What can insurers do to shape their own destiny, rather than acting like victims of circumstances beyond their control?

That was the question I came away with after attending the annual “family reunion” for company and association leaders, better known as the Property and Casualty Insurance Joint Industry Forum, convened recently in New York. The latest industry-wide results (through the first three quarters of 2013) were stellar for the business, as reported by the Property-Casualty Insurers Association of America and ISO. Net written premiums were up 4.2 percent. There was a $16.7 billion swing in underwriting — with insurers cumulatively recording a gain last year of $10.5 billion, versus a $6.2 billion net loss in 2012. The industry's profitability barometer —the combined ratio—was solidly in the black at 95.8, down from 100.7 the year before. Net income soared nearly 55 percent to $43 billion.

Those are very good numbers indeed, but insurers in general tend to be a cautious lot, which is not surprising given what they do for a living. They are trained to hope for the best but be prepared for the worst.

So it was that despite 2013's many positive developments, numerous concerns were raised at the Forum in formal panel discussions and informal conversations during the breaks. Among them were the following issues:

Herding cats: Insurer results benefited from lower-than-average catastrophe losses in 2013. If disaster claims return to more normal levels this year, or worse, that could have a substantial, negative impact on the industry's bottom line.
What goes up must come down: Insurer investments showed a net gain, but mainly because realized capital gains nearly doubled in a soaring stock market. Net investment income actually fell 2.9 percent, mostly due to the continued decline in bond yields. Investment income could continue to weaken this year as insurers reinvest their current, expiring bonds in new issues with lower rates. And while interest rates are likely headed higher (albeit gradually) as the Federal Reserve pulls back on its quantitative easing program, such a trend could erode capital gains if equity markets weaken as a result.
Playing 'The Price is Right': Premium volume rose last year as the slowly growing economy created additional insurable exposures, while higher demand for coverage and a greater emphasis on underwriting amidst uncertain investment returns pushed prices higher — particularly for personal lines. But the growing influx of new capital in reinsurance is already undermining insurer leverage in pricing, especially in property coverage.
Point of diminishing returns: Loss frequency and severity trends keep improving thanks to escalating loss control efforts, but that trend likely cannot continue long term, and could even reverse at some point, especially if economic activity keeps heating up, resulting in greater exposures.

These are all understandable and valid concerns. But I personally am more worried about the tendency of many insurers to speak passively about the forces impacting their ability to thrive—whether it's the direction of the economy or interest rates, the possibility of higher catastrophe losses or lower investment returns. They often sound as if the industry's future is outside of their control.

In our recently released report, “2014 P&C Insurance Industry Outlook: Innovation Leading the Way,” we emphasized that insurers need to reclaim control over their own destinies regardless of outside forces. They can do so by transforming their business model, technology systems, or the way they recruit and manage talent. They can also innovate in terms of product development, distribution, or the use of advanced analytics — not just to seize a bigger share of the existing market, but to reach underserved consumers and expand the size of the overall insurance pie.

To change the focus of the conversation at next year's P&C industry “family reunion” along these lines, I would pose the following questions to panelists and other attendees:

What is the insurance industry doing in terms of actual innovation?
Which new markets are they exploring, what products are they creating, and which additional sales channels are they experimenting with?
How are they reinventing their business models, operating procedures, and processing systems not only to be more efficient, but also to become more proactive, nimble, and agile in allocating capital and other resources?
What are they doing to upgrade not only their technological capabilities, but their people power as well when it comes to talent recruitment, retention, and training?

Ultimately, to respond to such longer-term challenges rather than just be a spectator battered by outside forces, many insurers will likely need to become more adaptive in their thinking, their culture, and their strategic approach. That's likely what it will take to be market leaders in an increasingly competitive, more tightly segmented, and ultimately customer-driven environment.

Sam J. Friedman (samfriedman@deloitte.com) is the research team leader at Deloitte's Center for Financial Services in New York. For many years, he was the Editor in Chief of National Underwriter's P&C edition. He may be reached at samfriedman@deloitte.com.

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