Articles

RSS

By Mechlin Moore

The reinsurance business is known for long periods of market-share driven price-cutting followed by shorter profit-driven corrections. Is there a better way? Can we break the cycle?

The elusive goal of pricing discipline is a common theme at industry meetings, but it's quickly forgotten when competition heats up. Most companies ride the cycle up and down. Today, however, a few are experimenting with systems, structures, and standards to achieve profitability goals in soft as well as hard markets.

One of these is GE ERC, the global GE Employers Reinsurance Corporation (ERC), Insurance Company Segment, owned by GE. We talked with Hoyt Wood, Chief Underwriting Officer for the worldwide operation. "It's an uphill battle," Mr. Wood acknowledged, "but we're determined not to compete on price when we don't know all there is to know about the risk we're taking." This commitment has been translated into sophisticated systems of assembling data on all the exposures of any given risk.

"We measure and track risks in an exposure metric. This alerts us when exposures are rising and competitive pressures are forcing prices down in the market. By capturing and monitoring the exposures of each risk and applying total return standards we provide a basis for rational pricing instead of telling our field underwriters to just do the best you can."

In an organization as complex as GE ERC with operations around the world, numerous subsidiaries, and diverse distribution channels, the marshalling of consistent, comparable data is a major challenge. To meet this challenge, Employers RE has developed "information technology to achieve consistency in storage, retrieval, and analysis of data," according to Mr. Wood. "We learned early on that one system for the whole Company doesn't work. As we grew through acquisitions, we inherited legacy systems. Through sophisticated data warehousing, we're able to produce consistent information to evaluate exposures."

The corporate structure is an important element in the pricing discipline matrix. Like most major corporations, ERC has a variety of profit centers. This encourages responsibility and accountability. Each profit center has its own Chief Underwriting Officer. However, on the organizational chart there's a dotted line to Mr. Wood, the global Chief Underwriting Officer.

"With this structure we have more knowledge sharing than in the past. We've developed pricing models that can be applied consistently by underwriters in London, the U.S., Latin America, or other parts of the world. We're not trying to apply a single pricing model, but we are striving for consistency," Mr. Wood explained. "Our mantra is risk-based pricing. We have no mandated increase goals. We look at every risk to evaluate the exposure. We put risks through an exposure rating model as well as an experience model. We're rigorous about following the disciplined approach."

Underwriters' "appetite for risk is tempered by high level global underwriting guidelines," according to Mr. Wood. These guidelines spell out the types of risk Employers Re wants to reinsure and the products they prefer to avoid. Thresholds are in place to determine when a higher level review is necessary. Some underwriting decisions require debate. About 10 percent are reviewed personally by the Company's Chief Executive Officer, Chief Underwriting Officer, and the Global Risk Officer.

When asked how ERC's parent, General Electric, influenced the Company's underwriting philosophy, Mr. Wood replied with two words, "risk management." At GE risk management is a high priority. Likewise at GE ERC. The chief risk manager, Samira Barakat, is an independent senior officer charged with assuring that the "aggregate risk taken by the Company is not out of line with corporate resources." Each line of business at ERC is subject to a quarterly risk management review. Ms. Barakat studies economic trends to be sure risk is balanced by geography and type of business. She monitors adherence to underwriting authority rules and portfolio triggers. "We believe GE's focus on corporate risk gives us a competitive advantage. It's interesting to see some others in the insurance industry beginning to take this approach," said Mr. Wood.

Pricing discipline at ERC also rests on a foundation of standards. Total return targets govern the evaluation of risks. The Company is willing to pass up business opportunities that don't meet return standards. "Every business unit has return hurdles to shoot for. Proposals go through a thorough process of peer review by underwriters and actuaries as well as senior executives," Mr. Wood explained

The disciplined approach to risk and exposure is embedded in the corporate culture at GE ERC. Mr. Wood believes that pricing reinsurance based on detailed knowledge of the underlying exposures and within the Company's risk-tolerance standards will keep GE ERC profitable in soft as well as hard markets.

A.M. Best, the industry rating agency, appears to agree. Best's Insurance Reports – PC, 2000 Edition assigned a Best's rating of A ++ (Superior) to the GE Global Insurance Group. In Best's opinion, "the Group's overall earnings have been consistently outstanding," and the rating agency "expects Employers Re to continue to outperform the reinsurance market's operating results." Certainly, GE ERC's persistent pursuit of the elusive goal of pricing discipline in reinsurance will help make this happen.

Mechlin Moore, former president of the Insurance Information Institute, is a cofounder of www.PropertyAndCasualty.com and brings expertise in reinsurance and related topics to the community. Email him at Click here to subscribe to the free weekly Property&Casualty.com newsletter.