Good, Bad Vibes from Industry Leaders

If you weren’t able to attend the recent Property/Casualty Joint Industry Forum in New York City, we can sum up CEO attitudes about the New Year in this way:

The market is hardening, although not fast enough; losses are rising and margins stink; consumer activists are at it again; we can’t invest enough in technology to compete; investment returns are dropping, and we’ve been depending on those for years to make up for our inept underwriting; someone’s looking to buy my company; and we’re not attracting enough young talent to our business.

Why are we working in insurance again?

Company executives at the forum said that financial results in homeowners and auto would deteriorate this year. In a poll taken at the meeting, nearly 90 percent said the 1999 Illinois court decisions that led many insurers to suspend use of aftermarket parts has led to higher auto insurance costs.

California auto insurance is turning ugly again, said Martin Feinstein, CEO of Farmers Group, during a panel discussion. Loss trends are increasing by 4 percent, yet rates are only going up an average of 1 percent. Investment returns have masked an ugly underwriting situation in recent years. The 2001 combined ratio might hit 108, he said.

After years of declining car insurance rates, raising rates more than 4 percent will be tough, Feinstein acknowledged. “Look at what is happening with utilities [in California] right now. They can’t raise rates to cover the cost of delivering the product. Consumers are saying, ‘Go bankrupt’—that’s interesting.” Moreover, assigned risk pools in California and Texas are growing.

In a call to action eerily reminiscent of the Prop. 103 campaign (been there, done that), Feinstein added: “There is a point where consumers will become very vocal. As an industry we need to communicate often, communicate early and communicate honestly” about the need for increases.

State Farm CEO Ed Rust Jr. agreed that “storm clouds are developing” in car insurance in several jurisdictions and California indeed might be one to watch.

Despite rate increases, the commercial p/c business is “still a significant distance away from rate adequacy” in most commercial lines, said Joseph Brandon, CEO of General Re. “As an industry we are not earning a fair return. That will be driven by voluntary discipline—and that traditionally hasn’t been a hallmark of our industry.”

Another hallmark we’re lacking is the ability to manage convergence among industries, according to Feinstein. “We are no longer in the insurance business. We need to approach our customers differently and serve them in the ways they want to be served. They will measure us against best-of-breed in all industries, not just insurance. Managing that change is not a core competency of our industry.”

And there was more depressing talk. Speakers pointed to the industry’s difficulty in attracting new underwriting talent, with a decline in new CPCU candidates as one symptom. Companies must make investments in people to properly underwrite risks, Brandon said. The insurance industry’s “decades-old regulatory framework is troubling,” added Jay Fishman, newly appointed CEO of Travelers Insurance. “We are viewed on college campuses as a sleepy, old, regulated industry that talented young people don’t want to be involved with.”

But there were optimistic signals here as well. Some 61 percent of executives polled expect 2001 to be more profitable than last year. Improvements are expected in workers’ comp, 56 percent said, and in other commercial lines (80 percent). The economic slowdown won’t significantly impact insurance, 70 percent responded. And some 58 percent felt the Bush Administration would be positive for the business, citing tort reform and tax relief as issues. Thirty-four percent were neutral on Dubya’s impact on insurance.

The forum survey also asked executives whether their companies had established a banking unit since the passage of Gramm-Leach-Bliley in 1999, and 93 percent said no. Another 95 percent said they haven’t begun to market traditional banking products; and 80 percent said they haven’t entered into strategic alliances with banks.

Perhaps we’re too busy keeping our heads above water in insurance underwriting to expand to other financial services? Not Ed Rust. He proudly said State Farm Bank is rolling out swimmingly, albeit slowly. “It’s a learning process for us,” he said, “a way for us to extend the company brand.”

Finally, we can expect mergers and acquisitions to increase in 2001-02. Rising stock prices are making deals more palatable. “I can tell you there are some things in the works right now,” one analyst said, but he starting choking on his croissant when we asked him for some names.

Peter van Aartrijk Jr., CIC, owns a marketing communications firm specializing in the independent agent distribution channel.

Topics California Auto Leadership