Will 2012 be the year the marketturns?

Robert Cubbin: While we are seeing somebottoming out and even price hardening in certain specific productlines or market segments, we still do not foresee a turn in themarket cycle in the near future. There is still a lot of capacityand strong competition present in the market. One issue we all arewatching closely is the industry adoption of the RMS 11 model.Insurers are continuing to stall on the implementation of RMS 11into their own underwriting models. However, the reinsurers areseeking to charge insurance companies potentially significant rateincreases based on the updated U.S. wind model at Jan. 1, 2012.This could have significant impact on potential rate increasesacross the board. However, we are uncertain at what level thecurrent economy can shoulder this burden.

Robert H.Rheel: It needed to turn 2 years ago. Something hasgot to give. Since the 2008-09 financial crisis, bond yields havebeen very low and this has affected returns on new money investedfor all insurance companies. Yet insurance market rates have notreflected this change. Why? Because this financial reality takestime to filter through to investment returns and some accountingconventions in the meantime flatter the returns with the creationof unrealized gains. It’s like a train with the engine pulling therest of the cars into the turn. The train car you are sitting indetermines when you will feel the turn. It is clear, however,that even the last cars are feeling the effects of a sustainedlow-yield environment. For insurance companies, if lower investmentincome is a given, then underwriting income needs to make up theshortfall for return on equity targets to be met. This canonly happen if either, so to speak, cars crash less often, orpremiums rise. Insurance companies would be foolish to bet on theformer but they can achieve the latter.

As both clients and insurance companies fully acknowledge theseeconomic realities, we believe this will support market change. In2012, we expect to see additional, though not all, segments of themarket experience the turn. The fundamentals of the insurancecompanies require lower combined ratios than those seen not only inthe recent past but, arguably, in history since interest rates arealso at all record lows.

Mike Concannon: Expectations for 2012 areheavily reliant upon the pace and extent of the economic recovery.The insurance industry faces a number of challenges: Interest ratesremain near all-time lows, unemployment is hovering around 9percent, weather-related catastrophe and non-catastrophe losseshave increased, and generally insurers are seeing less favorabledevelopment on prior accident years. On the flip side, favorabletop-line trends continue. We’ve seen signs of price firming acrossall lines of business, although it is too early to call aninflection point in the market cycle. Further, we expect loss coststo continue to rise, putting pressure on already thin underwritingmargins. At The Hartford, we’re focused on writing business at anappropriate price relative to the risk. We’re taking a disciplinedapproach to this marketplace. We believe commercial P&C pricingwill continue to increase, and we will continue to drive for priceincreases in 2012.

Where will companies see profits in 2012?

Cubbin: Given the existing excess capacityavailable in the market, fierce competition, low yields on fixedincome portfolios and tough economic conditions, profits willcontinue to be a struggle to achieve consistently. In particular,unpredictable weather-related losses caused poor underwritingresults across the board for the property-casualty insuranceindustry. A lot in 2012 will depend on the weather. For sustainableprofits to re-emerge, prices need to go up.

Rheel: Companies will drive toward greaterunderwriting profit. This focus will create stronger underwritingstandards, moving more business back to non-standard markets. Thisapproach also means stricter standards for customers that have poorloss ratios and reassessment of lines of business or segments thathave been historically unprofitable. Bottom line, thoseunderwriting experts will create underwriting profits for theirorganization.

Concannon: The economy is expected to remainsluggish, with growth slow and choppy at best. As we emerge from anenvironment of reasonable yet increasing loss costs and past yearsof negative pricing, we’re cautiously optimistic about the marketand hopeful that it will improve. Regardless of the externalfactors, The Hartford is focused on profitable growth opportunitiesin attractive segments, industries and geographies. We willcontinue to capitalize on our industry-leading capabilities inserving the small commercial segment. In the middle marketspace, we believe that targeting desirable industries such ashealth care, technology, life sciences and private education is keyto success, and we’re building specialized capabilities to help ouragents and brokers capitalize on these market opportunities. In ourspecialty casualty businesses, we will continue to focus ondelivering flexible, tailored solutions to address our customers’complex insurance and risk management needs.

Read on for the panel's take on the 2012 election andlegislative issues.Will the 2012 election impactthe insurance industry? How?

Cubbin: The election may have an impact for avariety of issues, including:

1. The poor economic environment and any additional stimulus
2. Ongoing health care reforms, including medical costcontainment
3. Inflation and its control
4. The political debate with regard to extending the NationalFlood Insurance Program (NFIP).

Concannon: Every election matters and 2012 willbe no different. Federal officials will continue theirimplementation of the new financial regulatory law. The nextcongress is expected to debate tax reform, which is likely toimpact individuals as well as businesses, both small and large. Ifthe flood program is not granted a multi-year reauthorization, thatissue will need to be addressed in 2013. Federal officials willalso be grappling with the expiration of the Terrorism RiskInsurance Program in 2014. At the state level, insurers are workingon workers’ compensation reform, specifically in the area ofpharmaceuticals, and auto no-fault in a few states. Litigationreform and litigation abuse issues are also pending in many statesand are being looked at on a federal level. In short, there arevery important public policy issues under consideration that canhave a real impact on our industry, so it’s important for everyoneto be engaged.

Rheel: It’s too early to predict the impact ofthe 2012 election, much less what it means for the insuranceindustry.

Can legislators and the industry come together on asolution to worsening cat exposures?

Cubbin: We do not believe that the federalgovernment is necessarily in a position to manage cat events,particularly from wind exposures. This is an area that is and needsto be managed by the private sector through risk modeling at thereinsurer and insurance company levels. However, we are watchingvery closely the government role and response to expanding floodexposures. Since 2002, there have been 11 last-minute NFIPreauthorizations, and on four occasions the program was allowed tolapse for extended periods of time; a long-term solution isneeded.

