With standard insurers widening their business models to capture policies residing in the excess and surplus lines market, insurers within the E&S segment continue to distinguish themselves from one another with very distinct business strategies.

Not only are companies like United States Liability Insurance Group in Wayne, Pa., and Markel Corp. in Glen Allen, Va., not fighting for the same policies, they can't even agree on the use of the term “excess and surplus.”

“I fine people in our company when they use that term,” Tom Nerney, president and chief executive officer of USLI Group, said during a recent educational conference for managing general agents.

In spite of the fact that USLI distributes its products exclusively through wholesale brokers and MGAs and writes some business on a nonadmitted basis, Mr. Nerney said that “E&S” doesn't accurately describe what his company does. He also suggested use of the term encourages a narrow, market-of-last-resort mindset that prompts MGAs and other specialty insurers to adopt reactive strategies in soft markets.

Explaining USLI's mission “to be the best insurance company writing small-premium accounts” with 101 different insurance products, Mr. Nerney used the term “E&S” to apply to “individual-risk underwriting” for larger accounts.

“That kind of emotional underwriting isn't something that I've seen done well in my 30 years in the insurance business. To me, [a risk] is either good or it's not,” he said, suggesting that if a submission doesn't fit into one of the underwriting boxes for his company's products, his underwriters aren't going to seek creative ways to write it.

Paul Springman, president and chief operating officer for Markel Corp., countered that “some of our companies have a saying that gray is our favorite color. We like things that fall in the middle. We like to have opportunities to talk with our clients. And we love to have to ponder,” and to come up with a solution different from a policy “that's just banged through the system in six minutes or less.”

“We love the term E&S. We love the fact that we are individual-account underwriters. That's our history and our passion,” he said, noting that Markel typically underwrites medium-sized accounts that are larger than those entertained by USLI but “below the radar screen of some of the mega-giants.”

The exchange took place in late February during a panel discussion at AAMGA University Weekend East in Philadelphia. The pair presented their opposing views at a session led by Bernie Heinze, executive director of the King of Prussia, Pa.-based American Association of Managing General Agents, who asked carrier executives to list some of the strategies they use, and that their MGA partners should use, to survive in the soft market–a topic sure to be taken up again at the AAMGA annual meeting in Phoenix this month.

“We like gray as well,” said Patricia Roberts, president and CEO of General Star Management Co. in Stamford, Conn. “So we try to come up with 10 new products each year, looking for gaps in the marketplace where we fill a need,” she said, highlighting a recent coverage launch for medical spas.

General Star writes on both an admitted and nonadmitted basis through General Star National and General Star Indemnity, with account sizes ranging from very small $300 accounts all the way up to multimillion-dollar accounts on the brokerage side.

Other market survival strategies, she noted, are “underwriting within your own circle of confidence” and systematically looking at costs. “You don't want to be underwriting something you don't understand,” she said, referring to the first strategy. “We systematically are programmed to pick up speed and find ways to increase our efficiency,” noting that her company is constantly looking at ways to get quotes and policies out more quickly.

Ms. Roberts and Mr. Heinze noted that while E&S was 14 percent of the overall commercial insurance market soon after Hurricane Katrina, the E&S share is steadily dropping–now down to 12 percent or less.

“There's just less buffalo for us to hunt,” Ms. Roberts said. “If yesterday a tough product that you were writing was a crane operator with horrible losses, now a standard carrier is picking that up. That's buffalo that's not in your real estate anymore, even if it belongs there–and much of the business we had probably didn't belong. That means that we all have to be better hunters–getting to the fundamentals. We have to have sharper spears. We have to run farther, and we're still going to eat less.”

“We're going to become better at what we're doing, but not [everyone] is going to make it,” she added. “We're determined to do everything we need to do on our end–and to help our [MGA and broker] partners do what they need so that we're all part of the folks that continue to eat and grow.”

