John Degnan, president of Chubb Corporation.
After decades of making obeisance to the great god Diversification, the property/casualty business is now being forced to take account of the drawbacks of a strategy that once reliably produced impressive growth and profits. With the domestic commercial lines market just beginning to climb out of the cellar, insurers increasingly are seeking to sharpen their focus and concentrate on product lines and markets where they have confidence they can make a profit.
One such insurer is the Chubb Group, whose management team is pursuing growth in carefully defined markets while at the same time divesting itself of interests in non-core business areas. We'll talk with top executives of Chubb to learn the key elements of its strategy, the impact of this new direction on independent agents, and the results the insurer expects to achieve. For an overall view of Chubb's goals and initiatives, we'll begin with John Degnan, president of The Chubb Corporation, which serves as the holding company for Chubb's insurance subsidiaries. Then we'll speak with executives from Chubb's major divisions: standard commercial lines, personal lines, specialty commercial, and multinational.
When and why did Chubb decide to pull back from the "be all things to all people" approach that had dominated the property/casualty business since the late 1960s, when carriers like Chubb began to form holding companies to serve as the vehicles for diversification?
Well into the 1990s Chubb, like most of its peers, was committed to offering a diversified portfolio of products and services to a broad market. "In 1997, we decided a better strategy would be to divest our interests in non-core businesses--life insurance and real estate investment--when the market would pay us a hefty reward, and focus on what had been our core business throughout our 115-year history: property/casualty insurance," Degnan explains. "We backed away from being a global financial services provider because we didn't believe we had to own it all. We redefined our mission: to be the preeminent global provider of specialized insurance products. The price we received for our life insurance company was a good return on the investment, and the sale of our real estate holdings reduced our debt and gave us a low debt to equity ratio. This allowed us to make acquisitions like Executive Risk. Our strategy is to grow organically and make strategic acquisitions that bring us products or expand our geographic spread, not just increase our market share. We don't see ourselves as a great consolidator."
Multinational expansion
A key corporate goal for Chubb is to derive 33% of revenue from outside the United States by 2005. What was the rationale for establishing this objective, and how does Chubb plan to achieve it? "The domestic property/casualty business is mature," Degnan observes. "We see significant growth opportunities overseas." Non-U.S. business now makes up one sixth of Chubb's revenue, Degnan says. "Had we not disengaged from Royal & SunAlliance in 1995, the percentage would be higher. I'm confident we'll achieve our goal." Chubb now has 132 offices in 31 countries, plus managing general agencies in Hong Kong and Denmark and a surety company in Argentina. "Chubb is one of only two U.S. property/casualty companies with licenses in China; we have offices in Beijing, Shanghai, and Shenzhen," he comments. "We're also one of only two U.S. insurers that has approval to do business in India. By 2005 we expect these offices will be contributing significantly to our growth."
Strategies for the future
What other major goals and initiatives does Chubb plan to pursue over the next few years? "In the short term, our first priority is to restore our standard commercial lines book to something approximating profitability," Degnan responds. Second, "We want to better position ourselves to compete in the specialty commercial market. We're making a recommitment to improving our ability to bring new products to the market. Executive Risk (which Chubb acquired last July) is a smaller, more entrepreneurial entity with a shorter product development cycle," he explains. "By combining our strengths, we can create a powerful marketing opportunity." Another key objective is to make use of Internet technology to streamline functions and control costs. "We want to find ways to use the Internet to accelerate growth and support our agents," Degnan explains. "Our agents now have access to online claims information and multiline quoting facilities. Too many insurers see the Net as a vehicle for direct sales, instead of using it to enhance the efficiency of agency operations and improve customer relations."
For a closer look at each of Chubb's major business units, we'll talk with the executives in charge of those units, beginning with standard commercial lines.
COMMERCIAL INSURANCE
Producing 26% of the insurer's
$4.2 billion commercial premium volume for 1999, Chubb Commercial Insurance manages middle market package, workers compensation, auto, and umbrella products. Senior Vice President and Managing Director Paul J. Krump, an 18-year Chubb veteran, is worldwide manager of the division and is responsible for turning this unit around and restoring it to profitability. The division targets a wide range of middle market risks: high tech (including electronics and software), biotech, broadcasters, wholesalers, metal manufacturers, and museums, among others. Selected products also are offered to smaller accounts.
