Advancing the “new paradigm” hypothesis at the annual Insurance Leadership Forum of the Council of Insurance Agents & Brokers a week before the NAPSLO conference, some broker executives have suggested that the market is always going to be the same.

“No, it's not,” said Christopher Timm, president of Century Insurance Group in Westerville, Ohio, the first executive at NAPSLO to voluntarily launch into an attack of that theory. “It's not going to be because of the way all our estimates are derived for [p&c insurer] balance sheets and income statements,” he said.

“You absolutely positively are always going to over- and undershoot” when posting initial loss reserve estimates, “unless you have Carnac as your actuary doing your reserving,” he said, referring to a fortune-telling character that used to be featured on late night television.

Like any other business, the insurance industry goes through cycles, “and the reason they are more pronounced” for the insurance business “is because of the uncertainty” of balance sheet figures at any point in time. “There is uncertainty built into our product because that is our product”– taking on uncertainty for insurance buyers, he said. The only things insurers know for sure are that their reserves are wrong, and their current loss picks are wrong, he continued, noting that they hope to err on “the right side of wrong.”

With his commentary, Mr. Timm echoed the well-known views of William R. Berkley, chairman and chief executive officer of Greenwich, Conn.-based W.R. Berkley Corporation, who believes that insurers, who use the past to predict future claims trends, are now moving from being on the right side to the wrong side of wrong. With reserve redundancies soon to be depleted, Mr. Berkley has gone on record predicting that the market cycle will turn during this quarter–fourth-quarter 2010.

Although Mr. Berkley was the only one of a dozen E&S executives interviewed by NU to make such a bold prediction of a near-term turn, most repeated the same basic argument when asked for their prognoses.

“On some level, I think he's right,” said Peter Eastwood, president and CEO of Lexington Insurance, referring to Mr. Berkley's arguments about the fundamentals of carrier performance. Cash flows are coming down, Mr. Eastwood said. “If you strip out prior-year development, accident year ratios have slipped over the 100 [breakeven] mark. Those fundamentals suggest that the market should be changing.”

Separately, Louis Levinson, president of the E&S operations of Argo Group, gave a similar assessment. “I'll say everything you already know about reserves being released. I think we're done there,” he said. “The interest rate environment is what it is, so there is no money to be made there, and insurers' combined ratios have to be creeping well beyond 100.”

“There's no where else to go but to start driving rate,” Mr. Levinson said.

“He always says things out loud like that,” Mr. Levinson said, commenting on Mr. Berkley's prediction of a 2010 turn. “There's nothing wrong that. So you're wrong. At least you're optimistic and you're trying to keep people energized in an environment where it is really difficult to do that.”

Mr. Eastwood noted that Mr. Berkley's forecast is not out of line with what most other carrier management teams were saying at the end of 2008 and the beginning of 2009. Back then, they were predicting that “by the time we reached the end of 2009 or the beginning of 2010, we'd have a very different rate environment than the one we have today”–particularly in the casualty lines, Mr. Eastwood recalled.

In fact, “certain carriers decided to staff up and to build infrastructure in anticipation of the changing rate environment,” he said. “I think most people expected a recovery in the U.S. economy that's very different than the one we have today” also, he said, noting that the resulting supply-demand imbalance has prolonged soft market conditions.

“People in this industry are spending a lot of time bemoaning the state of the marketplace, but the reality of it is that this has been a cyclical business for decades,” Mr. Eastwood concluded.

“It's likely to remain a cyclical business. Good companies figure out ways to essentially adapt to the environment,” he said.

CONSISTENCY AND DISCIPLINE

Steve Vaccaro, chief executive officer of Alterra Specialty, said he and some of the E&S peers that he most respects are “frustrated, because there's no need for the type of competition that we're seeing.”

At the same time, “we're optimistic because although the economy hasn't gotten better, it is stable.” Once things stabilize, business people can figure out how to deal with a different set of dynamics, he said, noting that strategies like minding expenses, reserving conservatively, and exercising underwriting discipline are indicated.

