Randall G. Oates (left), vice president of the Financial Services Division of Executive Risk, Inc., and Stephen J. Sills, president and chief executive officer, meet in front of the video wall in the company's lobby.
O SPEED LIMIT." That's the unambiguous message on an official-looking black and white sign that bears the logo of Executive Risk, Inc., and it aptly describes the philosophy that drives this specialty insurance organization. In this article we'll talk with two top executives of ERI and find out how its "loose bricks" approach to marketing and underwriting is proving to be the linchpin of a highly profitable strategy. First, however, we'll briefly review Executive Risk's history and outline its organizational structure.
Launched in 1987 with a group of six employees, Executive Risk, Inc., is the joint venture originally formed by Aetna Casualty & Surety and Executive Re to underwrite directors and officers liability and related risks. The chief underwriter was Stephen Sills, now Executive Risk, Inc.'s, chief executive officer, who says, "We decided it was time to become an independent entity, because we had the expertise and capability to move into other lines." In addition, he comments, "We wanted to devise a compensation system that would truly reward employees for their performance." Executive Risk separated from Aetna in 1994. Now a publicly held entity with more than 500 employees, it is a specialized insurance holding company based in Simsbury, Connecticut, with four subsidiaries:
* Executive Risk Management Associates (ERMA) serves as underwriting manager for Executive Risk Indemnity, Inc. (ERII), and Executive Risk Specialty Insurance Company (ERSIC), and underwrites D&O, lawyers professional liability, miscellaneous professional liability, and other coverages for ERII and ERSIC.
* Executive Risk Indemnity, Inc. (ERII), is a specialty insurer that offers executive and professional liability coverages on an admitted basis in 48 states, Puerto Rico, and the District of Columbia. ERII is also a surplus lines insurer in Colorado, the Virgin Islands, and Connecticut, the domicile of its surplus lines subsidiary, Executive Risk Specialty Insurance Company (ERSIC).
* Executive Risk Specialty Insurance Co. (ERSIC) is a specialty property/casualty insurer that offers executive and professional liability coverage on an admitted basis in Connecticut and on a surplus lines basis in 49 states, Puerto Rico, and the District of Columbia.
* Executive Risk N.V. is a specialty insurer based in the Netherlands with offices in London and Rotterdam. Staffed with local underwriters, the insurer writes business worldwide and offers $35million in capacity for D&O liability, with various limits available for other lines.
Executive Risk's U.S. branch operations are organized into four regions--East, Central, South, and West--and it has offices in New York City, Chicago, Atlanta, Dallas, Houston, Pasadena, and San Francisco. The company writes a wide range of risks in five major coverage areas: D&O liability, professional liability, health care coverage, employment practices liability, and special programs. Its focus is on top decision makers who need protection from the personal liabilities that could result from their decisions.
Executive Risk offers D&O liability for a diverse group of business entities: public companies, private businesses, health care organizations, managed care organizations, nonprofit organizations, diversified financial institutions, community banks, general partners, securities broker/dealers, initial public offerings, and insurance companies, among others. Employment practices liability insurance (EPLI) is available for commercial businesses, financial institutions, franchise organizations, nonprofit organizations, professional firms, and family offices (organizations that handle the financial operations of wealthy families), as well as other classes of business. In the professional liability arena, Executive Risk writes coverages for law firms; accounting firms; employed lawyers; fiduciaries; financial services businesses; insurance agents and brokers; mortgage brokers and bankers; title agents, abstractors, and escrow and closing agents; and miscellaneous professionals.
In most of its markets, Executive Risk is competing for business with much larger insurers--but the company is motivated rather than daunted by this challenge. "We're strong in all of our markets," Sills declares. "We may not have the largest market share, but we believe we have the strongest products on the street--plus underwriters who can't be beat."
Underwriting comes first
"Casual but serious": Those words aptly characterize the corporate culture at Executive Risk, where dress is casual, interactions are informal, and sound underwriting is key. "We have a strong culture of service, making an underwriting profit, and simply being good people to work with," Sills says. "We hire bright, motivated people, imbue them with our culture, and give them the freedom to do what they're trained for." What they're trained for is aggressive yet disciplined heads-up underwriting, in line with Executive Risk's creative, can-do approach to its highly specialized markets. "We're very much an underwriting organization," Sills asserts. "To be successful, we believe we must have a well-organized underwriting function, integrated with the marketing and promotion of our products to brokers.
Stephen Sills (left) and Randy Oates explain that Executive Risk's marketing strategy is to search for "loose bricks" in the marketplace--price, coverage or service needs that are not being met. Then it designs products which fill those needs.
"We underwrite to the risk, not to the market," Sills continues. "Some companies operate the other way: when prices are soft, they pull back; when prices are hard, they write a lot of business. Or, if the market is soft, their rates are cheap, and vice versa. We think our philosophy makes for a much stronger underwriting organization, and a much more reliable partner to our brokers and insureds."
Adds Randy Oates, vice president of financial services underwriting, which handles coverages for public and private commercial organizations and financial institutions: "We pride ourselves on our collaborative underwriting process. It doesn't slow us down; we can be just as quick making a decision, but the more eyes that see a risk, the more creative we can be with it. We approach each risk on its own merits--there's no cookie-cutter underwriting here."
Oates has set up a "war room" table in the underwriting department, where a senior underwriter is always available to offer help and guidance on challenging risks. On high-tech submissions, the collaborative process extends beyond underwriters to include experts from Executive Risk's MIS department. And to be sure that its lawyers professional liability coverages precisely meet clients' needs, Executive Risk again focuses on experts--in this case, hiring top lawyers who understand the exposures faced by their colleagues. "A law firm who's paying seven figures for professional liability insurance shouldn't be dealing with some general property/casualty underwriter who's recently been recruited to underwrite lawyers professional liability insurance," Sills asserts. "We employ top-line lawyers who can talk with our clients lawyer to lawyer. In this way, we bring added value to the law firms we insure and develop premium rates that accurately reflect their exposures."
