Ralph J. Palmieri, president and chief operating officer of First State Management Group (center), meets with Edward P. Neuberger, first vice president (left) and Christian J. Maciejewski, CPCU, RPLU, senior vice president.
In today's volatile and challenging property/casualty marketplace, the once distinct line between standard and specialty business has blurred to the point where some even question its existence. With standard carriers moving aggressively beyond their usual bounds, excess-surplus and specialty lines insurers are facing intense competition on both pricing and capacity.
What the seasoned veterans of specialty business understand better than anyone else is probably their saving grace: that over time, competition comes and goes, but there's nothing more important to long-term success than maintaining a stable presence in the specialty marketplace.
An organization that's firmly committed to this principle is First State Management Group (FSMG), the exclusive excess-surplus and specialty underwriter for The Hartford Financial Services Group. Backed by 50-plus years of experience, FSMG today is a leading writer of surplus and specialty lines with $238 million in gross annual premium. In this article we'll talk with the group's president and chief operating officer, Ralph Palmieri, and with other FSMG executives to find out how the group positions itself for success in today's demanding marketplace and how it serves producers and clients in its diverse specialty areas.
First State Management Group was incorporated in 1989; its roots in excess-surplus and specialty lines, however, date back to 1948. First State was acquired by Hartford in 1971, and it's unique in the Hartford insurance organization because of its wholesale (as opposed to retail) distribution system. FSMG operates primarily on a nonadmitted basis through Pacific Insurance Company; it writes admitted business through Trumbull Insurance Company and Twin City Fire Insurance Company. First State's home office is in Boston, and it operates six regional offices nationwide: in Boston, Atlanta, New York City, Chicago, Los Angeles, and San Francisco. Senior Vice President Chris Maciejewski, CPCU, is responsible for field operations at the six regional offices and also manages the home office program underwriting unit.
Clear-cut mission
When asked to describe First State Management's mission, President and COO Ralph Palmieri articulates a concise three-pronged summary. "Our mission is (1) to provide Hartford an effective means of distributing specialty products to wholesale brokers; (2) to offer an array of specialty and excess-surplus products in areas where we have underwriting competencies; and (3) to partner with other Hartford units by helping round out the total product portfolio made available directly through Hartford agents."
President and COO Ralph J. Palmieri says part of First State's mission is "to partner with other Hartford units by helping round out the total product portfolio made available directly through Hartford agents."
Over the years, FSMG has developed both depth and breadth of underwriting expertise in a number of markets: excess casualty, property, primary general liability, professional liability, and programs. The group also writes a small amount of high-value homeowners business. Currently FSMG is focusing on two areas it believes offer significant growth and profit opportunities: property and professional liability. "Professional liability is an area we've been highlighting in our strategic planning and growth objectives for the next three to five years," Palmieri explains. "Our involvement in the errors and omissions market dates back to the 1950s; we wrote the first E&O policy for the mutual fund industry. We still have policies in force that go back several decades."
Chris Maciejewski, who is responsible for field operations, emphasizes First State's flexibility in accommodating regional differences.
FSMG is organized into divisions by type of specialty. "Underwriters for all of our major product lines are located in our regional offices," Palmieri explains. "They have substantial underwriting authority, and they also interface with our home office people." Let's look at the products and coverages each division offers, then explore in more detail how First State Management is positioning itself in its key markets.
Excess casualty division
FSMG actively seeks general casualty and high-hazard casualty business for umbrella, excess umbrella, and excess liability risks. Coverage is written on either an occurrence or a claims-made basis and includes excess general liability including products; excess auto liability; umbrella liability (primary or excess); and other general casualty coverages and unique forms. Classes of business in which FSMG's underwriters have particular expertise are construction wrap-up, many kinds of contractors, hotels/motels, and manufacturing (all types).
Ed Neuberger, who joined First State in 1995, is responsible for First State's fast-growing professional liability operation.
Property division
FSMG's property division has two units: one for specialty property, which is mainly admitted business written for major accounts, and the other for small and medium-sized accounts, most of which are written on a nonadmitted basis. Policies are written on manuscript or ISO forms, and available coverages are all-risk (including or excluding earthquake); inland marine (all types); DIC (including flood and earthquake); and surcharged fire business. Classes of business run the gamut from amusement parks to warehousing, and include habitational, institutional, manufacturing, health care, and retail facilities, as well as unique coverage such as prize indemnification and special event covers.
