Commercial P-C Survivors Weather Perfect Storm

In the world of commercial lines insurance, a number of insurers have been voted off the carrier island by rating agencies and regulators in recent years, but a group of survivors claims to have weathered the “perfect storm” as they prepare for the challenges of the years ahead.

The survivors that spoke to National Underwriter late last year had a common list as they described the preparations theyve made to stay on course in 2004without the hard market headwind to drive profits. After undergoing extensive repair jobs, they say they are not simply “focused” on core products, but they are also externally focused on customers and agent partners.

The mantra of underwriting discipline hasnt gone away in 2004, but it has been enhanced by themes of improving technology, efficiency, service distinctions and brand image, according to commercial insurer executives.

Back To The Future: Firemans Fund

The “retro style” is really back in Americas popular culture, observed Jeff Post, chief executive officer of Firemans Fund Insurance Company, when he spoke to NU about where his company is going in 2004.

Firemans Fund is going to go back to its heritage to build its brand going forward, he said, noting that the Novato, Calif.-based companys history dates back to the 1860s. “This is going to be an exciting, philanthropic way of building the company backand building its image back,” he said without revealing details.

When Mr. Post donned his firemans hat to rescue an ailing company in January 2001, its image was tarnished by results that were “worse than the industry,” according to Mr. Posts own account. An actuary by background, he summarizes the problems in numeric terms. “Our combined ratio at the end of 2000 was 128; today our combined ratio for ongoing businesses is 93.”

The fact that inferior results forced the company into turnaround mode earlier than its competitors means it will face a different set of challenges in 2004, according to Mr. Post. “Theres still a lot of smoke in the air,” he said, noting that companies that didnt go into turnaround until after Sept. 11 and those involved in mergers have internal issues to deal with.

Mr. Post, who is often credited as the first person to use the phrase “perfect storm” to describe what is a familiar list of external conditions driving the commercial lines insurance market since 2001 (a catastrophe, a stock market decline and an erosion of the court system), sums up the reasons for Firemans Funds past internal problems simply: “We werent being responsible in pricing our products.” And: “We were trying to be too many things to too many people. We were in some businesses we shouldnt have been in.”

The turnaround was initiated by applying a “strategic lens” to each of the businesses the company was in. “We ultimately asked ourselves, Do customers value what we bring to the table? Do we think we can make money at it? Do we have the right people? Do we partner with the right agents to be in that business?”

The result was a decision to exit several businessesincluding surety and national accountsin favor of five surviving operations:

A multi-peril crop insurance operation generating $450 million in premiums.

A New York-based marine operation, also a $450 million business.

A $750 million personal lines business focusing on affluent homeowners.

Interstate Insurance, an excess and surplus lines operation producing $800 million through wholesalers.

Commercial lines, generating $1.5 billion, with a focus on middle market and small-business customers.

“Long story short, weve taken over 30 points out of our combined ratio in three years,” he said, noting that while some of the improvement is due to the hard market, “a lot is due to more disciplined underwriting, smarter claims operations” and greater efficiencies achieved by moving to a “shared services environment.”

Before shared services, there were people in each business unit providing back-office services. Now such servicesincluding information technology, human resources, claims and operationsare provided corporately, in one place, he noted.

Mr. Post prefers to use the term “efficiency play,” over “expense-cutting initiative” to describe this shift. “Just to size it for you, we are at the exact same premium size today–$4.4 billion grossas we were when we went into turnaround. In 2001, we had a little less than 8,000 employees. Today we have about 4,600.”

Why didnt premiums shrink as businesses were exited? “We put probably $1 billion into runoff, [but] between rate increases and growing the businesses we wanted to be in, weve essentially offset that,” Mr. Post said.

As for the 35-point combined ratio improvement, while he asserted that none of that was due to any type of guarantee or stop-loss reinsurance from parent Allianz, 20 points are probably from the net effect of rate (rate less inflationary effect), 10 points are probably attributable to better underwriting, and five are due to a different mix of business, he guessed.

As the CEO drives the Firemans Fund engine forward in 2004, “we really are focused on growingnot in an irresponsible way, [but in] a very focused way. Thats what I want to make sure everyone understands.”

“It is focused growthfocused in five lines of business [and] with agents that are the ones that we want to partner with going forward,” he added, describing professional agents who add value to clients, rather than those he termed “low-cost search engines for customers.”

For its part, Firemans Fund is helping to enhance its agents relationships with customers, as well as its own relationships, by investing in a Web-based product called “iCustomer.” Basically a channel that allows information to be shared among carrier, agent and client, Mr. Post said it brings products other than insurance to customers.

Noting that the insurer has negotiated volume discounts of products related to specific businesses, customers can buy data back-up and risk management tools at reduced prices. iCustomer also “puts them in contact with other insureds that are very similar” through chat rooms, helping them stay current on legal and product issues.

If We Build Tech, They Will Come: Safeco

Dale Lauer, president and chief operating officer for Safeco Business Insurance, talks a lot about technology and automation when he describes the strategies the Seattle-based insurer has put in place for commercial lines. Ask him about the challenges ahead, and hell tell you one big one is just making sure all the new automated models work.

“I think whenever you move to the kind of underwriting and pricing that weve moved to, its important to make sure those models are working as you expected them to work and to continue to validate that the assumptions that youve put into them are absolutely correct. That is a major issue and challenge.”

