Editors note: In April, Steve Pozzi, senior vice president, 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. An edited version of those comments is reprinted here.
Editor: How do you make the decision as to what risks to hold
onto and what risks to cede? How do you balance those portfolio kinds of questions?
At XL it's done on several levels. There's a company net, a certain amount of volatility that they are willing to take. Then within the businesses, there will be certain lines. I have a lot of people that would love to buy down what I call bonus protection programs so they don't really take much net. But financially on a segment standpoint, or a corporate standpoint, it does not make any sense. On an individual business standpoint, it might make some sense. So there's a balance between those. But in personal lines, there's a whole different philosophy than there is in commercial. Every company has different focuses that they do.
We believe in taking big nets, and no one in the company who underwrites who has authority gets paid on a net basis. They all get gross. So we buy all the reinsurance we want, but when it hits you get hit with the whole loss. So it's nice for the corporation, and the CEO is very happy. But the underwriter buys 10 X of 2 and on a $12 million loss, they just got a $12 million hit.
So by doing that ... you're telling people, no you're getting paid for how you underwrite. It also depends how comfortable you are with the different risks. Probably if you're getting into a line fairly new, you might buy lower than if you're writing business for 20 or 30 or 40 years in this area.
So a lot of it is going to depend on how comfortable you are with the underwriting, and if you're comfortable, the nice thing about that is you're using reinsurance truly as a macro protection and not to protect you against either market cycles or bad underwriting, and we've all seen competitors who've done that before.
We underwrite the reinsurance as well, but the reinsurers are reinsuring a bunch of folks. The thing that we have to remember is if they make bad decisions, and if the people they reinsure make terrible decisions, I'm dependent upon them later. So, we're really careful about that. If there is an industrywide event, we're all probably going to get hit there.
But if there is a tighter event, if the reinsurers aren't being as careful, they could put themselves in a bind that I had nothing to do with, and now I'm dependent upon somebody who's financials are iffy at best going into hurricane season or when an earthquake hits. I don't want to be there. So we're very tight on exactly who we're going to go with because we're underwriting that the same way that we don't want an account to blow up on us. We don't want a reinsurer to blow up on us.
Yes, we've gotten much stricter in terms of the credit worthiness of our reinsurers as one of the key underwriting measures when we look at them. The scenario that you're describing is basically a double-down. You give them their premium, and then 20 years from now, when you have the loss, they are gone. You end up having to pay the loss, and you never had the benefit of the premium float.
It's important to selectively buy your reinsurance, whether you ventilate it or buy some more layers on the top end. In most of our operations, we operate in smaller business units that roll up into larger ones that rolls up into a corporation. One of the things we have done at Liberty is to ask the operating entity what's your risk tolerance and how do you want to structure reinsurance?
Then we examine to see if there are other business units that could act as a reinsurer of sort. Then globally, we manage the entire portfolio of reinsurance. Realistically, all of the companies represented today have grown their surplus. The simple fact is that if you have more surplus, and the pricing and margins are still pretty good in the business, then you ought to be willing to take more in from a net perspective.
I also think that one of the things about reinsurance is that you don't want them to become your chief underwriting officer. At least I don't.
They're a partner; they're not the chief underwriter.
Yes, you will see that in some of the regional underwriting companies. What happens is they defacto say, "Listen, if you want to write those kinds of covers, you need us to do it. We're only going to write if you do this." They basically have just created the underwriting strategy for that company.
So, I don't want to rely on them. If all of a sudden they cut back, I'm out of this line of business where I can't write this market segment, because what we said is we want to build partnerships and relationships with all agents and customers in these areas. If I'm depending on a third party in order to do that, then I really can't build the relationships one on one, so I need to do that on my own and just use them again as a backstop and not for somebody who's driving strategy.
Editor: Is that happening more frequently?
I think you saw it after Sept. 11, and then again after Katrina. What you saw was some companies who were very dependent on reinsurers. The reinsurers got blasted, obviously, and said we're not going to do this anymore. Once they said we're not going to do this anymore, any company who was dependent on them said, "I guess we're not going to do this anymore." We're not going to take a net, and they're not going to cover me on the back side.
We saw some smaller mutuals in New England that just walked away from thousands of policies on Cape Cod. It was all driven by reinsurance. It was the cost as well as some of the underwriting dictums. The creditworthiness of all these reinsurers is critical. Why you don't want them to become your chief underwriting officers is that there is also a lot of knowledge that they have from a worldwide risk that can be shared with you and that's why you're looking for the partnership.
One of the things is there is less of them. There's really a consolidation in the number of reinsurers, and they are big and they will act as the chief underwriting officer or they won't play and the reduction in the number of them is pretty dramatic over the last 10 years, whether through consolidations or disappearance.
Editor: I would imagine that gives them more clout to become defacto underwriters.
You can always say no.
Steve Pozzi: Unlike reinsurers who are probably in the business of reinsurance, the capital markets are not in the business of reinsurance necessarily. If pork bellies become a better play that's where the money's going. What you'll see, especially on high ends and in certain areas of programs, is capital that you know the money's going to be there. Now, it's going to be hard to renegotiate, but I think you'll see capital plug holes where the reinsurers ask for that. It's not that we say no, there's now an alternative where there wasn't 15 years ago.
The fun part of the job that we all talked about, is credit management. It's risk selection. It's risk appetite. It's setting net retentions; strategy, facilitating, training, that's the fun part of what we do. We do touch all phases of the business.
Editor: So what's the hard part?
The hardest part is strategically investing both your time, you capital, your people in constantly adjusting because everything changes so fast. Hurricane Andrew, 10 miles north it would have been a $50 billion event. 10 miles south of where it was, it wouldn't have hit land. It can change like that in a day or two days, what you need to do and where you need to focus your business. You're trying to manage it so you control those events.
And you're trying to do it in a manner that doesn't induce panic because you're responsible for a group of people you need to look as if you're in control, even though a lot of times we're reacting. How do you have an Andrew or a Katrina or a Sept. 11, and you've got some parts, even senior parts of the company, that say, "OK, that's it we're not going to write another building that's more than three stories high within 50 miles of the sea."
A lot of it is saying, "OK, look, we've got to be careful, we've got to learn from these things, but we also can't over react because over time that's what we're in business for and that's going to show that we are here to build the relationships, that you can count on us." We're going to be there the day after the hurricanes hit and the day after that and so it's making those decisions but doing it in a manner where people can look at you.
Because you've got a lot of folks out in the branches saying, "OK, what are we going to do now? Are we out of this business?" That's the tough part because there's more and more of those things happening. The interesting part is being that kind of dispatcher of communications both up and down to people to say listen, that's why we have the plan guys.
While I love technology, I sometimes wish I could cut the online. In a prior life we used to hate Mondays as an underwriter because something came on CBS' 60 Minutes and the bosses would be in your office the next morning about this product. Are we on this?
Now with technology and all the news wires and being global all of us, it starts at 3 a.m. when something hits the Forbes line or the Reuters or the Moody's or whatever, and by the time you get into work or open your Blackberry at home at 5:30 a.m., there's 17 e-mails: Are we on that risk?
Steve Pozzi: We've cut the feed to the weather channel in the home office from June through November.
John Glancy: You have to constantly play that balance. It's the business we're in. If we don't pay losses, nobody's going to buy our product. Our job is to manage it, control it, and try to do it as proactively as possible. It's the randomness of the events, whether it's a hurricane or some of the others, that make it tricky and we have to react to them.
September 1, 2008
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