Primary general liability division
This unit offers a broad range of general liability coverages for manufacturers and contractors; real estate schedules; products/completed operations; owners and contractors protective liability and railroad protective liability. Coverage can be written on either claims-made or occurrence policy forms, and numerous special enhancement endorsements are available. The focus is on accounts with low claim frequency; however, the group will consider higher frequency accounts or accounts written in conjunction with a self-insured retention layer.
Professional liability division
Through this unit, FSMG offers comprehensive professional liability and E&O programs for a variety of professionals. Both stand-alone and program risks are entertained. The forms are claims-made, pay on behalf of, and defense within the limit. Coverages are available for architects and engineers, consultants, employee benefit administrators, ERISA and non-ERISA pension fund trustees, fiduciary liability, employment practices liability, investment counselors/advisors, miscellaneous E&O, trustees liability/trust management, and real estate agents E&O. FSMG also offers programs for trustees of self-insured funds, customs brokers and freight forwarders, and architects and engineers.
Program division
This division offers programs for primary and excess liability and professional liability, as well as property and inland marine. Coverages can be combined into packages, and programs are available for associations. Policies are written on both an admitted and a nonadmitted basis. FSMG writes property and inland marine for arts and crafts dealers and dealers of various collectibles. It also offers lawyers professional liability, liquor liability, contractors liability, and liability for a wide range of health care facilities. CGL and professional coverage are offered on a claims-made or an occurrence basis, and physical and sexual abuse coverage is also available.
Focus on financial services
Some 40% of First State's total professional liability premium volume is derived from financial services business. Heading up the professional liability division through which these coverages are written is First Vice President Edward Neuberger. In financial services, he emphasizes, stability and longevity are major determinants of First State's success--coupled with creative underwriting and a thorough understanding of the industry. "Many of our customers in financial services--mutual funds, institutional investment advisers--have been with us for many years because of the pioneering efforts of our predecessors," Neuberger explains. "We stay current with trends in the industry, and we make sure our policies are consistent with the needs of our insureds." An area in which First State has a long history of underwriting competence, he says, is fiduciary liability. "Fiduciary liability was greatly affected in the 1970s with the passage of ERISA (Employee Retirement Income Security Act), which essentially codified that coverage. First State was a pioneer in developing policies to comply with the requirements of the law."
As was mentioned earlier, First State has targeted its professional liability business as a major growth area in the years ahead. "In our 1995 strategic planning, we assessed our position in professional liability," Palmieri says. "We had a sound but somewhat static platform from which to grow this business. At that point we brought in Ed Neuberger. He has extensive knowledge of the business, plus producer contacts nationwide. Many people know him, and they came to First State when he joined us. He's been busy putting together an impressive team of underwriters, and we're placing some of them in our branch offices so they'll be closer to our markets."
Neuberger clearly is having a substantial impact on First State's professional liability operation. "Our professional liability operation is a strong growth engine for us, and we've experienced significant premium growth every year since 1995. In fact, if we meet our projections by the end of 1999, we'll have achieved growth of 400% since 1995," Palmieri says. "The market for professional liability is extremely competitive, but we're growing through additional product offerings, as well as additional penetration of regional markets."
Moving into EPLI
"When I came to First State, there was a solid base of financial services and ERISA products," Neuberger explains. "Since then, we've brought on several major new products: one of which is employment practices liability insurance, or EPLI. We decided early that we wanted to be a responsive player in the market for employers with 100 to 1,000 employees. We crafted products with broad definitions of employment practices and who is covered. We've continued to fine tune this product; it's being modified and amended in the marketplace." In this process, First State goes right to the source: its customers. "We work with customer groups to identify coverage enhancements and meaningful services we can offer with the product," Neuberger says. "It's in the area of services that we have the best opportunity to differentiate ourselves. For instance, our toll-free help line and our CD-ROM-based employer handbook are valuable tools to help our clients manage their exposures."
An attractive new market that Neuberger's group is currently cultivating is EPLI for real estate agents. "Real estate agents are typically independent contractors, and their coverage requirements are different from those of the ordinary employer-employee relationship," Neuberger explains. "We're also becoming a player in the market for real estate agents E&O," he says. "We met with a producer and several real estate firms to analyze their existing coverages and determine how we could enhance them. We've tried to make deductibles more affordable for individual agents, and we now offer a range of deductibles. We've also analyzed and revamped our lock box liability coverage to make it more responsive to our insureds' needs." In developing coverage grants for its wide variety of professional liability policies, Neuberger adds, "We generally try to use language that's familiar to the particular industry."
