Reinsurers Tighten Terms, Conditions

Reinsurance Editor

London

The newfound commitment by reinsuranceunderwriters to firm up terms and conditions is based on thereinsurance industrys drive to return to underwritingdiscipline–that is, a desire to return to underwritingprofitability.

There is a much tighter focus on setting adequate terms andconditions, according to Mark Lescault, chief underwriting officerfor Swiss Re Americas Division in Armonk, N.Y. “What we saw in thesoft market is that there were many extensions of coverage, and toa large extent those extensions of coverage werent being adequatelyunderwritten nor adequately priced,” he said.

During the soft market, the broadening of terms and conditionscreated an additional way to compete besides price, Mr. Lescaultnoted. “Now were trying to bring it back closer to what thestandard coverages should be, with add-ons only provided where theycan be specifically focused on and underwritten and pricedadequately,” he emphasized.

“The insurance industry cannot earn as much with investmentincome, so that also has to be reflected in the rating process,”Mr. Lescault said. “Weve certainly seen additional claims severityand adverse reserve development, and that has to be reflected inthe rating process.”

“The key is, as an industry, we have to focus on those issues,in order to be able to bring the coverage back to a profitablebasis,” he added.

Reinsurers are trying “to tighten up some of the looseness inreinsurance underwriting that has taken place,” affirmed PeterScanlan, chief executive officer of Carvill America, thereinsurance intermediary in Norwalk, Conn.

“They may be putting caps on treaties, where the overall lossratio theyll accept to a given contract might be 200 percent,” hesaid. “Or there may be loss corridors on quota-share business,where they write up to a certain loss ratio, and then the clienthas to come in and take the next 10 or 15 points of loss before thereinsurer comes back in again.”

“There is more skin in game on the part of the client as theloss ratio deteriorates,” he said, noting that this is especiallyprevalent in the professional liability lines of business. “It alldepends upon the nature of the product line and whether or notreinsurers feel theyre getting adequate pricing,” he said.

Proper underwriting, adequate pricing, and correct wording areindeed concerns of Mr. Lescault and other reinsurance underwriters.Reinsurers are getting back to underwriting basics by saying, “ifwe provide coverage, we have to be able to underwrite it properly,and we have to price it adequately, also looking to make sure wevegot the right wording for it,” said Mr. Lescault.

He pointed to areas like employment practices liability andcontingent business interruption coverage as areas that needed tobe better managed.

For EPL, to a large extent, both directors and officers andumbrella policies were being thrown into the policies “without goodunderwriting and without good pricing,” he said. “So what werefocusing on now is, yes, we can provide this cover, but it shouldbe provided in separate targeted policies, where the wording isspecifically crafted for the coverage you want to provide.”

Its also important to make sure “the proper risk managementpractices are in place for the firms were providing coverage,” hesaid, “so that we have prudent underwriting and adequaterates.”

Contingent business interruption also had been broadly writtenduring the soft market, he said, as was demonstrated by the highbusiness interruption losses experienced in the World Trade Centerdisaster. “Now were seeing many more coverages where its beingexcluded,” he noted, adding that business interruption is onlybeing provided if the potential exposure is clearly understood. Heexplained that the business interruption exposure is either beinglimited, or sub-limits are being provided so that accumulations canbe better managed.

“Another issue for terms and conditions is really just themanagement of accumulations, if you will,” he said, noting that itis now understood that the correlations between different coveragesare much greater than was underwritten in the past. “Certainly, wesaw it in the World Trade Center, where property, aviation, workerscomp, life insurance, all came together in the same loss.”

But its also being seen as a result of the accounting scandals,he continued, pointing to the multiple exposures coming fromdirectors and officers coverage, accountants errors and omissionspolicies, lawyers E&O policies, and potentially the bankscoverages.

Further, Mr. Lescault said, where many coverages in the past hadbeen thrown in together, such as with EPL, Swiss Re is moving toprovide that coverage separately, perhaps on a stand-alone basis,where the exposures being taken on can be understood as well asappropriately underwritten and priced.

Underwriting discipline is being enforced within reinsurancecompanies by internal structures they have adopted to preventmistakes of past soft markets.

In July of last year, Munich Re set up a division called“Corporate Underwriting,” which has the responsibility “to reviewthe portfolios of all the operating units from time to time,” saidClement Booth, a member of the board of management for MunichRe.

“The key issue is the responsibility of the units themselves,”he said, noting that the company formerly operated under a systemthat was a mixture between regions and lines of business whereaccountability was not as clear.

“We now operate a profit-center system where the particulardivision responsible for a region–for example, Europe or NorthAmerica–is fully responsible for all aspects of the business,” hesaid. “So it becomes self-regulating in the sense that there is noplace to hide if a loss is made. We think that the previousproblems are not likely to recur.”

Further, he said, John Phelan, the CEO of American Re inPrinceton, N.J., now sits on the board in Munich, “so he shares ourjoint responsibility for the company. So hes on the main board ofMunich Re, whereas in the past that was not the case.”

Mr. Booth said underwriting controls dont simply get handed downfrom “an ivory tower in Munich. They are discussed, so theunderwriters themselves are involved in setting up the parametersfor how we conduct business. Then having agreed on how were goingto do that, [the parameters] then become very inflexible, unlesstheyre changed within the same forum.”

But except for areas such as nuclear or terrorism risks, “theCorporate Underwriting division does not proscribe how you mustunderwrite or what you must charge. This is driven by the divisionsthemselves,” Mr. Booth explained. “We try not to be tooproscriptive because those who run the business units are part ofthe process.”

At GE Employers Reinsurance Corp., global product profit andloss units have been created to ensure underwriting discipline,according to Rick Smith, president and chief executive officer ofGlobal P&C Re, a business unit of the Overland Park, Kan.-basedreinsurer.

“We have field underwriters still, obviously, that workday-to-day with customers,” Mr. Smith said, but they are backed upby a team with in-house product expertise that “truly understandsthe macro and the micro changes to products around the world, withan unbiased decision-making process.”

He explained that these global product P&L units take “someof the bias out of the underwriting decision making, which youmight have if youre too close to the customer when making thatdecision.”

“In addition to product P&Ls, weve digitized the entireprocess, so we have transparency,” Mr. Smith said, noting that theprocess for underwriting decisions, which used to be in someoneshead or in a drawer, are now on the Internet. “Weve also tripledour actuarial pricing team, which has helped us greatlyacross-the-board,” he added.

Further, he said, individual underwriters are given letters ofauthority, whereby the underwriter has authority up to a certainlevel, based upon his or her experience, past performance, andability to assess risk, price risk, and make a reasonable return.“Authority beyond that level is then escalated to different levelsof approval,” Mr. Smith said. “I think when you talk aboutunderwriting discipline, getting more heads and eyes to reviewdeals gives you a better shot at improving underwriting disciplineand making a profit.”

To assure that the underwriting process is timely, he said, GEERCs Global P&C Re business unit has measurements in place that“track back to the customers needs, so we track our cycle time,” hesaid. If the customer wants the turnaround time in two days, “wetry to ensure we have a process in house that will turn around thatapproval process in two days without sacrificing a good decision,”he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 2, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.