200907 nolan property and casualty report

OperatiOnal priOrities for ProPerty and Casualty exeCutives

rObert e. nOlan COmpanyProPerty and Casualty

survey repOrt

taBle of Contents

introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Personal lines underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Commercial lines underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Customer Contact Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Claims Contact Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13organizational Maturity assessment . . . . . . . . . . . . . . . . . . . . . . . . . 15Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17acknowledgements & Background . . . . . . . . . . . . . . . . . . . . . . . . . . 18 to download a soft copy of this report go to www .renolan .com/pcsurvey

© 2009 robert e . nolan Company see page 18 for quoting and usage guidelines

ProPerty and Casualty survey rePort 1

exeCutive suMMary

The Property and Casualty insurance industry has been navigating tumultuous waters, churned by dramatic failures in the financial sector, a surprisingly rapid and severe recession, and a chain of unexpected, catastrophic storms. The financial impact of this “perfect storm” of events had a dire impact on the industry:

» net premiums have dropped reflecting the drop in consumer income and financial difficulties

» after tax income has continued to drop as a result of a multitude of worsening factors

» return on equity has dropped by a over 80% com-pared to prior years

» Combined ratios continue to run in the 104 to 107 range for Personal and Commercial lines

» Policyholder surplus has dropped measurably

The challenges of these turbulent times amplify the demands facing most companies, creating an intense pressure on lead-ership to bring dramatic improvements in customer-centric competitiveness and transactional efficiency. How will top insurance executives overcome these challenges?

The Nolan Property and Casualty Survey captures top ex-ecutives’ strategies and priorities as they maneuver through these trying times, which also represent an opportunity for those with vision. More than 100 executives responded to the survey, providing their views on the industry’s most pressing issues and their companies’ plans for tackling and overcoming the challenges of the current volatile insurance environment.

Not surprisingly, the top priority remains clear: maintain the underwriting discipline necessary to sustain profitability in the current state of the insurance market. Operational strategies support this priority by focusing on a select set of foundational objectives, including:

» exercise close management of expenses to ensure appropriate allocation of resources

» improve customer-centric service, focusing on differentiation in the marketplace

» drive organic growth where possible, building on existing relationships and products

» invest in talent management, upgrading staff skills and productivity, and improving employee satisfaction

» leverage existing technology, making only selected, well-justified purchase decisions

» invest in innovative analytics that improve data quality and create business value

» Control and gradually expand the use of contact centers, but at a modest pace

» improve internet use, emphasizing distribution channels and other business partners

This report provides a detailed review of executive responses to key questions, further enhanced by expert analysis and insights into current trends and practices provided by Nolan industry experts.

The common theme of executive responses is that companies plan to stay the course with well-thought-out strategies. Success requires that this philosophy be retained and executed as the underwriting and economic cycles follow their market turns.

www .renolan .CoM | roBert e . nolan CoMPany 2

introduCtion

“Pricing, profitability, growth!” and “Price, price, price!” These clear-cut comments pro-vided by executives participating in the Nolan Property and Casualty Survey exemplify the priorities that will drive companies’ actions. Specific operational initiatives vary, but some strong common themes emerged from the survey.

Responses reflect the realities of the property and casualty (P&C) industry today. Company leaders are determined to continue the two-year string of record underwriting profits, but unfortunately, with premium growth slow to negative, it appears likely that we are facing a period that may see the first underwriting losses since 2005.

who Participated?A diverse group of over 100 insurance executives participated in the survey, with almost 60% at the senior vice president level or higher.

The respondents include a good mix of P&C companies, with solid representation from mutual companies, many selling under $500 million in direct written premium.

Despite a diverse company representation in terms of size and distribution methods, responses were remarkably consistent. This indicates that the challenges facing company leaders are somewhat universal in nature. Any responses differing significantly by company type and size will be specifically noted in this report.

Job title of respondents

avP/director/other - 14%

evP/svP - 17%

Coo/Cfo/Cio - 18%

Ceo - 23%

vP - 28%

type of Company

other - 6 .6%

stock - 26 .7%

Mutual - 66 .7%

nOlan insight >>>>>>


The split between Commercial and Personal Lines is fairly even, with a slight majority in terms of premium going to Commercial Lines.

