Talent Scouts

• Barbara Bowers
• August 2002
• 

The much-anticipated hard market is exposing a serious shortcoming at many insurance companies where underwriters hired during the prolonged soft market often lack the expertise to make the right risk selections in a dramatically changed business climate.

While this problem surfaced well before Sept. 11, that catastrophe has made the situation worse, and insurance leaders are emphasizing almost on a daily basis how pressing the need is for greater underwriting discipline.

In recent years, insurers have added steadily to their stable of underwriters. There were 107,000 people employed as underwriters in the United States last year, up from 90,750 in 1998, according to the Bureau of Labor Statistics.

But several carriers have not prepared many of these recent hires for the very different underwriting challenges of the current market, observers say.

Talent Pool

"We as an industry have not been training new underwriters for a number of years," said Patrick O'Connor, vice president, chief underwriting officer, for Liberty Mutual Group's Property Operation. "The result is that the talent pool out there is short--there's more demand for talented underwriters than there is a supply right now."

For his company alone, O'Connor said he would rate this issue as "a very high 8 or 9" on a scale of 10.

To John Lawlor, vice president, strategic development for Property at Liberty Mutual, true underwriting talent lies in those people "who have the common sense, business savvy and the understanding of what it means to select, differentiate and price risk, with the discipline that says the No. 1 goal is long-term profit."

Liberty Mutual recruits from a designated list of colleges. LMG Property, Liberty Mutual's Property Operation, has reinstituted a training program and recently hired six college graduates to be trained as LMG Property underwriters. "We'll continue to try to build our underwriting strength via outside talent and with a combination of developing some of our own talent with college graduates through the trainee program," O'Connor said.

Industry consolidation has compounded the talent problem, Lawlor said. "When you look at the type of talent or pool that we used to try and draw from, many of those companies no longer exist or have merged and are part of another company," he said.

He noted that underwriter training has followed rates over the past 10 years or so, meaning that training has continually deteriorated over time. "Because we've gotten to a cash-flow standpoint, underwriting has been less disciplined and less accountable, and training has gone with it," he said. "That was one of the things that most companies just didn't do as well."

During that period, underwriters were focusing on production more than results, "so it was very difficult to train on the job in that kind of market environment," said Robert Fishman, chief executive officer of manufacturing services at Zurich NA. "Now that the results are poor, people are realizing that underwriting does matter."

Seeing the Light

But that realization may come too late for some.

Barbara Reardon, an underwriter in commercial insurance for more than 25 years and now owner of Educating Underwriters, Batavia, Ill., specializes in developing training for underwriters in commercial insurance. All the national underwriters' courses go through the coverage analysis, Reardon noted. "They teach you what is covered and what is not covered," she said. "What we teach is risk--how do you measure risk and equate that with price? And that is something that only comes from the long-term underwriter--that's a gut thing."

In March, Reardon visited 49 large insurance companies to inquire about their underwriting needs. At the end of each discussion, she reached the same conclusion--that these insurers seemed to be handicapped by the lack of trained underwriters. "A resounding 100% said, 'That is our problem!'" she said.

Twenty years ago, she noted, a lot of underwriters had proper training. "When we went into a soft market about 15 years ago, the longer the market lasted, the less we could afford to retain and maintain our underwriters, so we demolished our training programs and laid off people," she said. "And we laid off tremendous talent, because that was the talent that we were paying so much money for."

Many companies disbanded all their training programs, because training is the last thing a company will do if money is tight, Reardon said. "In the last 10 years, if you've hired underwriters, you haven't trained them. The only thing you've taught them is how to price things, because it's the fastest way to process paper," she said.

Reardon's visits with the 49 companies resulted in 49 pledges that they would use her consulting services. But since then, about half have notified her that their companies have pulled the plug on any training plans, because production seems to be the most important thing to them right now, she said. That doesn't surprise her. "You've got a lot of people panicking, because anyone who's been through a hard market knows it does not last long," she said. "So you have to really grab this and maximize it, or you will lose your opportunity to recoup and recover from the last 10 years."

And there are ways to structure fast-track training that will have a huge impact, she noted. "For example, take the largest book of business you have and train on risk and pricing analysis," she said. "Take the book of business that has the worst loss ratio and train on risk and pricing strategies to repair it. These solutions have immediate impact on profitability."

The companies that did sign on with Reardon "almost look like they've got their sea legs," she said. One major company that approached her said it had a learning management system in place but didn't know where to start. "Now can you imagine that? They're an underwriting company, and they don't even know where to start," she said.

