Will 2012 be the year the market turns?
Robert Cubbin: While we are seeing some bottoming out and even price hardening in certain specific product lines or market segments, we still do not foresee a turn in the market cycle in the near future. There is still a lot of capacity and strong competition present in the market. One issue we all are watching closely is the industry adoption of the RMS 11 model. Insurers are continuing to stall on the implementation of RMS 11 into their own underwriting models. However, the reinsurers are seeking to charge insurance companies potentially significant rate increases based on the updated U.S. wind model at Jan. 1, 2012. This could have significant impact on potential rate increases across the board. However, we are uncertain at what level the current economy can shoulder this burden.
Robert H. Rheel: It needed to turn 2 years ago. Something has got to give. Since the 2008-09 financial crisis, bond yields have been very low and this has affected returns on new money invested for all insurance companies. Yet insurance market rates have not reflected this change. Why? Because this financial reality takes time to filter through to investment returns and some accounting conventions in the meantime flatter the returns with the creation of unrealized gains. It’s like a train with the engine pulling the rest of the cars into the turn. The train car you are sitting in determines when you will feel the turn. It is clear, however, that even the last cars are feeling the effects of a sustained low-yield environment. For insurance companies, if lower investment income is a given, then underwriting income needs to make up the shortfall for return on equity targets to be met. This can only happen if either, so to speak, cars crash less often, or premiums rise. Insurance companies would be foolish to bet on the former but they can achieve the latter.
As both clients and insurance companies fully acknowledge these economic realities, we believe this will support market change. In 2012, we expect to see additional, though not all, segments of the market experience the turn. The fundamentals of the insurance companies require lower combined ratios than those seen not only in the recent past but, arguably, in history since interest rates are also at all record lows.
Mike Concannon: Expectations for 2012 are heavily reliant upon the pace and extent of the economic recovery. The insurance industry faces a number of challenges: Interest rates remain near all-time lows, unemployment is hovering around 9 percent, weather-related catastrophe and non-catastrophe losses have increased, and generally insurers are seeing less favorable development on prior accident years. On the flip side, favorable top-line trends continue. We’ve seen signs of price firming across all lines of business, although it is too early to call an inflection point in the market cycle. Further, we expect loss costs to continue to rise, putting pressure on already thin underwriting margins. At The Hartford, we’re focused on writing business at an appropriate price relative to the risk. We’re taking a disciplined approach to this marketplace. We believe commercial P&C pricing will continue to increase, and we will continue to drive for price increases in 2012.
Where will companies see profits in 2012?
Cubbin: Given the existing excess capacity available in the market, fierce competition, low yields on fixed income portfolios and tough economic conditions, profits will continue to be a struggle to achieve consistently. In particular, unpredictable weather-related losses caused poor underwriting results across the board for the property-casualty insurance industry. A lot in 2012 will depend on the weather. For sustainable profits to re-emerge, prices need to go up.
Rheel: Companies will drive toward greater underwriting profit. This focus will create stronger underwriting standards, moving more business back to non-standard markets. This approach also means stricter standards for customers that have poor loss ratios and reassessment of lines of business or segments that have been historically unprofitable. Bottom line, those underwriting experts will create underwriting profits for their organization.
Concannon: The economy is expected to remain sluggish, with growth slow and choppy at best. As we emerge from an environment of reasonable yet increasing loss costs and past years of negative pricing, we’re cautiously optimistic about the market and hopeful that it will improve. Regardless of the external factors, The Hartford is focused on profitable growth opportunities in attractive segments, industries and geographies. We will continue to capitalize on our industry-leading capabilities in serving the small commercial segment. In the middle market space, we believe that targeting desirable industries such as health care, technology, life sciences and private education is key to success, and we’re building specialized capabilities to help our agents and brokers capitalize on these market opportunities. In our specialty casualty businesses, we will continue to focus on delivering flexible, tailored solutions to address our customers’ complex insurance and risk management needs.
Read on for the panel's take on the 2012 election and legislative issues.
Cubbin: The election may have an impact for a variety of issues, including:
- The poor economic environment and any additional stimulus
- Ongoing health care reforms, including medical cost containment
- Inflation and its control
- The political debate with regard to extending the National Flood Insurance Program (NFIP).
Concannon: Every election matters and 2012 will be no different. Federal officials will continue their implementation of the new financial regulatory law. The next congress is expected to debate tax reform, which is likely to impact individuals as well as businesses, both small and large. If the flood program is not granted a multi-year reauthorization, that issue will need to be addressed in 2013. Federal officials will also be grappling with the expiration of the Terrorism Risk Insurance Program in 2014. At the state level, insurers are working on workers’ compensation reform, specifically in the area of pharmaceuticals, and auto no-fault in a few states. Litigation reform and litigation abuse issues are also pending in many states and are being looked at on a federal level. In short, there are very important public policy issues under consideration that can have a real impact on our industry, so it’s important for everyone to be engaged.
Rheel: It’s too early to predict the impact of the 2012 election, much less what it means for the insurance industry.
Can legislators and the industry come together on a solution to worsening cat exposures?
Cubbin: We do not believe that the federal government is necessarily in a position to manage cat events, particularly from wind exposures. This is an area that is and needs to be managed by the private sector through risk modeling at the reinsurer and insurance company levels. However, we are watching very closely the government role and response to expanding flood exposures. Since 2002, there have been 11 last-minute NFIP reauthorizations, and on four occasions the program was allowed to lapse for extended periods of time; a long-term solution is needed.
