December 1, 1999 by Lowell Conn and Sean van Zyl
The 1990s will likely go down as the most momentous period in the modern history of the property and casualty insurance industry, a senior executive with experience dating back to the post WWII era recently stated. From “riches to rags,” another executive referred with a note of irony to the industry’s course over the past ten years. While the industry over past decades has witnessed repeated business cycles delivering apparently similar competitive challenges — all suggesting that the latest would be the final turning point of the future — the 1990s did procure what the business world has been anticipating and dreading since the development of the first mainframe computer in the early 1960s: cheap and broadly accessible interactive consumer technology. Technology has lifted consumerism to an unprecedented high, with the stakes of remaining in the future financial services arena having become a “big players’ game”. And, as another executive observes, “I really believe the property and casualty business is facing a true turning point as we enter this new millennium”.
There is no doubt among all the players in the property and casualty insurance field that ultimately technology will play a significant role in the future design, management and distribution of products. However, surprisingly, there appears to be a difference in view of the financial analysts and business leaders within the different sectors of the industry as to the impact technology is likely to have over the next twelve months.
The analysts interviewed for this article all envisage greater cost controls across-the-board as being the prime focus of 2000, with little gusto being put into new investments. They, and leaders within the industry, do agree that business conditions and the financial status of companies will unlikely change much in the year ahead compared with the adverse results delivered for 1998 and the similarly dismal returns projected for the closure of 1999.
A conflict of opinion does, however, arise with regard to technology investment. The analysts expect, with Y2K upgrade costs already committed, the industry will shy from further significant technology capital expenditure over the coming financial year. In contrast, reinsurance and primary company CEOs expect the opposite: The new millennium will mark the beginning of what they see as a technology race.
Adopting an optimistic stance, Paul Kovacs, chief economist of the Insurance Bureau of Canada (IBC), expects 2000 company results will show moderate strengthening on that of the past two years, primarily as a result of increased vigilance on claims management and select hardening of premium rates. And, although the industry is abuzz with revolutionary talk of e-commerce in terms of business-to-business and direct-to-the-consumer, he does not believe that such initiatives will gain momentum in the year ahead. “I think the industry is viewing these opportunities with a five to 10 year objective.”
Instead, Kovacs expects insurers will focus on cost cutting and, naturally, any attempt at pushing through rate increases. “A great deal of investment has been put into Y2K upgrades, and through that process most companies have modernized their existing technology. I don’t see any broad move to replace that technology anytime soon.” In line with the cost cutting mood, the respite of having gotten over Y2K will provide companies with a breather on further investment, he predicts.
Joel Baker, general manager of A.M. Best Canada, concurs with this outlook, stressing the importance of reining in expenses. “The industry’s income is falling, with no room to maneuver on underwriting or on the investment side.” As such, Baker does not see Internet or any grand e-commerce type initiatives taking off next year. What will likely emerge, he predicts, is increased pressure by insurers on their support partners such as brokers and outside claims handlers to reduce expenses. Brokerage commissions will likely feature strongly in contract negotiations, he says, pointing to the fact that less than 30% of the companies are operating at expense ratios of 27% or lower, with the average brokerage commission comprising 14.5%. “There’s really not much room to move, and with brokerage accounting for more than half of total expenses in some cases, the reality is insurers will be left with little choice but to pressure a reduction in commission levels.”
Ted Belton, author of the Belton Report, adds voice to this sentiment, observing that the year ahead is likely going to be characterized by increased marketing and greater expense control. Broad-based premium rate increases, he believes, have become something of the past. “Any future hardening of the market will occur on a very selective basis.” He does, however, see technology playing a significant role in expense competitiveness in the year ahead.
Although direct insurers — which invested heavily in call center technology in the mid-1990s — have struggled to achieve profitability against their upfront expenses, they are now beginning to achieve the necessary critical market mass which in turn will place further pressure on traditional companies. The real battle in the year ahead will not be on getting expense ratios down to the upper 20%-range, but rather the lower end of the twenties, he predicts. Companies not keeping pace with modern technology delivery will be left behind, he stresses.
Another trend likely to surface next year is partnering between product designers/underwriters and non-traditional distributors, from retailers and direct mail style consumer clubs to network consolidators, Belton says. Of particular note, he refers to the ING group and Equisure Financial Network arrangement whereby the latter has moved into full financial services product distribution. “They [Equisure and ING] are beating the banks to the line in this regard, they have the community ‘brick and mortar branches’ through their brokerage network and aren’t limited by regulation in the type of product they can sell.”
