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NAPSLO Report

E&S Going Strong

Optimism about the opportunities in excess and surplus lines was strong during the NAPSLO conference.
By: | September 24, 2014 • 5 min read
NAPSLO

The state of the excess and surplus lines market is strong, as evidenced by the nearly 4,000 attendees, who networked their way through the annual convention of the National Association of Professional Surplus Lines Offices in Atlanta, from Sept. 15 to17.

“There’s a lot of optimism about the market and [the number of attendees] is a testament to the strength and vitality of surplus lines,” said Brady Kelley, executive director of the national organization, which focuses on networking and education for the surplus lines industry.

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In fact, A.M. Best reported that surplus lines companies “have been extremely successful when compared with the overall property/casualty (P/C) industry.”

Surplus lines now account for about 13.7 percent of all commercial lines direct premiums written, up from 6.1 percent in 1993, according to a 20-year retrospective on U.S. surplus lines released by A.M. Best in September.

“In 2013, 22 of the top 25 surplus lines groups produced year-over-year growth in premium (as measured by direct premiums written) — a testament to what is likely a contraction in the standard market’s appetite for risk and a broad flow of business back into surplus lines,” according to the report.

“A lot of people are optimistic because the economy is still growing and when the economy is growing, it can make up for a lot of foolish decisions.” — Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox

But the sector is not without its challenges, specifically overcapacity in the market, according to Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox, international insurance brokers and underwriting managers.

“The market here is soft,” he said. “I think it’s soft in more areas than people want to talk about. … I would not say ‘doom and gloom.’ A lot of people are optimistic because the economy is still growing and when the economy is growing, it can make up for a lot of foolish decisions.”

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E&S underwriting, said Stanley Galanski, president and CEO of The Navigators Group Inc., is “the essence of underwriting. There are no rules. There are no rates. There are no mandatory forms. In E&S, it’s all about your expertise and your judgment.”

To be successful, companies must have underwriters who can bring a “high level of expertise to the risk” and deep relationships with wholesale brokers, he said.

It also requires constant innovation, said Mario Vitale, CEO, Aspen Insurance. “Specialty E&S is tailored for high risk situations. It allows underwriters skilled in these special niches to apply their tools of the trade to help the insured, to help the brokers, with creative risk-based solutions.”

He said Aspen would be releasing some new products in 2015, and noted that there were numerous emerging risks to occupy carriers, including the impact of climate change, nanotechnology, fracking, drones, bitcoin and wearables.

“I believe all of these trends and all of these emerging technologies will bring risks and will bring demands for solutions and underwriter innovations to find them,” he said.

“It’s unbelievable how that [cyber] market is developing so quickly.” — James Drinkwater, president of AmWINS Brokerage

Jeremy Johnson, president and CEO of Lexington Insurance Co., the E&S division of AIG, said in a recent A.M. Best webinar that his organization is designing products to deal with risks from drones, celebrity risk and cyber bullying, and also has “in the pipeline” products to address risks related to Uber and Airbnb.

“If we are not staying ahead of where our customers are going as an industry, we won’t be relevant,” he said.

Bruce Kessler, division president, ACE Westchester, which focuses on the wholesale distribution of excess and surplus lines products, said, “You have to be strategic as an E&S company as to where to grow and where to shrink.”

But, he also noted, the “ease of entry” into the space, which he sees as “healthy and robust.”

“It’s easy for new capacity to come in,” he said, and that has put some pressure on property/catastrophe rates. That softening is “probably the biggest talk of the conference.”

Overcapacity offers one of the industry’s biggest challenges, Kaufman said. “Standard lines companies are aggressively looking to write the gray areas that may at one time have been E&S and now it’s back to standard lines. … You will see companies taking greater risks than they normally have in the past — risks that they don’t understand.”

Jeff Saunders, president of Navigators Specialty, said, “The capital in the industry is looking for a better return than from a Treasury note.”

While the influx of capital has reduced rates — significantly on property and less significantly elsewhere — the company has to compete “no matter what the rate environment is,” he said. That requires E&S insurers to be “agile while rotating in and out of sectors.”

E&S strategies are also increasingly being influenced by predictive modeling, ACE Westchester’s Kessler said. He also noted that he is seeing greater interest in product recall and cyber coverage.

Other experts at the NAPSLO conference agreed that cyber policies were finally taking off.

“It’s unbelievable how that market is developing so quickly,” said James Drinkwater, president of AmWINS Brokerage and one of NAPSLO’s Wholesale Broker directors, during a panel discussion at the conference.

“Companies are getting hit [with cyber attacks] constantly,” Vitale said. “As long as there are more hackers, they will get more sophisticated and we will have to do a better job of staying on top of emerging trends.”

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The opportunities in E&S outweigh the challenges, said Peter Clauson, senior vice president, excess casualty, Liberty International Underwriters.

When LIU excess casualty was established in 1999, he said, the E&S business was about a $10 billion market. “Fifteen years later, we are at $37 billion, and there’s a lot of talk that in five years, we could be a $50 billion market.

