So, Where Do Insurers Go after 9/11?
September 2001
Insurers have to figure out how they will
be successful in the future. Gary Bausom provides his view of how the insurance
industry should redefine value after the terrorist attacks.
by Gary
J. Bausom
Bausom & Associates, Inc.
This article is brief by design. Insurers have to figure out how they will
be successful in the future, and it will surely entail more than merely growing
written premium.
Yes, September 11 was a disaster of unprecedented scope and nature in terms
of its human, financial, and economic dimensions. Yet, the whole country is
moving forward after September 11, even after considering the loss of life,
destruction of businesses, buildings, and aircraft. Most definitely, though,
all of this has shaken the confidence of consumers.
On September 20, 2001, Alan Greenspan spoke before Congress and said, "As
we struggle to make sense of our profound loss and its immediate consequences
for the economy, we must not lose sight of our longer-run prospects, which have
not been significantly diminished by these terrible events." He added, "While
there is obviously a strong desire to move rapidly, it is far more important
to be right than quick."
Mr. Greenspan was addressing lawmakers on the economy; however, he just as
well could have been addressing insurers' CEOs on the right moves for improving
their businesses.
Insurance Market Conduct
This time it may be much easier to accept change because there really is
no choice. Insurers have little choice because billions of dollars in claims
will need to be paid promptly. In the aftermath of September 11, there will
likely be fewer insurance companies and reinsurers. Management at the surviving
companies will likely reduce emphasis on the top line, instead focusing on growing
its bottom line—this will be a shift in emphasis for the macro insurance marketplace
and most insurers. Volume alone, without positive margins, has no value.
It is encouraging to see the market conduct exhibited by some insurers, stating
that they were cutting the normal claims red tape and are expediting settlements.
However, at least one company appears to be taking the opposite tack, hinting
strongly at there being a question of coverage.
The real question seems to be: Where does a company want to be in a year
… in 3 years? This disaster, in financial terms, is not what will impair insurance
companies; instead, it merely accelerated a condition that was already in the
development phase. In short, insurers whose strategy was emphasizing written
premium or top-line growth may have succumbed to pressures by intermediaries
who obtained too good of deals for their clients.
Real Impact: Strategic or Short-Term Financial?
On September 18 and 19, Morgan Stanley published reports on the property/casualty
insurance industry indicating the industry's own loss estimates are about $15
billion, while Morgan Stanley is estimating $30 billion, and a few of the global
high quality reinsurers are suggesting the losses will be notably higher. Morgan
Stanley has also indicated they believe that reinsurance collectables will be
a significant problem.
Those who bought insurance primarily based on lower premiums may be facing
some "holes" in their insurance programs and discover that their claims may
not be paid in full. Very soon the majority will attempt to migrate to the minority
position of dealing with underwriters of the highest credit quality. Those underwriters
will desire to write only those companies that bring to the table a high degree
of credibility and superior risk management programs.
Looking beyond the short-term drop in stock prices resulting from significant
reductions in earnings, insurers with strong balance sheets have experienced
tolerable "hits" to their book values. For global insurers/reinsurers, the reduction
in book value, based on Morgan Stanley's report and analysis, is only 2-3 percent.
Certainly, some companies will be hit much harder, but for most, these losses,
while far from desirable, can be withstood.
This change should not affect the overall
mission or thrust in prospective capability of insurers in the future. Or, as
Alan Greenspan put it, "We must not lose sight of our longer-run prospects,
which have not significantly diminished by these terrible events." For any well-run
company, this change is opportunity!
Redefining Value
This disaster provides insurers a rare opportunity to gain strategic business
advantages. If, when planning actions for the coming months, insurance company
management thinks beyond the short-term impact to earnings and instead focuses
on how insureds can be better served, those companies will win.
To win, it will require surviving current losses, tightening the qualitative
aspects linked to improved profitability, setting new standards for acceptable
credit quality of its reinsurers, and learning how to increase prices in a manner
understood by insureds. After all, it is not necessary for insured clients to
like the increases, they just need to understand them. This boils down to doing
the right thing on a sustained basis and not allowing knee-jerk reactions.
Insurance company management will have to redefine value. Management needs
to continue encouraging questions and accept challenges (both internally and
externally), and adjust strategy and focus to assure that real value targets
are being achieved.
The question is: What is real value,
and how can it best be measured? Is value defined in terms of top line, bottom
line, asset quality, employee skills/execution, customers beyond their transactions,
as well as the right mix and balance? Do your insureds, your customers, understand
your product and your service value? Make sure they do, and profits will follow.
Look for opportunity, not exclusions.
So what is stopping you? You're in the spotlight now, not a year from now!
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.