“If we're writing the right business when the rest of the market is hemorrhaging, we shouldn't really be too pessimistic,” he said.

“There are still solid strong E&S companies that understand that you grow your book when it makes sense and you shrink it when it makes sense. And we're perfectly willing to do that–to shrink the book,” he said.

During the past few years, Alterra, known as Max Specialty prior to the May closing of the merger of Max Capital and Harbor Point Reinsurance, has grown faster that most E&S companies mainly because it started from the ground floor as a start-up operation in late 2006.

“Last year, we finished up with $280 million, and we're not looking for much more outside of some growth in the casualty business,” Mr. Vaccaro said, referring to an E&S casualty division launched in 2009 and a professional liability division started in January. He said that only $15 million of growth has been budgeted for 2010.

While the casualty pieces were recently added to Alterra's core brokerage property and marine divisions, which started writing business in 2007, he said that little else has changed, echoing several other NAPSLO members who hammered home a message of consistency.

The current game plan, he said, is “to stay in front of the producers to continually tell our story–continually tell them that it's business as usual. Our risk appetite hasn't changed where we feel the rates are adequate,” he said. “We spend more time really concentrating on our renewal base than aggressively going out after new business,” he added.

Robert Lala, senior vice president of the casualty division of Liberty International Underwriters, said delivering the message of consistency to brokers is “a daily ritual.”

“We're not a flag waving in the wind,” he said. “An account that was good to us in January of this year is good to us today. And an account that was bad to us in January is bad to us today.”

“If we get a call on a particular risk or a situation from Broker A, don't in any way shape or form think that if Broker B calls us, it will be a different answer. It won't be,” Mr. Lala said.

“We don't allow the market to dictate our underwriting standards,” he added, noting that capitalizing on the missteps of competitors–particularly claims-handling missteps–has proven to be one way to win business. “Maybe they didn't like the particular third-party administrator adjusting a claim, or they wanted their attorney to review claims. Whatever the case may be, we try to see if we can satisfy that need” for wholesalers and their customers.

Like other E&S executives, Mr. Lala stressed the message of thorough underwriting and price discipline. “We're not going to be the cheapest [because] we all want to be around to pay an insured's losses when they finally come to roost” three, five or 10 years down the road on casualty lines.

“We try to convey that to the wholesalers, but it's as much of a battle today with our field underwriters–to keep pounding that home, that yes, we are doing the right thing, yes we are committed for the long-haul and no, we're not thinking about how much money we're going to put on the books at the end of this week,” he said.

Thomas Mulligan, president and CEO of Western World Insurance Group in Franklin Lakes, N.J. agreed, saying the “the temptation to not underwrite prudently at this time is significant.”

“The E&S industry is designed to retract when the admitted market writes business that traditionally goes to the surplus lines industry as is occurring now.”

“For the E&S insurer, it requires a significant amount of discipline to hold back and watch business leave the organization when you believe it is being underwritten in a way that's either underpriced or imprudent,” he said, noting that having shareholders who understand that–”who that take a long-term view of the surplus lines industry” helps his company to manage the cycles.

“It's not a business that can be run from quarter to quarter,” he said. “We can become a smaller company in terms of premium volume when it's prudent to do so,” he said.

“We don't like it, but our shareholders understand it,” he said.

Mr. Lala said bottom-line strategies for his casualty operation involve expense control and leveraging technology to increase efficiencies. Implementation includes simple measures–like streamlining LIU's name clearance system so that it now takes two minutes instead of 10, he said, going on to explain a more complex move to launch a policy publishing system which carries users through the quote to binder to policy publishing process.

Other system improvements in the works include an “underwriting workbench” tying “the underwriter's analysis of the account and rating model (whether loss rated or ISO rated) together with the quote-binder-policy issuance system,” Mr. Lala said.

