“It would be a mistake not to understand that multiple peril insurance is the hub around which the spokes of umbrella, workers' compensation and auto are placed,” said Steven Pozzi, chief underwriting officer for the Chubb Commercial Insurance.

“If we write the multi-peril when we write those other lines, we are in a much better position to effectively address the insurance needs of the policyholder and improve the quality of the risk we underwrite,” Mr. Pozzi said.

For the industry–and for Chubb, in particular–good things come in packages, large and small. Early estimates based on a compilation of annual net premium, loss and expense data put the 2004 industry combined ratio at roughly 101–just one point over breakeven. And in the prior year–2003–an industry aggregate combined ratio of 99.7 revealed a slight underwriting profit.

Chubb's results were even better, with the Warren, N.J.-based insurer posting an eye-popping 69.6 combined ratio in 2004. Chubb's combined ratio was not only lower than the loss ratios of many competitors, but nearly 18 points lower than the enviable 87.4 combined that Chubb posted in 2003.

Across the industry, net written CMP premiums reached nearly $28.5 billion–up roughly 4 percent in 2004. That growth rate was just about half the 7.9 percent industry figure recorded in 2003, and nearly 10 percentage points below the 14.5 percent written premium jump recorded in 2002.

In spite of declining premium growth and a 9 percent spike in net incurred losses in 2004 (fueled by rising property claims), falling loss levels in the prior two years helped keep the industry CMP loss ratio near the lowest level recorded for the seven-year period reviewed by National Underwriter.

Although the 2004 jump in losses nearly offset the two-year decline recorded for 2002 and 2003, with net earned premiums soaring nearly 33 percent over the three-year period, the industry net pure loss ratio (excluding loss adjustment expenses) was 51.5 in 2004–nearly 15 points better than the 1998 loss ratio recorded at the start of our review period.

To Package Or Not To Package?

The year 2004 marked the fourth-straight in which package results were better than monoline liability and property totals, according to an analysis prepared using data from National Underwriter Insurance Data Services. (See Graph 1.)

For this comparison analysis, NU combined net premiums, losses and expenses for the fire, allied, inland, earthquake and burglary lines to derive loss ratio and combined ratio results which we refer to as “monoline property” results. Monoline liability results on the accompanying graphs are results for the “other liability” line of statutory filings.

Our comparison graphs, linked below, reveal the following trends:

o For the seven years reviewed, monoline property loss ratios were always better–consistently lower–than package policy property results. However, the gap between monoline and CMP property started to close in 2001, when substantial property loss ratios improvements were recorded, whether it was written in a package or not. (Graph 2)

o Monoline liability had worse loss ratios than CMP liability for the most recent five years. (Graph 3)

o Since liability differentials are greater–and because CMP property results improved so much in recent years–putting property and liability results together, CMP loss ratios–which were worse than weighted-average monoline loss ratios prior to 2000–are now consistently better than monoline loss ratios. (Graph 1)

o For combined ratios, the story is different. The expense component of monoline combined ratios tends to be lower than CMP expense ratios. As a result, combined ratios for package policies are consistently worse than monoline policy combined ratios. (Graph 1)

The shrinking gap between CMP property and monoline property loss ratios (Graph 2) isn't fully explained by strong net premium growth for CMP property in recent years. As analysts might guess based on intuition and buyer profiles, net written premium growth–accumulating to 26 percent in 2002 and 2003–significantly lagged monoline premium growth, which was 43 percent over the same two years.

“Much of commercial multiple peril is made up of businessowners policies, which are available only to smaller, much less complex accounts,” said Tom Quinn, vice president of underwriting services at MarketStance in Middletown, Conn. “During the post-2000 firming, pricing on this business increased substantially less than on larger accounts, due at least in part to more pronounced competition in the small commercial market,” he said.

In 2002 and 2003, however, net incurred property losses fell nearly 17 percent on the package policy side, while monoline property losses fell only about 5 percent.

“Could underwriting discipline be the difference–[explain] the crossover between monoline and package profitability?” Diana Reitz, managing editor of FC&S Online (the National Underwriter Company's online coverage interpretation source), in response to an e-mail query.