“That’s a lot of growth and opportunity,” he said.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Carrier Perfomance

Carriers See Strong First Half

Earnings are up in P/C segments for many carriers, with high expectations for full year profits.
By: | September 5, 2014 • 4 min read
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Carriers are enjoying a profitable second quarter and first half of 2014, thanks in part to fewer natural catastrophes and weather-related losses, as well as strong underwriting.

“There has been less catastrophic activity,” said Andrew Colannino, vice president at A.M. Best. “Those focused on property may have seen fewer losses.”

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“2014 will go on the books as one of the better years for the industry, barring any major catastrophe,” said Cliff Gallant, managing director of equity research for Nomura Securities. “Through the first six months of the year, we did have some tornadoes and some hail losses; it wasn’t completely quiet, but so far it’s a normal year.”

In addition to the absence of major catastrophes, “the industry is also benefitting from reserve releases from several years of good pricing and fairly benign inflation trends,” Gallant said. “There are reasons to be worried about the outlook, but at this point the industry is still enjoying some very good underwriting years.”

Gallant pointed to increased pressure on pricing – on both the insurance and reinsurance sides – and more signs of competition as possible impediments to continued growth.

“Investment yields are still pretty weak, so investment income growth will probably be weak, and some of those reserve releases might start to slow as well,” he said.
Allianz reported total revenues for the second quarter up 10 percent from the same period last year, while the operating profit was up 17 percent. Gross premiums written in property and casualty alone reached about $14.3 billion.

“In the second quarter, the segment property and casualty insurance again contributed roughly half to Allianz Group’s operating profit,” according to the company. “The impact from natural catastrophes was lower compared to the high level of the second quarter of 2013 and the underwriting result improved.”

Zurich echoed that experience. “In general insurance, business operating profit increased considerably, driven by a substantially improved net underwriting result reflecting the favorable underlying loss experience and the absence of major catastrophe and weather-related losses, especially when compared with the prior year period,” its report stated.

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“Zurich remains especially strong in the large commercial business, with a lot of the operating profit generated in North America while mature markets remained generally stable,” said Bjorn Emde, Zurich’s senior media relations manager. “We saw an improvement in the underlying profitability and in the expense ratio while profiting from a positive development in catastrophe losses compared to the prior year period.”

Zurich posted a business operating profit of $1.2 billion for the second quarter, up 32 percent from last year, with a half year operating profit of $2.6 billion, up 15 percent.

Part of its success can also be attributed to organizational streamlining, which affected 670 positions across the company.

“This will make our decision-making processes quicker and leaner,” Emde said.“Apart from making the company more agile, we also expect to generate cost savings of roughly $250 million per year by the end of 2015.”

ACE Group also saw strong performance in property and casualty lines. Global earnings from P&C net premiums increased about 8.5 percent on a constant-dollar basis, according to the company’s earnings report.

CEO Evan Greenberg said in the report, “P&C underwriting income was up 10 percent with a combined ratio of 87.5 percent. The growth in underwriting was driven by current accident year underwriting income before catastrophe losses.”
Boston-based Liberty Mutual ended the second quarter with a consolidated net income of $388 million, with $650 million in net income for the first half of the year.

Second quarter revenues were up 3 percent from last year at nearly $10 billion. Net written premiums also saw an increase of 5.2 percent at $9 billion. That improvement, however, came in spite of large catastrophe losses.

“Underwriting improvements lowered the combined ratio by a point despite sizable severe storm losses,” CEO David Long said in an earnings report. Liberty Mutual’s catastrophe losses for the second quarter were $676 million, an increase of $29 million, or 4.5 percent over the same period in 2013.

“In short, we continue to improve underwriting results and grow where we can do so profitably,” Long said.

Zurich and Allianz also reported being on track to achieve improved profit outlooks for the full year. Zurich “projects full year cash remittances in excess of $3.5 billion, ahead of 2013.” Allianz confirmed an operating profit outlook for 2014 of about $13.2 billion.

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These are just a few examples of earnings by insurers in the property and casualty segment.

Improved overall economic conditions could also be a contributing factor to higher earnings, A.M. Best’s Colannino said, but there is still variability among market leaders. Those with more focus on property are more susceptible to catastrophe losses; severe storm activity will have to remain low in order to hit full year projections.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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Sponsored: Lexington Insurance

The Re-Invention of American Healthcare

Healthcare industry changes bring risks and opportunities.
By: | September 15, 2014 • 5 min read
SponsoredContent_Lex

Consolidation among healthcare providers continues at a torrid pace.

A multitude of factors are driving this consolidation, including the Affordable Care Act compliance, growing costs and the ever-greater complexity of health insurance reimbursements. After several years of purchasing individual practices and regional hospital systems, the emergence of the mega-hospital system is now clear.

“Every month, one of our clients is either being bought or buying someone — and the M&A activity shows no signs of slowing down,” said Brenda Osborne, executive vice president at Lexington Insurance Co.

This dramatic change in the landscape of healthcare providers is soon to be matched by equally significant changes in patient behavior. Motivated by growing out-of-pocket costs and empowered with new sources of information, the emergence of a “healthcare consumer” is on the horizon.

