There is a much tighter focus on setting adequate terms and conditions, according to Mark Lescault, chief underwriting officer for Swiss Re Americas Division in Armonk, N.Y. “What we saw in the soft market is that there were many extensions of coverage, and to a large extent those extensions of coverage werent being adequately underwritten nor adequately priced,” he said.

During the soft market, the broadening of terms and conditions created an additional way to compete besides price, Mr. Lescault noted. “Now were trying to bring it back closer to what the standard coverages should be, with add-ons only provided where they can be specifically focused on and underwritten and priced adequately,” he emphasized.

“The insurance industry cannot earn as much with investment income, so that also has to be reflected in the rating process,” Mr. Lescault said. “Weve certainly seen additional claims severity and adverse reserve development, and that has to be reflected in the rating process.”

“The key is, as an industry, we have to focus on those issues, in order to be able to bring the coverage back to a profitable basis,” he added.

Reinsurers are trying “to tighten up some of the looseness in reinsurance underwriting that has taken place,” affirmed Peter Scanlan, chief executive officer of Carvill America, the reinsurance intermediary in Norwalk, Conn.

“They may be putting caps on treaties, where the overall loss ratio theyll accept to a given contract might be 200 percent,” he said. “Or there may be loss corridors on quota-share business, where they write up to a certain loss ratio, and then the client has to come in and take the next 10 or 15 points of loss before the reinsurer comes back in again.”

“There is more skin in game on the part of the client as the loss ratio deteriorates,” he said, noting that this is especially prevalent in the professional liability lines of business. “It all depends upon the nature of the product line and whether or not reinsurers feel theyre getting adequate pricing,” he said.

Proper underwriting, adequate pricing, and correct wording are indeed concerns of Mr. Lescault and other reinsurance underwriters. Reinsurers are getting back to underwriting basics by saying, “if we provide coverage, we have to be able to underwrite it properly, and we have to price it adequately, also looking to make sure weve got the right wording for it,” said Mr. Lescault.

He pointed to areas like employment practices liability and contingent business interruption coverage as areas that needed to be better managed.

For EPL, to a large extent, both directors and officers and umbrella policies were being thrown into the policies “without good underwriting and without good pricing,” he said. “So what were focusing on now is, yes, we can provide this cover, but it should be provided in separate targeted policies, where the wording is specifically crafted for the coverage you want to provide.”

Its also important to make sure “the proper risk management practices are in place for the firms were providing coverage,” he said, “so that we have prudent underwriting and adequate rates.”

Contingent business interruption also had been broadly written during the soft market, he said, as was demonstrated by the high business interruption losses experienced in the World Trade Center disaster. “Now were seeing many more coverages where its being excluded,” he noted, adding that business interruption is only being provided if the potential exposure is clearly understood. He explained that the business interruption exposure is either being limited, or sub-limits are being provided so that accumulations can be better managed.

“Another issue for terms and conditions is really just the management of accumulations, if you will,” he said, noting that it is now understood that the correlations between different coverages are much greater than was underwritten in the past. “Certainly, we saw it in the World Trade Center, where property, aviation, workers comp, life insurance, all came together in the same loss.”

But its also being seen as a result of the accounting scandals, he continued, pointing to the multiple exposures coming from directors and officers coverage, accountants errors and omissions policies, lawyers E&O policies, and potentially the banks coverages.

Further, Mr. Lescault said, where many coverages in the past had been thrown in together, such as with EPL, Swiss Re is moving to provide that coverage separately, perhaps on a stand-alone basis, where the exposures being taken on can be understood as well as appropriately underwritten and priced.

Underwriting discipline is being enforced within reinsurance companies by internal structures they have adopted to prevent mistakes of past soft markets.

In July of last year, Munich Re set up a division called “Corporate Underwriting,” which has the responsibility “to review the portfolios of all the operating units from time to time,” said Clement Booth, a member of the board of management for Munich Re.

“The key issue is the responsibility of the units themselves,” he said, noting that the company formerly operated under a system that was a mixture between regions and lines of business where accountability was not as clear.

“We now operate a profit-center system where the particular division responsible for a region–for example, Europe or North America–is fully responsible for all aspects of the business,” he said. “So it becomes self-regulating in the sense that there is no place to hide if a loss is made. We think that the previous problems are not likely to recur.”

Further, he said, John Phelan, the CEO of American Re in Princeton, N.J., now sits on the board in Munich, “so he shares our joint responsibility for the company. So hes on the main board of Munich Re, whereas in the past that was not the case.”

Mr. Booth said underwriting controls dont simply get handed down from “an ivory tower in Munich. They are discussed, so the underwriters themselves are involved in setting up the parameters for how we conduct business. Then having agreed on how were going to do that, [the parameters] then become very inflexible, unless theyre changed within the same forum.”

But except for areas such as nuclear or terrorism risks, “the Corporate Underwriting division does not proscribe how you must underwrite or what you must charge. This is driven by the divisions themselves,” Mr. Booth explained. “We try not to be too proscriptive because those who run the business units are part of the process.”

At GE Employers Reinsurance Corp., global product profit and loss units have been created to ensure underwriting discipline, according to Rick Smith, president and chief executive officer of Global P&C Re, a business unit of the Overland Park, Kan.-based reinsurer.

“We have field underwriters still, obviously, that work day-to-day with customers,” Mr. Smith said, but they are backed up by a team with in-house product expertise that “truly understands the macro and the micro changes to products around the world, with an unbiased decision-making process.”

He explained that these global product P&L units take “some of the bias out of the underwriting decision making, which you might have if youre too close to the customer when making that decision.”

“In addition to product P&Ls, weve digitized the entire process, so we have transparency,” Mr. Smith said, noting that the process for underwriting decisions, which used to be in someones head or in a drawer, are now on the Internet. “Weve also tripled our actuarial pricing team, which has helped us greatly across-the-board,” he added.

Further, he said, individual underwriters are given letters of authority, whereby the underwriter has authority up to a certain level, based upon his or her experience, past performance, and ability to assess risk, price risk, and make a reasonable return. “Authority beyond that level is then escalated to different levels of approval,” Mr. Smith said. “I think when you talk about underwriting discipline, getting more heads and eyes to review deals gives you a better shot at improving underwriting discipline and making a profit.”

To assure that the underwriting process is timely, he said, GE ERCs Global P&C Re business unit has measurements in place that “track back to the customers needs, so we track our cycle time,” he said. If the customer wants the turnaround time in two days, “we try to ensure we have a process in house that will turn around that approval process in two days without sacrificing a good decision,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.