Specialty Lines Insurers Make a Special Delivery

"Your policy administration system needs to be more robust for excess and surplus (E&S) lines than it does on the standard lines," says Mike Sciol?, CIO of the IFG Companies, a writer of E&S products, itself a specialty line. "One is built for volume, and one is built for complexity."

The complexities in specialty lines center around product configuration, explains Stagg-Macey. "The nature of the processes in personal lines is to streamline and give everyone the same product;" she says. "On the large commercial side, each risk is slightly different. There is a lot of complexity."

Specialty lines are of particular interest to Novarica principal Chad Hersh, because to a certain extent, every specialty lines writer is different. "How they make their money is by finding niches," says Hersh. "If you look at the types of policy administration solutions they use, they tend to be extraordinarily flexible solutions. They are very much focused on supporting whatever craziness the policy development people come up with to try to sell to the market."

If you look at specialty lines carriers in regard to product offerings, they are very different. But Hersh points out they all require extreme flexibility and the ability to deal with multiple manual processes throughout while still needing to automate as much of the process as reasonably possible. "So, yes, they are similar in that regard," he says. "They are similar in that they are all different."

PA Systems

Many of the leading policy administration system vendors in the market today started out with specialty lines because specialty lines tend to be unregulated, relates Hersh, and therefore don't require a lot of the regulatory content personal lines systems need.

Specialty lines systems don't necessarily need a lot of business processes prebuilt into the system, either, notes Hersh, because specialty lines processes tend to be very flexible and more nimble than your typical personal lines carrier.

"The new systems that come out on the market tend to be a good fit or designed for specialty writers," he says. "As time goes on and revenues come in, the vendors tend to modify or enhance their systems to support things such as ISO lines, bureau content, and regulatory content. What you'll find is the majority of the top solutions out there can support specialty lines quite nicely."

Only about half of the policy administration vendors market themselves to specialty lines insurers, Hersh estimates, even while the vendors expand their capabilities. "With every passing month, each vendor extends its system to cover more lines," he says.

There are some policy administration systems that were designed first for personal lines, though, and Hersh indicates those systems are significantly different than systems needed for specialty lines insurers.

"Those new systems don't factor in things such as manuscripting of policies, where you add legal text into the policy itself at the time of issuance, practically using a typewriter," says Hersh. "They don't factor in some of the incredibly flexible product development requirements of a specialty carrier. There's a good mix of options for different types of carriers, but I wouldn't say there is a specialized specialty lines solution out there or, at least, not many of them.

Nature of the Beast

Policy administration in the E&S world is different from the standard lines market, agrees Sciol?. "Standard lines tend to stay with Main Street products," he says.

Andy Grittman, CIO of Kansas Medical Mutual Insurance Co. (KAMMCO), believes it is the nature of the specialty lines business that makes it stand out from personal lines insurance.

"You don't see things such as tail coverage on a personal line of business," he says.

In KAMMCO's case, tail coverage is offered by medical malpractice carriers, explains Grittman, to cover a physician who may have retired but a former patient decides to sue two years after an incident takes place. "The coverage goes back to the date the claim was made," he says. "You need to have some type of coverage."

Another unique part of specialty lines can be seen in the fact KAMMCO primarily is a Kansas-only, physician-owned company insuring Kansas doctors, but the carrier also is licensed in Missouri.

"The way malpractice works is if your practice is located in Kansas but you live in Missouri, you have to have a Missouri policy," he says. "It's based on residence, not where you practice."

Custom Solutions

When the Fidelity and Surety Division of Capitol Insurance Companies determined it was necessary to replace its legacy bond administration system, explains Dalia Dannenberg, senior staff services specialist with Capitol, "We were looking for a rules-based web platform that would allow us customized configurations. An off-the-shelf solution wasn't going to accommodate our needs. We needed a vendor partner that could offer a solution that would help us build these customized rules. OneShield was able to offer the flexibility and the platform solution we needed."

Capitol went live with OneShield's Dragon solution in 2007 and promptly began work on building an automated underwriting option for its Surety product. The automated underwriting platform, called Capitol Express, is now in place, explains Dannenberg.