Popular products
A product that is very popular today, according to Neuberger, is miscellaneous E&O. "This works very well as part of a package, and it can be applied to many different industries," he notes. "We have broad-based capabilities here. It's an area where our underwriters can get excited and be really creative."
Also enjoying rapid growth, Ralph Palmieri says, is First State's lawyers professional liability program, which, under the direction of Senior Vice President for Field Operations Chris Maciejewski, is expanding from the New England states to other parts of the country. "With respect to professional liability in general, we're keenly aware that our insured's reputation is at stake," Palmieri says. "In professional liability, our guiding principle is: If you're a professional, your reputation is sacrosanct, and we'll do everything in our power to protect you. For this reason, we focus strongly on loss control and claims handling. We really feel that our claims service quality is such that if every one of our insureds had a claim, our retention rate would be 100%." In designing coverages and services for this market, he emphasizes, "We take a value-added approach. In conjunction with the Rhode Island Bar Association, we offer seminars that allow attorneys to qualify for continuing education credit. This year we purchased a loss control brochure on Y2K exposures and distributed it to all of our clients. We also assist our broker in publishing a loss control newsletter."
Media liability
Another hot product in specialty markets these days is media liability. "We're just starting to unveil our media liability facility," Neuberger says. "We've joined with partners in Kansas City to roll out state-of-the-art media liability coverages for newspapers, book and magazine publishers, and radio and television stations. This area is really heating up in the marketplace." As with professional liability in general, he observes, "Protecting the customer's reputation is the utmost priority, so top-quality loss prevention and claims service are essential."
Adds Palmieri: "In media liability, there's a smaller community of knowledgeable underwriters than in many other lines. We don't expect it to be as widespread as EPLI. Media liability is an area where defense lawyers really have to know their business in terms of First Amendment and constitutional law."
An important role First State plays as part of the Hartford conglomerate, Palmieri explains, is partnering with Hartford's standard commercial lines underwriters to fill gaps in their insureds' professional liability coverages. "We deal with knowledgeable, experienced wholesalers, and they in turn share their expertise with the retail independent agent who may need an EPLI or miscellaneous liability policy only occasionally."
A competitive edge
It's no secret that today's specialty lines marketplace is intensely competitive, with standard carriers delving into areas they never would have considered entering just a few years ago. "Today there's an abundance of capacity, or even an overabundance," Palmieri comments. "We encounter competition from both admitted and surplus lines carriers. And the lines continue to be blurred with the advent of commercial deregulation. One of our strengths is that we offer both admitted and nonadmitted facilities--and we provide a degree of regional presence and flexibility that isn't available from every carrier."
Throughout First State, field operations executive Chris Maciejewski says, "We're very flexible in accommodating regional differences. For example, insureds in some regions want property and casualty products to be packaged, whereas in other areas there's a demand for professional liability and EPLI coverages to be packaged with other coverages, so in each case we do our best to meet our insureds' needs."
Adds Palmieri, "We have a strong customer focus, and we concentrate on adding value in our products as well as our underwriting, loss control, and claims service. And the stability of Hartford is a strong factor when prospects are evaluating us against competitors. We have more than enough capacity to differentiate ourselves from competitors that may have lesser capacity."
Concerning competition, Palmieri observes, "We've heard a fair amount of rhetoric over the last six to nine months with respect to carriers beginning to draw the line on the commercial side. We may see evidence of this soon--but in our strategic planning, we're not counting on any big changes. Instead we're focusing on lines that offer the best profit potential, using our strength in underwriting expertise. If the market changes for the better, that would be a bonus."
An exercise in reinvention
"Most of us have been together a long time as a management team, and this gives us a good perspective on the market, and on the opportunities in the market," Palmieri comments. "Ten or twelve years ago, our largest product line was umbrella. Given the deterioration in pricing, umbrella is now a very small part of our operation. Since 1988, our facility for primary general liability has paid off very handsomely. And in 1993, after Hurricane Andrew, we increased our property writings in the catastrophe area because pricing had become very favorable. Over a long span of time, First State has reinvented itself along the way, avoiding pitfalls and taking advantage of its strengths."
If that sounds like a formula for success, it is. With its value-added approach, underwriting creativity, and regional flexibility, First State Management Group is more than ready to meet the challenges of the new millennium--and beyond. *
©COPYRIGHT: The Rough Notes Magazine, 1999