Rheel: The worsening of cat exposures calls for prudent assessment of risks. I believe this is first and foremost the responsibility of the industry. Management of risk is what we do and when we do it well, both policyholders and shareholders are satisfied. Nevertheless, legislators can help encourage this by providing a framework for operation and setting standards.
Concannon: There are steps that can be taken to encourage effective mitigation and land use planning in areas susceptible to catastrophic losses from wind, earthquakes, floods and other perils. It is important for policyholders located in flood, wind and earthquake zones to understand their risk exposure and ensure they have adequate coverage to help them recover quickly after a loss. While it would be difficult to design a grand solution that addresses all catastrophe risk issues, there are many important steps that are supported by the industry and legislators, such as improved building codes and building code enforcement and education around coverage adequacy, that can help policyholders prepare in advance of a catastrophe event and recover when a natural catastrophe does strike.
Next - the panel discusses program business, 2012 distribution strategies and agent/broker relationships.
Cubbin: As one of the leading program-focused insurers, specialty niche programs continue to be our strong core focus. In recent years, we have diversified our operations via Meadowbrook’s 2008 merger with Century Insurance Group, which brought a strong Excess & Surplus Lines binding and brokerage facility and special risk underwriting expertise to further develop and diversify our operations. We continue to see strong growth opportunities from both program and binding/brokerage operations which are available to our distribution partners.
Rheel: Aspen U.S. Insurance has nine business lines including Property, Casualty, Excess, Commercial Surety, Environmental, Marine, Management Liability, Professional Liability and Programs. Programs is our fastest growing business line and we are looking to continue this growth pattern selectively.
Concannon: Programs are an attractive business segment for The Hartford. The marketplace presents ample opportunity for profitable growth. Over the last decade, we have grown our program business to more than 50 programs, with a specific emphasis on specialty program and captive program business. Our written premium from these programs has doubled in the last five years. We attribute much of our success to three main factors: the flexibility of our program design and compensation structures, the depth of our underwriting talent and operational expertise, and the strength of our relationships with our program partners. We currently enjoy deep relationships with several niche wholesalers in this arena and will continue to cultivate that distribution system. We also believe our ability to tap into the greater Hartford network for selected opportunities gives us an even bigger universe for expansion. Through our programs business, we’re able to provide solutions to our producer partners for riskier accounts and a solid coverage solution for insureds. We view program business as mutually beneficial for our customers and producer partners, and we’ll continue to pursue profitable growth in this area.
How does your company's distribution strategy play into 2012 growth plans?
Cubbin: Meadowbrook is fortunate to have a strong and diverse group of distribution channels, including independent retail agency networks, wholesale distribution channels, and specialty program administrators. We also work with a number of industry associations and public entities. We think our strategy lies in maintaining and fostering this diverse group of various distribution channels and also utilizing opportunities to cross-sell between by providing access to different products, programs and binding/brokerage facilities.
Rheel: Our distribution strategy is critical to our organization, which is connected to our underwriting and claims strategy. We are seeking relationships that value and understand our expertise. For us, it's not about the number of agent and brokers firms that represent our products, but creating deep and effective relationships with our (chosen) partners.
Concannon: Independent agents and brokers are at the heart of The Hartford’s distribution strategy, as they have been throughout our 200+ year history. Our priority is to continue to invest in technology and process improvements that make it easier for our distribution partners to do business with us. For example, this fall we launched significant enhancements to our submission system for small commercial workers’ compensation quotes, which has created an entirely new experience for agents in the way they transact business with us. The system delivers fast, accurate and bindable quotes, which enable agents to present and issue the quote without having to wait for underwriter approval. For many risks, agents can get a firm bindable quote approved for issue in as little as two minutes. Agent feedback has been positive and they’re feeling the benefits. In fact, we are developing plans to expand this system to include our Spectrum business owner’s policy and commercial auto.
What role will independent agents and brokers play in the future?
Cubbin: Meadowbrook is a strong, staunch supporter of the independent agent / broker model. Meadowbrook itself was founded as an independent agency and beyond our insurance company operations, we continue to also operate separate retail and wholesale specialist agencies. There will always be a strong need and role for independent agents who will provide unique consultation, risk management solutions and moreover, market access to insurance companies.
Rheel: Simply put: 100 percent of our products are sold through independent agents and brokers.
Concannon: Independent agents and brokers will continue to play a critical role as trusted advisors to both commercial and personal lines insurance buyers. For The Hartford, agents and brokers are core to our company’s distribution strategy. We remain focused on developing opportunities that help our agents differentiate themselves in the marketplace and pursue new sources of revenue. For example, in our personal lines business, we’re proud to offer our industry-leading AARP-branded auto insurance program through our independent agents. Our research has found that 70 percent of AARP members prefer purchasing insurance through a local agent, so this program enables us to offer a differentiated product through a distribution channel that these customers prefer. We’re also seeing exciting outcomes from our joint-sales approach with our property and casualty and group benefits sales teams. By bringing these teams together to identify opportunities to present more comprehensive solutions based on a holistic view of a customer’s needs, we have written more than $100 million of new joint premium year to date. More and more agents are interested in learning how they can pursue these opportunities.