CEOs and brokers tackle tough issues
Executive panels discuss catastrophic event response and innovation
By Phil Zinkewicz
Insurance industry response to catastrophic events and creating a corporate culture for innovation were among the topics of discussion at last November’s annual Executive Conference for the Property-Casualty Industry sponsored by The Conference Board. Held in New York City, the theme of the conference was “Managing Change in the Property-Casualty Industry.”
The first panel on the program, moderated by Peter R. Porrino, global director of Insurance Industry Services for Ernst & Young, consisted of Stephen W. Lilienthal, chairman and chief executive officer of CNA Financial Corp.; Joseph P. Brandon, chairman and chief executive officer of General Re Corp; Edmund F. Kelly, chairman, president and chief executive officer of Liberty Mutual Group; and Vincent J. Dowling, Dowling & Partners Securities LLC.
Porrino began by asking panelists about the current soft market in the property and casualty arena and what it means for pricing adequacy. Kelly said that two things will determine when the industry loss ratio will top 100: claims and inflation trends. He speculated that interest rates will be “pushed down” in 2009-2010, leading to higher inflation in 2011 through 2013, when the fully developed loss ratio will top 100, resulting in market hardening. He said that inflation is “not going to get any better” than it has been in the last couple of years.
Lilienthal addressed market behavior as it affects pricing. He said that currently there is no fierce competition driving prices down dramatically, even though the market is soft. “However, when we’re two or three years into the soft market, and with new capital coming into the business, market behavior could be affected,” he said, meaning that cutthroat pricing could result.
Dowling said that he suspects current pricing in the P-C business is “worse than companies are saying but not as bad as agents and brokers are saying.” On the plus side, Dowling said that there has been a remarkable decline in litigation, evidenced by the fact that law firms have been laying off litigators
At one point, Dowling surprised the audience when, in discussing the industry’s distribution systems, he was critical of “giving the pen” to managing general underwriters (MGUs). He said that the acronym MGU is “short for saying losses.” During the question-and-answer period, Christopher J. McShea, principal of Insurance Advisory Services at Ernst & Young, rose and, describing himself as an “MGU alumnus,” said only half-jokingly that he would “walk out right now” but that he was assigned to moderate the next panel.
Later, Lilienthal took on the subject of capital management, saying that options for growth in the P-C market include expanding geographically, acquisition or repurchasing shares. Other panelists, however, said that the fall in the value of the dollar has changed the rules of the game. Panelists agreed that European insurers are better positioned to buy existing insurance entities than are American companies.
Finally, the panel discussed how the insurance industry is dealing with catastrophe management. Noting that seven of 10 of the most costly U.S. hurricanes occurred within the last 14 years, the panel agreed that the problem of insuring coastal areas of the country worsens when political issues come into play. Brandon said that there must be a partnership between insureds and the private market. “We must have risk-based pricing in coastal areas,” he said. “There is a general feeling that Florida has a ‘put’ from the federal government. The rest of the country is not going to accept this,” he said.
Innovation for growth
The second panel at the Conference Board meeting centered on “innovation.” Moderating the panel was McShea of Ernst & Young, who repeated his earlier mention of having come from the MGU industry and being proud of it. He then went on to comment on the current soft market, saying that it will be staying soft for some time. “There are two options in handling a soft market,” he said. “One way is to restrict underwriting and hold on until the market hardens, if you can. The other way is to innovate.”
McShea’s panel consisted of Ted T. Devine, chief executive officer of Aon Re Global; Donald Bailey, chief executive officer of Willis North America; and Norman Brown, managing director of Marsh, Inc.
Describing “innovation” as the application of new ideas, McShea offered as examples of industry innovation over the past 20 years the captive movement and the growth of the Bermuda market, the medical malpractice mutuals, outsourcing, Internet distribution and catastrophe management. He then asked his panelists to assess how important innovation has been to the insurance industry.
Panelists generally agreed that innovation has been critical to the industry’s survival and growth. Devine said that innovation is particularly important to the brokerage business and that Aon has established a $75 million innovation fund to encourage new ideas. Bailey also stressed the importance of innovation, but he said that the industry needs to execute its new ideas more diligently.
He said there is a changing dynamic in the property and casualty industry. “In the past, if you offered a client two choices, one that offers coverage for less money and another that may cost more but which offers innovative coverages, the insured tended towards the cheaper coverage,” he said. “Today, insureds are beginning to realize that the more expensive coverage might be the more practical choice.”
Brown said that Marsh has a history of innovation in the insurance industry. He pointed to the establishment of ACE and XL as examples. “Innovation is a way for us to distinguish ourselves among our clients,” Brown said.
Bailey said that there has not been a lot of innovation among carriers and noted that he saw more innovation efforts by brokers. “Soft markets usually lead to more innovation on the part of the insurance brokerage community,” he said. “Most insureds expect creativity on the part of their brokers.”
Brown said that the climate for innovation must be established by senior management. “Most people will keep doing things the same way unless they are motivated to innovate,” he pointed out.