Quotes Of The Week

Did you ever wish you could be a fly on the wall at a meeting of major insurance company CEOs? For those interested in hearing some of the most provocative comments issued at last week's NU Property-Casualty Executive Conference, read on, and feel free to speak out on any of the controversial issues they addressed.

It was no surprise that Ted Kelly, chairman, president and CEO of Liberty Mutual Group, was one of the most outspoken panelists at the conference. Mr. Kelly has never been shy about speaking his mind, and seems to relish the role of straight-talker.

At last year's conference, Mr. Kelly shook things up by suggesting that it would be fine by him if all statistical-gathering entities such as ISO were disbanded. He offered no shortage of killer quotes this time around. Among the better ones:

–”This industry is wonderful at running with good news and discounting bad news.”
–”Many public p-c companies are glorified bond funds, living off their portfolios. They are over-reserved and over-capitalized, and for a European buyer, this could finance one-third or more of an acquisition.”
–”Guaranty funds are the ultimate moral hazard for this industry. I would do away with them.”
–”Personal lines is now a merchandising business, and GEICO is doing it remarkably well.”
–”This industry has essentially been giving away homeowners insurance for 30 years to get that good auto business.”

But Mr. Kelly was not alone. Among the other interesting comments by his fellow CEO panelists:

Joe Brandon, chairman and CEO, General Re:
–”When you do the math, it doesn't take many 5 percent rate declines and 3 percent claims severity increases to turn very good years into very bad years for insurers.”
–”The quality of information at the disposal of senior managers is much higher than ever, but the fundamental question is whether the decision-making skills will be equally high quality.”

Steve Lilienthal, chairman and CEO, CNA Financial Corp.:
–”A lot of people are saying we will not go this way again. They insist they will hold the line on responsible pricing. That tends not to hold up in the second or third year of a soft market.”
–”A lot of the new capital coming into the market will affect our behavior. Whether the threat is real or perceived, we'll do whatever we have to do to protect our viability.”
–”The challenge will be how heroic we are when the pressure is really on [to cut rates].”

Vincent Dowling, managing partner, Dowling & Partners Securities:
–”Pricing is worse than what companies are saying on their conference calls, but not as bad as agents are saying in their surveys.”
–”With the dollar where it's at, the property-casualty side of the business is looking very attractive-slash-vulnerable for European firms shopping for expansion here.”
–”Florida decided to play Russian roulette with Mother Nature [by setting up a catastrophe reinsurance system].”

The CEO panel had much to say about the proposal by New York Insurance Superintendent Eric Dinallo to require property insurers to set aside catastrophe reserves, regardless of the federal tax implications.

Ted Kelly, Liberty Mutual:
–”I'm not sure the New York proposal in all its details is the right answer, but it is the right direction…Having big profits in non-cat years is still a big political problem…The politicians have it right here.”
–”Unless this industry is willing to report losses in a bad year, you're going to lose the catastrophe business to the government. It's not socially acceptable to buy reinsurance to protect earnings, which is what public companies are doing–looking to protect their stock price.”
–”It is socially inappropriate to dividend away the excess capital that could be used to cushion against a future catastrophe.”

Joe Brandon, General Re:
–”If we concede we can't help society solve its big problems–like catastrophes–we lose our relevance.”
However, about the New York proposal in particular, he added:
–”This [proposed cat reserve] only works if you make it tax-deductible. And in any case, it's not the solution. If the politicians think they've solved the problem by letting us make a journal entry, that won't get it done. We need to end rate suppression so that people pay for the risks they incur.”

Steve Lilienthal, chairman and CEO of CNA Financial Corp., had this to say:
–”It would be insane to handle cat reserving on a state-by-state regulatory basis. The concept is good, but what's needed is national legislation.”
Like Mr. Brandon, he added that:
–”If you don't have the right rate, the point is moot anyway.”

There was also a panel on innovation featuring the top three mega-brokers. They made some interesting points. Among them:

Donald Bailey, CEO, Willis North America:
–”Failure is too strong a word, but enterprise risk management has not been a broad-based success in our industry or for our clients…ERM hasn't been fully embraced, even though not connecting all the dots and managing risk as a portfolio rather than as a silo is a critical issue.
–”When it comes to innovation, senior management must set the tone. You have to wake up every morning with the conviction that your product or service could be made obsolete and then sell the rest of your organization on that.”
–”To innovate successfully, you have to provide the financial resources and the people to make it happen, and the most important part is execution–which is not a skill the industry is ripe with.”
–”A big part of execution is to get buy-in. If you don't get your people behind you, your ideas are DOA.”
–”Don't fall in love with your initiatives. The biggest problem is when someone falls in love with a potential acquisition or a new product, and that blinds them to the potential risks. Maintain objectivity during your due diligence and ask yourself why should I not be doing this.”
–”When it comes to training, we've been cheap and lazy as an industry. It will hurt us down the road. All we have is our people, yet we don't invest enough in their technical education.”

Ted Devine, CEO, Aon Re Global:
–”Innovation must be a priority. You have to let the new entrants cannibalize existing business–for example, a capital market solution might take business away from your treaty book.”
–”You have to be able to smell when growth is running ahead of acceptable risk and away from compliance.”
–”Poor execution of new initiatives adds to the risk and cost, especially when it's your reputation and the company's on the line.”

However, as noted in my Nov. 9 blog entry–”Brokers Sour When Talk Turns To Fees”–the panelists also had plenty to say when I asked how their firms intended to replace the billions lost in contingency income as a result of deals struck to settle big-rigging charges.

Don Bailey, CEO, Willis North America:
–”The playing field is ridiculously unlevel. Four people gave up contingency fees, while thousands of brokers did not.”
–”New supplemental commissions may just be contingency fees in drag.”
–”Transparency is a given–clients should know what brokers make on their accounts. But it is impossible to have an intelligent conversation about this” while a handful of major brokers are prohibited from taking contingency fees, but the vast majority can do so and keep that fact from the buying public.
–”It's obviously a high point of frustration for us.”

Ted Devine, CEO, of Aon Re Global:
–”On the retail side, it's a bit absurd and even surreal. Contingencies have not gone away, except for three or four firms.”
–”There will be a lot of innovative thought on remuneration,” with future brokerage fees perhaps following the “transaction-based capital markets model.”

Norman Brown, managing director and head of product development, Marsh:
–”When we're in a bake-off with a broker who does not have to disclose their compensation plans, it is fundamentally unfair. We need to level the playing field.”