NEW YORK--Insurers to be competitive need to focus on service and underwriting rather than price, the head of the ninth largest U.S. property-casualty insurer told industry counterparts at a meeting here yesterday.

Ted Kelly, chairman and chief executive officer of Boston-based Liberty Mutual, told his audience that one of their biggest challenges is breaking from a commodity-based business model--akin to one used by fast food giant, McDonalds.

Mr. Kelly ranked "differentiation based on service rather than price" as the second greatest challenge for insurers, during a keynote speech at the 18th Annual Executive Conference for the Property-Casualty Industry.

He ranked this challenge directly behind dealing with the federal government on issues like the extension of a terror insurance backstop, and keeping the government out of natural catastrophe insurance.

"While a significant natural catastrophe has the potential to do extraordinary damage to this industry, I would posit that we in the industry have destroyed far more capital through bad underwriting and pricing competition than any catastrophe," he said.

He explained that growth in the mature North American insurance market has historically been achieved by acquisition or by taking business away from competitors by offering lower prices.

"To truly differentiate on the basis of service in the face of pure price competition requires a much deeper understanding of what customers really want. Our service models will have to change," he said.

Characterizing differentiation as an "extremely difficult challenge," he said that very few industries have survived this challenge.

"I'm not saying that the insurance [industry] will be the McDonalds of the next 10 years. On the other hand, there is significant risk that the bulk of insurance--particularly in personal lines--could end up like the fast food industry," he warned.

During the question and answer session, Mr. Kelly suggested that selective underwriting and risk-based price differentiation would be possible if the insurers did not have the ability to share data through organizations like the Insurance Services Office.

Responding to a question about underwriting and pricing discipline--and the availability of data to allow for such discipline--he said, "We would be a much better industry if we couldn't share data."

"There is data. We just don't do a good enough job of using it," he said, adding that companies the size of Liberty Mutual should not need to lean on ISO as a crutch.

Asked about the potential for insurers to grow through consolidation rather than price competition in the near future, Mr. Kelly said that excess capital will likely fuel acquisitions over the next few years.

In addition, he suggested that federal lawmakers could force consolidations of small insurers. To support his theory, he offered the debate over the trigger of federal terrorism coverage, noting that when smaller companies argued for a trigger as low as $50 million, federal lawmakers on both sides of the aisle asked, "Why is a company in business if it can't support a $50 million terror event?"

He said the lawmakers concluded that such insurers shouldn't be in business.

Such companies "will be squeezed out of business. They will be forced to consolidate," Mr. Kelly said, having earlier described the dangers involving the federal government in insurance for natural catastrophes and other perils.

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