Analysts and insurance company CEOs who recently addressed the Property/Casualty Insurance Joint Industry Forum in New York City presented remarkably consistent predictions about the future of the insurance industry in the short term.
Members of separate panels composed of financial analysts who follow the fortunes of insurance companies and CEOs of insurance companies offered their views of where the insurance industry is going and the resources available to meet future challenges. They reinforced their consensus by agreeing on the principal problems facing the industry and the major strengths available to insurers for meeting those challenges.
Members of both panels agreed that a hard market is upon us but that the cycle will not endure as long as history might lead many to expect.
The panelists warned that insurers who are counting on a hard market to bail them out of difficulties brought on by their own lax underwriting discipline are headed for disappointment.
“While we certainly are off in the direction of seeing a cycle here, very much reminiscent of what we saw almost a decade ago, that cycle is going to be foreshortened in a very dramatic way,” predicted Kenneth A. Froot, professor of business administration at Harvard University. “The opportunities are not going to exist as long. The capital is moving much more rapidly into existing institutions with people who already know something about the area.”
Shortening of the cycle, panelists agreed, is a byproduct of lessons the insurance industry has learned from past cycles, and especially from catastrophe losses. The infrastructure insurers put in place following catastrophe losses of the early ’90s, along with the personnel they developed and trained, have made the reinsurance marketplace more efficient.
“The reinsurance market is able to actually deliver a much greater quantity of supply… for essentially the same price,” explained Froot. “That’s the quality of an efficient market.”
Lloyd’s Chairman Saxon Riley sees a silver lining to the abbreviated hard market and “foreshortened” cycle that he predicts is coming. He hopes that it will encourage insurers to focus on earning an underwriting profit.
Panel moderator Lawrence G. Brandon, president emeritus of the American Institute for Chartered Property Casualty Underwriters and the Insurance Institute of America, expressed the view that to achieve that goal insurers need to “get away from a short-term focus.”
Company CEOs could not agree more. Pointing to the $30 billion underwriting loss insurers sustained in 2000, Ronald R. Pressman, chairman, president and CEO of GE Employers Reinsurance Company, called for systemic change in the way insurers do business. “I hope,” Pressman said, “that the World Trade Center fundamentally is known for not just focusing our attention on man-made risk but also fundamental, catalytic change in our industry.”
A briefer hard market, however, does not mean an end to cyclical results, even if insurers succeed in reestablishing underwriting discipline. The insurance industry will have to continue to live with cycles, commented Raymond Barrette, chairman & CEO of One Beacon Insurance Group, because the public prefers an efficient market to a stable market.
People provide the answer
Both panels expressed the view that insurers have the assets in place to meet the new and unique challenge that the truncated cycle presents. The most important asset available to the industry, they agree, is its people. “I think our biggest strength is our people,” commented Pressman. “We have terrific people, terrific expertise.”
To prosper in the shorter hard market that they see coming, analysts and CEOs believe that insurers have to manage their personnel properly. Not everyone agrees that the industry has done a good job along those lines. “During the early 1990s,” Froot argued, “we built institutions which were able to house considerable amounts and deploy considerable amounts of capital. We trained lots of people.” He predicts that the industry’s accumulated experience base and “people with expertise” will accelerate the flow of capital into the stronger institutions that have greater expertise in managing the market cycle.
Pressman asserted, on the other hand, that the insurance industry has not done a very good job of systematically applying the expertise of its people, “and that’s going to lead to the biggest challenge that we have, which is technology.”
Technology and regulation were the factors Herman J. Ahrends, chairman & CEO of Auto Owners Insurance Company, cited when asked to identify the biggest challenge facing the insurance industry over the next five to 10 years.
Other panelists agreed. “It’s a business of people and information, and nothing much else matters,” commented Barrette. “So you’ve got to have just the best people and have them trained and updated all the time, and get your information to be what you need, when you need it and where you need it all the time.”
Pressman defines the technology challenge as harnessing the flow of data through the insurance industry to enhance the ability of its people to deliver value to customers. “At the end of the day our core competence as an industry is risk management, giving our customers expertise and insight into risk that they can’t do themselves,” he said. “Unless we harness the dataflows through our industry we’ll never be able to do that.
Technology is an issue in both commercial and personal lines, according to Michael S. Pritula, director at McKinsey & Company. For personal lines carriers, he believes the scale is important for technology and distribution. Commercial lines underwriters, he said, need to invest in managing the delivery of information to improve their underwriting results. “I think the headline there is that underwriting matters,” Pritula explained. “Investing in those systems in your company that get the right knowledge to the right person at the right time to get that risk underwritten and priced appropriately is paramount.”
The changing regulatory landscape is another challenge the insurance industry faces. “Our sense is that we are probably in for a major dose of reregulation,” said Richard E. Cavanaugh, president & CEO of the Conference Board Inc. Members of the CEO panel concurred, saying that the wave of deregulation at the state level has passed its peak.
Loosening the regulatory reins, they explained, is a soft market phenomenon because state legislators and insurance departments believe that it will encourage insurers to lower their rates. Because relaxing regulatory constraints in a hard market is likely to have the opposite effect, the CEOs are not looking forward to any additional regulatory relief.
Ahrends equated better regulation to less regulation, but did not hold out any hope that legislators and regulators will move any farther down that path until another soft market is in full swing. “The challenge for us,” he said, “is to get our message out that the free enterprise system is really the best approach.”
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