Is the Worst Over? A Risk Manager’s Perspective

From all indications the insurance market has rebounded and insurers have crested the hill that is the hard part of the insurance cycle. Loss ratios are under control, return on equity is at acceptable levels, and insurers are becoming profitable again. Insureds are seeing an easing in premium increases or flattening, possibly even slight decreases. Soon we will see more industry competition, more capacity, a relaxing of underwriting, less restrictions, and more “throw-ins”. The cycle is alive and well, much to the chagrin of pretty much everyone.

Over the past four years I’ve heard a great many insurance company CEOs say that they will learn lessons from this hard market, and will not return to competing to the point of un-profitability. The road to hell is paved with good intentions, however. Each CEO probably does believe they will stand firm but in reality, this is unlikely to happen. There will be companies who lead the charge of driving down prices now that financial conditions have improved. The other companies, though they may hold out for a while, will have to compete to retain and attract customers, and on goes the steady march into the soft market.

Risk managers are not blameless in all of this either. We vigorously fight for higher limits, more coverage, fewer exclusions, and of course the lowest possible price. While this seems natural, we cannot have our cake and eat it too. If we bask in the soft market, then we cannot complain about the hard market. If asked, most risk managers will say that they want a more stable market without the hard market, soft market extremes. But we cannot lose the peaks unless we give up the valleys.

CONFLICTING GOALS

There are inherent problems which cause me to be very pessimistic that things will ever change when it comes to the insurance cycle. First of all, although individual companies may resist the type of fierce competition that drives the cycle, very few, even the largest, can afford to stick to their principles while ignoring the bottom-line. Ironically, the companies who do not appear to compete on price are less impacted by the cycle and have more consistent results. This requires vision, a long term commitment, and a great deal of resolve, something we have not witnessed historically.

Another problem is the conflicting goals and interests within insurance companies themselves. The senior executive wants a healthy bottom-line, while underwriters want to “stick to their knitting” and produce an underwriting profit for the book of business they write. Underwriters do a very good job of assessing risks and determining a commensurate premium but then face pressure from the senior executives to write more business – the result is a relaxing of restrictions and more competitive pricing. If underwriters were able to operate in a vacuum, the insurance cycle probably would not exist.

PUBLIC EDUCATION

Being the eternal optimist, I must believe that there is something that can be done – but what? A regulatory body that sets benchmarks for floors as well as ceilings in terms of pricing might work, but regulation should be the last resort. Although most risk managers, as sophisticated insurance consumers, realize that prices which fall too low are systemically as big a problem as rate increases, most general consumers would probably have difficulty with that concept. This is where public education comes in. The general public vilifies and resents insurance companies because it does not understand the product or the market – this has been evidenced in the recent auto insurance turmoil. If insurers invested more money and effort into consumer education, the long-term benefits of an informed consumer would far outweigh the cost.

In addition to resisting market pressures and educating consumers there is much room for improvement on the claims side of the insurance equation. Insurers are also accused of settling claims too quickly by throwing money at claimants to make them go away. Having come from an insurance and claims background, and now working with insurers as a risk manager, I know that this is not without some merit. Most insurers are guilty of this to some degree, and in some cases an economic decision does have to be made when the cost to settle is far less than the consequences of a legal battle. However, this conclusion is made too often.

The legal community knows which insurers will pay without a fight and which will not. Lawyers know the “easy marks”. In the long run, the companies who aggressively challenge frivolous claims will come out ahead. Not only will claims costs be reduced, but consumer confidence will improve as well. In this environment where consumers are very vocal in their displeasure of insurers and where governments are jumping into the fray to defend consumers, insurers need to be more mindful of the fact that they are being watched closely and being held accountable for how they spend consumers’ money.

TORT REFORM

Working within the existing system to responsibly settle claims is one thing, but there is much room for improvement in the “system”. This is no more so true than in auto insurance. The insurance industry in Canada needs to put more resources into lobbying governments for much needed changes such as tort reform, limiting liability, and capping damage awards. We all know that with an increasingly litigious culture, sympathetic courts, and escalating damage awards, the tort system is nearing its breaking point. Consumers need to decide whether they want the ability to sue without limits, and unaffordable premiums, or a Quebec-like no fault system with a strict “meat chart”, and low premiums, or perhaps something in the middle. There is no question the Quebec system results in the lowest premiums, but people used to the right to sue will be loath to give it up outright. In most cases, consumers would probably prefer slightly reduced compensation in return for some premium relief.

Consumers need to be able to go about their business day to day without a frivolous lawsuit or an exaggerated claim waiting to ruin them, or result in significant premium increases. Insurers need to be innovative in coming up with solutions that will compensate the real victims, weed out the fraud, and stabilize premiums. Caps on general damage awards for minor injuries have been successfully used in some jurisdictions for automobile claims – why limit it to automobile claims? If a person injured in a car can get a maximum of $2,500 for her injury, then why should someone who slipped and fell be able to get $30,000 for the same injury? The system needs a complete examination in the context of the current culture and legal environment, and it needs to be overhauled to reflect the realities of our times.

The great philosopher George Santayana said, “those who do not study history are doomed to repeat it”. If we ever expect to break the insurance cycle and bring stability to the market, then we must look at what we have done in the past and resolve not to do it again. While this sounds simple enough, it will require vision, leadership, and a commitment by insurance company CEOs. It also requires a similar resolve on the part of risk managers who will bear the consequences for price-chasing. As consumers, we have to be supportive, understanding and patient. Change does not happen overnight, and it cannot happen without cooperation.