Hardening Market No Gravy Train For Insurers

In addition, insurers cited the need to assess workers' compensation exposures in a post-terrorist attack environment, and the need to push technology out to agents as two other critical issues.

Challenge #1–Getting Back To Basics:

"Underwriting is going to be more important because interest rates are going to be lower and we won't have investment returns to fall back on. In fact, they may be at an all-time low," according to Mr. Carmichael, adding that costs are increasing–"starting with reinsurance costs."

"So it's just that much more important to get back to the basics of underwriting and to try to produce combined ratios under 100 for all lines–not just auto and personal lines," said Mr. Carmichael, whose Fairfield, Ohio-based company writes personal and commercial lines.

Marita Zuraitis, executive vice president of commercial insurance operations for The St. Paul Companies, expects to see a "back-to-basics approach" across the commercial lines market in 2002. There will be "more fundamental underwriting–assessing risk, pricing risk, spreading risk–some of the basics that we all know is the right way to underwrite," she said.

"The first thing you've got to confront is getting people to understand that their job is to charge the right price, and that in a hard market you can do that," said William R. Berkley, chairman and CEO of W.R. Berkley Corp. in Greenwich, Conn.

"One issue that all companies face is that a large percentage of the people working for them have never been in a hard insurance market," he said. "If you've had 10 years of declining prices, even by 10 percent a year, then $1,000 of premium becomes $383. So even if you double the price, you're still only at 75 percent of the price 10 years ago. People don't intuitively understand that math.

"So when somebody says they're getting a 25 percent price increase, they think that's fabulous. Except they don't think of it in terms of what price they need in order to make a profit," he added.

"Our job is to underwrite to a profit and to grow the business in a sound manner," said Paul Krump, executive vice president and chief operating officer of Chubb Commercial Insurance in Warren, N.J.

"We're finding that the pool of adequately-priced customers has increased–which means that if we were baseball batters, we'd be seeing more pitches in the strike zone for us to go after." Going after those pitches, however, means individually underwriting every account, not "just slapping on an 'X' percent increase."

"We recognize that within the portfolio there are 165,000 individual policies. The average may come out close to the marketplace, but how we treat them individually is very different," he said. "That means recognizing an actual insured's loss experience, checking out the industry they're in, and making sure we give credit if they're in a good one." It also means looking at location and determining whether they are in a catastrophe-prone area or one more susceptible to terrorism, he noted.

Restoring profitability, restoring price, and returning to underwriting basics were key issues before Sept. 11–and insurers were moving steadily in the right direction in addressing them, according to St. Paul's Ms. Zuraitis. Now there are 9/11 issues on top of those, magnifying them and putting terrorism on the top of the list of challenges for 2002, she said.

Challenge #2–Workers' Compensation After Sept. 11:

For insurers, responding to terrorism exposures means "underwriting concentration risk," especially in workers comp, according executives like Ms. Zuraitis and William Smith, president and chief operating officer of The Kemper Companies in Long Grove, Ill.

"Our biggest challenge will be in workers' comp," Mr. Smith said. "We always underwrote concentration risk on workers' comp in California on the assumption that if you had a daytime earthquake, you could have a massive loss of life," he said. But "I don't think any of us were as prudent as we needed to be about underwriting that exposure" beyond California, he added.

"You're going to hear a lot more about aggregation and accumulation as issues," Ms. Zuraitis said, referring both to workers' comp and commercial property exposures. In the workers' comp arena, insurers are going to look for concentrations of large groups of employees "for basically the first time," she said.

"Our basic applications, many of them, don't even require information on the number of employees in specific locations," she noted.

Beyond the number of employees in given locations, Chubb's Mr. Krump said underwriters will ask about the marital status of those employees, whether they have dependent children, and even the ages of the children. And "we're paying a lot more attention to the floor people are located on in a given building," he added.

New reinsurance capacity and the prospect of raising rates won't solve problems in workers' comp, according to Mr. Smith. "The reinsurance support we had was literally wiped out" by 9/11, he said. Noting that most of that support came from the life reinsurance carve-out market, he said the reinsurers that remained after being "hammered on Unicover" are now bailing out.