At Western World, Mr. Mulligan said that several changes have been made over the past few years, and that changes continue as part of a complete strategic evaluation. “The sole purpose” of the structural and technological changes is “to improve our value proposition for the wholesaler.”

These activities started with an evaluation of how easy the company was to do business with–from both the wholesaler's perspective and, in support of their wholesale partners, from that of the wholesaler's customer, the retail agent, Mr. Mulligan explained.

“We have reorganized the underwriting and marketing organizational structure to be more customer-focused–simpler to understand and simpler to access if you are a prospective agent or current agent,” he said.

In essence, the simplification streamlined five underwriting areas, which were defined by a combination of both product and distribution method, down to “three that are based on how our customers want to do business with us–brokerage, contract or program.”

The company also introduced its Western World Integrated Platform (WWIP)–a technology platform that gives binding authority agents the MGAs the ability to underwrite, rate, quote bind and issue policies directly through a customized website.

Mr. Mulligan said the strategic planning process encompassing the restructuring, technology advances and a reevaluation of products began in 2008 and probably will take another year or so to fully realize.

Argo Group recently announced an ambitious restructuring as well, combining its Colony and Argo Specialty operations into one unit now branded Colony Specialty. An article in which Mr. Levinson details the rationale behind the changes will be published in the Nov. 29 edition on NU's E&S/Specialty Lines e-newsletter.

CENTURY'S SERVICE GOALS

Like Mr. Mulligan, Century's Mr. Timm spoke about the need to make the lives of agency partners easier and noted continuing goals to improve service that began back in 2006 with one of the industry's E&S first web-based rating, quoting, binding and policy issuance systems, Century Online.

“They're just as stressed as we are from a financial standpoint. It takes just as much work to quote, bind, and issue an account regardless of the fact the price has dropped,” Mr. Timm said.

The newest initiative built within the Century Online platform is called RAMP, an acronym for Retail Agency Management Process, he said, explaining that the RAMP portal sits on general agents' websites, who allow access to select retailers by giving them logins and passwords.

CSRs at retail agencies are trained to get quotes in 35 seconds by answering a few questions, he said, noting that wholesale agents train the retailers to use the 24/7 portals through webinars.

“The GAs that really embraced this have trained their retailers to do some of their work for them. That might sound like they're pushing tasks off, but by doing that they give these agents even better service,” Mr. Timm said, adding that the system, which launched in April, is not a full underwriting system.

“There is only so much you can do with making your policy form broader, making your price cheaper and raising your commissions. In a soft market, we have pretty much done those three things,” he said, going on to describe the firm's biggest service project of 2010–an internal process management review.

“We want to be able to get same-day [delivery] on 80 percent of our items,” Mr. Timm said. He described targeted turnaround times for requests coming into the Century Online system that are actually measured in hours, not days. “That's our biggest challenge right now. In the face of all the other things we have to do to maintain profitability,” Century aims “to absolutely be the best in service” by investing in better processes, he said.

The process improvement group is looking at everything–”stuff as basic as how does something get to an underwriters desk,” Mr. Timm said, noting, for example, that submissions now go to the scanning department of the paperless company so that electronic files are made. “Maybe that should go to the underwriters desk first,” he said, noting that the group has flowcharted its processes down to the smallest details to look for places to cut out time lags.

While technology is a backbone of all the improvements being considered to respond to the needs of agent partners, in the end, Mr. Timm believes that “technology can never be a sustainable competitive advantage. What can be is a penchant–a real desire to innovate.”

LEXINGTON STILL INNOVATING

Innovation has long been the mantra at Lexington, where the creation of new insurance products has been a goal for decades. “Part of our mission in life is to come up with as much new product as we possibly can,” Mr. Eastwood said.

Among the more interesting examples Mr. Eastwood shared with NU was the October 2009 launch of a product called LexCap Overturn, an add-on to medical professional liability policies. It is essentially designed to respond to insureds in the health care space located in states where there is a threat to medical liability caps being overturned.

