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09 Nov 15 16:10

Ok, now that I have your attention…let's break the title down. Was your initial interpretation, "bias exists; recognize yours"?

As insurance professionals, most of us pride ourselves on the fact that many of the decisions we make are backed by quantitative elements such as sophisticated computer models, costing analysis and data. Yet, in reality, that represents a portion of the way we make decisions. Our bias, that is the "invisible" thought processes that influence our judgement, is a big part of our decision making.

Whether we like to admit it or not, we all apply biases to our underwriting judgement. Sometimes it's based on what we hear, or preconceived beliefs that we have held on to for years. I became aware of cognitive bias during a coffee break conversation with colleagues who were preparing a presentation on the topic for an industry conference. It's interesting stuff!

There is usually resistance to the idea that we're biased. Even those who acknowledge they may have biases, generally consider themselves less biased than others. Underwriters and actuaries often believe that prior experience, knowledge and training effectively counter any biases they may have (particularly statistical ones).

The types of biases affecting our thinking and work as underwriters include:
• "Framing bias" occurs when we draw different conclusions from the same information depending on how it is presented or phrased. (i.e., the title of this article).
• "Confirmation bias" is the tendency to look for, interpret or focus on information that will support or confirm a preconceived belief or idea. For example, underwriters may look at a renewal package and look for patterns to support and confirm our view of the world, rather than evidence to the contrary.
• "Availability bias" is the tendency to overestimate the likelihood of events with greater "availability" in memory which can be influenced by how recent or how unusual or emotionally charged the memories are. "Availability bias" occurs when an underwriter relies on prior experiences that are easily accessible such as views on a particular line of business, keeping up with industry news on emerging risks and other important topics as they relate to our business. As underwriters, we tend to be swayed by information that easily captures our attention.
• "Anchoring bias" is the tendency to rely too heavily, or "anchor", on one trait or piece of information when making decisions. While underwriting, we can experience this bias through our exposure to historical loss performance, projections and results in our costing exercises. (For example, being influenced by last's year's expiring price, or by the broker's or client's expectations about this year's price).

Whew, so much to think about. I walked away fascinated by the impact behavioral science and cognitive bias could have on the underwriting process, and also gained a greater awareness of the elements that should be considered when evaluating risks and exposures.

So…what do you think? How does the way in which information is presented to you influence your underwriting decision? In addition, what about the latest emerging trend on the front page of the national news? Keep an eye on your biases, because recognizing them is the first step towards better underwriting decisions!


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8 Comments

Alicia Montoya - 9 Nov 2015, 8:55 p.m.

Such a critical issue, yet I'm always amazed at how little attention most companies pay to it!

In a world of fierce competition, in which companies spend millions on consultants to help them increase productivity by as little as 3% --often interpreted to mean the need for harsh cost cuts-- our biases, which I'm guessing can make us lose what, 20% (or more?) on a deal are largely ignored. I simply don't get it.

So thanks for raising the issue. I guess we'll only start caring when someone puts some figures behind the losses. So back to you, is anybody measuring this?

Andrea Scascighini - 9 Nov 2015, 10:39 p.m.

Totally agree with both of you. With little efforts and a lot of self awarness it is possible to reduce the impact of biases and to improve business decisions. You need actuarial know how to see a trend in data, but this might be simply a distortion of reality due to biases.

Barbara M. Beer - 10 Nov 2015, 12:45 a.m.

Lisa-thanks for this great post. A reminder for all of us to challenge our routine beliefs.

Karen Marques - 10 Nov 2015, 3:15 p.m.

Thanks Lisa. As you point out, as individuals, we should be aware behavioral biases exist and admit that we are likely to suffer from them from time to time. We should avoid making quick decisions if possible; take a moment to reflect, this reduces the opportunity for emotion to shape our responses. The bottom line is, it is important for individuals to take the time to identify their biases and learn how to overcome them in their day to day decision making processes.

Mike Hudzik - 10 Nov 2015, 6:46 p.m.

Excellent post - thanks for the insights. Looking forward to the upcoming training sessions on this..

Markus Schopferer - 10 Nov 2015, 9:29 p.m.

The funny thing is that the correlation between decreasing prices and optimism about future losses is -1. In my view this is nothing else but a survival strategy: no business could mean job insecurity - and the strategic judgemental thought in case things go wrong is 'it was an investment to stay in the market/with the customer'. This is not always wrong but we need to recognise the boundaries.

Lisa Silvano - 12 Nov 2015, 7:55 p.m.

Diversity through collaboration with colleagues by working in cross functional teams may be an effective tool for mitigating cognitive biases.

Dionne Chisolm, CPCU, ARe, ASLI - 13 Nov 2015, 3:49 p.m.

Great post Lisa! Being biased is human but as you pointed out, we must recognize it in our underwriting and keep it in check while making decisions.


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