Bench Strength

Some insurers say that for the most part, they don't have problems in finding enough talented underwriters.

Chubb, for example, has long been known in underwriting circles for its extensive training program. Recent market conditions and the company's strong growth at the end of 2001 and the first part of 2002 have prompted Chubb to bring in additional talent. In doing so, the company has been able to attract the kind of talent it needs, said Steven Schulman, vice president for worldwide strategic staffing, Chubb & Son.

But Chubb still faces staffing difficulties in some commercial lines--notably, emerging product areas that don't yet have track records behind them to spawn a tremendous amount of underwriting talent in the marketplace, Schulman said.

"Some of those specialty areas that we have taken an industry leadership position in--there's just not the bench strength out there--so some of those areas are a challenge," he said.

One example is executive protection, a line where Chubb and American International Group have long been the major players. This area is now drawing more competitors that are mindful of Chubb's strong training program and underwriting expertise in this line. They are hopeful of luring Chubb's underwriters away. "It's simply supply and demand--more companies getting into this area, looking for talent in what has been a fairly limited talent pool," Schulman said.

Another example is Chubb's ability to gain expertise in the life sciences industry, a relatively new line of business.Company recruiters will visit colleges and universities to identify graduates of life science programs. "These underwriters bring with them the basic foundation for writing this type of business," said Valerie Aguirre, vice president, Chubb & Son, and worldwide human resources manager for Chubb Commercial Insurance. "It's working out tremendously."

Its position as a leading company in emerging markets and its reputation as a good training organization make Chubb a prime target for prospecting rivals, Schulman said. "This is a knowledge-based industry, and the knowledge that we instill in our people, the knowledge that people who join our organization bring--that's what we want to retain," he said. "There's been a tremendous amount of emphasis over the last couple of years in making sure that we retain our intellectual capital."

To do so, Chubb offers rewards--in the form of competitive salaries--and recognition--in the form of professional development--that make employees feel they have a career path in the organization, Schulman said. "It doesn't matter what industry you're in, people want to know that they still have potential to grow in their current jobs and in their organizations."

Chubb has strong relationships with certain schools for recruiting purposes, and these institutions often call the company to recommend candidates, Aguirre said. Chubb is especially interested in hiring business and finance majors from schools large enough to have diverse populations. "We also look for second-jobbers--whether through the alumni organization or folks who have been working in financial institutions for a couple of years and are interested in changing careers," Aguirre said. "There's never just one solution to staffing. We need to continuously look at all options."

Chubb puts about 230 people a year through its training programs, and most of them work in underwriting. Technical skill is the foundation of Chubb's approach. "It's building the tools, the skill set, to be good underwriters, to make good underwriting decisions," Schulman said. The insurer also builds the curriculum with an eye to making sure that underwriters can use these skills effectively in a changing marketplace.

Trainees at Chubb go through a program called "Year One," which includes on-the-job learning plus two centralized training sessions. New underwriters are assigned mentors and coaches. Different vehicles are used, including the Internet and Web casts, to get information to students.

"Training doesn't stop at Year One, either," Aguirre said. "We offer many advanced seminars for all of our underwriters, to provide a continuous training and learning process."

Incentives Added

Pete Higgins, executive vice president and chief underwriting officer for commercial lines business at Travelers Property Casualty, said his company also has no problem with a shortage of talented underwriters. That's because Travelers invested millions of dollars in top-quality front-line people in the mid-1980s, a time when it faced a similar hiring problem.

"That means, literally, ownership in the company, position stability, responsibility," Higgins said. "And we would strip out layers of management and really work over this period of time--almost 20 years now--to create a pure underwriting and risk-taking organization."

This strategy led Travelers to leave its front-line management in place at its national accounts, midsize construction and small-business divisions. "First, we were going to leave our people stable," Higgins said. "Two, we would have the metrics, the management information and the numbers at the front line that our people could look at to know where they were at any given time."

The company also committed to creating compensation programs that would allow the professional underwriter to remain at that job and not feel obligated to move through management to make a higher salary.

"If they wanted to stay as front line in our business, they could do it and make the same kind of money as they could in a managerial capacity," Higgins said. "The way our incentive compensation works, it's not uncommon for account executives in these businesses to make more than their managers in a given year," he said.

At that time, Travelers also made a commitment to use its most senior underwriters to support its front-line people. "We have a collaborative underwriting-review process that is institutionalized here--every business has it," Higgins said. "This means the front-line underwriter has a senior underwriting officer he is working with who is more experienced. They kind of jointly own the results."

