The Forgotten Cousin of Finance: Commercial Insurance

So I have thought about doing something over this field for quite awhile but didn't know how much to go into and whatever. Depending on the response I will depends on whether I will expand further.

I really wanted to talk about the position of Commercial Underwriter.
Specifically property and casualty dealing with the major companies (AIG, LibertyMutual, etc.)

What is a commercial underwriter?
A commercial underwriter is the liason between the insurance broker and the insurance company, which prices the policy for the coverages requested by the broker. They do not calculate the pricing formulas (job of actuaries) however they piece together the prices, create relationships with brokers and then bind the policy. They command a "book of business" which is all of their policies they have approved and are reviewed by the P&L of their book as well as new business being wrote. There is little financial knowledge required being known other than possibly claims amounts, and other types of metric and has quite a bit of legal understanding (most of insurance is just a legally binding contract which mitigates the financial cost of risk).

What does a commercial underwriter get paid?
This is for Dallas, TX. Most majors start out their underwriters at 51-60k. The latter is for the higher named companies (AIG) and for specialty lines (will describe later). This is comparable to Big 4 starting pay however for much less hours (normal 40 hour work week). You'll see pretty normal pay raises, good PTO, holidays, etc. After 3 or so years you will be promoted to a Sr level and then after about 3 years you will have a manager promotion. After that it depends on your desire to move around/develop skills, but you could easily hit Chief Underwriting Officer by 35ish if you're aggressive.

The normal progression goes:

Commercial Underwriter (2-3 years, obtain CPCU) mid-50's
Sr. Commercial Underwriter (2-3 years) low 80's
Underwriting Manager (2-5 years) break 6 figures
Jr. VP of Underwriting (3-5 years) 125+
Chief Underwriting Officer (xxx) 200k

Insurance really gives lots of merit to performance and experience over politics unlike many other business facets. Although this is the normal progression, many never reach about the Sr. Underwriter normally because of lack of desire (tons of Type B in underwriting). A go-getter going into underwriting could easily expect the lower end of that time frame to progress.

Exit Opps:
There aren't many honestly. I'd say the three biggest exit opps is specialty underwriting, brokerage and risk management.

Specialty underwriting is writing commercial insurance coverages for specialized liabilities. For energy (tons of pollution and transportation liabilities needing to be wrote) for construction (hoisting/rigging and equipment costs which can get complex with the blurred lines between equipment/vehicles and tools) and even cyber insurance (Target/Home Depot had huge losses in cyber attacks which recouped a large penny from having cyber protection insurance.
- In these lines you normally have 1-3 years in normal underwriting writing general risks and then you lateral to a specialty firm or to a different specialty division and you will see salary increase of approximately 15-20% of the above mentioned salary progression. Then you have a better opportunity of going to a brokerage working with these clients or to industry handling the risk/insurance management for an industry leader.
- Then the next leader in specialty lines in reinsurance which is underwriting billions of dollars of coverage (it's pricing the risk for entire portfolios of insurance).

Brokerage is another route taken by many. After getting a foundational knowledge of commercial insurance, you develop a better position to meet with and sell insurance to those who you were originally underwriting. You will have a strong idea of insurance gaps, missing coverage, ideal coverage and be able to up-sell to your clients appropriately. The salary in commercial insurance brokerage is majorly commission based and after 2-3 years in the business you could easily expect 100k+ salaries nearing 200k-300k if you're good at what you do. The top 1% in this field do EXTREMELY well.

Lastly risk management seems to be a less obvious career which is assumed by underwriters. Either going to get an MBA or directly after receiving your CPCU you will have the opportunity to become a risk manager for many in-house risk departments at F500/F1000 companies. There will be a financial component of knowledge required where you may have a deficiency but a MBA in Finance or possibly a CFA type certification normally can help you transition into more high level jobs. Large portions of a risk department are dedicated to the corporate insurance culture.

Why I Am Considering This Career?