Nearly 60% of the companies distribute through independent agents, followed far behind by exclusive agents at 13%, leav-ing 27% for direct response, general agents, the Internet, and brokers. Personal Lines does show a higher success rate on

the Internet, at 7% vs. Commercial Lines at 1%, while Com-mercial Lines has a higher degree of general agents at 12% vs. Personal Lines at 6%. These differences illustrate variances in complexity between the lines that lead to alternative uses of secondary distribution channels. While both lines show 13% distribution by captives, the trend over the past few years has been away from captives in favor of independents.

direct written Premium of respondents

$500 million to $1 .0 billion, 21%

$1 billion to $2 .5 billion, 9 .5%

> $2 .5 billion, 6 .6%

under $500 million, 62 .9%

Product Mix

Personal lines - 42%

Commercial lines - 58%

Personal lines distribution Channels

Brokers - 5%

General agents - 6%

internet - 7%

direct response - 11%

exclusive agents - 13%

independent agents - 58%

Commercial lines distribution Channels

Brokers - 5%

General agents - 12%

internet - 1%

direct response - 9%

exclusive agents - 13%

independent agents - 60%


underwritinG

Not surprisingly, profitability is clearly the top underwriting concern. What is surprising is the relatively low ranking of organic growth and service, which, while consistent with the industry results in 2007, reflects potential shortsightedness in differentiating in an increasingly competitive market. With the financial turmoil of 2008 continuing into 2009, the profits of earlier years are unlikely to continue, putting increasing pressure on pricing in order to retain market share. On the expense side, internal investments in new tools and improved staff training are priorities in an attempt to leverage existing intellectual capital.

For the smaller companies, there is little interest in mergers or acquisitions as a means of growth, although in reality these companies may well end up being targets of larger finan-cial enterprises searching for diversification and economies of scale.

The appeal of outsourcing, particularly with respect to the knowledge-based underwriting functions, is nearly non-existent despite the need to cut expenses. Most companies recog-nize this function as a core competency and are focused on retaining it internally.


The key to success remains focusing on internally controllable factors, including careful evaluation of risks, underwriting quality, competitive pricing by segment, differentiation of customer service, and careful management of internal and external expenses.

Achieve / Maintain Profitability

organic Growth

improvement in Customer service

expense improvement

introduction of new tools / technologies

training

Growth through acquisition

outsourcing

overall underwriting objectives (lower scores = higher priorities)

0 1 2 3 4 5 6 7 8



For many companies, the solution to competitive pricing is being found in better market segmentation, with credit rating- and mileage-based rate plans showing an increasing popularity. Forward-thinking companies continue to find unique ways to segment their customer base in terms of pricing and service.

Personal lines underwritingRespondents feel that the greatest impact on underwriting re-sults will be achieved through the use of better analytical tools and leveraging the collection and analysis of detailed and accurate customer data. The path to sustainable underwriting profits will be through optimized matching of pricing to risk, which can be achieved through the use of complex models that differentiate rates at behavioral and demographic levels. Technology will provide the means to collect and analyze data from various sources to derive predictive information. Along with this approach, the respondents indicated an increase in plans to use vendor-supplied information, such as credit information, motor vehicle reporting, and claim information, as sources of data for the predictive models.

Responses regarding extending or replacing existing technol-ogy were split, indicating that technology remains a prior-ity and a concern for carriers that have not kept pace with advances in underwriting automation. Such concern is well founded, since automation upgrades are typically quite costly and disruptive. These factors are intensified when a protracted reliance on outdated systems has resulted in the proliferation of shadow systems, workarounds, and process inefficiencies. On the other hand, those carriers who have kept their technology current indicate that they are able to zero-in on underwriting quality, leveraging their established analyt-ics and differentiation tool sets.

As technology has matured, the volume of activity from Internet distribution channels has increased and continues to show growth. Given generational shifts in the marketplace, the need to provide different access and service meth-ods will continue to grow, demand-ing a greater breadth of options.

These trends will necessitate refined and more robust Inter-net-based support for agents and brokers. For those carriers lagging on the technology curve, lost market share and missed opportunity are the most likely outcomes.

One other notable finding regarding the Internet is that the use of Internet-based services by policyholders seems to be gradually accelerating in terms of sales, account information, and self service. Experience has shown that consumers have a threshold for conducting online transactions; if a transac-tion is perceived as complicated, consumers prefer to talk with someone. Thus, at present, there are a limited number of self-serve transactions and inquiries that policyholders are willing to initiate online. Innovative companies are recognizing this need, adding services and transactions to their Internet sites as the market matures, and improving accessibility and service levels while shifting costs away from labor-intensive internal support. Internet use will continue to increase as the next generation of policyholders, accustomed to online interactions, grows.

The responses in Personal Lines are similar across all com-pany sizes, with two notable exceptions. First, smaller com-panies are placing more emphasis on upgrading front-line underwriting skills, predominantly through increased efforts in hiring, training, and retaining underwriting talent, as well as improved processes. Second, mid-size companies—those with $500 million to $1 billion in written premium—have not indicated that obtaining new underwriting technologies is a priority, in part because many of them have already made the necessary investments and are now engaged in leveraging those investments.