Ms. Roberts told the MGAs that “like it or not, the real estate is just shrinking. You can be upset about it. In the end, that's just the way it is.”

That didn't sit well with Mr. Nerney. “We believe the professional wholesaler can in fact create more value with the retailer than just being a resource in difficult markets,” he said. “The real estate shrinks in soft markets, [but] if you're a survivor, you understand that eventually you have to adapt much differently to really survive.”

Mr. Nerney said his company completed 1,200 “customer-customer visits” in 2007–going out with its wholesaler and MGAs to the retailers they serve. “What we have found is that [retailers] are looking for a good partner. They're not getting their needs met from 'the standard markets.'”

“I have no idea what that term means,” he said. “We're an 'A-plus-plus' company. I think we're as standard as anyone else,” noting that USLI, a unit of Berkshire-Hathaway, has a superior A.M. Best rating.

He said some successful MGAs think the way he does. They're wired to think of themselves as “starters” rather than “role players” in the distribution system, he said, applying the term “role players” to those who simply react to market conditions. Such players believe they'll be growing at 30-to-35 percent in this market “because they have a different belief system,” he added.

ALWAYS IN THE GAME

Mr. Nerney, who used sports analogies to pepper much of his talk, said he wants his employees and agents to wake up everyday thinking they'll be starting the game, instead of waiting to be called in as a second-string replacement.

Company executives that react and decide to change philosophies in different markets “throw a lot of mixed messages” out to their players, he said.

“It's important for us to identify what it is we want to be, put a story together and a road map, and then try to get everybody on board to believe in it. That's what we try to do internally,” he said. “We are not doing anything different today than five years ago. If you really believe in fundamentals, you're doing them all the time.”

Coaxed by Mr. Heinze to reveal his three top fundamentals, he listed the following:

o Understanding what it is the company knows, referring to the fact that USLI knows its products and doesn't lapse into being an individual-risk underwriter.

o Figuring out how to get business into the company.

o Staying disciplined.

The discipline Mr. Nerney described was not limited to underwriting discipline but instead encompassed his broader concept of staying on an established course.

“A lot of times companies veer left or veer right, not necessarily because something is a good idea, but because they get tired of the path they're on,” he said. “It's very important for the leadership of an organization to stay energized and excited [about the path they've chosen]. That means being aware of what's going on, but not changing or getting everybody moving in a different direction every five or eight years.”

At USLI, the fundamentals are expressed as “community goals” that are shared and understood throughout the organization– and Mr. Nerney said he values MGA partners that demonstrate that same depth of understanding of “the company story.”

“I think there's way too much individualism going on in our [MGAs'] shops. There aren't enough where everyone is wearing the same uniform,” he said.

USLI has 170 wholesale/MGA distribution partners, and company representatives visited them 22,000 times since 2000, he said, adding that many MGA principals are hard-pressed to come up with an answer when USLI asks: “What is your story? How do you differentiate yourself from your competition?”

He described going to their offices with copies of their Web pages and those of their competitors with all the company names scratched out, only to find that they couldn't pick out their own from the stack, meaning the retailer can't distinguish them, either.

When interviewing four MGA competitors, “that retailer hears exactly the same thing four times. So instead of doing business with just one, they may do business with all four,” he said.

A DIFFERENT PLAYBOOK

The carrier CEO panelists had no trouble differentiating themselves during the four-hour AAMGA University session, whether they were talking about being involved in mergers, expanding internationally, or outsourcing parts of their business.

Mr. Springman, referring to Mr. Nerney's approach as basic “blocking and tackling,” said the current market demands a different strategy. “I think the market on both sides of the Atlantic right now calls for a few more trick plays than you had to call in 2002, 2003 and 2004 to win the game.”

Providing some examples from Markel's playbook, he listed:

o A move to automatic renewals for all loss-free accounts under $10,000 in the Shand division in Chicago.

o Combining property and casualty contract binding authority business “to make it easier for clients to find product” in the Essex division in Richmond.

o Hiring a new person to head a program unit for Markel Underwriting Managers.

o Reorganizing and introducing new products at Markel Southwest in Scottsdale.