As the country's sixth largest package underwriter, Chubb is known for its expertise in this complex arena. A key offering in the insurer's product line is the Customarq package, which is available worldwide in three versions: the Classic, which carries the broadest protection and highest limits on property, liability, and crime coverage; the Limited, with lower limits and a reduced premium; and the Essential, providing basic coverages at a lower premium. U.S. and foreign exposures can be insured under one policy; and when a customer purchases the global extension feature, Chubb will pay for losses outside the United States in the currency the customer requests.
Chubb recently introduced in France, a package program called Avantage that can be customized for specific industries. There's Avantech for high-tech risks, Avantal for the metal industry, and Avantime for mercantile customers. The new package concept has been very well received, Krump says. "It shows how adaptable we are, and how cognizant we are of the markets we're in. We're taking ideas like this overseas, and we anticipate significant package growth rates in the United Kingdom, France, and other selected European countries."
Small business players
In addition to serving a wide range of mid-market risks, Chubb also pursues business in selected small business classes. "Our target market is accounts that generate premiums between $5,000 and $35,000, where we have high name recognition and customers appreciate our broad products," Krump explains. The key to success in the small business market, he emphasizes, is the independent agent. "Our agents help us select desirable risks. When an agent brings us a piece of business, we know the customer wants our reputation and coverage and won't worry about getting the lowest price. We pursue rate adequacy with a defined exposure base, so we can provide better insurance to value than if we offered blanket coverage on uncertain loss exposures."
Chubb's underwriting approach in the small business market is highly selective, Krump says. "For the agent, only one out of 10 pieces of business will fit our profile. We also use tight renewal screens. We don't want to disappoint the agent at claim time." Clients who fit Chubb's profile, he comments, bring a lot of positives to the table. "They're careful and loss cost conscious; they care about their employees, and they value our return to work procedures."
Turnaround strategy
As was mentioned earlier, Krump is charged with returning Chubb's standard commercial lines business to profitability. How does he plan to meet this daunting challenge? "Our underwriting philosophy has not changed," he asserts. "We still want to be the premier insurer for the middle market customer; we also want to be the most profitable provider of value-added products and services. We must find customers who value what we offer. We don't expect to make money on every customer every year, but we do want our book to be profitable over the long term."
Paul Krump, senior vice president and worldwide manager of Chubb Commercial Insurance.
Krump articulates the key elements of his strategy. "We arm our field people with product knowledge and sales training, and we give them considerable underwriting authority. We're using loss control to the fullest to improve profitability. We have 400 loss control experts around the globe whose task is to minimize risk exposures. We're also doing a certain amount of culling. We're telling our customers why we need to increase rates. Some accept it because they appreciate the value we provide; others choose to go elsewhere. Our overall portfolio is underpriced; we must improve it in a judicious manner in light of individual experience and trends in specific industries. Further, we need to make sure our new business is profitable."
In implementing its middle market turnaround strategy, Chubb places a high value on the contributions of its independent agents. "We truly view agents as partners, and we always look for ways to enhance our partnership with them," Krump declares. "We care deeply about our agents and insureds, and we like to think they care about us and our long-term survival. Those relationships pay tremendous dividends, both literally and figuratively."
PERSONAL LINES
As the sponsor of public television's best-watched program, The Antiques Roadshow, Chubb has the opportunity to enhance even further its reputation as a leader in the market for high-end personal lines products and services. The decision to pursue the affluent market dates back more than 25 years, and it's allowed Chubb to create a stable, highly profitable niche of intensely loyal customers for whom price is perhaps the least important factor in the insurance equation.
Richard Ort, senior vice president of the Personal Lines Division.
Chubb & Son Senior Vice President and Managing Director Richard Ort, a veteran of more than 30 years with the insurer, is worldwide manager of the Personal Lines Division. For 1999 the division produced premium volume in excess of $1.5 billion, up about 11% from the previous year, and recorded an enviable 89.9% combined ratio including catastrophic losses.
Why did Chubb decide to focus on the upscale market? "In the mid-1970s, we concluded that 75% to 80% of personal lines was commodity business sold on the basis of price, and that the trend was likely to increase," Ort says. "Our analysis showed there was a segment at the top end where we could add value: clients with multiple homes and higher liability exposures, who have more to protect than the average insured. These clients see insurance as part of their financial planning program, not as a head of lettuce. They wouldn't choose an attorney or a financial adviser on price, and they have the same attitude toward insurance."
To test the water, Chubb put together a personal lines package for the high-end market, with value-added services and a price tag to match. "It's proved to be a pretty smart approach," Ort comments. "Over time, this market has consistently generated higher profit margins than commodity-type business."
