Disruptive Forces in the Insurance Industry: Constructive or chaotic?

Capital markets, technology and the use of mass media could be disruptive forces in the insurance industry in the near future, according to Paula Reynolds, CEO of Seattle-based Safeco Insurance Co. Speaking at the Insurance Industry Charitable Foundation’s 8th Annual Insurance the Future Educational Forum, Reynolds said the industry’s carriers and agents need to be much more “savvy” about capital markets than they have been; use technology to create more seamlessness between agents and carriers, and provide convenience for consumers; and reframe the mass media message because it currently is “highly misleading” to the public.

The Educational Forum was held in Walnut Creek, Calif., on April 12, and benefited the Child Abuse Prevention Program.

Changing capital markets
Reynolds said rapid growth of foreign economies and the free flow of private capital “is creating some disruptive and interesting aspects in the insurance business, most obvious in reinsurance.”

Previously, reinsurance pools of capital came from finite sources, but private equity and hedge fund capital now is coming into the reinsurance space, Reynolds said. This new type of reinsurance funding is creating volatility in the marketplace.

“Reinsurers are singing the blues because they say capital that comes from these new sources is short-term capital, not dedicated to insurance space forever,” she said. “That’s a disruptive force that in the near term brings down the incremental cost of the coverage, but one that will not be there forever. The truth is there is lots of capital … but the issue of volatility is an issue that will [long] be with us.”

Another changing issue in changing capital markets is that the United States is not at the center stage of the world economy. Other countries are seeing double-digit growth rates, with India growing at 16 percent per annum and China growing at 20 percent per annum, compared to the United State’s single-digit economic growth, Reynolds said. Such trends make those regions of the world more attractive to investors, who can get higher growth rates abroad.

The “tremendous” amount of capital in the insurance industry is making it “ripe for consolidation,” which could be disruptive as well, Reynolds noted. “Where [consolidation] will start isn’t clear to anybody.” But private capital, which can be raised overnight and used for consolidation, is just “waiting to be deployed,” she said.

A lot of capital markets say, ‘I’m going to deploy my capital offshore where I can get higher growth rates,’ or alternatively, ‘I like the mature economies in the United States because I like stability, but as a practical matter, I don’t like the regulation (post Enron and WorldCom), so I will put my capital into private not public markets,'” Reynolds said.

Another factor pushing capital from public to private markets can be seen in personal lines. “There isn’t a lot of room for rates to come down, other than incidentally in particular areas,” Reynolds said. “As a result, it’s a very thin margin business, and all of a sudden, Wall Street … [is] pummeling the carriers. Anyone who sells auto insurance is seeing pushing down of share price.

“In the public market, capital doesn’t want to stay there because it’s panicked,” Reynolds continued. “So we see major opportunity beginning to emerge that a lot of private equity [is entering] this business. Is it chaotic? Is it creative? Probably some of both. But it will change some of the names and faces over the next half a decade.”

Trusting technology
With regard to technology, Reynolds said automated underwriting means that agents and carriers can quote and issue polices faster than ever before. Technology also has “opened the door to greater transparency,” she said. She noted a couple of Web sites where consumers can see online comparisons of insurance costs and coverages in real time.

Reynolds recommended everyone in the insurance industry have a presence in cyberspace because although only 5 percent of consumers purchase insurance online, 40 percent of consumers research online before they buy.

The transparency of being able to compare carrier offerings is likely to bring up issues over what’s private data, Reynolds said. “There will be interesting public policy issues, because it’s certainly true that we struggled over the issue of credit for a long time,” she said.

Transparency also is likely to drive out excess costs from the insurance industry and create more competition. Reynolds predicted this would “turn the insurance proposition upside down,” and explained that instead of an agent evaluating a person’s or company’s risk, then offering coverage and totaling the price, the buyer will be able to look at his or her budget and say, “this is what I want to spend on insurance, what can I buy for it,” much like an auction.

An agent will still be valuable because people aren’t educated enough to sort out types of coverages by themselves, Reynolds noted. Yet having more transparency and operating more like an auction will lead the insurance industry to look like other financial markets, she said.

Harnessing mass media
According to Reynolds, the industry should be concerned with the mass media message being broadcast by some insurers. “Geico and Progressive have spent a decade persuading you to shop,” she told her audience. The public believes that it will pay to shop around. However, that message is “highly inconsistent with the underlying economics of the business,” she said. She believes the industry needs a countervailing message that explains to consumers that prices among carriers are not wildly different, but that coverages and the quality of the carrier matters.

“This is a very tough trend that keeps us awake at night,” Reynolds said. But she noted it is an important message because today’s and future consumers are not brand conscious. “Something that’s closer to the truth is something we have to be committed to,” she added.

Reynolds admitted she comes to the insurance business with “different eyes,” having previously worked in the utilities and energy industry as president and CEO of Duke Energy North American and senior vice president at Pacific Gas Transmission Co. Yet she believed while she doesn’t have the depth of insurance industry experience, her “world view” would help agents, brokers and carriers plan for future disruptions and turn them into creative, positive forces.