"The ultimate goal with our partnership with OneShield was to build an automated underwriting system," she says. "Now that it is in place, we are working with our regional offices to put a larger portion of our business through the automated underwriting system."

Capitol has a significant percentage of what Dannenberg describes as small transactional bonds that can be written through this automated underwriting system.

Unlike other specialty lines, the Surety business can have highly transactional business, which means there is a lot of room for standardization and it's these transactional bonds that can be written through an automated underwriting program, explains Dannenberg.

"We wanted to reduce the underwriting expense for these small transactional bonds while maintaining high underwriting standards," she says.

What's Needed

In the E&S space, typically there are mandatory conditions and optional forms that brokers will attach to the policy. "It's more a tool for an artist–a canvas, a paint brush, and a set of oils on the E&S side," says Sciol?, adding, "whereas on the standard lines sides, [policy creation] is more science. It's boxed up and allows you to go straight through and create a policy. One has a lot more features and functions to it than the other."

For Sciol?, policy administration systems mainly are comprised of underwriting rules, rating rules, a rating engine, and an output mechanism. On the personal lines side, those products tend to be marketed toward the masses. "You have a standard product with standard coverages along with liabilities and deductibles," says Sciol?. "Based on how you answer a set of questions, the policy admin system composes the policy."

On the E&S side, though, particularly with brokerage-based business, rating is done in a different manner. "There is a much higher need for an Individual Risk Premium Modification (IRPM) module that lets you play with your rates," says Sciol?. "Typically your IRPM module has loss-cost multipliers, rate modification factors, and premium modification factors. It allows you to do things such as retrospective rating, minimum premium, and target premium." In minimum premium, he continues, rates are constant and exposures move, while in target premium, the rates move and the exposures are constant.

The key functionalities a specialty lines writer requires are product flexibility and the ability to support both reinsurance and primary insurance, according to Hersh. It also needs business process flexibility, which often means either strong workflow capabilities or better BPM capabilities, he adds.

"Specialty lines writers tend to have extraordinarily complex underwriting that is done outside the system, so as a result, they have to be able to manage the process even while underwriting is outside the system," he says. "If the underwriting is being done manually or with the aid of cat modeling software or other models, you still need to know when it's been in underwriting for whatever your service-level agreements or promised times are. A typical older system isn't going to do that, so that's why specialty lines writers like the systems built on BPM platforms."

In the E&S space, when using the IRPM module, a carrier's rules engine needs to be more robust, asserts Sciol?. "Rules are used for rating factors, so you may be inserting a surcharge due to the fact a certain set of questions was answered," he says. "When [the application] is done, the underwriter needs the option to attach forms–maybe an endorsement buy-up, maybe an exclusion due to a particular situation."

Less Regulation

Another difference between the two sides involves filings, such as ISO circulars, according to Sciol?. More regulation is beginning to emerge on the E&S side, but carriers still are not bound by the provisions of a standard lines market, where the Department of Insurance will approve forms, coverages, exclusions, endorsements, and rates. "You don't have that on the E&S side," he says.

Specialty lines are much less heavily regulated, agrees Hersh. "There are regulations on things such as surplus, but in areas such as product approval, there tend to be fewer hurdles," he says.

The disparity between the two sides also surfaces when a managing general agent (MGA) issues a policy, in which case, Sciol? points out, there isn't a need for a policy administration system. "The MGA is issuing the policy," he says. "That's why you pay its rates. You just need a booking system to track account information."

On the personal lines side, the policy is issued and the premium must be paid. "You have agency remittance and direct bill, depending upon your business model," says Sciol?.

On the E&S side, carriers use an account current form of bookkeeping.

"When the policy is issued it's gone," says Sciol?. "By the time we get the policy data, that policy already is in somebody's hands. We have account current billing, and that's border row based. It's significantly different from the standards line side. The point being–they are very different."

Finding a Solution

In today's market, Sciol? believes, there is an oversaturation of policy administration systems. "Some are trying to hit niches," he says. "Others are trying to deal with the masses. Of those [vendors] dealing with the masses, they primarily are going after the standard lines market. I don't see a lot offered in the E&S space. [Vendor solutions] don't deal well with IRPM modules, and they don't work well with forms management.