Travelers makes sure that its field management, commercial accounts managers and regionals have extensive backgrounds in underwriting. The company also provides frequent training sessions, Higgins said. "We've put every one of our underwriters across our business groups into advanced seminars in property, business interruption, general liability, workers' comp," he said. "These are constant and ongoing programs."

Although each of these seminars is mandated, Higgins thinks underwriters would attend anyway. "They like it," he said. "They want it."

Like Chubb, Travelers says it is constantly on guard against those who want to poach its underwriting talent. "We have constant pressure on our folks from head hunters and other companies," Higgins said. "So, yes, we believe there is a shortage of quality people out there."

Despite this ongoing battle, employee turnover is less than 5% in the account-executive ranks, he said. Higgins attributes this to a combination of salary incentives and a favorable work environment.

Travelers has compiled a waiting list of underwriters who say they want to work there. During interviews, applicants are likely to discuss how much they've increased production at their current jobs, Higgins said. "We immediately turn around and ask them very specific details about how they would handle specific lines of insurance--their underwriting background, their pricing knowledge, what they've trained in, what deals they've handled, how they've handled them," he said. "We dig very, very deep into their professional skills."

While the company feels that effective underwriters yield growth, it doesn't make growth the objective. "We make profitability and combined ratio the objective first," Higgins said. "So we want people that understand risk, exposure analysis and pricing skills."

Facing a need for more underwriting hires, Travelers expects to make a big investment in training this staff during the next five to 10 years, he said.

Underwriting U.

Although Zurich NA has offered training in a variety of ways, it will take a thoroughly coordinated approach with the introduction of a comprehensive program it calls "Underwriting University Inc."

"What we're trying to say with this is, 'What's in the tool kit you need to possess to be successful as an underwriter by a particular line?'" Fishman said.

Zurich is moving forward with some basic courses at entry, intermediate and advanced levels, and it has begun to develop targeted courses by lines of business in both electronic and face-to-face formats, Fishman said.

The company already has an associates program that focuses on a two-year training and rotation. But the goal is to take those fundamentals of training and make them part of Underwriting University, "so we're not reinventing the wheel and that there is one, call it 'curriculum,' that will drive the organization," Fishman said.

Terrorism's Mark

Underwriters who want to understand hard-market underwriting must focus on hard pricing and terms, he said. "You need to go back and review policy-term-condition erosions as they relate to pricing and loss-experience levels that have occurred over the last 10 years," Fishman said. "In some lines of business, you need to focus on gaining a better understanding of costs as they relate to services, such as risk management."

These days, underwriters also should demand detailed information so they can fully understand the risk, he said. "As an underwriter, you really need to focus your discussions with customers and brokers on the details, not on the amount of the increase," Fishman said. "Also, focus on quality of the underwriting, not premium growth, and continually measure rate and exposure levels for both new and renewal business."

It's also good for underwriters to review their strategy regarding how often they refile rates and consider setting higher minimum premiums for certain lines, he said.

If anything, the tragedy of Sept. 11 taught insurers to take an even sharper look at their underwriting vulnerability. "I think it highlighted it, yes," Fishman said. "But for us, it was there before that, and we recognize it."

At Travelers, the event forced the company to change its approach to underwriting certain types of risk, Higgins said. "It has caused us to invest heavily in training our people, giving them new information, new probable maximum losses and new ways to look at risk--we're dealing with a new and horrifying exposure," he said.

Lawlor of Liberty Mutual thinks the terrorist attacks heightened the problem of acquiring underwriting talent. There already was a draw on talent before Sept. 11, but the industry lost so many people at the World Trade Center that the affected companies had to set out to replace their personnel, he said.

To Higgins, the professionalism of the front-line underwriter is the most important issue the industry is facing now. "More than ever, the quality of our people will determine how well this industry performs over the next five or 10 years," he said. "Underwriting professionalism is absolutely critical to the way the public will view us and the way we're able to manage a very changing environment in terms of exposure."

Meanwhile, the continuance of the hard market is a plus for talent development, Lawlor said. In most companies, he added, underwriting discipline will be one of the keys to success. But for that to happen, insurers need to have well-trained, talented people in their organizations--not just underwriters, but engineering staff, claims staff and the other people needed to support them, he said.

"What we see, and what we're hearing others are doing, is put additional resources into the training area, whether it's money or people or time," Lawlor said. "We think it's going to be a differentiator in the future for us."

by Barbara Bowers