Better Tools Don't Halt Insurance Price Cycles, Say Execs

NEW YORK--While enterprise risk management and predictive underwriting models should theoretically dampen cyclical pricing swings, it's na?ve to think property-casualty insurance management teams will universally follow their indications, executives said here.

Their comments came during a panel discussion at Standard & Poor's 2007 Insurance Conference.

Ramani Ayer, chairman and chief executive officer of The Hartford, said "tools are only one part of the game. Management will--management resolve--is the key differentiator in terms of when we decide that terms are unacceptable and we'd better stop kidding ourselves."

He does not think, he said, that management resolve "is as freely available or as widely distributed" as sophisticated tools."

Mr. Ayer's comments followed opening remarks by S&P Managing Director Grace Osborne, who said that while the hard market is now over, S&P's stable rating outlooks for all p-c sectors are predicated on the idea that this cycle will be different because enterprise risk management "is much stronger this time around" and because financial discipline should play a larger role in avoiding ruinous earnings impacts of soft market competition.

At a later session, Stephen Way, former CEO of HCC Holdings, who is now a partner for SLW International, LLC, a Houston-based investment and consulting firm, said: "We can sit here all day and talk about modeling....You have to separate the tools from whether they stop you from writing cheap business or...exceeding your PML [probably maximum losses] and risking your capital."

"Discipline may be more important than all the models in the world," said Mr. Way, speaking on a panel of experts who described predictive underwriting tools and catastrophe models.

Mr. Ayer was one of several executives who initially expressed some optimism about the beneficial impact of better tools. He also suggested that more transparent financial reporting--allowing investors to react to rapidly deteriorating performance--along with the potentially disciplining force of "rating agency intrusiveness" could mean less severe cycle downturns in the future.

Mr. Way said there are limits to transparency, noting that public companies typically report only on renewals. "They tell you how disciplined they are--[that] they let the bad business go because they have better underwriting than everyone else"--but don't discuss new business they're picking up at rates that may be declining 30 percent.

He also said that while tools could be valuable for small standard policies, they don't work for specialty business or large accounts. On that business, "brokers tell you what it's going for and then you can decide if you want to write it," he said.

At the earlier session, Stephen Lilienthal, chairman and CEO of CNA in Chicago, said the most pronounced accelerations in soft market conditions are currently in the large risk and specialty market segments.

Overall, he said, "ERM has made us better," noting, for example, that companies have become more diversified and "more segmented" in their approaches to business, and that they use higher quality data and have made smarter technology investments.

Still, Mr. Lilienthal said history paints a dimmer picture. During his 35-year career, he said, only 10 were in hard markets.

"I don't think we live in hard markets. We live in soft, competitive markets" sprinkled with hard-market "moments," he said.