Expert Commentary

So, Where Do Insurers Go after 9/11?

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.

September 2001

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.

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