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Editor's note: In April, Steve Pozzi, senior vice president and chief underwriting officer, Chubb Commercial Insurance; Donald J. Pickens, executive vice president and chief underwriting officer national markets, Liberty Mutual Group; and John R. Glancy, chief underwriting officer, XL Insurance, sat with Risk & Insurance® Editor in Chief Jack Roberts to discuss the state of underwriting today. As part of the wide-ranging discussion, the underwriters talked about the challenges of a soft market. An edited version of those comments is reprinted here.

Editor: The Risk & Insurance Management Society Inc.'s (April) survey said that pricing had dropped in the last quarter to its lowest levels since 2005. How do you maintain underwriting discipline in this kind of a market?

For example, right now for financial D&O, prices are going up and they are going up pretty significantly. But what's really important to know is that there are some lines where prices are diving and you just have to walk. There are others where there are opportunities and you can write good business.

Editor: That doesn't sound like it's a necessarily easy thing to do.

Steve Pozzi: One of the things that we tried to do is be somewhat stable so you don't have to go to the ceiling in the hard market, because you don't want to go to the floor in the soft market. Then there's the difference between new and renewal. With the renewal business, people feel comfortable.

I can give a little bit on this because I know it has been loss-free for this many years or whatever. New business is trickier. People may really want to write it because it's the best thing they've seen this week. Well, that doesn't make it good. It just makes it the best thing they've seen this week.

John Glancy: Excellent point. Underwriters want to write business. Good underwriters look to find solutions for clients. But right now, if your new business is somebody else's bad business, you need to be very careful at this pricing level in the marketplace. Constant communication with your broker, your agents, clients, your underwriters is key--to know where the market is, where you are in the plan, and what they're seeing.

Editor: Do you find that, when price is dropping in a soft market, you are under more pressure to write new business to make up the difference?

John Glancy: Not at all. Underwriting discipline and profitability will build book value, and that's what the marketplace rewards. That type of message from management, I think, has been stronger in the past five to 10 years than in my prior 20 years. Then, the prevailing attitude was that "cycles were cycles"--"Don't worry about it. It happens." Now the attitude I see is very much the other direction. No one gets a bonus at XL for revenue. It is totally tied to return on equity.

Don Pickens: In a soft market, profitability has to exceed growth, and in a hard market, growth absolutely should exceed profit in terms of how you manage the levers to optimize an ROE return. I'll quote my CEO who says, "Business plans are paramount, but not absolute." What he means by that is exactly what it says. You have a plan, you work hard to get it, you select the right business because there's still some margin left in pricing for the right type of business.

If you can go in and solve a new customer's problem, it's not necessarily that you're pricing at somebody's walk-away price, or writing a deal at another carrier's walk-away price. It's that you've solved something that the carrier can't, and those are the type of opportunities you try to work on during a softening cycle.

Steve Pozzi: Even the metrics change in different markets. For example, you'll hear as you travel, "Well, our retention is at 94 percent." Then you have to explain to them that a 94 percent retention, if you're cutting your rates by 35 percent, isn't any better than a 70 percent retention is if you're raising the rates 50 percent.

The other thing we have to be careful about is the balance between solving the problems of the customer and delighting the customer. You certainly want to please the customer. But there's also that long-term underwriting plan that says that you should be better than where you started from four or five years ago, even though you won't get there in a linear progression.

Editor: How do you manage that relationship as an underwriter so the client understands how the risk is being evaluated?

Don Pickens: Being a consultant to your buyer and/or distribution source is pretty darn important because they are reading all the journals, they are hearing the firestorm in the market and they are kind of getting swept up with that. You do need to have an eyeball-to-eyeball meeting with your clients and explain to them the positives that are going on in the market that might be pushing price and then what are some of the negatives that are going on in the market. You have to balance those things with what's best in his interest long term.

Steve Pozzi: It's not episodic, especially with some sophisticated clients. You don't wait till the market dives and then you go, "Oh, and by the way, we're not going to be able to cut your price." Hopefully, in the hard market, you're talking about price, you're talking about coverages, you're talking about what they're doing.

The second thing is, they are in business also. They deal with consumers who are asking for less price, more service. If you can get them thinking of us as a fellow businessperson as opposed to a vendor who provides something they don't want to buy in the first place, I think that changes the dynamic.

John Glancy: No two customers are alike. Most of the clients want to be able to plan five years out, know what their pricing is going to be, knowing what their insurer's products and capabilities are going to be, so that you need to build those relationships and understand them, especially for those clients in the large risk business.

Editor: That's an interesting point because a number of clients say they've been pushing for contracts longer than a year. How well has the industry responded to that kind of a request?

John Glancy: Many of our global programs are multiyear, and this is much more common in Europe than in the United States. I like good multiyear programs. It provides some stability to my book, but it has to be two-way. It can't be cancelled midterm or when the market goes soft. That's not the type of partnership that you're looking for. There are clients, though, that are driven by price, and you have to respond differently to those clients.

Don Pickens: The market consists of all different types of buyers. I try to instill in my underwriters' heads that one of the risk selection factors that we've neglected is underwriting your buyer. To the extent that you know he's a price buyer, then you may have products and a plan design and a bunch of other tools that you can use with him. But you treat that one different than someone who's looking for a 10- or 15- or 20-year relationship and is looking to solve a whole host of other problems besides the insurance premium.

Editor: Have you noticed other companies coming in and undercutting with price, or not yet?

Don Pickens: When a good piece of business hits the market, there is a bit of a frenzy, and it's interesting to see because somebody will use that as a benchmark for the next account that comes in that's not near the same quality. You have this fanfare in the market that says somebody cut the price 20 percent.

Well, they cut it 20 percent for this guy because he was at a different price point and he's at a different quality risk than this guy who was at a lower price point and lower quality. So I think it's pretty darned important for us as underwriters to distinguish that difference and to make it known and publicize it.

Editor: How do you do that?

Don Pickens: It's in coaching your underwriters. One of my favorite measures that a lot of us probably don't use is to really look at three types of returns across our book. We certainly look at new business very closely because we think that's probably our greatest concern from a pricing standpoint in general, but we also look at the renewals that are in the market, and I think those are priced a little bit differently than the renewals that aren't in the market. So you need to look at all three of those to see how your book is performing.

Steve Pozzi: We do have to fight the tendency to fall in love with either a client or market segment or line of business. Because you meet with these folks and you've renewed them and they've been with us for seven years and they haven't had a loss, you wind up making an emotional decision. You have to know the reason you reduce the price or expand the coverage on an account.

Don Pickens: The industry uses this term "underwriting discipline." While I appreciate the term, I get frustrated with it because no one's ever clearly defined it and there's no uniform definition of it. I know what it means to me personally; it means having the courage to make the difficult business decisions that are not the popular ones, and to take personal risk in doing so. It's not just a word that you throw out and then go execute something else.

JACK ROBERTS is editor in chief of Risk & Insurance®.

July 1, 2008

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