Taking the time: although insurers say they haven't changed their underwriting standards, they are investing more time and money to add staff, improve technology and extend research. (Property/Casualty: Underwriting).

Faced with corporate scandals, the looming threat of mold litigation, the sluggish economy and the hardening insurance market, insurers have reacted by instituting more stringent underwriting requirements, with demands for higher deductibles, reduction of limits and the elimination of multiyear contracts.

Even in this micro-underwriting mode, many insurers say they are applying the same underwriting standards now as they did before these internal and external changes developed. But they also acknowledge that in this shifting business landscape, they sometimes have had to add more staff to handle increased business, do more to provide training and improve technology, and invest much more time and effort in researching each renewal and new prospect.

In the past year, for example, Hart ford Financial Products--a leader in the directors and officers line--has increased its staff to 69 D&O underwriters--up about 20%--to meet the greater demand for that coverage, which helps defend company executives against shareholders' lawsuits, said John Rafferty, vice president, directors and officers, at Hartford Financial Products, a unit of The Hartford Financial Services Group. With the hard market, capacity in the D&O line has been shrinking, Hartford Financial has been deluged with business to look at, and the underwriting phase is taking longer these days, Rafferty said.

"There's more diligence around applicants--more thorough vetting," he said. "More time and more research is being put into each client, and there are more face-to-face meetings, which now can very well include the CFO, the CEO and the general counsel."

Although the time that goes into underwriting each account still varies with the complexity of that particular risk, the underwriting process "is probably taking almost twice as long now as it used to," said Marilyn Marshall, national manager of the emerging markets department and assistant vice president of Hartford Financial Products. "There is a lot more information to review, and we need to be comfortable that we have reviewed it all and understand the risk, inside and out, before we agree to insure them."

Historically, Marshall noted, underwriters at Hartford would rely heavily on publicly filed documents such as 10-Ks, 1O-Qs and proxy statements. While that's still a large part of the process, underwriters are adding research on internal policy procedures to the list, with a nod to gathering information on corporate governance.

"We're basically asking to become insiders," Marshall said.

Commercial Considerations

Patrick O'Connor, vice president, chief underwriting officer for Liberty Mutual Property Division, part of Liberty Mutual Group, said market and economic conditions haven't altered the way his commercial property underwriters evaluate businesses. "We're still very much individual account underwriters," he said. "We look at each account and judge it on the specific characteristics of that account. We feel that differentiating and selection is very much the key to a successful underwriting operation--not to discount the importance of pricing--but we really concentrate our efforts and pay a lot of attention to selecting the better than average risk."

These days, Liberty Mutual Property also is taking a much closer look at a company's financials than it has in the past. "We have access to tools like Dun & Bradstreet reports and similar reports, and we have internal financial and credit professionals who get involved in the pre-qualifying process," he said.

As a commercial insurer, Liberty Mutual Property has long considered management practices in its client evaluations, particularly the management's attitude toward fire protection and maintenance of fire protection systems, O'Connor said. If the insurer recommends improvements, it notes the client's willingness to follow through. "It goes hand in hand with the current economic environment that, in many cases, if the companies don't have the resources to spend on maintenance of or improvement of fire protection, it becomes an underwriting consideration and potentially, an underwriting issue," he said.

In the past year, Liberty Mutual Property has seen some increased prospect activity from companies that are no longer writing commercial-property insurance or that have dramatically changed their positions, O'Connor said. For example, changes made at Industrial Risk Insurers to shift from doing full-limit programs to a primary approach have led to increased business for his company, O'Connor said. IRI is a subsidiary of General Electric Co.'s Employers Reinsurance Corp.

As premium volume has been growing, the company has added staff to build its numbers to 65 underwriters, he said. Liberty Mutual Property also has reintroduced a property underwriting trainee program. Basically, this jump-started a college-recruiting program that had been in existence but hadn't been aggressively pursued, O'Connor said. In June 2002, the company hired six college graduates for its property underwriting trainee program, brought on four more in January 2003, and expects to add four more in June 2003.

