Take Benchmark Numbers And Act, Insurers Told

Brian O'Hara, president and CEO of Bermuda-based XL Capital, agreed that acting on the data produced by benchmarking was vital to a company's success. "We have to focus on execution–getting things done. Execution needs to be embedded within a company," he said.

Both believe the industry will become more efficient over the coming decade thanks to factors such as greater use of technology combined with growing pressure from shareholders, regulators, customers and others for higher standards and more transparency.

Applied correctly, they believe benchmarking will help the industry correct some of its shortcomings. "I am optimistic," said Mr. Coomber. "That does not preclude some business failures in the future, but the standard of management will improve. The industry will become more efficient in many ways."

In practical terms, he believes the industry can achieve efficiency gains by introducing new technology and better documentation. He described documentation standards in the property-casualty market as unacceptable, adding that they were even lower than in the life insurance market.

The poor quality of contracts and other paperwork was particularly worrying in view of the large amounts of money handled by insurers. Mr. Coomber called for the use of clear language plus greater clarity on the scope of coverage and the rights and duties of insured and insurer.

Mr. O'Hara also believes the industry will learn from past mistakes and become more efficient. In the United States, he believes the Sarbanes-Oxley Act on corporate governance will set higher standards, which should result in greater transparency for regulators and shareholders. "These changes should contribute in terms both of more consistent earnings and earnings growth," he told delegates assembled here in London.

Among the indicators measured by XL, Mr. O'Hara listed performance during the insurance cycle, capital management and corporate culture. Monitoring underwriting performance is at the heart of any insurance company, he said.

"We will all fall short if underwriters are not motivated and compensated for growth," he said, adding that the combined ratio is useful for monitoring underwriting performance, but is not the only yardstick, since losses from some years can be delayed or sometimes concealed by above-average investment returns.

Mr. Coomber noted that from the cycle-management point of view an underwriter should be "given the comfort that he does not need to write volume to keep his job." He added that the industry needs to act as decisively to stamp out bad practices as it does in rewarding success.

Judging capital management performance is made harder by the long-term nature of many of the risks assumed by the industry, according to Mr. O'Hara, who said "this is not a game of instant gratification. It's a marathon." As for a company's culture, that can only be measured internally, he said, but it is a "key differentiator and a fundamental component of financial strength."

Mr. Coomber divided benchmarks into three categories: internal company benchmarks, peer group benchmarks and benchmarks with other industries. In particular, he drew comparisons with the banking sector's success in raising its return on equity and achieving more consistent earnings over the past 15 years.

He argued that insurers should strive to match the returns of the banking sector, noting that a key factor in banks' success has been the transfer of risk from their balance sheets to the wider capital markets. This has reduced both the cost of their capital and the volatility of their earnings.

In contrast, property-casualty insurers use costly equity markets to finance their operations. Moreover, their profitability is highly sensitive to catastrophes, as the impact of Hurricanes Hugo and Andrew, the Northridge Earthquake and 9/11 all demonstrated, he noted.

With this in mind, Swiss Re has been spearheading attempts to securitize insurance risk with, Mr. Coomber conceded, limited progress so far. However, he pointed out that an appetite for insurance risk does exist in the capital markets, so Swiss Re will persevere with this strategy for changing the industry's business model.