Belton expects similar alliances will emerge in the industry next year, the objective being to achieve the cost-efficiencies of vertical style delivery. And, shocking a statement this may seem to some readers, he believes this may even see deals being struck between banks and some of the larger independent broker operations in serving local communities.
Reinsurers firm up
Although most reinsurance treaties are currently on a multi-year basis and will not be affected by the current round of yearend negotiations, reinsurers are adamant that rate increases will become the order of the day on renewal of business.
John Phelan, president of Munich Re Canada, believes next year will mark the turning point in rates. “Unsatisfactory operating results, together with a significant increase in the cost of retrocessional protection, will reduce reinsurance capacity and lead to a hardening of reinsurance terms after a long and deep soft cycle. Already, certain reinsurers have withdrawn from some market segments and insurers have curtailed assumed reinsurance activities in a number of instances.”
And, Phelan observes, multi-year style contracts are unlikely to be on offer at future negotiations. That said, he is not optimistic of a general hardening of insurance rates, primarily due to intense and ongoing competition. “I am not at all optimistic that insurers will, as a group, become less willing to ‘engage’ in the year ahead. The post Y2K period will see a relatively rapid advance in information systems which will enable further measures to reduce costs. The battles for brand recognition and marketshare will continue…insurers will be able to live with higher loss ratios than previously possible.”
Patrick Mailloux, president of Swiss Reinsurance Company of Canada, is a little more encouraged by market views to the fact that rates have to rise. Although he also sees increases as being moderate and on a selective basis, the important factor is that rates have not dropped in the latest round of treaty agreements. Furthermore, given that most compani
es benefit from prior years through favourable loss development or unrealized capital gains which have now been exhausted, he expects insurers will adjust rates to reflect the expected “accident year” loss experience and the latest interest rates. “What is encouraging is a hardening of the retrocessional market, the pressure of which will pass down from reinsurers to insurers, providing the stimulus for what all hope will be a general hardening of the market. We aren’t seeing the reinsurance rate reductions which characterized last year’s treaties, and the word on the street is that the major players aren’t going to agree to multi-year agreements on unacceptable terms.”
Technology and business-to-business type e-commerce will likely play a big hand in the reinsurance market in coming years, Mailloux observes. “It’s [e-commerce] the talk of the town, and something we will have to look at as an industry. Given the market pressure, we have to look at every possible way to reach customers and reduce costs through enhanced efficiencies.”
Insurers gear for technology
The year ahead will most likely be known as “the technology race,” says Bill Star, president of Kingsway Financial Services Inc. Star does not believe the industry will see a slowdown on its technology expenditure next year, the drive focussing on the two fronts of e-commerce and preparing for real-time interface with brokers. “With Y2K out of the way, the pressure will be turned up on real-time technology development.”
From a financial performance perspective, Star does not believe insurers will be able to improve results for 2000. He points out that rate actions taken at this stage will take a full year before having bearing on the bottom-line. As such, 2000 will likely be similar to this year’s performance, with over-capacity remaining the underlying market weakness. The result will probably produce further consolidation among primary companies, he predicts.
Gregg Hanson, president of Wawanesa Mutual Insurance Company, is hopeful 2000 will see actions taken to lift rates. He believes the losses currently surfacing in Ontario’s auto market may provide the necessary weight to turn the soft cycle. He points out that Ontario auto accounts for a significant portion of the $11 billion personal lines pool, and a groundswell move in this quarter would presumably carry over to other lines and territories.
Hanson concurs with Star’s view that the heat will be turned up next year on technology investment. However, he does not believe there will be much activity on consumer type e-commerce, the real push being on business-to-business interaction. “Companies are realizing that they have to be on real-time processing…the upload/download situation with brokers is not good enough and the larger insurers are looking at it seriously. In that respect, I see e-commerce taking off next year between brokers, companies and suppliers. I really don’t think there will be a huge uptake of consumers wanting to buy insurance over the Internet.”
Another factor which could have significance for insurers next year is further consolidation of the network consolidators, Hanson notes. Through mergers, he expects one or two of the networks will become major market forces to be reckoned with. “This is definitely something to watch carefully over the next 12 months.”
Next year will also prove to be the “acid test” determining success or failure for many of the company mega merger and acquisition deals which have taken place, says Mark Webb, chief operating officer of CGU Group Canada Ltd. This will definitely be the case for CGU, he adds. And, although consolidation on both the company and broker fronts may slow down, there will still be several deals occurring next year, he predicts. “There will still be a few select acquisition opportunities arising where global players may decide to withdraw from the Canadian market.” There are already several possibilities on the bidding block, he observes, “but whether they have value really comes down to how the numbers work out”.