“You have to stay a step or two ahead,” Mr. Springman said. “Tom [Nerney] built a great business model, but I disagree with it.”

Going on to say Ms. Roberts got the situation “exactly right,” Mr. Springman said that “you have to look a little deeper for opportunities.”

“You're being bombarded by one side with standard markets reemerging and taking part of the E&S traditional market. You've got unbelievable new capacity from Bermuda, London or onshore here in the United States,” he added. “I've got great competitors that sit at this table [and] they don't want to lose their market share either.”

He concluded that “frankly, the demand for product right now is a lot less than the supply that's out there. We just think you have to bob and weave and be a lot more nimble today than you did in the last three or four years.”

Being nimble at Swiss Re Commercial Insurance means entertaining a “broader strike zone” of risks, according to Robin Sterneck, head of commercial insurance for Swiss Re in Overland Park, Kan.

Over the last few years, Swiss Re's commercial insurance book was very heavy in construction, accounting for 40-to-45 percent of the book, she said. But with construction becoming a tough area in 2008 (as projects and risks available to cover diminished), the proportion declined to 30-to-35 percent, she told NU in an interview just after the midyear meeting of the National Association of Professional Surplus Lines Offices, Ltd in February.

“We want to let people know we're not just a construction-oriented book of business,” she said, highlighting expansions into product liability coverage for nutraceuticals and an entrance into the hospitality space for the first time in years.

“We're not running to write every diet product that comes out, but clearly there are a lot of holistic, preventative, herbal, vitamin-type based products that are out there and we've gotten involved with the manufacturers of those,” she said, referring to the nutraceuticals coverage. In the hospitality area, she said, Swiss Re is focusing on white-tablecloth restaurants and higher-end restaurant chains.

Like Mr. Springman, Ms. Sterneck also said Swiss Re embraces a definition of E&S that focuses on the ability to be a problem solver. “That's always been our mantra, but I think we're trying to resonate it more loudly in this tough market,” she said.

“We need to provide solutions because we really can't compete on those solutions that are very commoditized,” she said. “We just don't want to be another market.”

William Marko, vice president, said Swiss Re's commercial insurance division provided an example, noting that Swiss Re Commercial Insurance insures discontinued operations–covering liability risks for insureds that exit their businesses.

“For example, if a contractor exits the homebuilding market by selling his or her assets to another company, a home buyer may still sue the original contractor to fix a defect in his or her home,” he said. “Discontinued operations insurance protects the contractor in these types of cases,” he said, noting that the insurance solution is not limited to contracting.

Giving a reinsurer's perspective on dealing with the increasingly competitive market during the AAMGA panel, Paul Goodwin, client executive for the National Clients division of Munich Re America in Princeton. N.J., said a major push at his firm this year is a “client-centric initiative.”

Describing a firm-wide reorganization that took place to reflect this focus, he said, “Under the former organization, we had separate treaty people, separate facultative people and a separate group that just dealt with reinsurance intermediaries. As a result, silos evolved.”

“From the smallest organization to the largest, that's just human nature. People tend to organize into little teams,” he said.

But the “client-centric” initiative is breaking down the silos with the goal of getting to know major clients, like Markel Corp., “as well as they know themselves,” Mr. Goodwin said.

In addition, the reinsurer is focusing on product development–”on our own and in conjunction with our clients,” he said.

For example, he said, several “innovation teams” have been put together in Europe and one in the United States. “We listen to people and come up with products that a reinsurer may be able to sell. In some instances, we come up with a concept and approach some of our [insurance] clients” with product ideas to differentiate themselves, he said, adding that one area the innovation teams are looking at is the renewable energy arena.

Special Reports /

Business Strategies Vary Widely Among Specialty Carriers In Softening P-C Market

Related Stories

Recommended For You