In the upscale personal lines market, Ort says, "We're dealing with an intangible product, so we must identify what the customer really values. If we expect customers to pay more on the front end, we must provide service that will knock their socks off." An example is Chubb's complimentary home appraisal service, where a trained appraiser visits an insured's house to determine the appropriate amount of homeowners coverage and to offer safety and loss prevention recommendations. "This is one way we show insureds that Chubb cares about them and what they have, and that helps us," Ort remarks. Equally important to affluent clients, he says, are quick, efficient policy issuance and updating and prompt, responsive claims handling. In fact, he declares, "Nothing is more important than top-quality claims service."
Customized solutions
The linchpin of Chubb's portfolio for affluent clients is the MasterpieceTM series, a package of personal lines coverages that can be tailored to the insured's specific needs. Clients can purchase homeowners protection for their primary residence and for vacation or city homes, with deluxe or standard contents options; vehicle coverage, with an optional agreed value feature; valuable articles protection for jewelry, fine arts, and collections; excess liability; and yacht insurance. Coverages are broad, typically with high limits and few exclusions.
Chubb recently rolled out a high-value auto policy that incorporates features research shows are valued by the affluent market: replacement parts from the original manufacturer, body shop of the insured's choice, and coverage tailored to the vehicle's true replacement value. Another new product is a program that will insure any engagement ring, anytime, anywhere, for its full agreed value. The insurer also is looking at ways to protect the expensive home office equipment used by an increasing number of clients. Yet another concern is the growing problem of identity theft, which Chubb plans to address by incorporating coverage into its homeowners policy.
Changing face of competition
As one of a handful of carriers that target the affluent personal lines market, Chubb encounters considerably less competition than it would as an insurer of bread and butter risks. "We've had relatively less competition in the domestic market compared with commercial insurers," Ort remarks. "We think that will change; there's increasing recognition of the growth and profit potential. With the passage of financial services reform, we expect banks to become more involved. As for investment houses, they're very likely to get into insurance, as they have the capacity. They may decide to securitize insurance."
Dino Robusto, managing director of the Multinational Resource Group.
In response to these new challenges, Ort says, "We're working on ways to provide more global coverage and to offer seamless solutions to our customers who may, for example, have a secondary residence in the United Kingdom or the Caribbean. Regulatory considerations make this task difficult, but it's a legitimate customer demand, and one we must address."
In today's rapidly evolving market, "The biggest challenge a company like ours faces is the urgent need to grow so we can meet our shareholders' expectations. Growth rates of 3% or 4% are not satisfactory; we must aim for 15% growth, and to do this we need independent agent partners who are as committed to growth as we are. We value our agents, and we want to work with them to achieve a dynamic level of growth."
SPECIALTY COMMERCIAL LINES
Posting a 1999 combined ratio of 93.6 on premium growth of 9.4%, Chubb Executive Risk (CBER) is one of the Chubb Group's fastest growing and most profitable business units. With the acquisition last summer of Executive Risk of Simsbury, Connecticut, Chubb took a giant step toward becoming an industry leader in the rapidly expanding field of specialized professional liability products. To learn about CBER's operations and objectives, we'll talk with Paul Romano, a senior vice president of Chubb Executive Risk who serves as worldwide manager for health care insurance. Romano, a veteran of Executive Risk, is a member of the senior management team of the subsidiary that generated 1999 written premium of $1.078 billion.
"Our core business is the product families of D&O, EPLI, crime, and fiduciary liability, and we're increasingly focusing on E&O," Romano explains. "We use these core products in the marketplace for large publicly traded commercial, private entity, and nonprofit risks. We offer derivations of our core products to engage segments of markets that have unique needs or buying preferences. As Chubb and Executive Risk have come together, we've increased our local focus in areas like E&O for accountants, large law firms, and health care organizations. We are well on our way to creating a new company that offers a breadth of products and services greater than the sum of its parts. Our combined organization has either #1 or #2 market position in D&O, EPLI, fiduciary, and crime."
Regarding Chubb's merger with Executive Risk, Romano says, "The merger is behind us, and our task now is to manage remaining transition activities to closure and demonstrate the significant depth Chubb Executive Risk offers the marketplace. We recognize that our clients originally chose either Chubb or Executive Risk in the past. We need to be sensitive to their preferences and work with them to maintain their confidence and support. We continue to offer both companies' policy forms, and we plan to work through the integration process client by client, product by product. We'll offer separate Chubb and Executive Risk policies as long as clients see this as adding value."
