Society Meeting Reports Insurers Have Much to Think About in Dealing with Present Challenges

December 31, 2002

According to speakers at the Society of Insurance Research’s annual meeting, the strategic challenges confronting insurers include the rapid pace of change, terrorism, asbestos, the need to reform the tort system, poor financial results, weak balance sheets, the need for stronger underwriting, the need to modernize state regulation, and problems harnessing the latest advancements in technology.

Dale Hammond, president and COO, Kemper Auto and Home Group, observed that intellectual capital – talent, skills, intelligence, and creativity – can be more important than size, with some innovative carriers taking market share from larger competitors. He went on to say, “We’re an industry that doesn’t stand prosperity very well,” noting the tendency of some insurers to lower premium rates even in the face of declining profits.

Brad Kading, Reinsurance Association of America, estimated that the Sept. 11 terrorist attack cost reinsurers $30 billion. Kading observed — despite capital inflows, reinsurers’ capital had actually fallen from excessive to merely adequate, as a consequence of poor underwriting results, losses on investments, and the need to replenish reserves. Kading forecast that asbestos will ultimately cost reinsurers $60 billion, which is not fully reserved.

Noting the size in loss reserve deficiencies, Michael Murray, ISO’s AVP for Financial Analysis, observed, “Industry loss reserve deficiencies appear to be larger than at any time since I entered the industry more than 20 years ago.” Murray also noted that the number of people in the U.S. who have filed asbestos bodily injury suits is forecasted to rise to perhaps 1 million.

Myron Picoult, Advisor to Lazard Freres & Co., reported that even with several years of rate increases, the industry’s recovery is proving very difficult as a result of poorly underwritten and badly priced risks already on the books. Picoult remarked that, despite rate increases, “I haven’t seen an insurer CEO smile in the past 6 months, and I talk to a lot of them. ROE numbers must get real. It is not feasible to expect double-digit ROE’s in this economy,” Picoult said.

Picoult stressed that insurers “are not doing enough thinking about strategic positioning.”

Mark Puccia, managing director and Chief Criteria Officer-Financial Services Ratings Group at Standard & Poor’s, observed that commercial insurance prices were rising 20 to 25 percent in 2002 and might rise another 15 to 20 percent in 2003. He predicted through the first half of 2003, “downgrades will exceed upgrades.”

While technology has its role in the industry, Werner Kruck of Alpha Financial Services warned insurers that technology is no substitute for business strategies.

“The objective of corporate strategy is to create a sustainable competitive advantage – something that is unmatched by competitors, something that competitors cannot easily create, and something aligned with the capabilities of the organization,” Kruck said.

“Technology by itself does not increase revenue and rarely shifts the balance of power in the marketplace. Company leaders need to focus on business strategies,” Kruck added.

Terri Vaughan, Insurance Commissioner of Iowa and current president of the National Association of Insurance Commissioners, underscored regulators’ commitment to modernizing state regulation to meet the realities of an increasingly dynamic and competitive industry. To date, 47 states have enacted new legislation regarding producer licensing, and 14 states are using the NAIC’s new electronic system to process 1,000 licenses a month.

According to Keith Buckley, managing director of Fitch Ratings, the core issues challenging property/casualty insurers includes intense competition, the cyclical nature of the business, the U.S. tort system, reserve deficiencies, declining investment gains, limited availability of reinsurance, catastrophes, and insureds’ growing use of self- insurance and captives.

Buckley projected that the gap between the most successful insurers and the least will widen over the next five years. The “winning” insurers will be those that are able to leverage financial strength and their reputations. Other keys to success include a strong customer focus, a superior ability to execute sound technology strategies, and a willingness to publicly address issues such as corporate governance and the quality of accounting practices in the wake of Enron and other corporate scandals.

Finally, Buckley warned against “making the big bet” – investing heavily in a major acquisition that fails to pay off.

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