Is the property and casualty insurance economic picture better from the outside looking in or the inside looking out? A panel of outside experts, followed by a panel of insurance company CEOs, considered this question recently at the Property/Casualty Insurance Joint Industry Forum, held Jan. 13 at New York's Waldorf-Astoria hotel.
When asked by moderator Robert P. Hartwig, president and economist, Insurance Information Institute, about the 2015 financial outlook for P&C insurers, the industry experts, looking in, found the economic picture mixed, with all lines facing rate pressure. Matthew Mosher, senior vice president, Global Ratings at A.M. Best Co., said that Personal lines should be stable on rates and loss costs; however, he had a more negative outlook for Commercial lines. Reinsurance companies especially are dealing with rate pressure, new entrants into the marketplace and shrinking reserves.
Vincent J. (V.J.) Dowling, managing partner of Dowling & Partners, said that insurers are “taking more cookies out of the jar than they’re putting in.” Although catastrophes were fewer than anticipated in 2014, insurers still incurred $30 billion in losses.
Dowling also says he is increasingly concerned about low interest rates continuing for a long time, which lets the government help borrowers not savers, like the insurance industry. He noted that about 40% of revenue for insurance companies is from their underwriting profits. The companies aren’t earning much on the investment side with only single-digit returns.
Thomas B. Lombardi, a senior insurance advisor at Evercore, a global investment banking advisory firm, and former insurance commissioner for the state of Connecticut, noted that the high margins in reinsurance are eroding the market. The issue, he said, is that there are historically low yields on bonds and nontraditional players in the market. In addition, regulators don’t completely understand the risk this group faces. He says he believes the small players will get left behind.
Regarding Cyber coverage, Randy J. Maniloff, an attorney at White and Williams LLP, said that from a claims perspective, he’s not sure where Cyber is going. Policies are being marketed aggressively, he said, and at first claims will be paid well. The take-up rate is estimated to be about one-third of companies in the U.S., but he thinks that’s too high. There are too many sellers right now.
P/C Insurance Joint Industry Forum Panel of Experts (Photo by Don Pollard Photo)
It’s about the customer
Brian Sullivan, editor and publisher of Auto Insurance Report and Property Insurance Report, noted that there has been significant consolidation in auto insurance, and he expects more to come. “You can’t be stupid,” he said—a comment that resonated with the audience as well as fellow panelists. “There’s room for every kind of insurance company, regardless of size,” as long as the company makes smart decisions.
Howard C. Kunreuther, James G. Dinan Professor; Professor of Decision Sciences and Business and Public Policy at the Wharton School, and co-director of the Wharton Risk Management and Decision Processes Center, concurred that companies can’t be stupid, but he said the better question is how to increase the level of protection for customers. He focused on the need to change human behavior, the notion that before a disaster strikes people believe “It won’t happen to me.” They buy earthquake or flood insurance only after a loss (if they’re not required to by their mortgage company, for example).
The experts agreed that competitive pressure is restraining growth with minimal to no growth in personal lines claims. For example, safer autos and social pressure for driving safely contributed to fewer accidents. With fewer accidents, companies have less justification to increase premiums, leading to more intense competition on rates and long-term revenue decline. Homeowners claims, by comparison, are projected by Dowling to be bigger than auto over the next 15 years. “He who controls the customer wins,” he added.
When asked about industry consolidation, Dowling said that he has seen more change in the last three years than in the previous 30. The influx of third-party capital—from pension funds and hedge funds, for instance—is changing the underlying economies of the industry.
To continue to grow, Kunreuther said, the industry has to focus on the risk management side, primarily long-term strategies as well as short-term returns. Lombardi concluded that the industry has to reinvent itself, looking for cost effectiveness and scale. If not, he said, small players will be left behind.
P/C Insurance Joint Industry Forum Panel of CEOs (Photo by Don Pollard Photo)
Inside looking out—CEO perspective
The panel of CEOs also considered the P&C insurance financial picture, and their views were mixed. When asked for their predictions by the moderator, Bradley L. Kading, president and executive director, Association of Bermuda Insurers and Reinsurers, Paula Downey, president and CEO of CSAA Insurance Group, a AAA Insurer, said that from a personal lines perspective, she thought the outlook was stable. She agreed that there would be relatively low growth rates for auto and homeowners coverage, noting that new car sales are up but new home sales are not.
Downey also noted that companies are growing by taking market share from other insurers. Her brand is strong, she said, and the company has good control of its distribution channel. Her biggest issue for 2015 is how to deploy capital to invest in infrastructure and better compete. She plans to maintain pricing discipline while pursuing a growth strategy.
Jaime Tamayo, president and CEO of MAPFRE USA, said that he sees excess capital in U.S. P&C companies. He advised insurers to either accept low returns on equity or put their capital to work. The biggest challenge to Tamayo’s Personal lines business is the unpredictable weather pattern, causing losses that are less than catastrophic but significant nonetheless. The low interest rate economic environment and compressed margins also are concerns.
Henry Klecan, managing director, P&C and Life operations for SCOR, a global reinsurance company, said that the equity returns on “not spectacular,” but the balance sheet is strong. For 2015, Klecan said that commercial lines companies need to become smarter about risk selection and they need to understand their customers better.
According to Thomas A. Lawson, president and CEO of FM Global, there is downward pressure on rates across the board. Companies need to continue to make smart decisions and maintain discipline.
Steven D. Linkous, president and CEO of The Harford Mutual Insurance Cos., reminded the audience to “remember you’re an insurance company and make good underwriter decisions.” If companies can follow this advice, they can remain profitable for 2015, despite the economy’s ups and downs.
Lawson has seen a shift and redirection of manufacturing back to the U.S., and an investment in risk improvement, which bodes well for his company’s clients. Swift agreed that there has been a return of manufacturing to the U.S. by smaller companies, especially in the Midwest and the South, a sign of an improving economy.
Although agreeing that the return of manufacturing was definitely a positive sign, Klecan found the significant, rapid drop in gas prices troubling. He said that the drop could cause a slowdown in existing building or expansion projects, as well as delays in starting others.
Downey said that she is focused on expanding in the U.S., As a AAA insurer, she has a defined customer segment in AAA members. She is looking at building capabilities, especially for direct distribution.
All avenues of growth are valid, Tamayo said. He is looking at distribution, geography, new products and M&A. His company launched a new life insurance company in Massachusetts in 2014, for example. He also maintained that acquisitions are about the day after the deal closes. It all has to fit and make sense then. Klecan agreed that M&A has to be strategic, and integration of the companies after the merger has to be well thought out.
Swift plans to increase penetration in the Midwest and improve distribution relationships. He is looking at a broader array of solutions to stimulate growth. He said that it’s important to educate customers about their exposures and risk, then ask them how they would pay for a loss. That conversation gets them thinking about increased liability and increased coverage needs.
Tamayo concluded by reminding the audience to think about internationalization. Don’t expect 20%-30% growth in a mature market like the U.S. and Europe, he said. Instead, companies should be looking to Latin America or Eastern Europe, for example, where there are stable governments and there may be 10%-12% growth.