The key to the long-term success of a general insurance company is clear separation of underwriting and investment activities, says Janice Tomlinson, President of Chubb Canada.
Chubb Canada has a lot to be proud of. Last year with a premium growth of 28% and a return to underwriting profitability, the insurer virtually quadrupled, its profits to $44 million generating direct premiums in excess of $500 million. Few insurers enjoy such excellent results. “We care about investments, but we live and die by our underwriting results. In our industry, people talk a lot about the importance of underwriting profit, but few achieve it. With us, it’s a mandate.” Ms. Tomlinson, interviewed at her Toronto office, told The Insurance Journal.
Chubb is a U.S. insurance multinational that operates in 31 countries. Ms. Tomlinson took charge of the Canadian subsidiary in 1995, and since then, the Kansas-born executive said Chubb Canada has posted better technical profitability than its owner, who has been plagued by asbestos, mould and Enron, among others.
“When I arrived in Toronto, a journalist asked me what I planned to do or change at Chubb Canada. I replied that we would focus on our areas of expertise. Today, I take the same position. I always say that we are a very boring company because we do not change our strategy quickly. We prefer structured, orderly and prudent growth. And when a line is not profitable for us, we will try to fix or exit if necessary,” she said.
Chubb is known for its niches: luxury homes, boats, liability insurance, film, technology, and the list goes on. “We are competitive but we offer value. We believe that our expertise differentiates us from our competitors. Our brokers tell us that we ask more questions than others in the industry. That is because we want to understand the business we underwrite.” Ms. Tomlinson mentioned that the status of “niche insurer” tend to give her organization a more detailed understanding of specific customer groups.
She added that another strength of her organization is its ability to settle claims promptly. “Our reputation is built on our claims service.”
She underscored the expertise of her team. “Take the film industry. We have the most experienced film underwriter in Canada. In D&O, our team is highly skilled because they are specialists. They have a very good understanding of the coverage and know the challenges associated with this line of business.”
When we pointed out that Chubb does not have the monopoly on expertise in underwriting, Ms. Tomlinson replied that the culture of her organization is based on human resources development. “We have invested in staff development because we believe it is important for our future. This has not been an industry imperative.” When asked if that makes her staff targets for competitors, she replied “It is easy in this market to know who is good. However, we have excellent staff retention as we are a global company and present career opportunities. We have high expectations and our staff knows it.”
Ms. Tomlinson believes that it is important to develop staff. “We can’t let it become a problem for us. As a result, we have an active University recruiting program. This year we have 20 trainees. They join us for a year long training program. They work with our underwriting staff and participate in formal training both in Canada and the U.S. After a year, they are ready to assume a full-time underwriting position.”
No capacity limits
Chubb wants to be comfortable with exposure before they are willing to provide significant limits.
“In underwriting new exposures or new coverages, we generally like to put our toe in the water to get comfortable otherwise we would not learn and develop new markets or lines. We evaluate risks one by one and do not try to land a customer at all costs. We evaluate the risk, gain an understanding of the exposure, and try to price accordingly. In the soft market, a lot of the industry discipline went by the wayside and now the industry is paying the consequences. This is true in liability, auto, and other specialized coverages.
When asked to name the most profitable sectors for the insurer, Ms. Tomlinson spontaneously mentioned ocean cargo, a market where some insurers are experiencing difficulty.
“This line represents less than 2% of our sales, with $6 million in net premiums earned, but it is very profitable for us. We would like to increase our market share. Another very profitable sector for Chubb Canada is boiler and machinery, with a claims ratio of 25%. In personal insurance, we have done very well with watercraft, artwork and personal excess insurance.”
Chubb Canada plans to extend its activities to sectors where Ms. Tomlinson sees high potential. “Despite the current high-tech woes, it’s a very attractive market. We already enjoy good growth for homeowners nationwide and we believe there is still opportunity in D&O and the energy lines.”
Chubb Canada barely passed the assets test of the Office of the Superintendent of Financial Institutions (OSFI), with a mark of 10.21. (The industry average is 18.07. OSFI suggests that companies maintain reserves over a mark of 10.00, however, this measurement system is currently under review. ING Canada and Aviva Canada (CGU) are also around the 10.00 level.)
Geoff Shields, Senior Vice-President, Finance the company’s views about the test. “Essentially a “liquidation test,” the MAT is extremely conservative in that it grosses up existing liabilities by a significant margin, discounts various assets available to cover off these grossed up liabilities, and then requires companies to add yet another layer of cushion by requiring the latter to exceed the former by at least 10%.”
An example of one of the MAT’s key limitations, he explained, “is in its treatment of “unregistered reinsurance” arrangements, in that it severely penalizes insurers such as Chubb Canada that do business with very strong international reinsurers which do not happen to operate in Canada. Excluding the effect of the unregistered reinsurance reserve, our year-end 2002 MAT result would have exceeded 15%.”
Ms. Tomlinson considers that the turbulence in the Canadian insurance industry is not over. “Concerning underwriting profitability, it will not be resolved this year and not totally in 2004. I think there may be some stabilization at the end of next year or early 2005.” What do you see as the industry issue? “There are too many insurance companies all wanting the same business – auto, home and small commercial. The middle market to upper market is feeling a lot of pressure. At this point, that helps us as we can continue to develop our specialties. In my mind specialty is important as a more generalized approach to underwriting can lead to commodization – which is the opposite of what underwriting should be.
M&As not over
Ms. Tomlinson believes that consolidation will continue in Canadian P&C insurance. “It’s an inevitable phenomenon, because 200 companies are crowding a $30 billion market, 75% of which is concentrated in Ontario and Quebec. And with an average return on equity of 1.6% in 2002, down from 3.6% in 2001, the situation is untenable. Some global players will simply place their capital elsewhere. Medium sized players should then have more opportunity.
However, she said that it will be some time before the industry can really evaluate the effects of recent mergers and acquisitions. “Have they produced the anticipated results? Have they generated greater efficiency, economies of scale, improved profitability, better service? If this is the case, another round of acquisitions will take shape. Otherwise, the current market will remain the same, inefficiencies and all.”