Tech Mistakes Doom Insurers' Future: Consultant

Speaking Saturday at a session on market conditions at the Mid-Year Educational Workshop of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices, Ltd., Mr. Picoult of Lazard Freres said the fundamental problem of the industry is a cost structure that's "out of whack."

In particular, Mr. Picoult said that after spending six months studying the management information systems of insurance companies, he is "flabbergasted. I have never seen so much money being thrown away and so little being done" with systems, he said.

While there are some successful small companies that capably get the most of their systems on "shoestring" tech budgets, the industry "gorillas" are spending two-thirds of their budgets to "support legacy systems that are held together with spit, gum and glue."

"Everybody is seemingly focused on underwriting," but the systems that support their underwriting are "remarkably archaic," he said.

"I'm looking for companies that can collect appropriate data, [can] slice and dice it, and can execute on" what the data tells them, he said. What he's found is that some companies are capable of collecting data, fewer are able to slice and dice, and fewer still can execute valid underwriting decisions based on the data.

"Knowledge is power. This is one of the things that must change in this business." The real future of the business is in knowledge, IT and information, he said.

"The difference between the value creators"?the companies that can successfully access and use their data?and those who are "frozen in the past," he said, "is remarkably stark."

In a free-wheeling review of the industry's ills, he also gave his views on pricing cycles, merger and acquisition activity, the Bermuda market, and the make-up of insurance company boards of directors.

"It's peaked, folks," he said, referring to the question of where the industry is in the underwriting cycle. "Will terms and conditions hold? I'd like to think so." And Sarbanes-Oxley, "theoretically," does provide some impetus for further hardening by making executives stay a little bit more attuned to what they're doing.

Industry members always announce the underwriting cycle will be broken, Mr. Picoult said in a skeptical tone, going on to list the reasons he's heard industry pundits give to support the idea that "this time will be different" and that the hard market will last.

"There's no yield to speak of, so insurers don't have investment income. They're really focused on underwriting, the purview of the rating agencies, he said, listing a few. Some say that "more CEOs are financially oriented" and that "many of the ?crazies'" of the industry are now gone.

"A bunch of the crazies are gone. But not all of them," he said.

He said that his skepticism is also reinforced by anecdotal evidence of softening and by the statements of industry executives who asserted during their fourth-quarter earnings conference calls that the "market is beginning to change, [but] that [they] are better positioned than ever to handle it."

Mr. Picoult added: "There are incessant pressures from Wall Street to grow the top and bottom lines.?This always has been?and still is?a market share game."

In contrast, he said, "I see nothing wrong with companies that are smaller at points in time but more profitable." But noting that his views are at odds with an industry business model that "cries for volume" in lieu of prosperity, he joked that his personal strategy would be to send all the underwriters to Disney World for two years when competitive conditions start to heat up. "That's a defined loss," he quipped.

Turning to the Bermuda market, he posed a question to the NAPSLO attendees: "Look at the volume that these folks wrote out of the box–$1 billion, $1.5 billion. Do you really think all of that was underwritten?" Responding to his own question, he said, "I think?they were just order takers."

Turning to M&A activity, he said he didn't believe that the Travelers-St. Paul merger was "a template for change" or that there would be a return to the "hey-days" of record-breaking activity.

But acquirers "are sniffing around," he said. There will always be some "empire builders" in the industry.

In his view, mergers and acquisitions haven't worked in the p-c industry. "The record speaks for itself," he said, noting that 117 deals with a value of $55.8 billion were completed in 1998?a record-breaking year for mergers. "Think about all the grief we've seen from 1998 forward."

Still, there will be some deals, he said. As excess capital builds up, "money burns a hole in the pockets" of leaders of p-c companies and they feel the need to do something, he explained.