Insurer CEOs predict slow economic recovery, lingering soft market

Although he has noted an "uptick" in personal lines on discretionary spending such as motorcycles and boats, which is a positive sign, it's harder to see such signs of improvement on the casualty side, which is heavily dependent on employment, although this could see improvement in the second half of this year, Hughes added.

And although inflation is still not evident, and is unlikely to be an issue in 2010, the second half of 2011 could be a different story, Hughes said.

The market cycle
The CEOs were reluctant to make any definitive predictions on when to expect a hardening of the insurance market, although some believe it is a long way from recovery. Based on historic market cycles, which last around 10 years to 12 years, the current soft cycle, which started around 2002, is about 7 years old, Motamed said, which means "we still have a way to go…companies are still making profits, but growth is not there," he said. Although in the past the combined ratio "pain point" was about 110, he doesn't think it will get to that number in the current cycle before things turn hard, and added that he is already seeing companies starting to "push back" on rates.

Admitting that commercial lines pricing is still "crazy," LaRocco put the blame of market cycles squarely on the insurance companies, adding that "no other industry would accept the sort of pricing swings that we do." Adding that it's the companies' responsibility to control pricing based on underwriting profit, he added that Fireman's Fund is starting to take rates up, although the exception are long-tail exposures that have different and longer cycles. And although cycle extremes are less evident in personal lines because "companies can match rates to risk," in part due to the use of credit scoring, the current glut of capital in the marketplace means companies are still cutting prices to get business, he said.

A "rational market" in personal lines is occuring, Hughes said, noting that Safeco has seen auto rates increase between 2 and 4 points over the past 12 months, and homeowners' pricing up about 5 points over the last 3 months. For commercial lines, the bad economy makes it difficult for the industry to get appropriate pricing, he added.

However, things seem to be getting better, with commercial pricing up between 4 and 5 points, and more stabilization on the investment income side for the industry as a whole, Hughes said. "Capital has been replenished from the investment income side, with capital almost back to 2008 levels," he said. "We're a highly capitalized industry, and in pretty good shape. Because the property-casualty industry is highly regulated and state specific, 85 percent or more of our investments have always been in fixed dollars or in bonds," he said.

Regulation and legislation
Although the panelists agreed that the insurance industry did not present a systemic risk and that the current system needed streamlining, there was some divergence on whether regulation should come at a state or a federal level.

CNA, for instance, is one of the few large international companies opposed to federal regulation because the company believes state regulation is still best for consumers, Motamed said. Although state regulation can be "onerous and expensive," CNA believes "states look out for consumers better than federal regulation would," he said. During the financial meltdown, there were more than 15,000 people regulating the banking industry that missed the developing problem, he said. Unlike banking, insurance is not heavily leveraged and is centered on local business, and "people at the local level know a business better than someone in Washington," he added.

When it comes to licensing and filing, panelists agreed that uniformity was necessary. "It shouldn't be a federal/state issue, but rather the application of more common sense and efficiency," whether it's achieved on a state or federal level, LaRocco said.

And whatever happens with industry regulation, the CEOs agreed that the role of the independent agent must be protected. "When it comes to financial products, you can't find business people who provide value to their customers like insurance agents," McGee said. "Our industry must preserve this no matter what happens with regulation."

Although Safeco parent Liberty Mutual is open to debate on the issue of an optional federal charter for insurance regulation, the ideal regulatory system should provide speed to market and consumer protection, Hughes said. "Unlike banking, we accept risk, and are already well regulated, transparent, and 85 percent of our investment portfolio is fixed." Liberty Mutual supports regulatory reform that offers "freedom of rate, form, speed to market, strong solvency, and consumer advocacy that makes sense for policyholders, whether it's on a state or federal level." However, he pointed out that a dual regulatory system would be "unacceptable."

Healthcare reform
Because 15 percent of the average agency's revenue comes from healthcare-related product sales, the issue of healthcare reform is important, Hughes said. The problems endemic to healthcare, such as cost shifting and the quality of care will be exacerbated if the proposed legislation is not carefully amended, he said. Effective healthcare reform must include tort reform and independent insurance agents, and could probably be best achieved incrementally, he added.

In its current form, the healthcare reform bill also could expose insurers to an increase in medical malpractice lawsuits if the quality of care is compromised and medical malpractice tort reform is swept away, resulting in a steep increase in medical malpractice premiums, Motamed said.

Taxes, recruitment and technology
Many agents, which are small businesses, are organized as S corporations and pay taxes at the individual rate, noted panel moderator Rusbuldt. When the Bush business tax breaks expire, small businesses could be paying taxes of up to 60 percent of revenue, while corporations stay at 35 percent–an imbalance that could cost agents dearly.

"Higher taxes reduce profit margins, which in turn result in cost cutting, job elimination and offshoring," Motamed said. The number of employees per agency has gone down 10 to 15 percent over the last few years, and this could become even more extreme if taxes rise, he said. Worse, business investments in improvements and innovation could slow down as well.

"The current system has it backwards," McGee said, adding that the government should lower taxes for small businesses since they drive the economy.

Talent recruitment and retention is another challenge for the industry, and "the only issue that keeps me up at night," Motamed said. With 60 percent of agents over age 45, by 2016 the industry will need 200,000 new hires, Rusbuldt said. Insurers must collaborate to figure out how to keep the independent agency system going, he said. The upside of the recession is that college graduates who can't get jobs are a perfect target for industry recruitment, he said–and those recruitment efforts should be happening now. "You can't wait until the market turns to start adding new talent, you must start doing it now," Motamed said.

To help generate interest, the insurance industry as a whole must become more aggressive in communicating the benefits of our industry, Hughes said. Recruitment at the university level, continuing education and producer development programs are all part of the picture, and insurance companies must partner to retain every good person, he said.

"We have not done a good job in PR about the industry," LaRocco said, adding that recruitment and communication efforts must be coordinated across the industry. "We must come together with a PR campaign on a long-term basis to attract new talent."

Another topic tied to changing demographics is Internet and social networking use, and changes in how consumers want insurance products delivered and serviced. The industry must make faster, easier and more secure, Hughes said. Although agents provide value to the transaction by acting as trusted advisors, the industry must make sure "we're not leaving any business on the table" through the Internet, and by adding social networking into the mix. Liberty Mutual's "Bricks and Clicks" program for agents helps agents to facilitate doing business online.

Technology is a big issue in every industry, not just insurance, and communicating with customers doesn't come down to one method over another, but a matter of using them all, McGee said. "It doesn't matter what the company wants; the customer is driving these changes. Ironically, agents could actually become even more valuable in the Internet sales realm because buyers still need trusted advisors," he said, stressing that the industry must come together on both selling and servicing over the Internet.

Young buyers are "choosing a lifestyle, not a company," LaRocca said, and their reliance on the Internet and social networking is a ripe opportunity for agents to easily reach the next generation of small business owners, who will more closely resemble personal lines buyers than traditional commercial lines purchasers, he said.