How Insurance Companies Live For 100 Years and More

Nearly 13 percent of property/casualty insurance companies today are more than 100 years old, which means they have been through two World Wars and the Great Depression. About 62 percent of 100-year-old companies are mutual insurers, while stock insurers account for about 36 percent of the total.

According to a leading insurance economist, these carriers have survived this long because they have focused on more than simply increasing profits.

Robert P. Hartwig, president and economist for the Insurance Information Institute, says that companies that live to be 100 learn to adapt to changes in their environment and constantly reinvent themselves.

Hartwig, looking back over 40 years of data, said that history shows that property/casualty insurers do not fail during financial crises, as their friends in banking circles tend to do. In fact, the number of failed P/C insurers is near an all-time record low. “Somehow our friends in the banking industry are having a failure rate near an all-time record high [which means] there’s something different” between banks and insurers, he said. “And it’s a good difference.”

Instead, P/C failures tend to occur at the tail-end of a soft market, when combined ratios begin to rise. “This should not be all that surprising. When we start to see large-scale underwriting losses, some companies are going to fail,” he said.

He suggests now is the time to be watching insurers’ combined ratios.

“[A]re we approaching a period like this soon? Will we have another one of these shakeouts in the P/C world? Failures in the P/C industry tend to be caused by our own internal cycle – that is the leading cause of death of insurance companies,” he said.

5 Deadly Mistakes

There are “five deadly sins” property/casualty insurance companies make, according to Hartwig.

The top mistake is underpricing/under-reserving, which contributes to about 38 percent of company failures. “The leading cause of death is suicide, because this is something you can control,” Hartwig said, noting that his data underscores the importance of discipline. “What we need to do in the industry is improve our record of pricing and reserving that allows us to better ride out the underwriting cycle.”

Second, excessive growth too quickly, either organic or through mergers and acquisitions, can be fatal.

Too much underpriced catastrophe exposure, too little reinsurance and insufficient diversification also can lead to failure, he added. Excessive catastrophe exposure accounted for approximately 8 percent of P/C company failures, according to his analysis.

Companies whose investments are too risky, too illiquid or insufficiently understood also have a high chance of failure, representing about 7 percent of failures.

Finally, problems with affiliates – when non-core operations cause problems for the parent company as in the “grand example” of American International Group (AIG) in which the financial services wing caused problems for the parent company as a whole – have contributed to approximately 8 percent of P/C company failures, he said.

Sage Leadership

On the other hand, companies that have managed to around a long time can point to sage management as a key factor in their longevity.

Strong leadership can make a difference and keep a carrier on the road to longevity. In centenarian companies, management tends to act as a steward of the enterprise. The objective is not to get rich, but rather to pass a healthy firm safely and securely to the next generation of management and their policyholders, Hartwig said, noting that this is perhaps why so many mutual insurance companies have lived to be 100. The CEO should not be an “imperial,” but rather should be a listener and consensus builder, he added.

Management financial incentives also should be in line with the goal of providing the projection purchased. In centenarian companies, there is typically no third-party like shareholders to compensate, and the CEO’s total compensation is generally a smaller multiple relative to the average employee.

These long-lived companies grow more slowly, but nevertheless are still nimble and adapt over time. “I guarantee that every one of the 100-year companies operating today uses telephones,” Hartwig said jokingly. In the next decade, he said keeping up with underwriting technology will be essential. “Whether it’s credit, predictive modeling or telematics, these are things most centenarian companies were not first-adapters of, but did apply successfully and will be moving into in not to distant future,” Hartwig said.

Meanwhile, management needs to be “disciplined enough to stick to the business that they know, but also adapt to changing business conditions and seize opportunities ad necessary,” he added. “Sticking to your knitting has certainly been a character of success.”

Importantly, long-lived companies have a strong customer-focus and relationship-driven nature. “It’s palpable, you see it, you feel it, you see it in the relationship with the customers and agents,” Hartwig said. “This means that customers are the No. 1 priority, as is the agency form of distribution, with 21st century enhancements.”

Topics Carriers Property Casualty