Staying ahead of the game
The market for executive risk and professional liability coverages is subject to a great deal of volatility because evolving technological, legal/regulatory, medical, and social trends are constantly creating new liability exposures. How does CBER keep its finger on the pulse of this dynamic market and respond to clients' ongoing needs for new products and services while at the same time achieving profitable underwriting results?
"We believe these dynamics in the marketplace offer us the opportunity to run this as a 'craft' business," Romano responds. "To the extent the market becomes commoditized, our franchise loses value. On a day-to-day basis, our relationships with agents, customers, and industry associations, as well as trends in our claims experience, tell us a lot about how our products are performing and what the market needs. We're committed to being a market leader in providing meaningful coverage solutions to our clients."
New product offerings
Two new products from CBER exemplify its commitment to address emerging needs in the marketplace, Romano says. Plan Purchaser Protection was developed in response to increasing negative publicity aimed at managed care organizations. The product, which covers employers' managed care liability, can be written on a stand-alone basis or added by endorsement to CBER's fiduciary liability policy. The endorsement option offers enhanced bodily injury coverage for claims that result from benefit denial or delay; managed care provider selection; and plaintiffs' legal expenses. The stand-alone policy provides the coverages offered in the endorsement and also covers employers' direct and vicarious liability for breach of confidentiality; claims service, utilization review, and case management; and vicarious liability for medical malpractice. Coverage applies to all major health benefit plans: health, vision, and dental.
Another CBER product innovation is SafetyNetSM, an all-risk media liability policy that covers exposures arising out of a company's Web site, e-mail and other electronic communications. An optional feature protects against domain name infringement by others. "We believe every company with a Web site has liabilities that can be addressed by our product," Romano asserts. "SafetyNet represents a new frontier in the dynamic race for Chubb and its competitors to respond to liabilities that are just beginning to become known. Our coverage is comprehensive and responsive; it will evolve over time, and it's likely to change frequently to meet emerging needs."
Setting priorities
In the volatile and competitive specialty commercial market, standing still is the same as moving backward. What are some of Chubb Executive Risk's key initiatives for the future? "Creation of new products will be a very high priority over the next three to five years," Romano responds. "We're always looking for ways to meet emerging needs, and for new ways to meet existing needs. We'll continue to position ourselves as an organization that is sought out for all kinds of solutions by producers and clients. We believe we can achieve substantial growth by offering a degree of specialized expertise that hasn't been available in the marketplace."
Essential to CBER's continued growth and success, Romano says, is the efficient use of automation technology. "We're making progress in developing e-commerce capabilities to support producers and provide service to clients," he says. "We understand the importance of getting information to them on a timely basis." Looking ahead, "A big priority for us is using technology to manage our business more efficiently and comprehensively. We believe technology must be used to conduct business as opposed to merely supplying or exchanging information. We're also committed to being a leader in this area."
MULTINATIONAL RESOURCE GROUP
As Chubb Corporation President John Degnan mentioned earlier, a key initiative for Chubb is to expand its non-U.S. business to 33% of revenue by 2005. Spearheading that effort is Dino Robusto, senior vice president and managing director of Chubb & Son and worldwide manager of the Multinational Resource Group (MRG). With 132 offices in 31 countries, Chubb has locations in markets that together produce 93% of the world's property/casualty premium.
His group, Robusto explains, uses a unique business model. Initially, he says, "Chubb concentrated on establishing branch offices from which we could build indigenous markets and also service the overseas needs of domestic businesses. "MRG was started in 1995 to take Chubb's globalization strategy to the next level. Our customers were going global, and we needed a more efficient mechanism to help these U.S. clients." MRG supports all of Chubb's divisions overseas. "We help our U.S. underwriters understand overseas exposures, price coverage appropriately, and place underliers. We have the ability to issue policies in local currencies overseas, and these policies are complemented by our multinational controlled master policies, which are written in U.S. dollars."
At present, 65% of the Multinational Resource Group's customers are domiciled in the United States, with the remaining 35% consisting of non-domestic business. "In 1998 we put an MRG team in London to target European Union risks that were expanding across borders outside Europe," Robusto explains. "We also make it a priority to follow trends in U.S. overseas expansion. Currently, 50% of the underliers we place are in the United Kingdom; 35% are in Asia and Australia; and 30% are in Latin America."