Compared to property, an even more pronounced premium-growth differential is evident on the liability side in recent years, with other liability premiums soaring more than 69 percent in 2002 and 2003, compared to a 20 percent jump in liability package premiums. However, towering losses for monoline liability–rising more than 50 percent in 2002 and 2003, compared with only a 2 percent rise in CMP-liability losses–kept monoline liability loss ratios well above CMP liability in recent years.

“The other liability line on the statutory blank, in addition to commercial general liability, incorporates umbrella, errors and omissions, and most notably directors and officers liability,” Mr. Quinn noted. “A sharp deterioration in D&O results doubtlessly is a factor in the underwriting results for 'other liability,'” he said.

Reserve additions may be a factor as well. According to results recently presented by analysts at New York-based Standard & Poor's, nearly $18 billion in asbestos, construction defect and D&O reserves were added to other liability from 2002-2004. The comparable CMP amount was $4.4 billion.

While the relative positions of package and monoline results remained the same in 2004 as they did in the two prior years, double-digit premium declines that showed up for the monolines, housing larger or more complex risks, did not appear among package results.

Other liability net written premiums fell 14 percent in 2004, and monoline property premiums dropped more than 10 percent. In contrast, CMP premiums increased 4 percent overall–rising roughly 2 percent for the property piece and 8 percent for liability.

An Imperfect Comparison

NU's monoline versus package comparison is only as good as the annual statement data that went into it–and carriers don't all necessarily follow the same rules when they record CMP results.

Beyond BOP policies, “the rest of what is reported as CMP can be a hodge-podge of coverages whose only common denominator is that they've been brought together to qualify for a package discount,” Mr. Quinn notes. Crime coverage (employee dishonesty, forgery and alteration), for example, could be included in a package, as could auto-related liability coverage such as non-owned autos or garagekeepers' liability, he said.

Analysis By State: Florida A Wipeout

An analysis of direct loss ratio results by state shows that while California, Michigan and Massachusetts produced the best loss ratios for insurers in 2004, Florida writings punished CMP insurers with direct losses coming in at nearly twice the level of direct earned premiums.

The 195.4 direct loss ratio for the largest Florida writer, Zurich, looked good when compared to results for the tenth-largest Florida CMP writer, Allstate–a direct loss ratio of 732.0. Reports of results for the top-10 writers in California, New York and Florida–the three largest states based on CMP premiums–are attached.

Chubb Leads The Profit Pack

In a nationwide analysis of direct premiums and loss ratios for the 25-largest CMP writers, St. Paul Travelers leads in volume, with over 9 percent of the CMP market. The largest writer also produced one of the lowest 2004 loss ratios–39.5, compared to an industry level of 52.9.

Second-ranked Zurich wasn't as fortunate, with its loss ratio deteriorating more than 36 points to 92.5, owing in part to the group's large Florida presence.

However, while Zurich's loss ratio results deteriorated in nearly every state (California was a notable exception), and the company recorded loss ratios over 100 in 17 of them, the fourth-largest insurer, Chubb, reigned at the other end of the spectrum, reporting loss ratios under 40 in 48 out of 57 territories.

With a countrywide CMP loss ratio of 24.2, Chubb's result falls far below any of its competitors. An analysis of Chubb's results by region reveals that a single-digit loss ratio for “other alien” territories (outside the 50 states) as well as a comparatively low Florida marketshare explain part of the carrier's good fortune.

Mr. Pozzi needs no such data analysis to explain the results. According to him, Chubb simply has a different view of the business.

The CMP package “is the core product for how we deliver [insurance to] our niche market segments,” Mr. Pozzi said, noting that the majority of Chubb's multiple peril policies are written for risks with complex exposures. Examples, he said, are life sciences companies, technology firms, energy entities, metalworkers and law firms, which make up the bulk of Chubb's multi-peril book.

Many competitors, he said, deliver commodity-type packages to the majority of their insureds–”and the only way they can respond to specific needs of their customers is by manuscripting,” he said.

He explains that Chubb's base CMP policy–known as “Customarq”–is a specialty policy in and of itself. Special features include a property valuation approach that includes cost of replacement at the same or another site and selling price of finished stock, he said. The policy also grants automatic limits of insurance for emerging Internet exposures, he said.

