Specialty Insurer, Broker Distinctions Amplified In Soft Market

"Our ability to grow in the past–and we believe our ability to grow in the future–derives from our business model, which is the basis for our theme," said Michael Stone, chief operating officer, referring to a tagline, "We're different," displayed on recently created marketing materials.

The insurer's unique business model, according to Chief Executive Officer Jonathan Michael, is centered on hiring and retaining experienced underwriters. These experts are given the freedom to write the business they specialize in and they're rewarded through an incentive plan that serves up profits from the underwriting pie.

That recipe, Mr. Michael noted, has produced underwriting profits for RLI in 26 of the last 30 years. Mr. Stone added that through its new marketing campaign, the company is looking to attract even more talented groups of underwriters with "entrepreneurial zeal and skills in niches" in which the company doesn't currently play.

This is how a marine operation began a few years back, consisting of "people that came from another company and wanted a piece of the action. That's what we provide," Mr. Stone said.

"Most of our business leaders want to run their own business. They would like to run their own insurance companies. The problem is they don't have any money. They have skills, contacts, relationships."

RLI, he said, provides the capital, infrastructure, licenses, technology and claims support and enables them "to work at their skill." Such teams are empowered to run their businesses as they see fit, making all decisions ranging from the locations of their offices to their underwriting guidelines.

"They basically set their appetite–what they want to write, what limits they need to put out, what the terms and conditions are. We don't referral underwrite," he said.

Mr. Michael noted that RLI's business model means underwriters don't have to deal with the day-to-day administrative matters, which are handled at a corporate level. "All they're focused on is underwriting. They're not worried about who's going to fill in for the receptionist when she goes to lunch."

He highlighted the simplicity of the firm's incentive bonus plan, distinguishing it from others that might exist. "We pay a piece of the underwriting profit, period. And on different books, we can develop the business for up to eight years and pay it out over that time period," he said, noting that even if underwriters retire, they can still get paid post-retirement.

Mr. Stone said RLI's underwriters "report to me, and there have been a number of years when they all made more than I did," adding that everyone reaps the rewards of the profitable company.

In fact, Mr. Michael said, the compensation scheme works so well that the only danger is underwriters might get too comfortable once they've built up a fairly large bank of profitability over a period of years. "If they have a nice book of business, they may become complacent, defensive and risk averse," he said. He noted that Mr. Stone had introduced plan features to provide even greater incentives to grow the business.

A unique incentive plan is just one innovative feature of the business model in place at TAPCO Underwriters, a wholesaler and MGA in Burlington, N.C.

TAPCO doles out $10 rewards to retail customers for each policy bound through the company, according to President Tap Johnson III. The rewards are automatically added to bank-issued debit cards, he said, noting that a goal of the TAPCO-branded Visa card is to keep customer service representatives calling on TAPCO.

The debit cards, which can be used to make purchases anywhere that Visa cards are accepted, are a novelty introduced about a year ago, said Mr. Johnson. He also takes pride in describing a longer-term innovation–a modern policy delivery system that was 25 years in development.

Like the rewards program, the delivery system tries to "get into the psyche of the CSR," he said. "We realized long ago that it's really the CSRs in the retail agencies that steer the business. They have lots of choices for small accounts."

The firm, started by Mr. Johnson with his father in 1983, works exclusively on small accounts averaging $2,000 in premium, he said, adding that his father taught him much more than simply to "talk to the wallets" of CSRs, many of whom are working moms who feel overworked and underappreciated. He also was taught, he said, to respond to the CSRs' desire to get their jobs done quickly to allow them to return home to their families.

"All we're really doing is delivering a quote and ultimately a policy," the younger Mr. Johnson said. "Why would [CSRs] pick TAPCO over anybody else? We had to make it easy and quick for them."

TAPCO makes it easy by doing all quoting over the phone, he said, noting that the ability to speak to a human being increases a CSR's comfort level in the unfamiliar world of surplus lines. "You can pick up a phone and in 30 seconds you're talking to a TAPCO underwriter. And in about five minutes, we've quoted you with about 15 insurers," he said.

