A report in P.R. Newswire said the U.S. property & casualty insurance industry — suffering from declining investment returns and unprecedented claims from the Sept. 11 terrorist attacks — could retain $30 billion annually through aggressive transformation of the way it processes insurance claims, according to global management consulting firm A.T. Kearney, a subsidiary of global services leader EDS.
A.T. Kearney conducted the study following its effort to understand the impact of the attacks on the insurance sector as part of the New York City Partnership’s Economic Impact Study. The analysis indicates insurance companies could possibly emerge from the near-term fallout stronger, provided they embark on concentrated efforts to better underwriting results and enhance operational performance.
According to Tom Dente, A.T. Kearney vice president who led the analysis, with declining investment results, insurers have to better their core underwriting competence via rigor and innovation in risk pricing, expertise in market segmentation and effective portfolio management.
Stefan Spohr, a principal with A.T. Kearney, added that improvement in underwriting alone will not close the industry’s performance gap where the return on equity has been very minimal in the last five years. Spohr noted that aggressively transforming the claims function to take advantage of new technologies can have a dramatic impact on profitability.
Uncertainty over terrorism coverage and new types of risk with increased possible losses have formed a temporary imbalance in the insurance market, with demand for new areas of coverage vastly outstripping supply, according to A.T. Kearney.
The likelihood of longer-term higher prices and new manners to mitigate risk offer an opportunity for the most savvy insurance companies to move into the market to trim the supply gap A.T. Kearney reports.
In addition, higher prices will provide the incentive needed for insurance companies and financial institutions to seek other means of risk transfer past the traditional re-insurance market. One result will be a gain in the use of capital market products seeking to securitize insurable risks linked to single or multiple events, such as hurricanes or possibly even terrorist attacks. A.T. Kearney is anticipating there will be new means of insurance capital markets solutions that would be traded like traditional securities over public and private exchanges.
Finally, marketplace uncertainty will mean a flight to quality and improve the position of the top players in the industry. The remaining companies will need to take note of their market position and core capabilities and seek out strategic partnerships to round out those capabilities, according to A.T. Kearney.