In addition, Customarq has customized contracts for niche classes like life sciences accounts, he said. Marketing material on Chubb's Web site, for example, notes that spoilage of a biotechnology company's cell cultures during a power outage would be covered due to a broad property definition that includes research and development property, together with a “change in controlled environment” contract.

“The thing is not to confuse the fact that simply because it's a package product, that it is non-sophisticated and therefore granted to anyone who comes in looking for insurance,” Mr. Pozzi said.

Once you have developed a highly sophisticated package product, you must treat it with a great deal of care on the underwriting and pricing fronts, he continued–”because you're granting wider-ranging coverages than most of the competition would as a base product.”

Explaining Chubb's dramatic turnaround in underwriting results in 2002, Mr. Pozzi admits “the market helped,” because the climate was right for Chubb to more adequately price exposures.

In the late 90s, Chubb–and the industry as a whole–”gave up more on the underwriting than we should have,” falling into the trap of competing on price. Responding before most competitors, Mr. Pozzi said his company culled those accounts that could not be appropriately priced.

(According to NU data, Chubb still managed to grow net CMP premiums 52 percent in 2002, while industry CMP premiums rose less than 15 percent.)

AIG Impact

With every data compilation comes decision-making, and NU's decision to show industrywide net combined ratios in our graphs carries with it one inherent problem created by recent events.

While net combined ratios (including the impact of ceded reinsurance) give a better sense (than direct ratios) of underwriting results that contribute to bottom-line net income, the fact that net premium and loss information for the largest members of American International Group have not yet been filed may have a distorting impact on the overall 2004 combined ratio result of 101.0 estimated based on carrier results reported through May 2005.

While the directional impact of the missing AIG insurers can't be determined, we note that in prior years the AIG companies lowered overall industry ratios. In 2003, with $0.5 billion in CMP net premiums, AIG moved the industry underwriting result from a loss to a profit. Excluding AIG, the 2003 combined ratio would have been 100.1, rather than the 99.7 reported for the industry in aggregate.

Given AIG's volume in this line, restatements of AIG results for any of the prior years will similarly swing the overall industry results.

SIDEBAR with Data Insights logo

Flag: Editor's Note

Head: About the Data

Source: NAIC Annual Statement Database via National Underwriter Insurance Data Services/Highline Data.

National Underwriter Insurance Data Services (formerly Thomson Financial Insurance Solutions and Sheshunoff Information Services) is part of Highline Data LLC, the data affiliate of Highline Media, parent company of this magazine.

For information about NUIDS' products, contact Chris Rogers at 617-441-5976.

Graphs: Line graphs for this article were prepared using information from the Insurance Expense Exhibit, Part II.

Industry aggregate figures calculated by NUIDS used for 2003 and prior; 2004 ratios are preliminary estimates based on total premiums, losses, expenses reported by 3,121 individual insurance companies as of mid-May. The largest members of American International Group have not filed net data and are not included in the 2004 total.

Pure loss ratios exclude loss adjustment expenses; combined ratios include LAE, underwriting expenses and dividends.

All ratios are net of reinsurance.

To calculate weighted average monoline CMP ratios shown on Graph 1, the percentages of property and liability premiums in industrywide CMP figures were used as weights and applied to monoline property and monoline liability ratios in each year.

Charts: The tables for this article were prepared using direct premium and loss information from individual state pages of insurer annual statements.

Direct premium growth figures for individual insurance groups reflect organic growth only. In other words, for any group that made an acquisition in 2004, premiums for the acquired company were included in both 2003 and 2004 to calculate growth percentages.

Direct data by state as reported to regulators by American International Group is included in the charts.

Art: Tearing The Package Open

A National Underwriter analysis reveals that industry commercial package loss ratios fell below loss ratios for individual liability and property coverages in recent years, reversing the positions for 1998-2000. While package policy property results are consistently worse than monoline property results in all seven years, a shrinking property gap and a wide gap between CMP liability and monoline liability loss ratios explain the turnaround.

Quotebox, with Pozzi mug

“It would be unfair not to give [commercial multiple peril] its credit. It is the hub of an account.”

Steven Pozzi, CUO, Chubb Commercial

Flag: Fast Facts

Head: CMP Commission Ratios

Among the top 25 writers of CMP based on direct written premiums, ratios of direct commissions to direct premiums varied from a low of 3.8 percent to a high of 21 percent.