Technological investments are required to develop and constantly modify the predictive models, which will become the industry norm as increased integration of internal and vendor-supplied information becomes the source of rate plan competitive differentiations.


Personal lines underwriting will be most improved by (lower scores = higher priorities)

upgrading first-line underwriter skills

acquisition of new technology

Better use of Claim data in underwriting Process

Better use of existing underwriting automation

Better risk evaluation tools

Gathering More detailed and accurate Customer info

1 2 3 4 5


Commercial lines underwritingAs with Personal Lines, respondents felt underwriting results would benefit the most from investments in the discipline and rigorousness of analytics. This belief is consistent with the direction that top carriers have taken toward data management, data aggregation, data accuracy, and predictive analysis. Following closely behind the analytical investments are those intended to leverage the results of the analysis, including better risk-evaluation tools, upgrading of first-line underwriting skill sets, better use of claim data, and integra-tion with existing technology.

Additional responses reveal that respondents have no intention of transferring either underwriting or policy-issue functions offshore, seeing them both as core competencies to be leveraged for competitive advantage. Along these same lines, many respondents plan to make expanded use of vendor-supplied financial information, experience information, and predictive analytics integrated into the underwriting and risk assessment processes.

Perhaps attributable to the nature of the business, the Commercial Lines segment has not seen an appreciable increase in Internet activity from customers. However, activity from distribution channels, both transactional and e-mail, has increased substantially. This trend is likely to continue and will necessitate additional investments in service process design and enabling technologies.

Compared with the 2005 Nolan P&C survey, a few variances deserve mention. For one, respondents’ satisfaction with the underwriting process has improved slightly. There is also a greater expectation that technology can be used to improve and maintain underwriting results, perhaps indicating greater acceptance and understanding of predictive analytics, BPM, and rules-engine technologies.


Commercial lines underwriting will be most improved by (lower scores = higher priorities)

acquisition of new technology

Better use of Claim data in underwriting Process

Better use of existing underwriting automation

upgrading first-line underwriter skills

Better risk evaluation tools

Gathering More detailed and accurate Customer info

1 2 3 4 5


Respondents to the Commercial Lines questions, particularly the small- and mid-sized mutual companies, are sharply focused on the basics of first-line underwriting skills and quality underwriting practices as a means to maintain and improve underwriting results. They do not believe that “magic bullets” will emerge to accomplish this, but instead are planning to rely on past proven techniques to maintain underwriting quality, proper pricing, and profitability.



Carriers with outdated core systems need to plan now for a comprehensive redesign of underwriting processes and technology, incorporating expanded use of the Internet for distribution channels and customers. Carriers who stay at the forefront of the trend toward increased use of the Internet by establishing a solid technological infrastructure will have a dis-tinct competitive advantage enhanced by swift and continuous process improvements, e-service innovations, and selectively-targeted, customer-centric technology enhancements.


CustoMer ContaCt Centers (other than ClaiMs)

Non-claims contact centers have been opened at a modest pace in the P&C insurance industry, particularly in companies where general agencies, independent agents, and/or captives are the key distribution channel. While customers can benefit from the service capabilities and convenient operating hours of carrier contact centers, agents have been reluctant to steer customers toward them. Most agents believe they should be the primary source of service for their customers, particularly given that each contact provides the opportunity for them to reinforce the relationship and possibly offer additional coverage.

Carriers have responded by creating agency-focused, transactional contact centers toprovide services and information to the distribution channels. In turn, agents haveresponded by leveraging these call centers, encouraging direct policyholder accessfor common high-volume or time-specifc functions like billing, proof of insurance,after-hours support, and backup for overflow. The resulting blend of agent andcarrier support has proven successful in streamlining the customer service process andreducing associated costs, all while retaining the agent as the primary contact for keytransactions and needs. Respondents identified the top three challenges for call/contact centers as: » acquiring, training, and retaining staff » acquiring and using technology » Managing contact center performance

Smaller companies are struggling more than their larger counterparts in developing multi-functional contact centers. This may be due to a lack of achievable scale combined with the cost of technology and the complexity of blending calls and transactions effectively. Mid-sized companies are better able to achieve economies and invest in new technology in order to gain the significant benefits resulting from multi-functional contact centers.

Customer Call/Contact Centers

with Call Centers - 56%

without Call Centers - 44%


Managing contact center performance requires special-ized skills in order to effectively address economies of scale, complexities of state specificity, blending transactions with calls, and scheduling coverage to ensure high service levels. There continue to be issues concerning the implementation of expensive workforce management solutions, with many carri-ers choosing homegrown solutions over integrated packages. Those without any solution have found it more difficult to achieve schedule-compliance and service-level goals.