Price, service, reputation and, ultimately, value are soon to be important factors for patients making healthcare decisions.

Such significant changes bring with them new and challenging risks.

Physician integration

Although physicians traditionally started their own practices or joined medical groups, the current climate is quite the opposite. Doctors are now seeking out employment by health systems. Wages are guaranteed, hours are more stable, vacations are easier to take, and the burdens of running a business are gone.

“It’s a lot more of a desirable lifestyle, particularly for the younger generation,” said Osborne.

Brenda Osborne discusses the changing healthcare environment and the risks and opportunities to come.

Given the strategic importance of successfully integrating acquired practices into a larger healthcare system, hospitals are rightfully focused on how best to keep doctors happy, motivated and focused on patient safety.

A key issue that many hospitals struggle with is how to provide effective liability insurance for their doctors. Physicians who previously owned their practice are accustomed to a certain type of coverage and they expect that coverage to continue.

Even when operators find comparable liability insurance solutions for their doctors, getting buy-in from their staff is often an additional hurdle to overcome.

“Physicians listen to two things — physician leaders and data,” said Osborne. “That’s why Lexington provides assessments that utilize deep data analysis, combined with providing insights from leading doctors to help explain trends and best practices.

“In addition, utilizing benchmarks against peers helps to identify gaps in best practices. It’s a very powerful approach that speaks to doctors in a way that will help them improve their risk.”

Focusing on the “continuum of care”

There’s been a fundamental shift in how healthcare providers care for patients: Treatment is becoming more focused on a patient’s overall health status and related needs.

SponsoredContent_LexA cancer patient, for example, should have doctors in a number of specialties communicating and working together toward a positive patient outcome. But that means a change in thinking: Physicians need to work collaboratively with one another — not easy for individuals or groups that are used to being independent. Healthcare is a team sport.

“If there isn’t strong communication, strong leadership, and the recognition of proper treatment procedures between physicians, healthcare providers can increase the risk of error,” said Osborne. “The provider has got to treat the whole patient rather than each individual condition.”

That coordination must extend from inpatient to outpatient, especially since the ACA has led to a rapid increase in patients being treated at outpatient clinics, or via home health or telehealth to reduce the cost of inpatient care

“Home health is going be a growing area in the future,” Osborne continued. “Telehealth will become an effective and efficient way of managing and treating patients in their home. A patient might have a nurse come in and help the healthcare provider communicate with a physician through an iPad or computer. The nurse can also convey assessment findings to the physician.”

Metrics matter more than ever

Patients have not always thought of themselves as healthcare consumers, but that’s changing dramatically as they pay more out of pocket for their own healthcare. At the same time, there’s an increase in metrics and data available to the public — and healthcare consumers are drawing upon those metrics more and more when making choices that affect their health.

SponsoredContent_Lexington“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems. That competition will force everyone to improve the quality of care.”
– Brenda Osborne, Executive Vice President, Lexington Insurance

Think about all the research a consumer does before buying a car. Which dealership has the best price? Who provides the best service? Who’s offering the best financing deal?

“Do patients do that with physicians? No,” said Osborne. “Patients choose physicians through referrals from friends or health plans with minimal information. Patients may be putting their lives in the physicians’ hands and not know their track record.

That’s all going to change as patients’ use of data becomes more widespread. There are many web based resources to find information on physicians.

“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems,” said Osborne. “That competition will force everyone to improve the quality of care.”

Effective solutions are driven by expertise and vision

The rapidly evolving healthcare space requires all healthcare providers to find ways to cut costs and focus on patient safety. Lexington Insurance, long known as the leading innovative and nimble specialty insurer, is at the forefront in providing clients cutting-edge tools to help reduce costs and healthcare exposures.

These tools include:

  • Office Practice Risk Assessment: To support clients as they acquire physician practices, Lexington developed an office practice assessment tool which provides a broad, comprehensive evaluation of operational practices that may impact risk. The resulting report, complete with charts, graphs and insights, includes recommendations that can help physicians reduce risk related to such issues as telephone triage, lab results follow-up and medication management. .
  • Best Practice Assessments: High risk clinical areas such as emergency departments (ED) and obstetrics (OB) can benefit significantly from external, objective, evidence-based assessments to identify gaps and assure compliance with best practices. In addition to ED and OB, Lexington can provide a BPA for peri-operative care, prevention of healthcare-acquired infections, and nursing homes. All assessments result in a comprehensive report with recommendations for improvement and resources along with consultative assistance and support. .
  • Continuing Education: In an effort to improve knowledge, decrease potential risk and support healthcare providers in the use the most current tools and techniques, Lexington provides Continuing Medical Education credits at no cost to hospitals or their physicians.
  • Targeting the Healthcare Consumer: With Medicare reimbursement impacted by patient-satisfaction surveys, assuring a positive patient experience is more critical than ever. Lexington helps hospitals understand and improve the patient experience so they can continue to earn the trust of healthcare consumers while preserving their good reputation. .

To learn more about Lexington Insurance’s scope and depth of the patient safety consulting products and services healthcare solutions, interested brokers may visit their website.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.


Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.
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