Aside from trainees, the insurer has a mix of veterans and some newcomers who have not experienced a market change before. "To address that, we have internal training programs that we provide to our underwriters," O'Connor said. "We also lean very heavily on our management staff, which without exception have all been through changing markets. We feel we have the people and procedures in place to make sure those underwriters that personally haven't experienced a changing market are educated and knowledgeable and savvy as they interact in that market."

Gathering More Information

Even a relatively new insurer on the homeowners' scene is reacting to these outside forces. Bunker Hill, a program underwriting specialist, sells only homeowners insurance to the Massachusetts market. Micro-underwriting "is happening at Bunker Hill, but it's something I feel should have been happening all the time," said John Tierney, president. "I really don't think things have changed with the economy, or with the corporate scandals or mold. I think the issues we have today are just part of the fundamental challenges that insurance companies have always had, and that's identifying the exposure, knowing the exposure, managing it and pricing it appropriately. I think some companies got away from that."

Even before the latest market changes, his company had earmarked funds to add more technology and build in more training for underwriters, Tierney said. "We're trying to make our underwriters more efficient and give them tools that allow them to get at their jobs more effectively," Tierney said. "For example, there's so much more information available now on the Internet than there was five years ago."

Homeowners insurance underwriters, for example, can obtain a great deal of information about the houses their company insures by just pointing and clicking on their computers, he said. Before, they might have had to leave the office and visit the agents and the localities to learn as much, he noted. "In some cases you can get on the Web and get a picture--you can see the house, you can get information as to square footage and so on," Tierney said.

Bunker Hill had 2.7% of the Massachusetts homeowners market in 2001, according to A.M. Best Co. Although Bunker Hill is new as a statutory entity; its parent company, Plymouth Rock, has been in the homeowners insurance business since 1984. Two years later, Plymouth Rock established Bunker Hill as a separate company to focus the efforts of the staff on the homeowners line, Tierney said.

Tierney doesn't expect any dramatic change in the Northeast homeowners insurance market this year. The market has been relatively healthy, competitive and dynamic for an extended period of time, he said. "I think where you're really going to see most of the change in homeowners is in the Midwest and in the South and that's where the change is needed," Tierney said. "Companies can't keep operating with the sort of results they've had in those regions of the country."

In and Out of D&O

Many insurers have cut back on D&O coverage or reconsidered it after last year's high-profile corporate finance scandals involving, most notably, Enron, the energy-trading giant, and the resulting get-tough legislation on corporate accountability. Exceptions are Allianz Insurance Co., which recently launched a unit to offer D&O insurance in the United States for the first time. Allianz Insurance, a subsidiary of Germany's Allianz AG Holding, will consolidate D&O operations in its Chicago and New York offices. And OneBeacon Insurance Group, Simsbury, Conn., a subsidiary of White Mountains Insurance Group Ltd., created a new division to enter the D&O liability and professional liability markets in February 2000.

At the same time, the D&O market has more than doubled in the last decade, a growth attributed to an increased number of companies, including an estimated 4,000 newly public companies, buying this coverage.

With fewer carriers in the D&O market, Hartford Financial Products has been seeing more of this business land on its doorstep in the past year, Marshall said. "More companies are looking at buying higher limits," she said. "Some perhaps have never bought D&O coverage in the past--that's very rare--but some of the smaller, publicly traded companies and private technology companies are first-time buyers as well."

Marshall, who started her underwriting career in 1992 at Hartford Financial, said she and colleagues have always prided themselves at being disciplined underwriters and looking closely at each piece of business--whether new or renewal--that came their way. "But I've never seen it taken to this extent," she said of the current climate of intensive underwriting. "The fact is, too, that companies want to differentiate themselves and they're more willing to provide the information. They want the time with you."