A solid 40 hour week without much overtime, mixed with strong resources to learn very specialized information in a very under-manned industry is what draws me to this stuff. My goal is to get into a general commercial underwriting gig (or energy if able out of undergrad). Work for 3-5 years obtaining my CPCU, ARM and then going to a top regional MBA and landing a gig at a top commercial brokerage as an energy insurance broker.

I currently work in risk and insurance and have researched this stuff and met with individuals in this and related to fields. If you have any questions feel free to ask.

Comments (14)

 
Oct 21, 2014 - 11:24pm

Interesting. Thanks for the post +1 SB.

The last act is tragic, however happy all the rest of the play is; at the last a little earth is thrown upon our head, and that is the end for ever.
 
Oct 27, 2014 - 4:40pm

thebrofessor:

how do you measure an underwriter based upon performance? I feel like they would essentially just be in charge of implementing the bank's requirements, in which case the performance of the loan portfolio is completely dependent upon how good the bank's guidelines are, no?

You're approaching it from a commercial underwriting (loan and credit) type view. I am unsure of this route, although I would assume it would be a similar approach. In commercial insurance, you command book of business (i.e. book of policies you have wrote and normally in the millions). You're main performance is (P&L, new business and policy retention) in that order. You want to have more coming in in premiums than you have going out in claims. Seems like more a "luck" thing but you're analyzing basic risk and can have a general idea whether you think they will have a claim in the near future or not. The second is building new business and means maintaining a good relationship with brokers and getting them to write more policies with you (by offering lower premiums or more encompassing coverage) or purely by accepting the policy. And lastly it's keeping the company with your company. Commercial policies take so long to underwrite for more complex risks that you will find much less shopping than you would with your personal auto policy. I assume commercial lending and credit underwriting has similar guidelines.

unaware:

Great writeup, thanks. Do you know if these facts apply to UK (and more or less the EU by extension) as well?

I would say the UK is especially similar in terms of duties, mainly because London is probably the #1 insurance hub followed by NYC. The UK and EU has a strong insurance market and it's where a lot of finance guys ultimately end up. Salaries would be scaled to EU limits which I am unsure of but I would assume would be pretty similar in proportions.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
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Oct 27, 2014 - 10:34pm

UTDFinanceGuy:
Brokerage is another route taken by many. After getting a foundational knowledge of commercial insurance, you develop a better position to meet with and sell insurance to those who you were originally underwriting. You will have a strong idea of insurance gaps, missing coverage, ideal coverage and be able to up-sell to your clients appropriately. The salary in commercial insurance brokerage is majorly commission based and after 2-3 years in the business you could easily expect 100k+ salaries nearing 200k-300k if you're good at what you do. The top 1% in this field do EXTREMELY well.

Just chiming into your thread to to add some more information on the brokerage segment of the industry for those who may be interested.

Brokers don't underwrite and don't take insurance risk. They are, not surprisingly, brokers. They deal with the clients, assess the clients needs (often quite a bit of work, particularly in commercial P&C - see below) and then deal with the big insurers (aka "carriers") to get an adequate policy.

In this deal, the insured is notionally the broker's client.

The broker gets a fat commission from the carrier (% of premium) when the client signs up a policy with the carrier.

But that's not it. The broker then gets a further commission (different % of premium, lower from memory) every year that the client sticks with the carrier.

People don't change insurance companies all that often. So the broker builds up a big FAT book that pays commissions long after the broker does the work arranging the policy in the first place.

However, people will shop around, so the broker maintains a relationship with the client to ensure that the client either sticks with the current carrier or, if the client switches to a new carrier, the client does that via the broker. The broker gets another "sign on" commission in that case, plus protects his/her ongoing commission tail. The client retention rates I've seen are typically 90 - 95%.

In the broking businesses I've seen, the recurring commission tail often makes up ~90% of revenue.

In the personal insurance space (eg health, auto insurance, home insurance), a lot of insurance product is largely commoditised, disintermediation is a big theme and brokers' share of the market has taken big hits in the last 10 years, commissions have been squeezed.

