Why Do Specialty/Niche
Companies Outperform Their
Peers?
A Long Term Player’s Perspective
May 17, 2005
Michael F. McManus
Senior VP & Actuary
Chubb Specialty Insurance
Chubb Specialty Insurance
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$3 Billion in 2004 net written premium
25% of Chubb’s overall premium volume
Major products include:
Directors & Officers Liability
Fiduciary Liability
Errors and Omissions Liability
Employment Practices Liability
Crime and Financial Fidelity
The views, information and content expressed herein are those of the author and do not necessarily represent the views of
any of the insurers of The Chubb Group of Insurance Companies. Chubb did not participate in and takes no position on
the nature, quality or accuracy of such content. The information provided should not be relied on as legal advice or a
definitive statement of the law in any jurisdiction. For such advice, an applicant, insured, listener or reader should consult
their own legal counsel.
Chubb Specialty – Long Term
Value Proposition
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Leverage Chubb’s strong balance sheet
by offering:
Broad coverage
Superior claims service
Superior risk selection, based on intimate
customer knowledge of larger insureds
obtained in face to face meetings
Achieved through having specialty
underwriting expertise at point of sale (50
branch offices in U.S. and another 20
outside the U.S.)
Schedule P-Other LiabilityClaims Made
25,000
120.0%
100.0%
80.0%
15,000
60.0%
10,000
40.0%
5,000
20.0%
0
0.0%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
Industry Net Earned Premium
Industry ex. Chubb Net Incurred Loss Ratio
Chubb Net Earned Premium
Chubb Net Incurred Loss Ratio
2001
2002
2003
Net Incurred Loss Ratio
Earned Premium - $ in millions
20,000
Actuarial Role in Chubb
Specialty in1980’s and
Early1990’s
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Until late 1980’s, no actuarial involvement
(other than reserve analysis) because of
low frequency, high severity nature of
business and small premium volume
Original products filed on (a) rate basis, so
pricing was very judgmental
As specialty lines grew larger and became
more visible with regulators, manual rate
filings were required, which required
actuarial support
Profitability analysis was fairly basic and
at a high level (because results were
good)
Specialty World Changed in Late
1990’s
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Variety of factors led to deterioration in
results in the late 1990’s:
Increased competition
Persistent rate decreases over several
years
Granting of entity coverage for D&O
Proliferation of prepaid multiyear policies
Cheap reinsurance led to excessive policy
limits
Bursting of stock market bubble
Corporate governance scandals
Greater Need for Actuarial
Support
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Impact of these trends not fully realized
until 2000/2001 because of long tail
Deterioration in results led to need for
much greater actuarial involvement
Chubb acquisition of Executive Risk in
1999 led to addition of a much more
robust actuarial function (staff of 8)
Much more involvement in product
development and profitability analysis at
detailed level
Driven by very granular data gathering
process and fully integrated I/T system
with good quality data
Key Actuarial Deliverables for
Chubb Specialty Today
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Regular profitability analysis is integrated
with underwriting and claims management
in joint accountability process
This drives ongoing refinements in
underwriting strategy and accountability to
senior management
Administer robust price monitoring system
that is driven by actuarial calculations of
rate changes
Careful tracking of nonrenewal strategies
and quantification of benefit on rate needs
More recently added tracking of new
business pricing adequacy
So Can a Large Specialty
Company Outperform Its Peers?
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OR
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Strategic advantage of
being a large specialty
player with critical mass
and granular data
Very limited sources for
industry data on claim
frequency and severity
trends or advisory loss
costs
Has not prevented new
competitors from entering
market in last few years
Time will tell who will