Insurance Veterans’ Forecasts for 2012
Insurance Journal spoke with leading industry professionals and asked them what they are expecting this year. If their forecasts are any guide, 2012 is going to be another very interesting year for the P/C insurance industry. Here are their commentaries.
Overall, 2011 was a challenging year for companies due to the weak economy, significant rise in bankruptcy filings, high unemployment rates, record EEOC discrimination charges, dramatic increase in state merger objection cases, and severe financial stress placed on business operations.
Looking to 2012, we are keeping a watch on areas related to the weak global economy, heightened regulatory requirements and new legislation, and data security breaches. We’ll be watching the development of D&O activity related to the growing number of public company merger objection lawsuits and the high number of private company bankruptcies.
Activities surrounding the high and long-standing unemployment rates, Dodd-Frank and health care legislation, increased Department of Labor oversight, and merger and acquisition activity could also create an increase in exposure for companies. Finally, as companies look to expand globally, there will likely be greater exposure due to increasingly proactive regulators in countries worldwide.
Natural catastrophes, from tsunamis to earthquakes and tornadoes, presented many challenges to companies worldwide in 2011. As a result, companies found themselves confronting a myriad of exposures from business interruption to valuing and rebuilding property and managing supply chain disruptions.
Looking ahead, companies will need vigilance to combat increasing exposures from products and services throughout the world—some of which were unheard of as recently as 30 or 40 years ago. Staying abreast of these exposures will be critical for companies that wish to remain vibrant and profitable in the foreseeable future.
Opportunities will be where we are able to leverage underwriting acumen to select risk better than our competition. Margins are now extremely thin, even non-existent, and the ability to confidently select and price risk will yield superior results, especially when combined with tools to enable customers to better manage their own risk.
Specifically, we believe there are continued opportunities in environmental liability, corporate aviation and cyber liability, and see a heightened interest in the development of solutions to address multinational exposures, whether driven by risk management, tax or regulatory concerns.
More generally, we are still operating in a fragile economic climate, with a U.S. recovery stalked by a European debt problem. With the potential for emerging credit and liquidity exposures, I think insurance buyers will be looking hard at credit sensitive products such as trade credit and surety.
The overarching challenge will be to retain and rebuild margin in the products. Risk selection and the ability to sell an appropriate price for the product are key. Underwriters need to be able to differentiate their product, drawing attention to coverage, service, claims handling and market commitment.
There remains an abundance of competition, many looking to build market share at the expense of profit, and the temptation to allow the insurance products to be commoditized along price lines must be resisted.
The insurance industry is witnessing an explosion of data, meaning new technologies are needed to effectively manage it.
For example, there is a transition from predictive analytics operating on terabyte-sized datasets to analytics operating on petabyte-sized datasets. These emerging data sets are an order of magnitude larger than what the insurance industry is typically used to dealing with, thus requiring new data management approaches and technology solutions in 2012 and beyond.
Leveraging large, dynamic data sets for business insight will be just as important as mining data at rest. Data streaming (peeling off real-time data and gaining insights, whether it’s publically sourced, purchased, or personal data) and coming up with ways to mine data streams will evolve in 2012 and the years to come, along with advances in predictive modeling.
The public cloud is not yet ready for prime time due to reliability and security concerns. But cloud computing is here to stay and requires leadership from insurance IT management. While insurance IT organizations may not be ready to fully sign up for cloud offerings due to its evolving maturity, the infrastructure and platform of the service are worth tracking. In 2012, both IT and its business counterparts should take an increasing leadership role in determining how and when it is appropriate to leverage the cloud.
In 2012, CIOs have the opportunity to take on a leadership role within the c-suite on innovation in the enterprise. Specifically, CIOs and the IT group at insurance companies need to track emerging technologies and evangelize them to create opportunities to innovate new products, services and processes.
For example, tablets can become a true business game changer. An increased use of tablet computers throughout 2011 by sales, service, and other mobile workers suggests that in 2012 tablets will evolve from personal entertainment devices and come of age in the business context of insurance.
In our interconnected world, insurers are often stewards of data – including sensitive customer, organizational, and third party information. The quality of stewardship is only as good as the privacy controls in place. In 2012 more than ever, insurers need to stay a step ahead of hackers, requiring continual reviews of the information security landscape and more investment in research and development.
The pricing environment appears to be improving, however there are factors pulling the market in opposite directions. The Council’s quarterly commercial p/c survey showed that rates stabilized in the 3rd quarter and rose modestly in some lines, particularly those with cat-prone exposures, such as property.
The year 2011 was one of the worst catastrophe years in history and the rate increases reflect the negative impact on insurers’ profitability. Low demand and the weak economy will continue to eat away at profits.
If underwriting losses remain high (combined ratios hit 108 percent in 2011) and reserves continue to be depleted, insurers may be forced to raise rates. However, there is plenty of capacity in the market and that may have a dampening effect on pricing. Although rates may remain flat or increase modestly in 2012, increases are not likely to be across the board. The 1st quarter of 2012 will give us a better indication if the increases will stick.
Brokers continued to struggle to find organic growth in 2011. The big brokers did manage to eke out modest growth, but for most organic growth was flat. The need to grow will continue to drive mergers and acquisitions in 2012. M&A was strong in 2011 and we expect to see that trend continue in 2012.