However, in the commercial insurance space - largely property and casualty ("P&C") - the insurance policy are highly tailored and bespoke. The carriers need someone kicking the tires on the business, assessing the risks, doing some actuarial work and making sure that the insurance policies are appropriate. Similarly, the client needs access to someone who ensures that the insurance coverage covers the business risks appropriately and is a good price.

Carriers don't want to bear the cost of a sales force out in the market doing this. They'd much rather pay brokers to do this.

Clients want an adviser who gives them access to a range of different options at decent prices, rather than a company shill selling just one carrier's products. They want an independent broker.

This is not a commoditised product and, despite the efforts of some businesses, it does not lend itself well to commoditised insurance products or online processes. Few can see that disintermediation happening in the next decade.

Accordingly, commission %s look fairly stable, although premium pricing may vary (particularly following catastrophes). Bear in mind that commission revenue = commission % x policy volumes generated by the broker x policy premiums.

In the GFC, policy volumes were reasonably resilient (eg the listed co's below largely suffered only single digit declines in organic revenues).

So you have an industry of small brokers out there who, after years of hard work building relationships, are sitting on nice fat commission books that pay recurring revenues. A good pay off for years of sweating it as an insurance salesman.

Often, a better pay off than you'll see as an investment banker.

One current theme in the market is there are quite a few companies pursuing roll up strategies, buying up small commercial P&C insurance brokers, typically at around 7 - 10x EBITDA. Some are listed (eg Marsh & McLennan, Aon, AJ Gallagher and Willis), while others are PE sponsor backed (eg AmWins, Hub).

Despite these roll up players out there looking for acquisition targets, prices paid aren't overheated, as the industry is hugely fragmented. I've seen numbers suggesting there are currently >35k small to medium size brokerages.

Roll ups are assisted by other theme in the industry, which is that many of the owners of the small and medium sized insurance broker shops are baby boomers who are looking to cash out. Selling up to one of the roll up companies is a good way (often the only way) to cash out.

However, the broker business is a relationship business and the roll up companies don't want to buy a book, have the charismatic sales guy walk out the door and then lose all the clients (hence lose the value of the fat commissions). So normally you see buy out terms that include something like a 2 year earn out, plus the seller gets part of the purchase price (25 - 35%) in equity in the buyer.

What do these roll up companies do? Not that much in the client-facing part of the business. Generally, the insurance broker keeps trading under the same name with the same staff. The buyer doesn't want to interfere with the sales magic. Often the buyer just offers centralised back office functions that make the front office brokerage operations cheaper to run. This is particularly the case post-Obamacare, as many of the small mom & pop shops don't want to pay the high cost of legal advice on compliance with the new regime. A large roll up player already has that advice and can provide a bought shop with policies/procedures/training to comply.

Those who can, do. Those who can't, post threads about how to do it on WSO.
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Oct 28, 2014 - 12:38am

Interesting. I work in one of the large carriers you mentioned. Not in commercial nor underwriting side of the business, but am equivalent level between Sr. Commercial Underwriter and Underwriting Manager. Message me if you need a referral.

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Oct 28, 2014 - 12:41am

I worked in Commercial Insurance Underwriting and unless you're a 48 year old woman who barely got out of high school and are okay with maybe making $100K some day - then by all means go for it. Only the brokers (selling) are making money but 98% of them don't make shit.

The job is amazingly mind numbing and there are absolutely no analytics involved - you don't even collect financial statements. It really is glorified data entry.

It should not even be discussed on this website as it is not even remotely close to finance, banking, etc.

 
Oct 28, 2014 - 1:48am

You're right if your talking the average commercial underwriter for some small insurance provider. Those jobs are a dime a dozen. When you're dealing with P&C commercial accounts at a major (AIG, Liberty Mutual, Zurich) or even further at reinsurance, then you're looking at more comparable jobs/duties. When discussing majors you're talking about college graduates, many who obtain grad degrees and live very easy middle class/slightly upper middle class life's.

