Kevin H. Kelley is chairman and chief executive officer of Lexington Insurance Company.
When you're already the country's leading surplus lines insurer, how much higher can you go? That's a good question for Lexington Insurance Company, a wholly owned subsidiary of the giant American International Group and acknowledged leader of the pack in today's competitive excess and surplus lines marketplace.
One thing is certain: This top-ranked carrier is doing anything but resting on its considerable laurels. In this article we'll talk with Lexington's chairman and chief executive officer, Kevin Kelley, to find out what drives his company's ongoing pursuit of excellence in all its endeavors.
Established in 1965, Lexington has grown to become the largest surplus lines carrier in the United States, with 1998 net written premium of more than $290 million and a market share estimated at 17%. Rated A++ (Superior) by A.M. Best and AAA by Moody's and Standard & Poor's, the insurer boasts a five-year (1993-1997) combined ratio of 95.5%, well below the industry average of 106.9% for the period. (The low combined ratio reflects not only Lexington's sound underwriting judgment but also its unique distribution system, which we'll learn about in more detail later in the article.) Based in Boston, Lexington employs some 375 people and has offices in London and Bermuda. Within its broad specialty of hard-to-place property/casualty risks, the company has developed expertise in a number of carefully selected niche markets.
Chief among these markets, Kelley says, are design professionals liability, employment practices liability (EPLI), inland marine, elements of the health care industry, and elements of the transportation business. Other key niches are chemical manufacturing, communications, construction, energy, entertainment, program business, and catastrophe-driven high-risk property.
Lexington also offers personal lines coverages under the LexElite servicemark: excess flood (over National Flood Insurance Program limits), personal umbrella, excess personal umbrella, vacant home coverage, and a stand-alone personal articles floater.
Flexible and responsive
A vital ingredient in Lexington's success in its complex markets, Kelley observes, is the insurer's receptivity to new ideas. "Clearly, we want to respond quickly to new ideas; that's why we characterize ourselves as 'pioneers in revolutionary protection,'" Kelley explains, referring to the tagline on Lexington's informational materials. "Implicit within that identity is the belief that innovation is a multidimensional game, in which we need to stay ahead of the trends that affect our customers so we can design products that help them deal competently with those trends." To identify emerging trends in the industries it serves, Lexington regularly conducts focus group sessions with executives from those industries.
"We know we must seek ways to increase our penetration of this market (middle market surplus lines), and our best avenue is independent agents."
--Kevin Kelley
How does Lexington seek to differentiate itself in a highly competitive market? "We try to be more innovative than our competitors in responding to the needs of the marketplace," Kelley replies. "We encounter competition in many forms, including the alternative risk market. We must meet our customers' needs, or they'll seek other options. We believe that our clients appreciate the value-added services we offer."
To streamline the product development process, Lexington has established a New Products Department whose mandate is to create customized products for the high-risk exposures of specific industries. Among these coverages are simplified professional liability and excess loss for physician groups; sexual misconduct liability; managed care liability; and directors and officers liability for environmental service firms and manufacturers. Other areas for which Lexington has developed specialized coverage products are bloodstock transport, design/build liability, directors and officers liability (particularly for financial institutions and high-tech and biotech companies), franchisor errors and omissions, health care provider excess loss, intermodal contingent liability, and ostrich mortality.
Lexington's New Products unit allows the insurer to streamline the product development process and bring new products to market faster. The unit serves as a liaison among producers, insureds, and Lexington, an arrangement that allows for open communication and contributes to the development of flexible coverages and policy forms.
Programs are a priority
With almost $500 million in premium volume and more than 25 years of experience, Lexington's parent, AIG, is a major underwriter of program business through its AIG Programs unit. AIG Programs consolidates all major program business divisions within the AIG group of companies. This specialized unit offers program administrators, reinsurance intermediaries, agents, and brokers a single source for all their commercial property/casualty program business: large or small, national or regional, standard or high risk.
Lexington itself has developed programs to meet the needs of a diverse selection of niche markets: computer resellers, ambulance services, churches, certified nurse midwives, clinical research professionals, health care governmental liability, tattoo and body piercing shops, camps and clubs, bridge painters, animal mortality, pet health, tanning salons E&O, ski resorts, and managed care E&O, to name a few. Lexington has existing programs which producers can offer to their clients, or the producers can work with the insurer to develop new programs.
