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INSURER CONNECTS WITH THE CUSTOMER

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SAN FRANCISCO -- Some surplus lines insurers are trying new tactics to tap into the commercial market.

For example, rather than relying solely on the advice of managing general agents and wholesale brokers, one surplus lines insurer is surveying policyholders directly to find out what they want.

The company also is encouraging its staff to bone up on other aspects of the financial services industry, such as securitization, so that they can develop alternative financial insurance products.

The objective is "getting to better understand what the customer wants," explained Richard Quehl, president and chief operating officer of CNA E&S, Commercial Operations, a division of Chicago-based CNA Financial Corp.

"We've had some eye-opening successes in that effort."

For example, socioeconomic research into liquor liability revealed that significant changes in the industry were impacting the sale of insurance.

"Given our size and our tenure in this industry, we thought we knew all there was to know, at least all that had value for insurance companies," Mr. Quehl said during an interview at the 1998 annual convention of the National Assn. of Professional Surplus Lines Offices, held in San Francisco Sept. 9-13.

But CNA's researchers found that liquor sales have been declining at restaurants and bars in California since the implementation of a statewide smoking ban this year. Conversely, liquor sales at California retailers are climbing.

"If you follow the money, the money's going into package stores or liquor stores. Fewer revenues for restaurants and bars, but a real uptick in the revenues being generated by liquor stores," Mr. Quehl said. "So what do we do? We need to start focusing in on a new product for liquor stores."

CNA's research also showed that "with the distribution system we have in place today, we can't reach the growing part of the industry" -- the ethnic communities -- according to Mr. Quehl.

"Policies written in English don't have the same meaning or value as policies written in Korean or Spanish or some other language. But why not sell the customer a policy that he or she can read?"

To reach this market, CNA is looking for alternative distributors, such as brokers in inner-city and ethnic areas, he said.

"We haven't been accessing the businesses that are servicing the largest-growing ethnic populations in their areas. We've been much more focused on suburban sales than on inner-city sales," he explained.

In discussions with another of CNA's clients, the operator of a large Colorado ski resort, Mr. Quehl learned about the need for products that provide balance sheet protection.

"If there's not a lot of snow in his area, the word gets out very quickly," he explained. "So he was very concerned about maintaining financial stability on his balance sheet."

"The more we talked about it, it seemed like a good opportunity to do some new type of insurance hedge-like product, the theory being that if he had two ski resorts, one on the East Coast and one in the Rockies," one would likely have snow while the other did not.

Looking at the situation from an insurer perspective, Mr. Quehl reasoned that "if you were to provide balance sheet protection for both resorts, you're going to have a limits loss in the Rockies one year and no loss on the East Coast, or vice-versa. That equates to a 50% loss ratio. If you put a margin on top for profit and expense, you're still running a loss ratio of under 60%.

"That's a very attractive opportunity for us and each year, as long as we could accurately predict the weather impact on these two resorts, each year we'd be in a profit position," he said.

And "each year the customer is very happy, because he's got the balance sheet protection he wants to go back to his corporate owners and show increased growth."

"There's a million of opportunities like that out there. And there's all kinds of swaps and derivatives you could use to securitize those types of risks," Mr. Quehl said. "You look at all the weather-related hedges associated with crops. People in the securities industry have been doing that for a long time."

"The problem is, the insurance people don't speak securitization. The people who are experts in securitization don't understand insurance. So you have this communication gap," he explained.

This is why CNA is teaching its employees about the world of financial transactions outside of the insurance realm.

CNA also is offering financial incentives such as bonuses to foster a corporate culture like that espoused by the Three Musketeers: "All for one and one for all."

"If they're all focused on how their responsibility fits into our overall financial organization, I think ultimately we've motivated people in a direction that's best for them, best for the results we're trying to achieve," Mr. Quehl theorized. that had value for insurance companies," Mr. Quehl said during an interview at the 1998 annual convention of the National Assn. of Professional Surplus Lines Offices, held in San Francisco Sept. 9-13.

But CNA's researchers found that liquor sales have been declining at restaurants and bars in California since the implementation of a statewide smoking ban this year. Conversely, liquor sales at California retailers are climbing.

"If you follow the money, the money's going into package stores or liquor stores. Fewer revenues for restaurants and bars, but a real uptick in the revenues being generated by liquor stores," Mr. Quehl said. "So what do we do? We need to start focusing in on a new product for liquor stores."

CNA's research also showed that "with the distribution system we have in place today, we can't reach the growing part of the industry" -- the ethnic communities -- according to Mr. Quehl.

"Policies written in English don't have the same meaning or value as a policies written in Korean or Spanish or some other language. But why not sell the customer a policy that he or she can read?"

To reach this market, CNA is looking for alternative distributors, such as brokers in inner-city and ethnic areas, he said.

"We haven't been accessing the businesses that are servicing the largest-growing ethnic populations in their areas. We've been much more focused on suburban sales than on inner-city sales," he explained.

In discussions with another of CNA's clients, the operator of a large Colorado ski resort, Mr. Quehl learned about the need for products that provide balance sheet protection.

"If there's not a lot of snow in his area, the word gets out very quickly," he explained. "So he was very concerned about maintaining financial stability on his balance sheet."

"The more we talked about it, it seemed like a good opportunity to do some new type of insurance hedge-like product, the theory being that if he had two ski resorts, one on the East Coast and one in the Rockies," one would likely have snow while the other did not.

Looking at the situation from an insurer perspective, Mr. Quehl reasoned that "if you were to provide balance sheet protection for both resorts, you're going to have a limits loss in the Rockies one year and no loss on the East Coast, or vice-versa. That equates to a 50% loss ratio. If you put a margin on top for profit and expense, you're still running a loss ratio of under 60%.

"That's a very attractive opportunity for us and each year, as long as we could accurately predict the weather impact on these two resorts, each year we'd be in a profit position," he said.

And "each year the customer is very happy, because he's got the balance sheet protection he wants to go back to his corporate owners and show increased growth."

"There's a million of opportunities like that out there. And there's all kinds of swaps and derivatives you could use to securitize those types of risks," Mr. Quehl said. "You look at all the weather-related hedges associated with crops. People in the securities industry have been doing that for a long time."

"The problem is, the insurance people don't speak securitization. The people who are experts in securitization don't understand insurance. So you have this communication gap," he explained.

This is why CNA is teaching its employees about the world of financial transactions outside of the insurance realm.

CNA also is offering financial incentives such as bonuses to foster a corporate culture like that espoused by the Three Musketeers: "All for one and one for all."

"If they're all focused on how their responsibility fits into our overall financial organization, I think ultimately we've motivated people in a direction that's best for them, best for the results we're trying to achieve," Mr. Quehl theorized.