Mr. Eastwood explained that the innovation allows a customer to pay a small option fee premium upfront, giving the customer the right to buy additional limits at a predetermined price in the event that state tort reforms are put in place that overturn an existing cap on non-economic damages. “Given the uncertainty associated with whether the cap will get overturned or not, we're not requiring them to pay the full premium to us upfront.”

While Mr. Eastwood also discussed products emerging from the green movement, as well as some dealing with the protection of idle real estate assets, he stressed that innovation at the nation's largest E&S insurance company has moved beyond product design–to marketing and communications.

He said that Lexington frequently hosts webcasts to explain client issues and products that address them, but in addition to those, the marketing department has developed tools known as “LexOvations” and “LexPlorations”– interactive ways of getting information out to customers. (Editor's Note: LexPlorations, which resemble interactive whitepapers, and LexOvations, which interactively present the type of descriptive material usually available in product brochures, are visible to customers at lexingtoninsurance.com)

On the product front, Mr. Eastwood said Lexington finds ideas in societal trends, citing health care reform as one that presents new opportunities. “There are likely to be more surgical centers [and] be more 'doc-in-the-box-type'” venues, he said, explaining that physicians are popping up in clinics and in the local retail stores and pharmacies.

Predicting further change in the landscape for physicians, he foresees movement from individual to group practices and into hospital environments. He speculated that the principal driver would be the increased pressure on reimbursement form the federal government, changing the economics of the business and forcing physicians to look for ways to achieve economies of scale.

Fortuitously, Lexington, a long-time player in the health care facilities arena, set up a physicians group insurance practice several years ago not in anticipation of the impacts of health care reform, but rather as a means of diversifying the portfolio.

DIVERSIFICATION AT IRONSHORE

In an interview with NU last year, Lexington Executive Vice President Matt Power highlighted product diversity in property, casualty professional lines and specialty programs as a key competitive advantage. Recent upstart, Ironshore is emulating the model, according to executives, who describe the transformation from the company's launch as catastrophe property specialist in 2007.

Ed Mazman is the senior vice president of Ironshore's U.S. property unit, but by the time he joined the company in 2009, the company had more of its insurance portfolio in casualty and professional lines, he told NU. “I think we'll finish this year with 40 percent in property” he said. “It's tough to rely on just writing property because of the capital requirements you need.”

He said that while property volume is flat this year, Ironshore will probably end the year with over $1 billion from all lines, up from $830 million last year and $325 million in 2008. By his count, the company is now in at least 14 different businesses, including a recent foray into aviation.

Mr. Mazman reported that Ironshore also has a diversified distribution platform, with 65 percent of the U.S. property business coming through wholesalers and the rest from retailers. “You rely on wholesalers when you first start out–to mine the business,” he said. Supplementing a wholesale-dedicated operation in St. Louis, he started a Boston retail property group when he came on board, and within a year, Ironshore's U.S. property division has opened offices in Los Angeles, San Francisco, Chicago, and New York, he said.

Within the property unit, he said Ironshore has de-risked the portfolio, reducing line sizes down from the catastrophe limits put out on Fortune 500 accounts from the original Bermuda office, now writing more middle market accounts and E&S classes like vacant property.

He said the offering for vacant buildings is a package that includes environmental coverage. “It's not easy business to do,” he said, noting that Ironshore has chosen to attack the challenge by specializing and tailoring underwriting to the class. If instead the company had chosen to underwrite such properties on a case-by-case basis, the team wouldn't be building a knowledge of this particular market, he reasoned.

Summing up an overriding theme for all of Ironshore's businesses over that last year, he said: “We want to see the submissions, see the market, and then select the ones to write. It's not an exact science, you hope to be right through sound underwriting and thought processes,” he said. “We have to be careful in what we do.”

He reported that representatives of the developing company found it easy to set up meeting with senior people of NAPLSO broker members during the October conference. “That's a good sign. Wherever we go we get a good reception–I think in anticipation of what we're going to become in the next five years,” he said.