ISO’s Coyne Urges P/C Insurers to Reinvent Themselves to Survive Fierce Competition, Catastrophes

Fierce competition and catastrophe losses are forcing change all across the property/casualty insurance business, an industry leader said Monday.

Ferocious competition has driven rates of return down and led to an increase in the number of insolvencies, while inflation, population growth and economic development along the nation’s hurricane-prone coastline ensure ever-rising catastrophe losses, said Frank Coyne, chairman, president and CEO of ISO.

Though insurers face daunting challenges, the future is bright for those who make best use of state-of-the-art analytics, the ISO executive said in remarks to 800 attendees at ISOTech, the insurance industry’s technology conference.

The application of advanced analytical techniques “is transforming every critical step in the insurance value-creation process. All along the insurance value-creation chain, art and science are coming together in new ways, profoundly affecting competitive dynamics in insurance markets,” said Coyne.

Reflecting increasingly intense competition, insurers’ average rate of return dwindled from almost 12 percent during the decade ending 1984 to less than 7 percent during the decade ending 2004, far below that of firms in most other industries, said Coyne. Even though 2004 was insurers’ most profitable year since 1997, “insurers didn’t earn their cost of capital – something they haven’t done since 1987.”

Intense competition has “thinned the herd,” said Coyne, noting, “The number of insurers serving the U.S. has dropped 25 percent since 1990. And the long-term prognosis is for more of the same.”

Insurers’ future is further clouded by the prospect of worsening catastrophe losses. At $44 billion and counting as of Nov. 4, this year has “already set a record for catastrophe losses – surpassing even 2001, when we suffered the tragedy of September 11.”

Even if the intensity and frequency of hurricanes doesn’t increase, catastrophe losses will, said Coyne, citing inflation, rapid population growth and booming development in the country’s most hurricane prone areas, especially in Florida and Texas. “Hugo, Andrew, Katrina and Rita are harbingers of things to come,” said Coyne.

“But it isn’t just the intensity of competition that is changing. The nature of competition is changing too.” Leading-edge insurers are achieving competitive advantage by deploying powerful analytical techniques at virtually every step in the insurance value-creation process, said Coyne.

“In recent years, computer processing capacity has skyrocketed, and data-storage costs have plummeted – paving the way for data mining, predictive modeling, scoring and other analytical advances that are transforming everything from product development and marketing to underwriting, pricing, exposure management, claim settlement and reinsurance decision making,” he said.

By applying “increasingly sophisticated analytical techniques to ever-larger data sets, sophisticated insurers can home in with increasing precision on exactly the right price for each individual risk.” Leading-edge insurers, he said, “can operate with scalpels instead of meat cleavers when they decide to grab market share or stand back.”

Leading-edge insurers are also using data mining, pattern-recognition technology, data-visualization tools, scoring and other techniques to reduce claim fraud and boost profits.

But not all insurers are leading-edge, said Coyne, warning, “A chasm is growing between insurers using state-of-the-art analytics and those who aren’t – between the ‘haves’ and ‘have nots.'”

“The ‘haves’ will be able to write business at the margins they target. The ‘have nots’ will fall victim to adverse selection. And the bar will rise continually as competition drives weaker players from the field,” he said.

To survive and prosper in an increasingly complex and challenging environment, Coyne urged insurers to reinvent themselves by harnessing “new technologies all along the value-creation chain.”

Topics Catastrophe Carriers Property Casualty