Product innovations
To support the overseas expansion of Chubb's domestic business while at the same time responding to the needs of indigenous markets, the Multinational Resource Group devotes considerable effort to creating products that address a host of complex exposures. "In 1983 we developed the first policy to cover the overseas property and liability exposures of American exporters," Robusto comments. Today the Exporters Package Portfolio provides a wide range of coverages: blanket accident, business income, commercial auto, crime, employment-related practices, excess medical, foreign voluntary workers compensation, general liability, kidnap/ransom and extortion, open ocean cargo, personal property, political risk, and products withdrawal expense.
U.S. companies that operate overseas face a significant set of risks they don't confront in their domestic activities. Among these risks are revocation of operating licenses by the host government; return of infrastructure to local competitors by the host government; asset confiscation; nationalization of an industry; and property damage caused by local civil unrest. Known collectively as political risk, these and a host of other overseas exposures aren't addressed in standard property/casualty policies. To provide the needed coverage, Chubb offers confiscation, expropriation, and nationalization (CEN) insurance. Other political risk products are contract frustration, wrongful calling of guarantee, and non-repossession insurance.
Special service solutions
A key to Chubb's success in the international market, Robusto says, is its commitment to providing top-notch service to policyholders and agents. "Our newly created Multinational Claim Unit (MCU) provides 24/7 claims service with a global 800 number and translation facilities for 140 languages," he explains. "We have 1,300 claims professionals throughout our branch office network, and we have one of the largest loss control facilities with 400 experts."
For producers, "Our correspondent services team helps our agents establish relationships with brokers overseas. We introduce them to brokers who have appointments with our local offices and who understand Chubb's operations." His group also offers agents assistance in prospecting and account rounding. "An Internet-based system helps us identify companies that are expanding their activities into additional countries. We forward this information to our underwriters electronically so they can work with local agents to pursue these new business opportunities."
Like Chubb's other major divisions, the Multinational Resource Group is using technology to manage its substantial portfolio. "Three and a half years ago, we started to develop the Multinational Admitted Placement System (MAPS)," Robusto says. "It has evolved into a state-of-the-art tool that automates our entire underlier placement function. The system is Net based and accessible by any browser. Our underwriters use it as a workflow management tool, and it's also available to affiliated insurers where we don't have branch offices; we can connect them directly via a URL. In the second half of this year, MAPS will be piloted with a small group of our agents, and then we'll roll it out to the others. Our agents and brokers tell us that no other carrier provides this level of service."
Branch office strategy
As was mentioned earlier, Chubb's multinational strategy is based on a network of branch offices, as opposed to the acquisition or establishment of separate insurers in overseas markets. "This gives us an unparalleled advantage in the marketplace," Robusto asserts. "We're the only insurer with a truly integrated network of overseas branch offices. Other carriers treat their offices as separate profit centers, making it difficult to coordinate coverage and services. Our offices are tightly knit together, and each office has a dedicated multinational account coordinator who is familiar with the local market's policy forms and regulations. This is a big way we differ from other companies."
A new commitment to agents
Amid all the talk--and action--surrounding the use of alternative distribution methods, Chubb Corporation President John Degnan says, Chubb is renewing its commitment to independent agents as the company's primary sales channel. "A few years ago Chubb had a reawakening as to the value of independent agents," he remarks. "We continue to grow our business through independent agents at a far greater rate than through multinational brokers or large regional producers. Our relationships with independent agents are fueling our growth. If we don't honor that achievement with a return commitment, we'll be shooting ourselves in the foot," he asserts.
As proof of that commitment, "We've rolled out profit-sharing captives for agents," Degnan says. "Agents can take some of their contingency commissions in heavily discounted shares of Chubb stock; that makes them owners of the company. We've had a great response." What's more, "We're making strategic investments in our agency plant. Also, by remaining a fairly consistent market, we're able to maintain good agent relations. We're managing our book of business in such a way that agents will always play a vital role in what we do," Degnan declares. "We work with our agents as partners. Because Chubb is in a relatively strong position with respect to capital and reserves, we have a better opportunity than many companies to improve our relationships with agents. We believe independent agents will remain trusted advisers to their insurance buyers for the foreseeable future. They may have to retool and sell other products, but people trust their agents for advice and coverage explanations. Chubb is very bullish about the role of independent agents, so long as they're willing to compete aggressively in financial services as well as insurance. We think our customers will prefer one-stop shopping with an agent to shopping on the Web."
In a market that abounds with complex and often daunting challenges, the Chubb Group clearly is positioning itself to be a leader, from New Jersey to New South Wales. Using a powerful combination of traditional values and next-generation technology, the venerable insurer is preparing to carry its franchise to the farthest reaches of the globe--and possibly beyond. *
©COPYRIGHT: The Rough Notes Magazine, 2000