Top Leaders, Conferees View Trends, Concerns at January Conference

Attracting Millenials Seen as Important Challenge for U.S. Insurers

The “millennial question” was one area of consensus among six chief executive officers at a panel discussion at the Property/Casualty Joint Industry Forum, held here.

The CEOs—drawn from a wide range of insurers, including large and small carriers, writers of personal and commercial lines, insurers and reinsurers as well as companies headquartered both in the United States and abroad—discussed a diverse set of issues. But they largely agreed that learning how to attract millennials, both as employees and as customers, presents an important challenge in the coming years.

As employees, millennials—those born between 1980 and the turn of the century—work best in an atmosphere of openness and inclusion, said panelist Paula Downey, president and CEO of CSAA Insurance Group, an AAA insurer. “It’s really a war for talent and we have to attract and retain that talent,” she noted.

Steven D. Linkous, president and CEO, The Harford Mutual Insurance Companies, said millennials were attracted to the mutual insurance structure of companies like his, where they can engage the community to “make a difference.”

And it’s important to acknowledge that the millennial approach to work-life balance often differs from that of older generations, said Christopher J. Swift, chairman and CEO of The Hartford. Each generation is different as to what motivates them, he added. Millennials “have a tremendous thirst for information and knowledge and want to know how things work.”

Millennials are also more likely to embrace corporate efforts in social responsibility, Swift said. “They are interested in time off and in working in urban areas with mass transit and reasonable commutes, and companies that hire them need to be aware of those things.”

The efforts are worthwhile, said Thomas A. Lawson, president and CEO, FM Global, because properly motivated millennials can be valuable employees. “It is important to make sure they know when a boss approves of their work because it brings out their best.”

The panel addressed other issues as well, in a discussion led by Bradley L. Kading, president and executive director, Association of Bermuda Insurers and Reinsurers. One challenge they all face is how to effectively earn an appropriate return on capital when industry capital levels are at record highs but macroeconomic trends seem to forecast meager growth. For personal lines insurers like Downey’s CSAA, the solution can include investing in technology so they can compete in a data-driven digital world. The Hartford’s Swift also recognizes value in becoming “an easier company to do business with.” Part of that is linking insurance to mobile technology, with an eye on the millennial as customer, both in commercial and personal lines.

Commercial lines CEOs like Linkous and Lawson emphasized the need for underwriting with discipline in order to pick the right client and stressing loss control to help clients minimize risk.

Investing in technology is important, a fact that presents a particular challenge for Linkous’ Harford Mutual, which is smaller than many of its competitors, so the cost of technology can take a bigger budgetary bite. “We’re making that investment to make sure we have the same tools [as larger companies],” he said, “to deliver the product to our customer.”

Reinsurers will have to be “much smarter in how we choose our risks,” said Henry Klecan Jr., president and CEO of SCOR U.S. Corp., a reinsurer with worldwide headquarters in France. “Reinsurers will have to choose cedents with the knowledge and technical savvy to understand their own customers.”

Panelists agreed that U.S. growth prospects were generally better than in recent years, but not robust. One important change, several noted, is the re-emergence of America’s manufacturing sector, which has been growing more strongly in the past few years, particularly in the Midwest and Southeast.

The challenges could create a separation among industry players, said Jaime Tamayo, President and CEO of MAPFRE USA, a Spanish insurer with significant U.S. operations. “The nation is saturated in terms of insurance,” he said, so organic growth will have to take place outside the country. Within the United States, companies will have to compete hard to gain market share. The successful companies will be the ones that can target new customers—in particular the millennials, whose need for mobile technology and fast transactions create a new demand on the insurance industry.

“These new customers are demanding more and more from us,” added Tamayo. “They want us to do business the way they want to do business.”

 

Lowering Interest Rates Ahead: Insurers Need Attention to Underwriting, Infrastructure and Alternative Capital Markets

Dr. Robert Hartwig, president of the Insurance Information Institute (I.I.I.), who moderated the six-member “Experts Panel: A View from the Outside Looking In,” asked experts to look back at the industry’s related performance highlights and lowlights in 2014.

