U.S. Insurers look beyond the ratio

Profitability and operating ratios were not in play at the 2000 Property & Casualty Insurance Joint Industry Forum, with industry panelists conceding to tougher times ahead. Delegates were also skeptical of a profitable immediate future, with a conference survey indicating 80% believe the industry will be less profitable in 2000 than in 1999. Nearly 90% of the survey respondents also expect auto lines profitability will plummet this year.

The conference-sponsored industry CEO panel looked beyond the unanimous facing future, discussing the multi-distribution channel, industry globalization and the potential minefield accompanying mergers and acquisitions.

The distribution debate

Panelists mirrored the delegate survey, which indicates 60% of insurers will be using the Internet as a distribution channel by the end of 2000. While all agree the Internet will play an important role in conducting business to business transactions, the question of focusing efforts away from the agent/broker distribution channel drew strong debate.

The Allstate Corporation has already mixed a direct and agent distribution model. According to president Ed Liddy, the multiple channel system is too early in its incarnation to determine channel conflicts. He says insurers cannot blind themselves to the public’s demand for different purchasing methods. “People want choices. The future is brighter if you give opportunities for people to buy in all ways.”

CGU worldwide president, Robert Gowdy, counters this argument, saying that insurers who do not focus their distribution efforts are likely to spread themselves thin. “Companies should use alternative distribution channels to support their current chain. Use the Internet and other technologies to support the independent agents and brokers.” He adds that companies venturing online should heed warning that different distribution methods will require different types of products. “Focus, don’t dilute the product.”

Despite Allstate’s venture into multi-distribution, Liddy does not foresee a day when single distribution companies will become extinct. “But companies opening up to reach more customers are at a definite advantage,” he says.

Don Kramer, vice president at reinsurer ACE Ltd., is skeptical distribution methods that do not include an agent or broker will have long-term prosperity. “Nobody wants to buy insurance,” he says. “They have to. As a result, marketing the convenience of the Internet does not have the same affect on this area. I’ve yet to see a real killer Internet marketing strategy in the insurance field.”

Globalization advantage

While the insurer delegates were not enthused about the prospects of going global — only 35% say their company will expand into international markets in 2000 — panelists say their companies continue to reap rewards offered by global presence.

Jerome Karter, president of SCOR U.S., says reinsurers in particular need to maintain as diversified a global position as possible to hedge bets against catastrophes concentrated in one region.”Reinsurers cannot remain in business and profitable without diversifying their products, and without diversifying their global presence.”

On the primary company side, Gowdy maintains globalization has impacted the types of products offered by CGU worldwide. The popularity of a product engineered in one country, he says, can be duplicated in another. “Travel insurance was developed in the U.K. before being brought over to the U.S. It has been a success though, on both sides of the Atlantic.” Companies without a presence in both countries would be forced to reinvent the wheel, he says.

Some insurers, however, are ignoring the global vision and concentrating on policyholders in their own backyard. Panelist Doug Ryder, president of Holyoke Mutual Insurance Company says being a small niche operator means greater access to insureds and a greater control and handle on claims cost. “We only have to worry about what goes on 30 miles from home,” he wryly notes.

Absorbing the surplus

Panelists agreed industry capitalization is no glaring concern in the current year. The worldwide industry is estimated to have excess capital in the area of $100 to $125 billion. With an eye on losses in the coming years, industry chief executive officers believe that money could dwindle, and fast. “The fact is, there are a lot of things that can change in this industry. Underwriting losses, low pricing, both tend to lead to losses that eat away at the retained earnings,” notes Kramer who adds publicly traded insurance companies are not highly valued, making accumulating new capital difficult. “I wonder how fast all of this excess capital will remain,” he concludes.

Liddy says the publicly traded insurers should utilize overcapitalization to make a dent of share value. “Companies with excess should repurchase stock. To suggest overcapitalization will continue is not accurate. Our strategy is to invest our earnings back into the business.”

Depressing insurer share prices, insists Gowdy, is that there is too much capital in too many hands. He notes the extra capital is pushing insurers towards further consolidation, “consolidation will help spell some of the overcapitalization.”

Merge drive

An overwhelming 90% of conference delegates report consolidation will increase in the coming year. What began as transactions to acquire new product lines has developed into a push to increase market share, reports Kramer who believes consolidation will continue at record pace. “We are looking at a future with an international polygophy. Five or six companies will rule the roost.”

Insurers should, however, be weary of overlapping infrastructure which can harm an otherwise good acquisition, says Gowdy who claims the General Accident and Commercial Union merger fell victim to this malady.

Karter says companies that look to acquire books of business and not necessarily entire companies will benefit most from consolidation. Liddy says his company’s acquisition of CNA’s personal lines business added critical mass to the operation. “We were able to cut seven or eight basis points and become more profitable.” Insurers can learn steep lessons from existing forays into mergers and acquisitions though, delegates were told, make the transition quick and never lose sight of the customer. “The need for to work with speed cannot be understated,” says Liddy. “No matter how fast you make a move, make it faster. There is nothing worst than uncertainty when putting two organizations together.” The consumerism focus cannot be lost, “the ‘Holy Grail’ of any industry, ours as much as others, is to maintain broad deep relationships with our clients”. cu