That leads to the buy/build hybrid for specialty lines insurers. "If your technology matrix has enough developers and toolsets to build it yourself, that's one thing, but the application integration and vendor integration becomes tremendous," says Sciol?. "The larger you are and the more scale you have, the more difficult it is to buy something and plug it in. "

Startup carriers have the good fortune to be able to look at an integrated solution, but Sciol? remarks, when a carrier reaches the midtier standpoint, it should be looking at best-of-breed solutions or possibly hybrid solutions.

As for the large carriers, he feels those companies are looking at hybrid solutions.

"A rating engine, a rules engine, an output engine–and you are going to do the scaffolding yourself," he says.

More often than not, Sciol? maintains, the two things that are the biggest implementation inhibitors for carriers are application integration and vendor turnaround on corrections. "Those are your killers," he says.

KAMMCO has been with Delphi Technology since 2004. At the time, KAMMCO was using a text-based DOS legacy system that had been written in-house. "We knew we needed an upgrade," says Grittman. "Initially, our thought was to develop a new system in-house."

Grittman was aware of Delphi's capabilities, particularly in the med-mal market, so the carrier invited Delphi to come in to do a demo. "We mainly wanted to justify in our minds it would be better to develop our own product in-house," says Grittman. "Delphi came in and did its demo, and literally, the IT staff as well as the business side said, 'Wow.' It would be impossible for us to write a product that had as many features and was as comprehensive as Delphi's Oasis product."

Having a customizable application for the way KAMMCO does business in Kansas vs. the way another company does it in New York or Mississippi was important to the carrier. Even more, though, Grittman points to the carrier's increased ability to get information out of the Oasis system to allow KAMMCO to make good decisions.

There is enough of a market for policy admin vendors to start their business focusing on specialty lines, according to Hersh, but not enough business to sustain it in that market.

"What you'll find is specialty-lines systems get built in clusters when times are good for specialty writers," says Hersh. "When you get back-to-back years of no catastrophes, those carriers are awash in cash, and they refresh their systems."

Frequently after a catastrophe, many new insurers enter the specialty lines market, notes Hersh, in order to prey on the fact a lot of their competitors just went through a huge drubbing. "You will see a lot of capital flowing into the insurance market [after a major event] often in the form of Lloyd's syndicates or Bermuda writers," he says. "And when they get formed, they have to have a system, so there actually are quite a few specialty lines writers with these modern systems."

Worldwide Web

Another key aspect of a strong specialty model is writers typically require underwriting teams in remote locations, according to Hersh. "Having everything be browser based is more critical than with most standard lines carriers," he says.

Specialty lines writers also have a presence in multiple countries, either in a Lloyd syndicate in the UK or through a Bermuda company. "Usually there are a lot of moving parts that are best addressed by having a somewhat virtual work force," Hersh says.

Delphi's Web-based version of the Oasis product is being used at KAMMCO. "We were one of two companies that volunteered to be test cases for a migration from a client/server version to the Web-based version," says Grittman. "The Web-based application is good for us because we have branch offices throughout the state, and it is much easier for them to get access to the application. If our claims adjusters are out of the office, they can access that application over a secure connection and have access to the information when they are at a trial or meeting with a physician. That's been a huge benefit for us."

Legacy Issues

Many specialty lines carriers entered the market after 9/11, points out Hersh. "But when you think about 2001, there weren't a lot of policy solutions in the market that were modern, so a lot of insurers bought legacy systems that were late in the game, which was doubly bad because they were unable to recover their costs fully," he says.

Most legacy issues deal with product development tools, adds Hersh. For personal lines writers, the products don't change much year to year other than in areas such as differences in riders and endorsements and declining deductibles.

But ripping a page from today's headlines, Hersh points out, if an oil well explodes and collapses in the ocean and starts polluting an entire coast line, specialty lines writers may want to come out with a whole new series of environmental coverages. "You have to be ready at all times to come up with new product lines and implement them quickly," he says. "A lot of these [writers] aren't admitted businesses, so you can get them to the market quickly."