Avoid Price 'Gouging,' Consultant Warns Insurers

“Getting the right price” will be one of the major issues facingproperty-casualty insurers in 2002, but that doesnt mean exactlythe same thing to an industry consultant as it does to some of theinsurers themselves.

“When I say 'right,' there's clearly anopportunity now for companies to price gouge–and it's happening,”according to Jeanne Hollister, a consulting actuary forTillinghast-Towers Perrin in Hartford.

“In every line of insurance–it doesn't even matter if it hasanything to do with the World Trade Center losses–all insuranceprices are up significantly. Part of this is we've been in a verysoft part of the cycle and rates have been too low,” she added.

“But I think companies are overreacting, because they see awindow in which they can do it,” she said, suggesting that theyshould instead “be mindful of the fact that their better customersstill may have choices.”

“You don't want to drive away better business by sticking peoplewho don't deserve it with high price increases. Knowing who yourbetter customers are, which ones create value, which ones you wantto keep–and how to price them–is a major issue. A broad-brush 50percent rate increase is not going to have the intended effect,”she said.

Ms. Hollister, whose firm regularly takes the pulse of financialservices leaders through its electronic “pulse” surveys, noted thatgetting the right price also implies that insurers can build in theincreased cost of reinsurance and pass it along to customers.

“That's kind of tough to know when you haven't been able torenew your reinsurance yet,” she said.

“Getting the right price” was actually third on a list of issuesfacing insurers that she went over with NationalUnderwriter.

Topping the list was one that none of the insurance companyexecutives interviewed by NU for last week's editionidentified separately as an issue–”securing adequate reinsurance,particularly in workers' compensation.” (See NU, Jan. 7,page 11.)

Could it be that the issue is so well known that no one felt theneed to list it?

“Maybe they were trying to project more into the future, andthat's happening right now. So it's a given for them,” Ms.Hollister suggested.

Although insurer executives did not specifically identifyreinsurance as one of their top issues, they did, in fact, mentionit as a corollary or a factor creating some of the other issuesthey said were at the top of their minds.

The reinsurance issue for workers' comp insurers might start tofade early next year, Ms. Hollister suggested.

“We have some sense that after Jan. 1, they may have more of amarket” in Bermuda, she said.

“All these new companies that have been formed that wereresponding to a perceived lack of property reinsurance are going tohave some capacity left to write some other things, and theirinvestors are going to expect them to use that capital. So they mayshift their focus to lines like workers' comp and charge egregiousprices for it,” she said.

Ms. Hollister also suggested that fewer reinsurers will existthis year, and that the ones that do will put significantrestrictions on their coverage.

“Terrorism is a clear one,” she said, noting that reinsurers arealso trying to exclude mold and cyberrisk.

As for there being fewer reinsurers, “it's hard to say whetherthey will be allowed to become insolvent or be acquired. Companiesthat are in strong positions can do different things with theircapital, including buying others,” she said.

Ms. Hollister said the second major category of issues forinsurers is risk management, referring to the need to measure andmanage aggregation risk.

“Thats new in a line like workers comp,” she said, noting thatthe prior view was that the larger the company, the moresophisticated and responsive they would be to loss controltechniques.

Insurers are now under pressure to create models that tell themhow many people are insured in one place, and how many lines ofbusiness could get hit at one time, she said.

Even if insurers don't see the need for such models, A.M. Bestand other rating agencies will do it for them, making some “prettybold assumptions” to show the company they don't have the surplusto withstand that kind of event, she added.

A third issue for insurers, she said, involved knowing thecustomer and using technology.

Referring to results of Tillinghasts first “pulse” survey one-business trends, “one of the major themes that came out is thatnew technologies are changing–and that understanding and “owning”the customer is a top-order issue for insurers.”

That doesnt mean cutting out agents–it means knowing whocustomers are, and being able to sell products in a way thatattracts the better ones and allows companies to maintainlong-term, profitable relationships with them, she said.

The Internet also offers opportunities to be more efficientthrough insurance intermediaries, she said, noting that bothinsurers and agents face significant challenges to keep costs inline and become more efficient.

“That's not a new issue, [but] it's exacerbated by the fact thatwe're going to be in a down economy. If your revenue is off, andyour investment income is off, you need to squeeze costs too,” shesaid.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, January 14, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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