The top five ratios were:

o 21.0 for Maguire Group (Philadelphia Consolidated)

o 20.7 percent, Erie Insurance

o 20.5 percent, Hartford Fire & Casualty

o 20.3 percent, White Mountains

o 19.5 percent, Harleysville

For Data Insights Charts

Source: NAIC Annual Statement Database via National Underwriter Insurance Data Services/Highline Data. For information, contact Chris Rogers at 617-441-5976

Net Pure Loss Ratios and Combined Ratios

PROPERTY AND LIABILITY COMBINED

Package vs. Wted. Monoline

Flag: Graph 1: Expense Ratio Impact

What CMP writers gained in terms of a loss ratio advantage in 2001-2004, they gave up on expenses. Higher package expense ratios have kept monoline combined ratios below package combined ratios. While monoline liability and property expense ratios averaged 25 and 28 in the last three years, the three-year average expense ratio for CMP was 32.

Net Pure Loss Ratios

PROPERTY

Package vs. Monoline

Flag: Graph 2: Gap Closes On Loss Ratios

The industry loss ratio for the property portion of CMP was only 3.6 points higher than loss ratio for monoline property in 2004, closing a gap that was more than 10 points in 1999 and 2000.

Net Pure Loss Ratios

LIABILITY

Package vs. Monoline

Flag: Graph 3: Advantage Package

The industry loss ratio for the liability portion of CMP averaged 17 points better than the industry loss ratio for the other liability line over the last three years. Reserve issues and unfavorable results for D&O embedded in the other liability line are likely contributors to difference.

Net Combined Ratios

CMP TOTAL

Industry vs. Chubb

Flag: Graph 4: 30 Points Of Profit

“The thing is not to confuse the fact that simply because it's a package product that that means non-sophisticated and therefore granted to anyone who comes in looking for insurance,” said Chubb's Steven Pozzi, explaining the carrier's better-than-average results.

Top 25 Chart:

Head: Direct CMP–Top 25 Writers ($000)

Flag: Storm Damage

For the top 25 CMP writers (based on 2004 direct written premiums), direct loss ratios ranged from a low of 24.2 for Chubb to a high of 132.4 for Allstate in 2004. The percentage of premiums that an individual insurer wrote in Florida was one key factor determining where its loss ratio fell within the range.

50 (or 57 state) chart:

Head: Direct CMP Results By State ($000)

Flag: California Dreaming

CMP insurers continued to like California in 2004, writing 13 percent of their premiums in the Golden State. While the attraction seemed well-founded, with the state producing one of the lowest 2004 CMP loss ratios within national borders, Florida writings punished CMP insurers with direct losses coming in at nearly twice the level of direct earned premiums.

Footnote: The loss ratio results for “Other Alien” territories are distorted by negative incurred losses reported by ACE Ltd., the third largest “Other Alien” writer, in 2004. Removing ACE from the totals produces direct losses ratios of 32.0 and 41.4 for 2004 and 2003, respectively.

California chart:

Head: Direct CMP Results for State of California ($000)

Flag: Results Uneven

While the industry reported its best loss ratio result in the state where insurers wrote the most CMP business, individual results varied widely in that state–California–in 2004. Zurich, the largest California CMP writer reported a 48.4 direct loss ratio, nearly 38 points higher than sixth-ranked Chubb.

New York chart:

Head: Direct CMP Results for State of New York ($000)

Flag: EmpireState

The names of three regional insurers–Greater New York, Harleysville, and Tower–joined national writers among the top 10 players in New York state. But neither group had a clear advantage from a loss ratio perspective. National writers reported the highest and lowest loss ratios in 2004.

Florida chart:

Head: Direct CMP Results for State of Florida ($000)

Flag: Read 'Em And Weep

Devastating hurricanes that blew through Florida last year made it necessary to widen the loss ratio column to include three digits before the decimal point for eight of the top 10 insurers. Indeed, the 195.4 direct loss ratio for top-writer Zurich looked good when compared Allstate's results of 732.0. Chubb whose results (not shown) were better than competitors in nearly every state, managed a 95.2 loss ratio in Florida on $42.4 million of direct written CMP premiums.