"We and every other comp underwriter understands now that if you have an average death benefit across the country of about $500,000, and 1,000 people in a building, you've got a $500 million potential loss," going on to suggest that an urban area could easily generate a $25 billion event. "So even if you could get all of that capacity on the ground in Bermuda, and even if it is committed to comp, there's no simple way to see how that all wouldn't get used up pretty quickly."

Whether Bermuda startups will be interested in writing workers' comp reinsurance remains to be seen, but Brian Duperreault, chairman and CEO of Bermudas ACE Ltd., is no longer interested in writing excess workers' comp business related to self-insured accounts.

"We sent out non-renewal notices to every account," he told reporters at a December media luncheon, noting that insurers cant put terror exclusions on workers' comp policies as they can on commercial property, and that "accumulation of people" has become an issue in a "changed risk environment."

Kemper's Mr. Smith noted that workers' comp is an extremely political line of business. "We're not in a position where we can just raise rates to offset reinsurance costs," he said.

Workers' comp issues, he said, are exacerbated by what's happening in the residual market, state funds and guaranty funds. Noting that the California State Fund is now "astonishingly big" and carrying poor credit ratings, he said, the fund can access the already troubled guaranty fund. In New York, where underwriters agree they can't take the concentration risk anymore, the very large risks, if they don't self-insure, are all going into the assigned risk plan, he said.

"That's a very short-term solution, because now if we get a terrorist event and don't have a federal terrorism solution, then the residual market mechanism is going to get bankrupted," he said last month as Congress continued to debate a terrorism reinsurance bill.

He also said that workers' comp presents enormous challenges for the agents and brokers that have to explain to customers why a lot of new questions are being asked or why they can't get insurance. Kemper has been holding conference calls with key agents to walk them through the background so they explain to customers what's likely to happen.

For Kemper, which has built a strategy toward targeting small businesses with professional liability and other specialty products, the challenges facing agents are creating unique problems.

"The agent and broker have no time for that small customer. The distribution channel is totally fixed on how they can solve the capacity problems, the property problems and all these things for their big customers," said Mr. Smith.

"We continue to believe there's a huge opportunity to sell a lot of coverage that [small business] customers say they want," he said, noting that Kemper is attacking the problem through technology and alternative forms of distribution.

He noted that Kemper, which does warranty business for Office Depot, is getting the message out to Office Depot's customers that the company can serve other business insurance needs.

In addition, he said, "we're managing costs like everybody else, but one area we're not cutting is anything to do with our Web site. In situations where no agent is calling small-business customers, at least they have someplace they can go to find out what coverages we have–and how to get hold of our agents."

Challenge # 3–Making Life Easier For Agents:

Several insurers said that their technology investments were being directed to "making agents lives easier"–making that one of the three most frequently listed issues during interviews with NU.

"We've got a continuing challenge to roll out our policy management system," said Mr. Carmichael, noting in December that Ohio Casualty was working to get all its commercial lines products on PARIS (the Policy Administration Rating and Issuance System) by year end, and then to "push it out" to agents.

Once PARIS is adopted by agents, "they'll be able to take data right out of their [agency management] systems and input it into ours without having to rekey," he said, noting that they will be able to enter applications and request policies, billing plans and policy changes.

On the personal lines front, Michael LaRocco, president and chief operating officer of personal insurance at SAFECO in Seattle, had a similar message. "We want to provide point-of-sale and point-of-service technology for the independent agent that makes us the easiest company to do business with, period," he said.

Describing point-of-service technology, he said the Internet-based service will allow agents and policyholders to make "once-and-done" changes to their policies, such as change of address, adding vehicles or adjusting coverages. Like point-of-sale technology, which will be completely rolled out by April, there won't be a need to complete any paperwork, he noted.

Such technology is part of an overriding effort to be more effective and efficient–an effort that will extend to the company's handling of claims, he said. "We really are always looking to reduce our expenses. That challenge never changes year to year," he said, noting that lowering costs gives insurers the ability to lower rates and be more competitive.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 7, 2002. Copyright 2002 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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