Building bridges to brokers
Along with its strong emphasis on quality underwriting, Executive Risk places an equally high premium on its relationships with brokers, on whom it depends for profitable business in its complex specialty markets. Executive Risk nurtures these relationships in a number of ways: by giving brokers complete information on the products it offers; by responding to submissions on a timely basis; and by being honest about its underwriting decisions. "As soon as we've reviewed a submission, we tell the broker whether we will or won't quote it," Sills says. "Brokers are busy. They're under extreme cost pressures. They don't have time to drag a risk through the market. If we don't want to write a piece of business, we just say so." What's more, "When brokers call us, they don't just talk to a rater," Sills observes. "They're talking to an expert."
A key market for Executive Risk is program business. "A broker with special expertise in a particular area may have built up a book of business with a carrier and even been granted underwriting authority, but doesn't have a good relationship with that carrier," Sills explains. "In our experience, being a stable, faithful partner to such a broker is an excellent opportunity for us as well as the broker." He cites the example of an agency that had 50% of the market for psychologists professional liability. "They were having problems with their carrier. We saw the potential and swung into action to file policy forms." At Executive Risk, getting a specialty program up and running doesn't have to be a long drawn-out process, Sills notes. "We can indicate almost immediately if we're interested--it takes us one week to run an actuarial feasibility study. This kind of responsiveness makes us a favorite with brokers."
"To us, sitting around waiting for a hard market isn't a strategy. Over time, we plan for 15% annual growth in premium volume and earnings per share..."
--Stephen Sills, president and CEO
"Loose bricks" approach
As was noted earlier, the cornerstone of Executive Risk's aggressive yet disciplined underwriting strategy is what it calls the "loose bricks" approach. "We can identify a 'loose brick' by a mispriced product, poor service, or a coverage that doesn't adequately serve the insureds," Sills says. "Everyone in our organization is asked to keep an eye on the marketplace for opportunities to fill in these gaps. If we see a coverage or a service that isn't being handled appropriately, we explore the situation to see if we can be a player in the market." An example of such a "loose brick" was D&O liability for nonprofit hospitals. "We conducted focus groups among risk managers for these institutions and identified needs that weren't being met," Sills explains. "We now have a 40% share of the market with a product that's endorsed by the American Hospital Association."
Another example of an underserved market segment is cited by Randy Oates. "There was a need for privately held and closely held companies to have D&O and employment practices liability coverage to protect them against claims from employees, clients, customers, competitors, and regulatory agencies," he says. To fill in this "loose brick," Executive Risk created a policy called The PowerSM, designed for private companies of any size or type. "We're known in the market for innovative products," Oates observes. "We know our competitors will copy us, so we always think ahead to the next product innovation."
Additional instances of loose bricks and Executive Risk solutions are easy to come by. "Our FLEX policy (FLoating EXcess) provides an additional layer of protection over existing scheduled professional liability and other coverages," Oates explains. "With FLEX, the risk manager doesn't have to buy high limits for each underlying coverage; it's much cheaper than creating individual 'silos' for each coverage," Sills adds. Launched last December, FLEX had already met one-year premium expectations by October of this year. "Brokers who are carefully monitoring their insureds' exposures are always looking for new products--and for ways to save their clients money," Oates comments. "In our areas of expertise, they'll find it easier to deal with us than maneuver through a standard company."
In the area of media liability, "we found that the available policies hadn't kept pace with the changes in this industry," Sills says. "We brought in libel and slander lawyers to help us develop liability policies that would meet the unique needs of media organizations." In contrast to the usual named perils approach, Executive Risk's NewsMediaSM Liability insurance and Multimedia Liability insurance provide comprehensive coverage for risks that arise out of the core functions of media organizations: gathering information and communicating that information to the public.
Early last year, Executive Risk identified yet another "loose brick" opportunity and created individual employment practices liability policies for franchises. "We've gotten franchisor endorsements and have been able to successfully penetrate individual franchisees," Oates says, adding, "We're enjoying our greatest success with food, beverage, and restaurant franchises, and we're also writing substantial numbers of other non-food franchise operations, including rental car agencies and card stores."
Executive Risk also discovered an underserved market very close to home: errors and omissions coverage for insurance agents and brokers. "We found that some E&O policies don't meet the needs of brokers with specialized operations," Sills observes. "We developed BrokerNetSM, which we can customize to meet an individual broker's needs."
Ahead of the game on Y2K
These days, you can't pick up a trade journal or a consumer publication without reading about the Year 2000 problem. The clock is running, and Executive Risk is addressing the issue with its Year 2000 Project Office, a multi-phase initiative designed to ensure that the organization's automated systems are fully Y2K compliant well before the new millennium. To keep brokers and clients informed of its progress, the company has created a section on its Web site dedicated to Y2K that provides periodic updates of its Y2K status and also offers links to other Y2K Web sites.
Looking to the future
Invited to gaze into the crystal ball, Stephen Sills and Randy Oates are sanguine about what they see ahead for Executive Risk. "The market keeps getting more competitive. Inexperienced companies that can't make it in their core businesses are entering ours," Sills observes. "To us, sitting around waiting for a hard market isn't a strategy. Over time, we plan for 15% annual growth in premium volume and earnings per share, and 15% after-tax ROE. We can continue to do that by using the skill sets that got us where we are--and by continuing to enjoy what we're doing." *
©COPYRIGHT: The Rough Notes Magazine, 1998