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High Risks Demand Discipline.

The bench strength of underwriting talent lies at the heart of successful product line for high-risk exposures.

Years ago, virtually all surplus lines were written by surplus- and excess-lines carriers, typically on a non-admitted basis. In the softening market of the late 1980s, many carriers jumped in when they saw the potential in writing coverage for risks that pose too high an exposure for standard commercial-liability insurance.

The expanding economy of the '90s helped fuel standard carriers' interest in this marketplace with its explosion in companies that manufacture potentially high-risk new products such as medical devices, cosmetics, nutritional supplements, health-care products and industrial equipment. These companies have high exposures and carry the risk of large claim awards for bodily harm or property damage.

Since the late 1980s, standard lines have written more of the tough stuff, sometimes without the needed expertise. As the market changes--and there's some evidence lately of firming--we'll see more standard carriers weed out these troublesome accounts, sending them back to traditional surplus-lines carriers, a sign of a standard-lines market lacking the expertise or discipline required by the surplus-lines market.

For customers, however, standard-lines carriers can offer advantages that surplus-lines carriers can't afford. The key is finding standard-line carriers who have the ability to write tough exposures through dedicated units that know this business. Agents also see the advantage of working with standard carriers because the agents can place their accounts with their regular carriers and build on established relationships rather than having to go to a standalone, nonrelated marketplace.

Pricing is a paramount issue. In a soft market, standard carriers run the risk of inadequate pricing, terms and conditions due to lack of expertise or pursuit of premium. Surplus-lines carriers may offer an array of pricing, terms and conditions and have trouble competing.

The flip side of price is stability. Carriers must make sure their short- and long-tail losses are covered, or no one will be in business very long.

Insureds also look for a company that understands their particular business and products and, most importantly, can aggressively defend those products in the event of a claim. This, too, is where standard carriers can compete effectively. Successful carriers offer a breadth of knowledge of the marketplace and a significant expertise in claims handling, loss control and underwriting. They also possess an in-depth knowledge of various coverages unique to product manufacturing, such as design errors and omissions, product recall expense and pollution coverages.

Knowledgeable buyers often look first at a company's claim-handling capability to find the right fit. They want a carrier that will aggressively safeguard their product's reputation, a capacity that typically comes with substantial experience in tough products.

Take the case of a woodworking-machine manufacturer facing allegations that the safety guard on one of its power saws is deficient and resulted in a serious arm injury Some carriers might attempt to settle the claim quickly, which could make the insured a target for lawsuits by other product users alleging they, too, were injured by the machine. However, a carrier experienced in tough products might investigate the claim more deeply and discover that the safety guard was not deficient, but instead removed by the owner.

Loss-control expertise is another area where it pays for the carrier to invest deeply and where a standard-lines carrier can have a significant leg up over its surplus-lines carrier competitors. Many buyers of tough products are small or start-up manufacturers with a limited knowledge of the product-liability landscape. They're looking for loss-control proficiency in product design, warning labels, safety literature and other area. A large, standard-lines carrier can often leverage its loss control know-how as it vies with surplus-lines carriers, which often are less likely to have in-depth loss control capability.

At the heart of any successful tough products line is the bench strength of the underwriting talent. Underwriters of tough risks must price the accounts solely on the exposures, and not by rates promulgated by class. Without published rates, the underwriters must harness all their knowledge and experience to judge exposures accurately.

For a carrier, any weakness in underwriting is a time bomb. The consequences of writing the wrong account or pricing it inadequately might take years to surface. Then, a carrier might find a particular decision was a bad one and the damage was already done. Despite these pitfalls, standard-lines carriers can carve out a profitable niche and succeed by maintaining underwriting expertise and discipline, and not chasing premium as the market cycles.

Richard J. Quagliaroli, a Best's Review columnist, is president of Hartford Commercial, Hartford, conn.
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Author:Quagliaroli, Richard J.
Publication:Best's Review
Article Type:Brief Article
Geographic Code:1USA
Date:Jan 1, 2000
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