Like Mr. Post, Mr. Lauer also talks a lot about focus. Safecos commercial insurance focus has narrowed to small-business in recent years. And with $1.6 billion in premiums, the insurer is among the top five writers in a highly fragmented segment, Mr. Lauer noted. Defining the companys appetite in terms of account size–$100,000 premium and lesshe estimates the segment represents about 99 percent of all businesses.

Safeco is also “focusing exclusively on independent distributors” in relating to customers, he said. Small-business owners are “time-poor people involved in every aspect of their businesses. Insurance, for them, is a complicated issue,” he noted, explaining that “independents are really the best at providing advice and solutions.”

He said the companys four-part strategic visionto deliver superior underwriting, an ease of doing business and service that excels, and to create a unique sales modelis built on the recognition that agents and customers want fast accurate solutions.

To achieve “superior underwriting,” Safeco has built “automated underwriting platforms that use data mining, modeling and technology to create a greater degree of segmentation in the small-business market, he said. “The data mining and modeling enable us to correlate risk variables,” while Internet-based technology brings risk information into the underwriting process, creating a real-time platform that allows agents to quote and sell accounts online in a matter of minutes, he said.

Mr. Lauer said he believes the fact that both the commercial and personal operations at Safeco are using the same business-entry platform is unique in the industry, further enhancing the goal of making it easy to do business with the company from an agents perspective.

Turning to discuss the build-out of a client services operation, he noted that small-business owners have a lot of transactions that need to take placeendorsements, certificates of insurance, billing questions, policy questions. “The client services capability enables distribution partners to give that kind of work to us,” at their option for a small fee, letting them “focus on the new business sales and the renewal and retention of customers.”

Finally, Safeco is developing a focused force of employee sales representatives, which works face-to-face with agents, Mr. Lauer said. “Since we have a very tight focus, they are quite effective in representing both” Safecos commercial and personal product lines, he said.

While competing against The St. Paul Travelers Companies in the small-business arena isnt one of the things that worries Mr. Lauer going forward”Its a huge market with substantial opportunity”the need to continually test all the new models is a major issue.

“We shouldnt fool ourselves into thinking that everythings perfect. They never are. So we have to keep on top of that” with testing and look-back capabilities, he said, noting that Safeco has come a long way in recent years.

In Safecos 2002 Annual Report, CEO Mike McGavick explained just how far Safeco has come. “If Safecos results stunk in 2001 (and they did), youll be pleased to know that 2002s results did not,” he wrote, noting that the p-c combined ratio improved to 105.3 from 118.7. “Our turnaround phase is over. Were back,” he said.

Still, in third-quarter 2003, Safeco did announce more restructuring, more staff cuts and some shoring up of reserves. According to Mr. Lauer, the reserving issue that emerged in the workers comp line was almost all associated with large-account business the company exited well over a year-and-a-half ago. And the decision to sell off Safecos Life & Investments unit, he said, just reinforces the focus on auto and small business, where new platforms are enabling the company to grow on a profitable basis.

A Broader Underwriting Appetite: Ohio Casualty

Jeff Haniewich, chief operating officer of commercial lines for Fairfield, Ohio-based Ohio Casualty, was the only representative of the survivor companies to say that offering “broad coverages” was a strategy for 2004.

“Our goals are to have underwriting profitability, to have prudent responsible growth and to focus on how to become more efficient from a cost structure [perspective]and also how to add value to our agents,” he said. “To add value to our agents, you have to have strong ratings, responsible pricing thats competitive, broad coverages, and you have to do whatever you can to make agents respect that youre easy to do business with.”

When pressed to describe “broad coverages,” Mr. Haniewich said that “competitive coverages” might be a better description. “Broad probably is something that is shrinking a little bit. But the coverages, at least, have to be adequate for whatever needs there are,” he said.

In June 2001, Ohio Casualty outlined its strategic turnaround plan, reorganizing the company into three business unitsstandard commercial, specialty commercial and personal lineswith the standard commercial segment targeting small and midsized customers. More recently, at a September investor conference, Mr. Haniewich noted that the company is willing to write some larger accounts and has the ability to serve multistate accounts.

Championed by CEO Dan Carmichael, who was formerly the CEO of IVANS, an industry-owned provider of electronic communication services, Ohio Casualtys “ease of doing business” initiatives remain a critical strategy in 2004.

“Companies [need to] understand that agents are businesses and that they have to run their businesses as efficiently as they possibly can,” Mr. Haniewich said. Those “that give agents tools to help them do that will be the ones that will prevail,” he said, going on to describe competitive advantages of offering straight-through processing capabilities and products that allow agents to enter business into their agency management systems without having to go out of the systems to quote, rate and issue policies.

Like Safecos Mr. Lauer, Mr. Haniewich said another challenge for Ohio Casualty is to find ways to segment pricing “so that were competitive in the classes and types of business and areas we want to be in.” To achieve pricing sophistication, he said, “were looking at such things as better financial underwriting, more segmented pricing, better product segmentation, even looking at predictive modeling.”

Explaining the need for financial underwriting, he said, “I think you need to look at the financial ability of the customer to pay.

Mr. Haniewich said another challenge for Ohio Casualty is to become a lower-cost provider of insurance products by making sure its expense structure is effective. Through the first nine months of 2003, the company remained nearly four points above a targeted expense ratio of 32.1 set forth in its June 2001 strategic plan. For standard commercial lines, the overall combined ratio110.1was also far from a targeted goal of 104.5, but a full 20 points below a combined ratio of 130 for 2000the last full-year result that preceded the turnaround plan.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 2, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Commercial P-C Survivors Weather Perfect Storm

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