diversification is good. The real issue is defining diversification, because it means different things to different people. The role of diversification is to improve returns, but in order to do so at the portfolio level, an underwriter must first find returns acceptable at the individual transaction level. In today’s market, most of our efforts to diversify don’t pass the individual transaction test in that we are not being paid enough to take on the new risk. So, our overall portfolio will not benefit because the target risk is simply too low-margin.

If you look back to the sale of our US operations in the fourth quarter, our decision to exit was a demonstration of our discipline and willingness to reduce diversification for the benefit of the overall portfolio. I know it was the right thing to do, but I also appreciate that we were able to make such a bold move with confidence, thanks to our dedication to constantly evaluating and improving our business mix and portfolio construction.

What are the major risks inherent in diversification and how can reinsurers best mitigate against these threats?

Diversification should add only limited additional risk as long as you don’t compromise to diversify. From a macro perspective, diversification can increase returns by adding leverage to a rated balance sheet. Any time one adds leverage to a balance sheet, small changes can have big impacts: a good decision can result in significant benefit and a bad decision in significant loss. Our business is already leveraged in that we take in a fixed premium to assume the risk. Our best case scenario is that we will make our premium, but we can also lose our limit (which is many multiples of premium), so the combination of our leveraged product with a leveraged balance sheet needs to be monitored carefully.

What is your approach to new and unusual risks, and how can a chief underwriting officer best seek to understand and price these new insurables?

In looking at new risks, I try to put myself in the buyer’s shoes, modelling their business to determine the reasons and benefits for buying. I believe a thorough understanding of why someone needs or wants coverage is a critical step in underwriting the risk being reviewed. Additionally, it is useful to draw from similar analysis and experiences to help benchmark the new class of risk against other risks with which you are more familiar. Such analysis allows you a point of reference against a much larger pool of risks and should enhance understanding.

Some commentators have suggested that underwriters are overly dependent on cat models in their decision-making. How significant are models to the underwriting process at RenaissanceRe and how does your underwriting approach compare to that of other Bermuda-based players?

The reason we need models is because we live in an uncertain world with uncertain outcomes. If you make pencils, you know how much it costs to make them, so you can add a margin and sell them with a known profit. We don’t know the cost of our goods, so we need models to estimate our costs and our margins.

Any risk that is taken is modelled in some form or another. If you flip a coin, you take a view of your chances of getting heads or tails. You don’t need millions of dollars’ worth of computers to guess the answer in this instance, but you model it in a very simple sense. I think of all risk in this way, and the more complicated and larger the risk, the more you’ll want to invest in your models.

In my opinion, models are critical in understanding risk but are most useful in three respects: comparing one deal to another, comparing one year to another and allowing you to determine how much risk overall your firm is taking. Ultimately, models are only one component of our risk evaluation process. It is our people who make the final decisions based on their experience, their understanding of the client’s risk, and the data at hand—not the models.

Where do you see Bermuda and RenaissanceRe’s greatest opportunities in the future in terms of underwriting new lines of business and what can the Island bring to the offering in these new lines and geographies?

I think RenaissanceRe’s greatest opportunity lies in our underwriting rigour and entrepreneurial spirit. Keeping these two qualities aligned and energised will produce strong returns for our firm over the long term. Our company has made Bermuda home since its founding almost 20 years ago. We appreciate the many benefits to being here and have high expectations for the future of the Island.

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Bermuda Re