Rheel: The worsening of cat exposures calls forprudent assessment of risks. I believe this is first and foremostthe responsibility of the industry. Management of risk is what wedo and when we do it well, both policyholders and shareholders aresatisfied. Nevertheless, legislators can help encourage this byproviding a framework for operation and setting standards.

Concannon: There are steps that can be taken toencourage effective mitigation and land use planning in areassusceptible to catastrophic losses from wind, earthquakes, floodsand other perils. It is important for policyholders located inflood, wind and earthquake zones to understand their risk exposureand ensure they have adequate coverage to help them recover quicklyafter a loss. While it would be difficult to design a grandsolution that addresses all catastrophe risk issues, there are manyimportant steps that are supported by the industry and legislators,such as improved building codes and building code enforcement andeducation around coverage adequacy, that can help policyholdersprepare in advance of a catastrophe event and recover when anatural catastrophe does strike.

Next - the panel discusses program business, 2012distribution strategies and agent/brokerrelationships.

How important has program businessbecome for your company?

Cubbin: As one of the leading program-focusedinsurers, specialty niche programs continue to be our strong corefocus. In recent years, we have diversified our operations viaMeadowbrook’s 2008 merger with Century Insurance Group, whichbrought a strong Excess & Surplus Lines binding and brokeragefacility and special risk underwriting expertise to further developand diversify our operations. We continue to see strong growthopportunities from both program and binding/brokerage operationswhich are available to our distribution partners.

Rheel: Aspen U.S. Insurance has nine businesslines including Property, Casualty, Excess, Commercial Surety,Environmental, Marine, Management Liability, Professional Liabilityand Programs. Programs is our fastest growing businessline and we are looking to continue this growth patternselectively.

Concannon: Programs are an attractive businesssegment for The Hartford. The marketplace presents ampleopportunity for profitable growth. Over the last decade, wehave grown our program business to more than 50 programs, with aspecific emphasis on specialty program and captive programbusiness. Our written premium from these programs has doubledin the last five years. We attribute much of our success to threemain factors: the flexibility of our program design andcompensation structures, the depth of our underwriting talent andoperational expertise, and the strength of our relationships withour program partners. We currently enjoy deep relationshipswith several niche wholesalers in this arena and will continue tocultivate that distribution system. We also believe ourability to tap into the greater Hartford network for selectedopportunities gives us an even bigger universe forexpansion. Through our programs business, we’re able toprovide solutions to our producer partners for riskier accounts anda solid coverage solution for insureds. We view programbusiness as mutually beneficial for our customers and producerpartners, and we’ll continue to pursue profitable growth in thisarea.

How does your company's distribution strategy play into2012 growth plans?

Cubbin: Meadowbrook is fortunate to have astrong and diverse group of distribution channels, includingindependent retail agency networks, wholesale distributionchannels, and specialty program administrators. We also work with anumber of industry associations and public entities. We think ourstrategy lies in maintaining and fostering this diverse group ofvarious distribution channels and also utilizing opportunities tocross-sell between by providing access to different products,programs and binding/brokerage facilities.

Rheel: Our distribution strategy is critical toour organization, which is connected to our underwriting and claimsstrategy. We are seeking relationships that value andunderstand our expertise. For us, it's not about the numberof agent and brokers firms that represent our products, butcreating deep and effective relationships with our (chosen)partners.

Concannon: Independent agents and brokers areat the heart of The Hartford’s distribution strategy, as they havebeen throughout our 200+ year history. Our priority is tocontinue to invest in technology and process improvements that makeit easier for our distribution partners to do business with us. Forexample, this fall we launched significant enhancements to oursubmission system for small commercial workers’ compensationquotes, which has created an entirely new experience for agents inthe way they transact business with us. The system deliversfast, accurate and bindable quotes, which enable agents to presentand issue the quote without having to wait for underwriterapproval. For many risks, agents can get a firm bindablequote approved for issue in as little as two minutes. Agentfeedback has been positive and they’re feeling the benefits. In fact, we are developing plans to expand this system to includeour Spectrum business owner’s policy and commercial auto.

What role will independent agents and brokers play inthe future?

Cubbin: Meadowbrook is a strong, staunchsupporter of the independent agent / broker model. Meadowbrookitself was founded as an independent agency and beyond ourinsurance company operations, we continue to also operate separateretail and wholesale specialist agencies. There will always be astrong need and role for independent agents who will provide uniqueconsultation, risk management solutions and moreover, market accessto insurance companies.

Rheel: Simply put: 100 percent of our productsare sold through independent agents and brokers.

Concannon: Independent agents and brokers willcontinue to play a critical role as trusted advisors to bothcommercial and personal lines insurance buyers. For TheHartford, agents and brokers are core to our company’s distributionstrategy. We remain focused on developing opportunities thathelp our agents differentiate themselves in the marketplace andpursue new sources of revenue. For example, in our personal linesbusiness, we’re proud to offer our industry-leading AARP-brandedauto insurance program through our independent agents. Ourresearch has found that 70 percent of AARP members preferpurchasing insurance through a local agent, so this program enablesus to offer a differentiated product through a distribution channelthat these customers prefer. We’re also seeing exciting outcomesfrom our joint-sales approach with our property and casualty andgroup benefits sales teams. By bringing these teams togetherto identify opportunities to present more comprehensive solutionsbased on a holistic view of a customer’s needs, we have writtenmore than $100 million of new joint premium year to date. More and more agents are interested in learning how they can pursuethese opportunities.