With the economy flat-lining, interest rates stuck at zero and no dramatic turnaround in sight, p&c insurers are stuck between a rock and a hard place. How can they keep their bottom lines in the black with their top lines so starved for revenue? Are there enough premium dollars to go around, or will some fall by the wayside via mergers and acquisitions?
Those were the conundrums cited most often during private chats I had at the industry’s annual family reunion yesterday in New York, with insurer CEOs and outside analysts at a loss to find much opportunity for organic growth.
Both panels at the annual P&C Insurance Joint Industry Forum were dominated by gloomy prognostications about the industry’s financial prospects, and not just for this year. Indeed, “it will be a pretty stagnant market for the foreseeable future,” according to one panelist--Joe Guastella, a principal and global insurance leader at Deloitte--echoing many others at the Forum. “Even in 2011, you can expect very moderate growth,” he warned.
I always take the pulse of the business at this forum, where the leaders of 16 industry associations and a bunch of carrier executives gather to trade notes and commiserate about the state of the market.
Insurers make money in two ways—selling coverage (hopefully, but not always, for a profit) and investing premiums (almost always for a gain). Yet carriers are likely to find both revenue generators downright stingy when it comes to growth—certainly for this year, and very likely in 2011.
The primary fear factor challenging insurers is the moribund economy. Millions have been laid off, and employers are reluctant to hire again. Many businesses have either scaled back or closed up for good. Entrepreneurs have been discouraged from launching new ventures.
Even if companies are in the mood to expand or if some visionary is eager to enter the market, getting financing from banks still hoarding cash is nearly impossible.
There are also a ton of homes on the market, thanks in part to lenders loath to write mortgages, fearful buyers will lose their jobs and be unable to repay the loans.
Consumers are also saving like mad, usually because they are out of work (or terrified of becoming unemployed) and are paying off a mountain of debt. That is putting a serious crimp in the economy.
Meanwhile, interest rates are zilch. That’s a great way to prop up the banking sector and make loans more affordable, which will help p&c insurers in the long run if this monetary policy helps jump-start the economy.
But in the meantime, carriers—who depend on bonds for a large chunk of their investment income—are being denied a key source of revenue, and are left with little opportunity to compensate for a premium rate environment that is flat at best.
Investment risk has also risen in the bond market, given the economic climate—particularly with municipal bonds, since so many state and local governments face budgetary crises.
So what do insurers do now? Most are reciting the mantra of underwriting discipline, but I am skeptical most carriers will be able to maintain their composure in the face of such intense competition for a shrinking exposure pie.
Consolidation could be the answer. Literally eliminate the competition--thin the herd so there is enough premiums to keep the survivors alive. Nearly three-quarters of those surveyed at the forum agree with me on this.
How about you?
(By the way, if you like this tee-shirt, you can order one at http://www.zazzle.com/rock_and_a_hard_place_tshirt-235212506499811347. I have no commercial interest here, but want to give credit where credit is due--it's where I found this funny image.)