Brokers and insurers will look for growth opportunities in emerging markets. Asia and Latin America hold great promise for growth. In fact, the largest brokers gained most of their organic growth last year from Latin America.
The first wave of baby boomers are coming of age — retirement age that is — and that will have an impact on the industry, but will create opportunities. Boomers will take trillions of assets out of the system, but also create need for wealth management instruments, i.e. annuities, etc. as well as supplemental health care products, i.e., long-term care, etc.
Retiring boomers could also result in a talent shortage for the industry. The industry is already facing a talent void. Recruitment in the industry is a challenge, although better in this economy, and now they will have to fill positions left by experienced, knowledgeable retirees.
The industry continues to hold tightly to archaic legacy agency management systems that are costly and inefficient. With costs of doing business increasing, the industry will have to embrace the most efficient processes to lower costs and keep customers happy.
While broad-based workers compensation system reform is unlikely in 2012, NCCI expects to see a number of states engage in some workers compensation legislation. NCCI anticipates that these will be focused changes rather than broad-based system reforms, with the intent to make state systems less expensive and more economically attractive to business.
As was true in 2011, the economy will again be the driving element in Conning’s outlook for 2012. This reflects both a subdued median outlook and a degree of volatility and uncertainty, at US and global levels, that continues to challenge planning and navigation.
In the U.S., Conning’s current outlook is for a modest rise in real GDP, though possibly remaining below 2 percent, with a possible increase in headline CPI to around 3.5 percent.
For the property-casualty sector, we forecast a slow advance in overall premium growth, though our projections are declining from previous reviews based on continued disappointment in the economy.
The growth is based on an assumption of some increase in underlying exposures, and some rate firming across both personal and commercial lines. Personal lines and commercial lines underwriting cycles remained diverged in 2011, with premium rate growth continuing for personal auto and homeowners products and generally softer pricing in commercial lines.
However, more insurers and pricing surveys affirmed commercial lines price-firming in the second half of 2011. Small business markets, workers’ compensation in some states, and property exposed to windstorms are showing the most consistent firming trends.
The overall combined ratio is expected to fall back slightly from the higher than average catastrophe loss levels in 2011. Offsetting the assumption of average annual catastrophe losses in 2012 is an expectation of less loss reserve releases for the industry.
Most companies have been releasing loss reserves over the past several years, based on falling claim frequency and strong premium rates from years prior to 2008. Early signs of flattening of claims frequency and concerns about increases in severity have caused some insurers to reverse this trend and begin strengthening reserves. We expect more strengthening of reserves in 2012, particularly in the face of low interest rates.
Continued lower interest rates and bond yields are particularly problematic. The dramatic drop in Treasury yields in mid-2011 exacerbates a multi-year trend of gradually falling interest rates and reinvestment activity of maturing bonds from earlier, higher-yielding periods.
Some of the drop was an effect of actions by the Fed, including maintaining low short term Fed Funds rates and purchasing longer term Treasuries in the open market. This was reinforced by troubles in Europe Sovereign Debt and a flight to quality of the safe haven of U.S. Treasuries. Though corporate spreads have widened over U.S. Treasuries since 2010, their overall yields have also fallen, with total net issuance up almost 20 percent in 2011.
With modest exposure growth and still anemic premium rate growth for most commercial lines of business, continued high combined ratios and declines in investment income drive our estimate for overall ROE levels for the industry to remains below 5 percent.
The year 2011 marked a record-breaking year for insured losses attributed to severe thunderstorm events, with figures exceeding $25 billion according to ISO’s Property Claims Services (PCS). As a result, long-term views of severe thunderstorm activity came under increased scrutiny, just as the 2004-2005 seasons did for hurricanes.
As insurers prepare for 2012, it is important to remember that the development of severe thunderstorms is subject to a great deal of natural year-to-year and even day-to-day variability, and furthermore, that losses are highly sensitive to where storms strike. If the events of 2011 occurred in slightly different places the result could have been only 10 to 20% of the losses observed in 2011 or significantly larger than those observed.
Cleary, volatility exists for annual severe thunderstorm risk just as it does for hurricane and earthquake perils. Thus, rather than ask whether a trend can be extrapolated from the 2011 activity, astute risk managers will be re-evaluating their exposure accumulations and employing a robust catastrophe model to manage the risk from this peril.
The state of the Excess and Surplus property market is changing daily as insurers tally up losses and see combined ratios edging higher. This has led to an uneven market with pressure on insurers to raise rates in certain classes and geographies. Specifically, these include properties in coastal areas and habitational risks, although we are seeing broad momentum for rate increases in other areas as well.
The implementation of RMS version 11 has clearly had an impact on pricing in coastal areas, but has not driven price increases across all coastal areas. Flooding, tornadoes, wild fires and earthquakes across the globe have impacted reinsurers negatively all year. We will directly see the impact of this starting on or about January 1, when many insurers treaties are renewed.
Increased reinsurance treaty costs will likely be passed onto insureds. However, with an abundance of capacity in the market at this time, the insured will still have a powerful advocate on his or her side as they navigate through renewals in 2012.
Although developing for some time, the biggest trend we see for 2012 is the growing influence of federal and international developments on our regulatory system. Included among the issues where this is apparent are corporate governance, solvency rules and enforcement, systemic risk determinations, and new reporting tools.
Our objective in all of this is an insurance regulatory system that best serves consumers because it is effective at assuring safety and soundness, is as efficient as possible and encourages the maximum degree of competition.