Most people in the insurance industry in general are not your Type A go getters. It creates a better opportunity. You can excel much more easily and get the better jobs. Pretty boring work means it's easier to excel and be the top 1%, and dedicate time to learning more and pursuing your own side ventures.

Most people in the career won't break 100k. Then again most in corporate finance might not either. The top 10% in the field do very well for themselves and make figures in surplus of 150-180k+. It'll never have the same allure as high finance but for stable life/balance and decent pay compared to many jobs it's not a bad option for non-targets or semi-targets who find it interesting.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
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Oct 28, 2014 - 7:17pm

I started my career working for two years as an insurance broker in one of the big three insurance brokers (Willis, Marsh, Aon). I agree with OP's fundamentals (decent pay, good work-life balance, easy to stand out), however I could not get over the mind numbingness.

I now work as an equity analyst in the buy side, making a similar amount of money, working much longer hours but much happier with what I do, feeling intelectually stimulated and knowing that my compensation upside is pretty much unlimited.

 
Oct 29, 2014 - 7:08pm

Underwriting in general is a viable alternative to Big 4 accounting, but you are building very specialized knowledge and skills which makes you vulnerable to product-specific or industry-wide downturns. As you said, there are very few exit opps. "Exit opps" means more than career progression, it also means the ability to find a new job if fired.

One benefit you did not mention is that you can often live in very lost cost-of-living areas and still do this type of work.

 
Oct 29, 2014 - 9:49pm

LongandShortofit:

Underwriting in general is a viable alternative to Big 4 accounting, but you are building very specialized knowledge and skills which makes you vulnerable to product-specific or industry-wide downturns. As you said, there are very few exit opps. "Exit opps" means more than career progression, it also means the ability to find a new job if fired.

One benefit you did not mention is that you can often live in very lost cost-of-living areas and still do this type of work.

Exactly, the exit opportunities aren't too broad. However, one of the benefits of the insurance industry and specifically P&C, is that the industry is very resilient in regards to recessions and economic slow downs. Premium rarely fluctuate based on work volume (at least downwards) and it's a commodity which is as necessary to companies as utilities. Rarely are jobs lost, unless you're just terrible (which the caliber of students even ever considering IBD and the like, are most likely going to excel at their jobs regardless.

And that's true about the COL comment. Specifically in Dallas, TX there is a wide range of these jobs with relatively little supply for the top tier underwriting jobs (most because of ignorance and people wanting to go else where). Atlanta/Florida also see a strong insurance market.

Great additional feedback.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
 
Feb 10, 2015 - 4:51pm

Great post +1 SB. Out of curiosity, what's your opinion on underwriting vs. brokering? I'm currently working as an intern at one of the large insurance brokers (Willis, Marsh, Aon) in a fairly administrative position and am looking for something more technical/intellectually challenging for my upcoming summer.

"A guy gets on the MTA here in L.A. and dies. Think anybody'll notice?" - Vincent
 
Feb 19, 2015 - 4:05pm

Actually it's been a few months since I posted this and have decided to go the brokerage route instead of underwriting.

I decided that I will apply for underwriting positions, but income is relatively limited. You don't get bonuses like you would in a more sales oriented job. It's really structured and relatively boring work in most cases. Brokering is at least moderately more interesting, especially from a people's point of view. Although I have seen underwriters become brokers, but RARELY the other way around.

The plan is to hopefully start working for a brokerage for 2-3 years and then decide whether to go into more B2B sales roles vs. going back for a MS-F and try my shot at Wall Street.

Brokering insurance is an extremely diluted version of stock brokering. Except the commissions are obviously not nearly as good (although surprisingly good) and the material is pretty boring (insurance as you've probably noticed is so fucking boring unless you love law/legal compliance stuff).

Getting into a brokerage internship at a top 10 firm will definitely give you a hand up in general depending on what year you are. It can just add another name on your resume. And hopefully add 'client-faced' experience to your resume.

Honestly I could speak a whole other post on insurance brokers.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
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