“The state of the business is strong”: Here's everything that S&P is predicting for P&C insurance in 2015

Robert Hauff, managing director, Wells Fargo Securities, LLC, observed that low interest rates were causing low returns on earnings (ROEs) for most P&C insurers. Previously, he noted, three-quarters of ROE came from investments, but that's now down to 50%. This situation "has restored discipline to the underwriting side of the house," he said. "The question is will the discipline remain on the underwriting side?"

Carvalho asked the panel how low they thought premium rates could go. Hauff believes that rates may come down a little but not much, although he expects small increases in auto and personal lines.

(Photo: Shutterstock/Michael Wick)

Inflation concerns

Jay Cohen, managing director, Bank of America Merrill Lynch, noted that, "Companies do dumb things at various points in the cycle, but they seem to be getting smarter about managing data. They're using technology more effectively," which should mean no major pricing war. He expects pricing to lag inflation, currently at -0.2%.

Cohen also said that he's not expecting big changes in P&C. He has seen a trend to more creative financing, especially among reinsurers.

Hauff commented that multiline insurance companies have sold off their life insurance business to improve their balance sheets. The question now is whether the companies will be rewarded [in the stock market] for concentrating on P&C. Historically, multilines haven't been very successful, he said. "Investors reward companies for simplicity, but only a few multiline companies do it well."

(Photo: Shutterstock/Joseph Sohm)

Non-life specialty market insights

A panel on the non-life specialty market, moderated by John Iten, director, S&P Ratings Services, opened the session by noting that there are 14 companies that are primarily specialty insurers. They're diversified and manage the underwriting cycle by moving between products. This strategy provides consistently strong underwriting results, he said, allowing these companies to outperform the industry. He then asked the panel what makes the specialty market so attractive.

Appearing on the day of the announcement that his company was being acquired by Tokio Marine, Michael J. Schell, CEO of Houston Casualty Company, said that each company has its own definition of "specialty." Schell defined specialty as non-standard lines of business with fewer competitors that a company can develop. He observed that there also is money to be made in specializing in underwriting and claims handling of those lines of business.

Mark D. Lyons, executive vice president and chief financial officer of Arch Capital Group Ltd., said that specialty markets are "more knowledge intense." In these markets, the underwriting is more important than process. He added that a company can specialize in customers, distribution or product, using the example of volunteer fire houses, a customer base that he developed early on in his career.

When asked about current conditions in the specialty market, M. Steven DeCarlo, CEO of AmWINS Group, Inc., said, "It's a war!" The market is "very competitive," especially on price, he added, but there is capacity in a lot of places. He also observed that specialty niche companies are flocking to New York construction contractors and cyber. He believes that his job is to help underwriters be successful in this market and find the best deal for the retail broker.

(Photo: Shutterstock/Ivelin Radkov)

P&C CEO panel: Words of wisdom

The P&C CEO panel, moderated by Kevin Ahern, managing director, S&P Rating Services, discussed competition, pricing, underwriting, investments, capital management and advances in risk management.

Frederick H. Eppinger, president and CEO, The Hanover Insurance Group, Inc., was concerned that action by reinsurers will affect the P&C market. He's generally bullish, he said, with a positive outlook.

Christopher J. Swift, chairman and CEO of The Hartford Financial Services Group (HFSG), said that the market is increasingly competitive but still "rational." He could be described as "guardedly optimistic" about the future of P&C, saying that the small to mid-sized market is HFSG's "sweet spot."

Swift explained that his company has become "a deeper, broader risk player," and has made significant investments in technology as well as improving the customer experience and creating a better distribution network. He also noted that HFSG had been one of the top three workers' compensation carriers, but, thanks to improvements in other lines, workers' comp is now only 30% of the business.

Peter D. Hancock, president and CEO of American International Group, Inc. (AIG), commented that his company is repositioning itself in the property market and expanding its risk engineering capability. Hancock hopes to grow the middle market in the U.S. AIG also has shrunk its excess workers' compensation line, while cyber grew about 35% in 2014.

(Photo: Shutterstock/donskarpo)

Customer service matters

Thankfully, Hancock said, AIG was able to retain 92% of its clients throughout the economic crisis. When asked why they stayed, the customers said it was because of AIG's people and the long-term relationships. Swift agreed that customer service is "critical" to the industry, especially in a competitive marketplace. "It's the only way to distinguish yourself," he said. Customers stay with HFSG because of their exceptional claims service. "You need people and talent, plus technology and systems," he explained, "but they all have to work together."

In Eppinger's view, diversification is necessary to dampen volatility. Lack of diversification leads to consolidation in the industry, he said, especially among companies that can't innovate or change. He believes that "We are a more informed industry. If we get into trouble now, it's because we do things we shouldn't do." He's optimistic that better run companies will get more market share.

When asked about "big data" Hancock observed that using data analytics effectively is a challenge. The problem is to get the human/machine interface right. "We're overwhelmed by the geometric amount of data," he said, "but its usefulness is also shrinking. We need to figure out how to filter out the noise."

Eppinger believes insurers need to look at underserved markets and lines of business to understand the real risks of that market. Companies generally think about the product lines first and the market segment later. "Go outside the data," he said, "to get insights into how to tailor the product to the customer."

When combined with the low numbers of catastrophes in the last few years, overall the P&C outlook is good.