Multi-tiered distribution system
As was mentioned earlier, much of the credit for Lexington's low expense ratio goes to its diverse distribution system, which wins high praise from rating organizations. The insurer seeks to reach its clients through a number of channels: wholesale and retail brokers (both generalists and specialists), who account for about half of Lexington's business; Risk Specialists companies (AIG-affiliated surplus lines brokers located throughout the United States); London brokers; reinsurance intermediaries; and program and third-party administrators. This unique distribution structure allows Lexington a degree of flexibility not enjoyed by competing insurers and gives the company a significant measure of control over its acquisition costs.
Despite being the surplus lines market leader and one of the jewels in the crown of the world's largest insurance organization, Lexington doesn't transact business exclusively through major national and regional brokers. Historically, Kelley points out, his company has welcomed the opportunity to deal with retail independent producers. "Much of the business that comes into the excess-surplus market is not placed by major brokers," he comments. "Of a total of $9 billion to $10 billion in surplus lines premium volume, more than half is middle-market business. As a result, we know we must seek ways to increase our penetration of this market, and our best avenue is independent agents."
The key quality Lexington seeks in independent agents, Kelley says, is that they be "good advocates" for their clients. "They should honestly represent the client so our underwriters can make a fair, accurate assessment of the risk and properly underwrite it, price it, and set the terms and conditions of coverage."
Value-added services
In today's challenging marketplace, Kelley observes, it's not enough simply to offer leading-edge coverages. Increasingly, the competitive advantage is going to insurers that recognize the need to add value to the insurance transaction. Kelley joined Lexington in 1975 as a senior underwriter and over the years held positions of increasing responsibility in underwriting. Not surprisingly, he considers underwriting expertise to be of the utmost importance in the complex, highly specialized markets in which his company operates. Experienced, flexible, responsive underwriters unquestionably add value to Lexington's relationships with its producers and clients, Kelley says, as do a creative approach to problem solving and fast turnaround on coverage inquiries. On the claims side, claims professionals often work closely with underwriters and participate in meetings with producers and insureds. Lexington's broad range of risk management services is delivered both by in-house professionals and through strategic partnerships with outside legal specialists and consultants.
At Lexington, adding value is far more than just a buzzword, Kelley emphasizes. In each of its major niche markets, the insurer offers an array of services that are designed to enhance and solidify its relationships with clients. Here's a sampling of the services that are available to insureds in some key markets:
Employment practices liability
* Employment practices audits conducted by a leading law firm
* Toll-free EPL hotline
* In-house risk management consultant
* Dedicated in-house EPL claims staff
* HR/COMPLY, an electronic human resources compliance reference system
* Risk management educational seminars
* Lexington Executive Newsbriefs on employment-related issues
* Coordinating national defense counsel for multiparty litigation
Design and construction professionals
* Pre-claim prevention service
* Claims management service
* Contract review
* In-house risk management consultant
* Risk management educational seminars presented by a nationally known construction law firm
* Lexington Insurance Newsbriefs for design and construction professionals
* LexLetter Risk Management Edition for design and construction professionals
Health care providers
* Regional risk management education seminars
* Viewpoint for physicians
* "Lexington Executive NewsBriefs" for managed care organizations
* Risk assessment audits for managed care organizations conducted by a prominent health care law firm
Health care provider stop loss insureds
* Contract review and consultation
* Operation management assessment and consultation
* Recovery assessment
* Cap rate analysis
All of Lexington's value-added services are optional, and all are available to the client at no additional cost.
The "knowledge advantage"
With its outstanding reputation, vast capacity, and high level of expertise in product development, underwriting, claims, and risk management, Lexington appears poised to enter the new millennium with all the tools it needs to maintain its dominant position in the excess and surplus lines marketplace. What will that market look like over the next one to three years?
"The excess-surplus lines market is becoming not one market but many markets," Kelley responds. "People talk about the soft market/hard market cycle, and try to apply that construct to current conditions. What we're really looking at is many highly segmented markets, each of which will perform differently over the next one to three years. Some markets are contracting and prices are rising; others have huge capacity that's putting downward pressure on rates. There's substantial capacity today, but that supply may not continue to be so ample. In my opinion, the key determinant of success in the excess-surplus market will be what I call the 'knowledge advantage': superior skill in underwriting that's based on a deep understanding of the particular market segments an insurer targets."
If that's the recipe for success, there's no question that Lexington Insurance has all the ingredients. *
©COPYRIGHT: The Rough Notes Magazine, 1999