Underwriting is the PEO’s Hidden Advantage

by Frank Huang | January 21, 2019

Per the call to order from my opening post, the plan is to begin writing about PEOs from a micro-level focused initially on the risk program, then zoom out to look at risk in the context of the PEO’s business operations, and eventually survey and comment on the industry en masse. This article is the first in the series.

What is a PEO’s Risk Program?

Traditionally, a PEO offers small and medium-sized businesses an economical and efficient way to address insurance and business risks. These risks traditionally include workers’ compensation, health benefits, and employment practices liability. A PEO has departments and functions that exist to help the PEO evaluate and price the insurance risks of prospects, and then minimize and mitigate the insurance risks once they become clients. All the departments involved in this process combine to make up a PEO’s risk program.

A PEO’s risk program is usually represented by at least the following departments and/or functions – underwriting, risk and safety, and claims management. 

The First Line of Defense

The above order was set intentionally. Underwriting is the first line of defense for a risk program, as this group decides whether to accept a specific prospect based on a variety of considerations. If the prospect becomes a client, risk and safety[1] enter the picture to partner with the client and ensure the highest standards of working conditions and avenues for medical care for the benefit of the client’s employees. Should a worksite injury arise, the claims group comes in to help the injured worker receive appropriate treatment and quickly return to work. And claims, as we will talk about in subsequent articles, have the ability to affect sales and the firm’s future prospects. Needless to say, underwriting has a significant role in a PEO’s risk program, and has the ability to affect all other departments.

The (Internal) Struggle is Real

The opposite is also true, in that all other risk departments have the desire to affect underwriting.

Sales, for example, wants underwriting to be less stringent so they can sell more and meet their quotas. On the other hand, finance wants underwriting to be more stringent so as to protect margins. These opposing forces act constantly on underwriting, and it is rare that everyone agrees on what underwriting should do.

Because of this, underwriting has one of the most thankless departments in a PEO. If the business is doing well and people are hitting personal bonus targets, then no one mentions underwriting. But if the company sees rising insurance premiums, starts missing sales goals, or experiences shrinking margins, then underwriting is one of the first places to be blamed.

Tale of Two (Underwriting) Cities

Underwriting, as done in the PEO industry, spans a wide range of ability, sophistication, and performance. There are two ends of the spectrum, and where a PEO is found on that spectrum can be determined based on three factors: (1) Underwriting’s relationship to other departments, (2) the decision making process, and (3) guiding goals.

At the suboptimal end:

  • Other Departments. Underwriting acts independently of the other departments, and seeks outside input and direction only when deemed necessary.
  • Decision Making. Decisions are largely based on experience and supported by tools which utilize simplistic quantitative analysis. Underwriting guidelines are often insular and perpetuate the disconnect with outside departments.
  • Guiding Goals. Underwriting’s goal at the end of the day is to prevent disaster and be its first line of defense.

At the optimal end:

  • Other Departments. Underwriting actively collaborates with other departments so that all groups share a common perspective despite the inevitable disagreements on minor issues.
  • Decision Making. Decisions are based on both experience and predictive analytics, the latter of which are designed specifically for the company and represent a collaboration with the firm’s long-term goals.
  • Guiding Goals. Underwriting’s goal at the end of the day is to be its first line of offense by efficiently writing the most business according to the firm’s profit goals.

Underwriting in Reality

Reality has a funny way of rearing its ugly head when waxing long about idealistic organizations. But rather than walking away from making changes or contemplating blowing up the entire underwriting group, there are three things those within the organization can do to start changing the aforementioned issues and welcome in improved performance.

First, leadership must set quantifiable goals. This requires that leaders and key stakeholders agree on an end goal. Is it to be nth place in market share? To hit a target top or bottom line compound annual growth rate (CAGR)? Or exit through a sale? From there, leadership must work backward to identify a suitable value proposition and lead conversations between all department heads to ensure operational acceptance. The underwriting result of these conversations should be specifics with which to flesh out underwriting guidelines –including but not limited to what industries, states, occupations, and demographics they should expect to come through the sales pipeline.

Second, underwriting must consider all risks simultaneously. Many PEOs have separate underwriting decisions when it comes to workers’ compensation and health. This is not optimal, and can result in on-boarding prospects that actually hinder the company’s overall objectives, such as by writing business because one piece is profitable despite the client being collectively unprofitable. Utilizing analytics can help the company underwrite all risks simultaneously, providing instantaneous performance expectations that can inform and support the underwriter’s decisions.

The benefit from this type of analytics and holistic approach cannot be overstated, and most PEO operators know this intuitively. Day-in and day-out, PEOs must decide whether or not to write business that is not in their proverbial sweet spot. The PEO may anticipate making money in one risk area but lose money in another. While this is true, the entire picture is actually more complicated and involves a variety of different factors. We will touch upon this more in the “Pricing” article to come.

Third, leadership must structure the underwriting department properly. Underwriters must be able to write business efficiently and confidently. Without a doubt, analytics has a big role to play in this, but the organization structure and support it gets from leadership is just as important. With the right organizational structure and analytics, an underwriting team can quickly push clearly unacceptable or acceptable prospects to their ultimate conclusion. This allows for more time to be spent looking at more prospects or properly evaluating complicated cases. 

Wrap Up

Underwriting should be the company’s first line of offense and an extension of the company’s value proposition. If done well, underwriting can bring all departments to work better in concert, and even be a source for competitive advantage.

Take-Away Questions

  1. What would you say is the role of the risk organization – more defense or more offense?
  2. Are the company’s long-term goals seen in underwriting guidelines and decisions?
  3. Does your company simultaneously evaluate and coordinate the different risks of a prospect?
  4. How is the organization structure helping or hindering efficient underwriting?


[1] I will use workers’ compensation risk as the main example, but other risks can also apply. 


Frank Huang has more than 15 years of actuarial consulting experience serving a wide range of clients, including serving as ADP’s Chief Actuary.  Learn more about our PEO consulting practice here.