While the pledge is to answer in 30 seconds, the 60 TAPCO employees answering the phones typically respond in seven seconds, he said. TAPCO provides consistent five-minute quotes and same-day binding using proprietary technology.

"We programmed every bit of underwriting logic for all our carriers," boiling the process down to a one-page application, he said. "A human might know what Scottsdale or Western World or AIG does well. But not even the brightest person can juggle the likes and dislikes of 15 companies. So we just program it in."

Beyond quoting, TAPCO has technology in place to speed every step of the insurance process. "We're like an insurance policy factory," Mr. Johnson said. "We've actually studied how long it takes to do every single step."

The same kind of rules-based processing that distinguishes insurer likes and dislikes exists for customers also. "We had 20,000 CSRs call for quotes last year, and for each, we stored profiles of how they want their experience to be," he said. The systems retain information about whether CSRs want quotes e-mailed or faxed and to what locations, and whether they want customers to pay by credit card or if they want to offer financing.

The next time that CSR calls, he said, "all the choices are populated," guaranteeing fast service no matter who answers the phone.

The ground-breaking business model has been so successful for TAPCO that it's allowed the MGA to nearly saturate the small-account market in the Southeast, where the company has done business for more than two decades.

TAPCO is now in the process of exporting the delivery system to California and Texas. The goal is to double current premium volume–nearly $200 million–within five years, writing the same kinds of policies for small contractors and for depressed housing in the two biggest E&S states.

If TAPCO and Mr. Johnson have counterparts on the company side of the business in the world of professional liability, they may be Darwin Professional Underwriters and CEO Stephen Sills.

Because the Farmington, Conn.-based insurer started up less than four years ago–bypassing the expense of maintaining or updating old legacy computer systems that plague other carriers–the company was able to put its technology dollars into developing a Web-based underwriting system for specialty lines–known as i-bind.

The system was designed to create an easier experience for specialty brokers placing small professional and management liability policies, as well as lower the costs of writing them for the carrier.

A broker or carrier representative beginning the placement process using i-bind simply fills out a short application. They can automatically get a quote, download it on their letterhead, download a binder and even a policy, Mr. Sills said.

"Particularly in the case where they enter the information, the incremental cost for us to provide a quote is virtually zero because they put in the material and the machine gives them the quote. If we don't bind it, we haven't spent any money. We haven't had an underwriter working on it a half-hour," he noted.

Darwin is now in the process of rolling i-bind out for 300 classes of errors and omissions insurance, Mr. Sills said, noting that some producers already use the system for lines like nonprofit directors and officers, fiduciary liability and employment practices liability. The company specializes in D&O, E&O and medical malpractice.

The system uses a "dynamic application," he said, explaining that for a prospective E&O insured, the process begins with just four questions–identification (name and location), the insured's job description, total revenues, and if the insured has had past claims.

"If everything comes up right on that, then there's no reason to ask any other additional questions. If it turns out you are a $20 million operation or you've been sued, then it's a different story," he said.

Unlike Mr. Johnson, Mr. Sills suggested that i-bind, so far, has been too radical for many producers to embrace.

"We think it's a compelling proposition. Unfortunately, when the marketplace is sliding in price, it's hard to get people to adopt new things," he said. Although momentum is building, "we would have liked everyone to say, 'hallelujah,' and to change all their business over to using it. That's not happening."

Nevertheless, Darwin wrote nearly a quarter-million dollars in premiums last year, and expects continued growth through specialized expertise, Mr. Sills said.

Having built a very expensive infrastructure to effectively handle hospital malpractice in small community hospitals, for example, Darwin can now leverage the underwriting, actuarial, risk management and claims expertise in that line to areas like liability coverage for senior living facilities, a recent addition to the company's specialty coverage lineup. "Risk management for a senior living center is similar to risk management for a hospital," he said.

