Nearly five years ago–back in the July 23, 2001 edition of National Underwriter–we stepped into an actuarial time machine and forecast the “Top 10 News Stories of 2005,” as viewed from the perspective of the property-casualty insurance industry. In this follow-up piece, we boldly examine the accuracy of our forecasts and their implications, as well as peek ahead to spotlight issues the industry might be facing five years down the road.

1. Underwriting Cycle Heads South Again:

We might just as courageously have predicted the sun would continue to rise and set, given that the industry seems determined time and again to use its competitive pricing tools to erode hard-won profit margins.

Prior to Hurricane Katrina, 2005 showed a repeat of this pattern. After an industrywide underwriting profit in 2004, price levels slipped by 3 percent for commercial lines in the second and third quarters of 2005, compared to the corresponding periods one year earlier, according to the Tillinghast commercial lines price monitoring survey, CLIPS.

However, over the past five years, we have seen encouraging developments related to several underwriting cycle implications we discussed in our 2001 article.

o Price Monitoring. Back in 2001, we warned of the dangers to insurers that establish their pricing based primarily on competitors' actions, or adjust loss-reserve adequacy to soften the deterioration of reported underwriting results. We have been noticing, however, that many insurers are introducing and strengthening price-monitoring tools and paying greater attention to the results.

We also see an increasing number of executives, boards of directors and audit committees that insist on receiving unvarnished briefings from loss-reserving actuaries. But more work is needed within companies to create full feedback loops that allow–or force–managements and underwriters to learn from the results of past actions, and to prompt them to make better decisions the next go-around.

o Segmentation. While insurance is a business of averages, no one policyholder is “average.” In 2001, we observed the development of various techniques for refining market segmentation and individual account analysis, and predicted that insurers using these tools in a disciplined way would outperform competitors.

This trend has taken hold in a major way in personal auto, where the use of predictive modeling is pervasive and the search for additional explanatory variables continues. Innovative companies continue to lead the pack–witness Progressive having increased its personal auto marketshare from 2.6 percent in 1995 to 4.7 percent in 2000 and 7.3 percent in 2004.

The use of new data elements and analytical tools to define segments for targeted marketing, pricing and underwriting has also migrated to homeowners. We are seeing an increased level of predictive modeling exploration in commercial lines as well, beginning with Main Street accounts and moving to larger account sizes and specialty coverages.

2. Mini-Cats Cost Insurers $100 Billion:

We correctly predicted “an unusually large number of tropical storm systems,” but we doubt anyone expected that those naming hurricanes would need to dip into their supply of Greek letters to label the final few storms of 2005–and, of course, we won't try to categorize Katrina, Rita or Wilma as mini-anything.

Fortunately, other predicted catastrophes did not occur, and it appears the $100 billion cost estimate for 2005 was pessimistic. Still, Katrina's $34 billion-or-so insurer price tag indicates that $100 billion in catastrophe claims in a single year in the United States is by no means outside the range of probability. Superimpose the Asian tsunami or the devastating October earthquake in Pakistan to a heavily-populated U.S. city or coastline, and the cost would be beyond counting.

We earn mixed scores on predictions of industry implications:

o Predicted Solvency Threat Didn't Materialize. While many insurers took sizeable earnings blows from the storms, the number of insurers facing an immediate capital crisis has been mercifully small. Certainly risk management techniques adopted by insurers in the 13 years since Hurricane Andrew must be credited with helping prepare some companies.

o Public Outcry Muted. We aren't seeing restricted markets giving rise to a predicted outcry for full coverage of catastrophe perils at affordable prices, but pending litigation in Mississippi illustrates a worst-case scenario–retroactive coverage of cat perils at no additional cost. Plus, we do expect property insurance cost and availability will be one challenge of the Gulf Coast rebuilding effort.

o Catastrophe reinsurance market tightens. Nearly weekly, a new catastrophe reinsurer springs up in an offshore domicile, indicating there will be plenty of reinsurance capacity, but perhaps not at prices or terms primary insurers would like.

o Securitization lags. A predicted increase in securitization deals has not developed as rapidly as we anticipated, perhaps because the deals are complex to structure and traditional reinsurance has remained available.

3. Internet Sales Of Personal Lines Insurance Dominate Youthful Market:

Our 2001 story included a prediction that by 2006 the Internet would account for nearly 80 percent of the young-adult market and almost 40 percent of new and renewal transactions in the personal lines market overall.

Although the exact figures quoted in the story have not been achieved, Forrester Research estimates that nearly one-quarter of auto insurance buyers apply for their policy online, and about one-fifth of the remainder conduct at least some comparison shopping or other information-gathering online.

Some of our anticipated implications were on target–among them, faster cycle-times for product innovation and price changes, as well as growing price competition as more shoppers make online comparisons. But we inaccurately predicted that online shoppers would become increasingly aware of jurisdictional regulatory differences and limits on insurer flexibility to price, classify and underwrite business in some areas.

4. Information-Gathering Devices Produce Flood Of Data:

The 2001 article anticipated that the smart chips routinely installed in cars, appliances, phones and other devices would produce information on usage patterns, and would ultimately gain acceptance in pricing and underwriting–especially with the lure of premium discounts coaxing low-risk consumers to allow insurers to use data collected from these sources.

Technological innovation continues to point in this direction–onboard computers signaling the location of automobiles or appliances that “ask” the home office for maintenance when they need it.

