The Renewal That Was Priced on Hope
A mid-sized commercial insurer writes a property portfolio of 1,200 SME risks. The portfolio has run a loss ratio of 78% for three years, but the head of underwriting reports a 92% retention rate and argues the book is 'stable'. A new exposure modelling exercise shows that 14% of the portfolio sits in a flood plain that was remapped by the national authority six months ago; the remapping was never loaded into the rating engine. The average premium per risk is 2,400 and the average sum insured is 480,000. The reinsurer's treaty excludes flood for any risk where flood cover was not explicitly rated. The CEO wants to grow the book by 15% next year to hit a group revenue target. The underwriting manager proposes a flat 5% rate increase across the whole portfolio and no change to acceptance criteria.
1. Evaluate whether the proposed flat 5% increase is adequate, and identify the underwriting and treaty consequences of the unrated flood exposure.
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A flat 5% increase is not defensible on the evidence. The loss ratio of 78% already leaves little margin once expenses and the cost of capital are added; a 5% uplift on an average premium of 2,400 raises only 120 per risk, which is trivial against an average sum insured of 480,000. The real problem is mispricing of a concentrated peril, not a uniform rate deficiency. Roughly 168 risks (14% of 1,200) sit in the remapped flood plain and were never rated for flood. Because the treaty excludes flood where it was not explicitly rated, those risks are effectively uninsured for the dominant peril while the policyholder believes they are covered - a coverage gap and a conduct risk, not just a pricing error. The correct response is targeted: re-underwrite and re-rate the 168 affected risks, apply flood exclusions or sublimits where cover cannot be priced, and notify affected policyholders. Growth of 15% should be conditional on remediation, because growing an underpriced flood-exposed book multiplies the loss. Retention of 92% is a symptom of underpricing, not evidence of health.
2. The CEO insists on the growth target. Recommend how the underwriting manager should escalate and what governance controls should apply before any new business is written.
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The underwriting manager should escalate in writing to the chief risk officer and the board risk committee, setting out the quantum: 168 risks, average sum insured 480,000, unrated flood peril, and a treaty exclusion that leaves the insurer bearing the loss in full. The escalation should frame the issue as a breach of underwriting authority and treaty conditions rather than a commercial disagreement. Before any new business is written, three controls should apply: first, a rating-engine fix that loads the new flood mapping and blocks quotes in the flood plain until referral; second, a referral authority requiring sign-off above a defined sum insured in mapped zones; third, a treaty compliance check confirming that any flood cover sold is either explicitly rated or excluded with documented customer disclosure. The growth target should be re-based on retained premium net of remediation, and the board should receive a written risk acceptance if it chooses to proceed. Silence is not consent - the manager's professional duty is to ensure the decision is taken with full information and recorded.