Darwin marries what Mr. Sills calls a "loose bricks philosophy" with specialized expertise to move into such areas. "It starts from a mindset that very few insurance products have reached their optimal state," he said, explaining that loose bricks are breakdowns in service, coverage or pricing of competitor products.

In the senior living area, he said, "insureds are being penalized for the industry's mistakes a few years ago" when business was priced too low and some insurers wrote accounts they shouldn't have. "They didn't bring enough risk management to the table to make the insureds good enough risks, or to distinguish between the good and the not good," he said. "If you're able to discern those differences, if you're able to bring good risk management, if you're able to bring better pricing to better quality risks, there's an opportunity there."

Specialization and risk differentiation are keys to the game plan at Arch Insurance also, said John Edack, executive vice president, Western region, for Arch Insurance in San Francisco, Calif.

"What we've been doing really from the get-go is specialization," he told NU in a post-NAPSLO interview. "Casualty doesn't just mean primary general liability or excess and umbrella," he said, noting that representatives of Arch's health care, environmental, and architects and engineers E&O teams were included in meetings set up during the NAPSLO conference. "We also spoke to our railroad capabilities and expertise in miscellaneous E&O," he said.

Brokers mirror that type of specialization, he said. "Rarely will you go into a meeting and [meet with] the casualty brokers just by themselves. They don't handle all those lines. They have specialists, too," he said, noting that a more professional dialogue was apparent this year.

Mr. Edack said Arch's business model relies on sophisticated data mining techniques aimed at segmenting its books of business to identify classes of business and individual risks with better relative loss ratios. "So, we're not just looking at the construction book in general. There can be several different buckets consisting of construction wraps, general contractors and different types of specialty subcontractors."

He noted that there are many ways to get a better understanding of the drivers of better results. "We're drilling down, getting deeper, getting better information to make better risk selection decisions."

This allows Arch to respond to its producers more quickly, he said. "If you've done your homework correctly, you know your underwriting requirements for an electrical contractor…You're focused on the real drivers that make a difference in the bet and not just looking in a manual," he said.

Like the wholesaler brokers that Mr. Edack met at NAPSLO, Mercator Risk Services has a business model revolving around specialists, according to CEO Chris Treanor, who said industry specialties at his firm include construction, transportation and real estate, and products specialties include D&O, E&O and builder's risk.

But that is not what sets the wholesaler apart, Mr. Treanor said. Wholesalers all "inhibit a pretty consistent space. What we do from a product specialization standpoint is not unique in terms of being the only ones in the market who do it," he said.

"What we do better than most is deliver those specialties to the end user," he said, highlighting a high-touch professional service model and a different compensation scheme–based on salary and bonus, instead of commission–that allows specialized experts to respond to the needs of their customers on complex risks in teams.

Mr. Treanor said brokers working at firms that use traditional commission-based models are focused on handling deals themselves, even those falling outside their area of expertise. "You don't necessarily bring the right resource to a deal. It's the one who was first through the door who's going to want to work on it," he said.

Mercator's model is more like that of a traditional retailer or investment banker, he said, explaining that those models employ relationship managers who work closely with customers to understand their needs.

At Mercator, when a relationship manager looks at a risk or problem with its retail customer, he or she will ask three questions: what person or group of people has the best expertise to bring to the problem, who has the right relationships with the key insurance company markets to work on it, and who's got the time.

"It allows us to make sure we're giving a consistent level of service," Mr. Treanor said. He added that another benefit of the model is that it breaks the traditional broker job into two parts. Instead of spending half their time selling–getting the business in the door–and half in the office placing the risk, the relationship manager does the outward-facing work of dealing with clients, giving brokers more time to work on deals.

Giving an example of the model in action, he said Mercator is currently working on a large Florida construction project. Because of the size and complexity of the assignment, two relationship managers are working on it–one in New York, where the retail broker is based, and another in Florida, where this client spends part of its time. In addition, groups of brokers in New York, Chicago and Florida with expertise in liability, construction and wind-exposed property complete the team.

"That's how we work everyday. It's a group win as opposed to an individual win," he said.