Even data on when, where and how people interact with Web sites is being gathered and analyzed. The ability to track activity is becoming pervasive–and invasive, with involuntary and unknowing downloads of spyware to our computers. The acceptance of information sharing, especially among young adults, is growing.

We anticipated several implications of this trend, most of which still ring true but are somewhat delayed. For example, there hasn't yet been much insurer activity aimed at using this new data to establish rating classes. But we understand some insurers are offering time-sensitive coupons and other incentives to capture business of online shoppers–based, in part, on shoppers' behavior in navigating insurer Web sites.

5. Stat Data To Be Abbreviated:

The predicted story: Several large U.S. insurers rally around a proposal that the National Council on Compensation Insurance and the Insurance Services Office dramatically reduce the variety and volume of statistical data collected.

While pressure is on for statistical agents to justify the efficacy of, and streamline, various data collection processes, this pressure has not produced a wholesale reduction in the variety and volume of statistical data that is collected. Several trends, in fact, point in the direction of increased data collection:

o Increased regulatory attention on data quality/integrity. Regulators show greater interest in real-time information on cost trends and market behaviors.

o Sophisticated market segmentation research presents opportunities. Whether stat agents do research themselves or allow company members to manipulate online databases, the stat agents and their clients will need more information, not less.

6. Solvency Regulation Moves To Washington; Rating Freedom For Middle-Market Accounts:

While the story of federal solvency regulation has not unfolded exactly as we might have predicted, we have been watching several related national trends:

o Sarbanes-Oxley, enacted in response to several significant financial reporting scandals, is creating marked changes in the way many insurers–and their professional advisors–gather, interpret and report financial data. If these changes ultimately result in more accurate, timely, complete and meaningful information, the ability of states, federal regulators and the market itself to monitor the solvency of insurers would indeed be enhanced.

o Enterprise risk management is emerging strongly as a sound business management tool, notwithstanding that many companies initially adopted some elements of ERM primarily as a Sarbanes-Oxley compliance measure. The impact of ERM is not particularly to enhance the ability of outsiders to evaluate the solvency of an entity but for management to have better information and control regarding key business decisions and actions that will affect future performance and solvency.

o Rating agencies increasingly are serving as de facto regulators of financial strength and performance for much of the marketplace. Today, few insurers make major strategic or financial moves without considering how the agencies will respond.

The other half of the predicted story focused on deregulation for commercial accounts with over $100,000 in premium.

We perceive that market forces, rather than state rate regulation, are indeed the primary determinant of prices for this business. However, the driver of this trend has been the marketplace itself, rather than regulatory change. And, into the future, predictive modeling and segmentation will foster still further competitive innovations in commercial lines insurance.

7. Banks Integrating P-C Products Into Service Offerings:

This prediction anticipated that banks would have by now effectively incorporated the distribution of personal lines products of partnering insurers into their suites of products and services.

In fact, we do not yet observe a broad change in the effectiveness of such partnering, cross-selling and integration initiatives with p-c insurers, although banks continue to expand into the insurance brokerage business.

8. Jury Awards Skyrocket:

Back in July 2001, we predicted that in 2005, class-action suits directed at auto, tire, computer, artificial sweetener, airline and insurance firms would total $100 billion.

Tillinghast's 2005 tort cost study indicated that the cost of the tort system continues to grow at a faster rate than the U.S. economy, but that the growth rate had moderated somewhat from historical trends. While tort reform remains an issue in front of Congress, headline stories have been more localized than in the 2001 predictions (for example, medical malpractice crises in various states).

While this remains more of an evolution than a sudden story, direct implications for p-c insurers align with our expectations:

o Continued demand for liability insurance, and continued challenges in the underwriting, pricing and reserving for liability coverage.

o Cost of defense rising faster than the cost of settlements. Leading insurers have restructured relationships with defense firms–revising financial arrangements and becoming more involved in the control of cases.

o ERM heads in a positive direction. We anticipated that the increase of tort issues would have implications for the growing trend of corporate entities to embrace a more holistic, enterprisewide understanding and management of risk. For example, we predicted corporations would demand risk-transfer mechanisms that more completely address the consequences of class-action cases, such as loss of reputation and marketshare.

This is a relatively difficult trend to observe and measure, but we perceive that a considerable proportion of ERM energy is headed in a different and positive direction–toward identifying and addressing circumstances that give rise to problems in the first place, not just to financing and handling problems when they do occur.

9. Plaintiff Law Firms Positioned In Latin America and Japan:

We are not yet observing a sea change in the legal climates in other jurisdictions toward a U.S.-style tort system. If and when such changes begin to occur, they will produce both opportunities and challenges for the p-c insurance industry.

10. Acquisitions Hit Record Pace; Outstripped By De-Acquisitions:

We have not seen a significant predicted shift in the number or creativity of divestitures, spin-offs or breakups of parts of businesses that no longer fit insurers' strategies, although some major insurers have taken exactly these steps.

The world has indeed changed in the past five years. Some of the changes were very predictable, and some more surprising.

We will be able to make the same statement five years from today. The challenge for insurance company management teams is to be able to answer “yes” to the following question: “Are our decision-making, strategic, operational, risk management and response systems better equipped today to anticipate, monitor and address emerging external and internal trends, changes and problems than they were five years ago?”

Companies that can answer this question in the affirmative improve the odds of surviving and thriving despite the uncertainties ahead.

Special Reports /

'Time Travelers' Miss Some Forecasts But Find Encouraging Developments

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