Webb also falls in the camp believing that technology expenditure will not drop next year. Many projects were put on hold until Y2K was resolved, he notes, and there is likely to be a period next year when insurers will take up the slack. While an industry-wide technology solution on the scale envisaged with the Synchron project is not likely to be on the cards next year, Webb expects companies will place greater emphasis on real time processing with brokers.
Laird Laundy, vice president of mergers & acquisitions at Equisure Financial Network Inc., expects the evolving marketplace will see two types of consumer segments emerging: the empowered, “high-end boutique shopper”, and what he describes as “Johnny Lunchbox”, the predominately blue collar earner.
Brokers, he believes, have a strong edge in serving both these consumer segments. The blue-collar consumer will need assistance with basic policy terms and conditions while the high-end customer expects advice on more complex cover requirements. In other words, Laundy insists, the core need for the broker remains intact despite the inroads scored by direct writers.
Laundy concedes, however, that the face of the market is changing. According to his research, the current distribution market is comprised of 45% small brokers, 15% global “alphabet” brokers, 20% networks, and 20% direct writers. He expects that by 2015 these numbers will have shifted significantly with around 51% of the broker market held by consolidators, 10% by global brokers and 5% in the hands of small independent operators and the rest held by direct writers. “Already the top consolidators are among the biggest insurance entities in Canada.”
The bulked-up broker networks could provide the catalyst for a change in distribution, suggests Insurance Brokers Association of Canada (IBAC) executive director Mabel Sansom. With the networks controlling a greater percentage of nationwide premiums, she says, there could be increased pressure on insurers to authorize front-line broker underwriting. “Big brokers will demand more, not less in commissions. In return, carriers might expect more distribution channel efficiency — which in turn might lead to brokers issuing paper on the insurers’ behalf.” Increased underwriting responsibility could trigger reduced duplication on the distribution front, Sansom adds.
Ken Orr, president of the Insurance Brokers Association of Ontario (IBAO) concurs, and insists industry-wide automated processing must also take shape. Industry automation endeavors have failed when initiated by the competing insurers, he notes, and it is incumbent upon brokers to demand all stakeholders step up to the table. “Getting this level of trust between all of the different parties will be very difficult,” he admits.
Adjusters promote outsourcing
On the claims handling end of the business, branding will meet outsourcing in the future relationship between insurers and adjusters. Glenn Gibson, senior vice president of Crawford Adjusters Canada points out, “if insurers could do one thing to make a significant change in their business, they would want to attract really good business that doesn’t generate claims.” Insurers should focus their attention on designing quality products and selling into the market. “They should concentrate on marketshare and treat the claims side of the book as an expense and outsource it,” he says.
Gibson says adjusters are open to innovations designed to ensure insurers get brand recognition for strong adjusting work. “In the U.K., insurers are outsourcing but branding through adjusters. The adjuster has different business cards and hands out cards that list the appropriate insurer.”
Operating ratios should also attract insurers to outsourcing, says Serge LaPalme, president of Underwriters Adjustment Bureau. “For the past ten to fifteen years, insurers have not been able to kill the expense ratio factor. The answer could be fueled by new concepts like the emerging virtual insurers who see themselves as money managers and outsource all core function
s to third parties.”
Rob Gow, senior vice president of operations, at Cunningham Lindsey, admits the market trends suggest increased interest by North American insurers to internalize claim handling. In response, he notes, adjusters are expanding their scope of service and looking at enhanced service quality. “We used to measure our performance based on our own benchmarks. What we should have been doing all along was basing our performance on the insurers’ benchmarks.” Adjusters are currently polling their insurer customers to establish these benchmarks, Gow insists. LaPalme, Gibson and Gow all agree that technology and the Internet is playing a dominant role in the future direction of the market.
David Buzzeo, president of the Canadian Independent Adjusters Association (CIAA) believes the move towards outsourcing could accelerate if provincial legislation governing in-house adjusting is modified as expected.
Quebec and Alberta, Buzzeo notes, are currently in the process of writing new insurance legislation, part of the drive will address regulation of in-house staff adjusting licensing. Other provinces will follow the lead, he predicts (currently insurer adjusters operate under the company’s license while independent adjusters are individually licensed). New legislation dictating individual licensing could tax training resources of carriers, potentially tilting the balance towards more claims side outsourcing. “New standards would be time and cost consuming for insurers to comply with. A legislative twist could change the demand for independent adjusters among the carriers,” Buzzeo says.
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