Not all insurers are equipped (or interested) in growing the enterprise through mergers and acquisitions, so organic growth remains the focus for the majority of property/casualty insurers. However, unless a carrier has prepared itself appropriately, meeting that challenge can prove elusive.
In Ernst & Young's "Property/Casualty Industry 2008 Outlook," Chris McShea, a partner with E&Y and co-author of the report, lists striving for growth as the number-one issue for carriers, followed by operational transformation, catastrophe solutions, financial events, Solvency II, and International Financial Reporting Standards.
The perfect scenario for growth in the industry, McShea believes, was achieved by carriers that performed a great deal of experimentation during the hard market when others were busy booking premium and replenishing their balance sheets. "During that time, carriers were able to evaluate those experiments with innovation in a controlled environment and selected those that had the best chance at success," he says. Carriers that followed such a plan are in some stage of bringing those innovations to fruition today, he adds.
McShea expects approximately 20 percent of P&C carriers will grow in the soft market, outside of any M&A activity, and those insurers are going to be the ones that worked the hardest during in the hard market. There was a lot to do in the hard market that kept carriers sidetracked, he says, pointing to areas such as catastrophe management, TRIA, the Spitzer investigation, and SOX compliance. "[Those challenges] absorbed an enormous amount of energy from companies," he says. "I don't think as many companies were in the experimentation or innovation role as one might like to think."
One area of innovation where insurers are focused is working with their policyholders, indicates McShea. "I don't think we fully understand the customer nor have a robust picture of the customer," he says. "The technology is more than able to do the different things we want to do with the customers; it's just a matter of getting those things into the processes and day-to-day activities and then starting to fine-tune them."
Customer service innovations also have examined branding issues, customer preferences, and the need to perform expectation management, McShea continues. "I think the technology is in good shape; we just need to get our arms around the processes and understanding the customers," he says. "If you are going to have [customers] interacting with you online or through the call center, are you going to be able to see the robust customer over the silos of the business? It's a matter of having the businesses breathe life into it."
McShea contends the second issue, operational transformation, is most effective right now in working across silos within the organization. Most carriers have a variety of silos–either by business unit or function–and technology has the capability to scan across those silos and help companies work two different sides of the data equation at the same time, he says.
One side is expense reduction, explains McShea, and the other is efficiency, which allows carriers to move data across silos, move knowledge across silos, and learn from other silos without having to conduct experiments in the marketplace. "Underneath it all, the technology is there to share the information and to take the personnel you have and spend their time doing more important things for the broader organization," he says.
An operational area McShea sees gaining more traction is outsourcing. E&Y anticipates outsourcing to double for insurance carriers by 2010. "In a soft market, expense ratios are going to get such scrutiny that companies experimenting with outsourcing the last three or four years are going to be the ones that have the expense advantage," he predicts. "That debate [over outsourcing] is going to come to a pretty quick halt, and people will just get on with it."
In his report, McShea asserts there is better use of technology today for catastrophe management than in the past. One reason for this is the public's perception of a carrier's reaction time to a catastrophe. "I don't think there will be much forgiveness if [insurers] get caught when we have the next set of troublesome storms," he says. "You can argue whether Katrina could have been foreseen, but the bottom line is the industry got a mulligan on that storm. But if we have another one, I think management teams that haven't sorted out [catastrophe response] are going to have a challenge."
In discussing financial events, McShea believes occurrences such as the subprime crisis actually may slow down the problems insurers face in the soft market. "The signals are so clear that investment income for insurers will continue to be depressed," he says.
The U.S.-based insurance portfolio relies on long-term bonds, so McShea doesn't foresee dramatic improvement in investment income. "The bonds you buy today are going to have an impact on investment income for the next five to 10 years," he says. "A little bit of discipline will be important in pricing, which could help the market's need for more underwriting discipline. If you can stay somewhere between the hard and soft market, that would be a big victory."
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