Pitfalls in soft market caused by blind optimism and chasing quarterly profits

Unwarranted optimism about claims trends and immense pressure to meet quarterly profit targets are two of the primary reasons insurers find themselves in trouble during a soft market, said George Cooke, president and CEO of the Dominion General Insurance Company of Canada.
Cooke spoke at the Property and Casualty Underwriters Club final luncheon of the 2007-2008 season in downtown Toronto. Speaking as a member of a panel, Cooke offered tips on how to survive a soft cycle.
“In my 16 years at Dominion, I look at this industry and we have constantly missed the claims trends,” he said. “We have a tendency to be optimistic about it and to find ways to understate it.”
His advice would be to pay attention to those claims trends “because what you think is there, is usually worse.”
There is also an immense pressure to boost quarterly earnings and market share, he noted. “We have these beacons or a goal post that we’re chasing.”
As more and more companies are publicly traded, he added, insurers are making promises of increased profits and growth to investors on Bay Street. But these investors don’t always understand how the insurance industry works or appreciate the long-term nature of the insurance business.
“The reality is, we sell a product that we don’t know what it will cost in seven years,” said Cooke, and so “making these short-term commitments [to investors] is artificial and foolish.”
Such a mentality is behind the lack of focus and discipline that is otherwise required to ride out a soft market, Cooke said.