From a reported point of view, the industry’s results were reasonably good, said Vincent J. (V.J.) Dowling, managing partner, Dowling & Partners. “There was approximately an eight percent return on equity in a two percent interest rate environment; that’s probably not bad. If you look back over time, if the industry is earning 700 [basis points] over 10-year Treasury on new business, they are doing well. That said, the reported results of the industry are always a lagging indicator, they’re not reflective of what’s actually happening in the business,” he noted. “The underlying results are not nearly as good as that eight percent would indicate.”

On the investment side, Dowling said that “the investment income we are earning on the embedded portfolio is somewhere between 30 and 40 basis points higher than the new money rate so we’re over-earning there as well. Every time a bond matures, that money is reinvested at a lower rate, putting pressure on the returns. When you put all those numbers together, I would suggest that the industry probably earned about a five to six percent return on equity last year and that is not commensurate with the risk the industry is taking.”

On the commercial side, Dowling said there are increasing lines of business where rates are down or the loss costs are now exceeding the rate increases. “So if we’re starting at five to six [percent] and going south, we may be in for some tough sledding.”

Reviewing the current outlook of the personal lines, commercial lines and reinsurance segments, Matthew C. Mosher, senior vice president of rating services, A.M. Best Company noted that there is a stable outlook on the personal side.

“There is clearly pressure in that marketplace in terms of efficiency of scale, pressure for consolidation in terms of bundling and just the size issue that benefits the law of large numbers, the amount of data and quality of data that you’re able to bring to pressure in terms of pricing and the things you can do with the more data that you have,” he said. “You don’t see the wide fluctuations on the personal side like on the commercial side and reinsurance. It tends to stay more on pace with loss costs. Obviously favorable loss costs and frequency numbers in auto is always a driving force there and has been for many years.”

On the commercial side, Mosher said “We have a negative outlook there. That gets to the direction of ratings and one of the key things is the reserve issue. You do have stronger companies that maintain a solid reserve base, but a larger number are facing pressure in terms of reserves and we expect to see more and more adverse development on the smaller and mid-size type companies that might be pressured in terms of their position in the marketplace.”

For reinsurance the issue is dealing with rate pressure, the terms and conditions of all the new entrants, and the alternative capital, Mosher said. “There’s also the shrinking reserves that are driving that.”

The home and auto insurance business has been working through a number of disruptive forces that we haven’t seen in a very long time, said Brian Sullivan, editor and publisher Auto Insurance Report and Property Insurance Report. “We have pro- found changes in infrastructure for personal lines companies that are changing the dynamic of mid-size companies,” he added. “Up until now giant companies have always had a tremendous competitive advantage, especially in auto; there’s an assumption that you’re going to wind up with a handful of giants,” he explained. “But you have these claims systems and policy management core infrastructure systems that are sold by third parties that are enabling those little companies to actually match or have superior throughput to giant companies,” he noted. “If you have bad infra- structure, if you’re bad at data analysis and you’re not good at managing your distribution channel, you’re going to be crushed; it doesn’t matter how big you are.”

From an investment bank perspective, Thomas B. Leonardi, senior insurance advisor, Evercore, and former Connecticut insurance commissioner, said that since there haven’t been any significant CAT events recently and there has been dividend growth, the property/casualty insurance industry is still an attractive area for the traditional investor. “As to the alternative investors, that’s been deemed one of the top disruptive factors in the industry right now,” he said.

“If you look at insurance, securities and CAT bonds, what were very high rates of return in a prolonged artificially low interest rate environment, low level of correlation of asset risk com- pared to other asset classes that in particular pension funds might have, and there haven’t been any significant losses to date on these CAT bonds or ILS securities,” Leonardi said. “It’s not a small piece any more, it’s $25 billion. The other thing to keep in mind on the reinsurance side is this a very high margin business, that it’s eroding the traditional reinsurers. These bonds were covering risks four years ago that were generating 7 or 7 1?2 percent; all of a sudden these same risks are 3 or 3 1?2 percent.”?Leonardi added that as a former regulator, he didn’t think regulators fully understand the risks that this market is presenting to the industry.

From a behavioral economics standpoint, Dr. Hartwig noted that this period of relatively subdued CAT losses will not persist, and asked what public policymakers and insurers can do to change people’s behavior when considering disaster preparedness and increase the level of protection for homeowners and business owners who are vulnerable to natural disaster risk.

Howard C. Kunreuther, the James G. Dinan Professor of Decision Sciences and Business and Public Policy at the Wharton School noted that emotions play a role. “There’s a notion prior to a disaster, ‘it’s not going to happen to me, I don’t need to protect myself,’” he said. “How do we change that? One way is to note that the best return on an insurance policy is no return at all; celebrate the fact you haven’t had a loss.” Professor Kunreuther continued, “Focus on a worst-case scenario, and then ask them, ‘What would you do if you didn’t have protection?’”

Dr. Hartwig asked Randy J. Maniloff, an attorney at White and Williams LLP of Philadelphia, his view of the cyber environment. “Right now the insurance industry is out there aggressively marketing cyber policies,” he said, noting there are probably too many companies selling it now. Having read various reports indicating only one-third of all U.S. companies had coverage for the economic fall-out of a data breach, Maniloff challenged the premise, arguing the take-up rate for these policies has “been extremely low” and is not as high as the companies would like it to be.?

 

Cyber Risk: General Keith Alexander Tells Industry “We Need a New Approach”

Gen. Alexander, who was director, National Security Agency, Chief Central Security Service with NSA/CSS from 2010 to 2014, noted that technology is changing at phenomenal rates. “The amount of unique information will double every two years,” hesaid. “There are huge changes coming our way, but should we stop and take a rest ?”

Gen. Alexander referenced IBM’s Watson, the artificially intelligent computer system that has changed technology. “Watson is capable of answering questions and can beat humans at Jeopardy,” he said. “They took Watson and adapted it to go after the most lethal form of brain cancer. If you were diagnosed with a certain type of brain cancer, it metastasized so quickly, all the information changed,” he said. “Using Watson, they were able to diagnose the type of cancer and its treatment in nine minutes instead of 30 days.”

Gen. Alexander also mentioned new changes in the mapping of the human genome, which tells the probability of getting certain diseases. “It holds the secret to how we will solve these diseases—so we can’t stop,” he said, adding, “but with these great opportunities there are many vulnerabilities.”

Looking at the issue of hacking, Gen. Alexander noted that Estonia is more wired than the U.S., but is also vulnerable to hacking, and that Georgian banks were hacked in October 2008 during its war with Russia. He also mentioned the Wiper virus that took place in 2012 where data in 30,000 systems was affected. “In March 2013, South Korea was hit with the same version of the Wiper virus as Sony.”

Gen. Alexander pointed out that the underlying technology is shifting. “You have criminals stealing and selling data, which is costing $445 billion a year in cybercrime.” Referencing the hacking of Sony, Gen. Alexander said that the problem is that it is not defensible today. “(Hackers) are getting in at the same rate and speed as we are. We need a new approach.”?Gen. Alexander noted that there are two areas the U.S. needs to focus on: defensible architecture and cyber legislation. “The government needs to work with industry to understand the landscape and vice versa. You can’t have Sony inciting something against North Korea. We need cyber legislation so we don’t leave these companies hanging out there.”

Gen. Alexander noted that privacy and liability are real concerns when industry gives data to other firms or the government and that protections for information sharing need to be developed. “We can come up with ways to protect our network far beyond what we’re doing today,” Gen. Alexander noted. “We’re the country that created the Internet; we should be the ones to protect it.”

Gen. Alexander pointed out that industries are prevented from sharing some forms of data with each other or the government under the 1986 Electronic Communications Privacy Act. “If the government gives someone information that might backfire, who’s liable, the government or the industry?”

Forum participants asked whether any legislation was being drafted. Gen. Alexander said the House did pass a bill, but that it needs to be re-done with a new Congress. “The issue of liability is important to you as an industry and you should be involved in some of those discussions,” he said. “We’ve got to have the right set of liability issues, do something to protect networks.”

“The issue is, for the President or any decision maker, what’s the most efficient and effective way to stop a war, to keep countries from fighting and what tools and capabilities do you have to do that? Republicans and Democrats look at this the same. They look at all our capabilities and in the future cyber will be melded into it. What happened to Sony could happen to others in this country and throughout the world.”