With a growing focus on customer centricity, some companies recognize the importance of finding a solution that allows direct policyholder access to services, effectively bypassing the agent. Given the inherent complications, there remains only moderate agreement that contact centers will be expanded beyond current levels, with mixed opinions on what functions will be added and the degree to which technology will be integrated.

The expectations are that contact centers will continue to increase in attention and importance as service accessibility and competitive pressures grow. Expanding call centers into full contact centers improves their productivity by including capabilities like e-mail and Internet transactions, which in turn leverage the staff ’s overall effectiveness. The key challenge remains gaining distribution-channel support for direct interaction between customers and the company and maintaining the balance between carrier support and agent accountabilities.

Compared with the 2005 Nolan P&C survey, there is stronger agreement that contact centers will be expanded to serve mul-tiple functions. There is also a continuing belief that technol-ogy is not the limiting factor in expanding contact centers and that current technology can be used more effectively.

The respondents generally expressed a desire to continue to base their contact centers in the U.S. as an internally provided service. In fact, there was strong sentiment against moving them offshore. However, there continues to be an expanding interest in the use of remote (including home-based) em-ployees in contact centers to address variations in coverage schedules, with creative use of split shifts, shared space, and part-time employees added into the mix.


As underwriting processes and procedures become increasingly rules-based and automated, it becomes more attractive to selectively move routine services into the contact centers, freeing underwriters for more complex risk assessment. Specific transactions, such as deleting cover-age and changing and adding vehicles, can be handled by a contact center once appropriate technology and proce-dural support are in place.

Contact Center strategies (higher scores ranked more likely)

Contact Centers will serve Multiple functions

the use of Contact Centers will expand

Contact Centers will Be Most improved by deploying new technology

Contact Centers will Be Most improved by Better use of existing technology

Many Personal lines underwriting tasks are Moving into Contact Centers

Contact Centers will use home-based employees

underwriting is Moving to a Contact Center environment

Many Commercial lines underwriting tasks are Moving into Contact Centers

Contact Centers will Move offshore

1 2 3 4



Claims Priorities (lower scores = higher priorities)

There is confidence among the survey respondents that claims departments will meet their objectives for this year and beyond. This confidence is expressed not only by claims executives, but also by other senior executives and respondents who have no direct responsibility for claims.

The main objectives identified for claims functions represent the three key measures of claim performance which have been consistently identified in other Nolan studies as be-ing critical: improvement in loss costs, improvement in loss-adjustment expenses, and improvement in customer service.

Within these objectives, there is a very clear message that talent management will be the greatest challenge in claims, particularly hiring and retaining qualified staff. Ensuring that claims professionals are prepared for their roles through sufficient training and education is a similarly critical priority.


ClaiMs

Like underwriting, the intellectual capital represented by claims staff is seen as a critical core competency to be nurtured and leveraged into a competitive advantage.

improve loss Costs

improve loss adjustment expense

improve Customer service/satisfaction

improve legal Management

improve reserving accuracy

improve subrogation results

improve siu effectiveness

improve Cat experience

0 1 2 3 4 5 6 7


There has been a shift in Tort Reform in favor of plaintiffs, which will likely accelerate due to the change in political parties at the federal level. As part of litigation management, insurers will be faced with additional demands driven by this shift, particularly in the area of auto and Workers’ Compensation claims.

Litigation management and how to control its costs and im-prove results are concerns for many P&C insurers. A number of comments specified that improvements in litigation man-agement could have the greatest impact on expense reduction through better control of expenses (e.g., with bill review and audit) by limiting attorney involvement and properly involv-ing litigation specialists.

Technology continues to be seen as an area of opportunity for the claims function. Results were split, however, on where the greatest opportunity lies—with some believing that the answer is to make better use of current technology, while others favor acquiring new technology. This is not surprising, given that the answer in part depends upon what existing technology investments a company has already made—those with a more robust infrastructure are inclined to leverage existing technol-ogy, while those with more legacy systems need new technol-ogy. For claims, solutions addressing the needs of anti-fraud, call centers, workflow, and rules engines remain at the top of the list for investments.

According to respondents, the areas least likely to have any additional positive impact on results include centralizing and decentralizing functions, outsourcing and increasing vendor usage, or increasing the use of contact centers. These areas

appear to have reached maturity from a claims perspective, at least with regard to the survey respondents. This is not too surprising given the amount of effort invested in each of these functions over the past few years combined with the need to now focus on improving what is in place.

Respondents’ comments reinforce the critical focus for claims executives as improving the quality of claim handlers through stronger hiring practices, more intensive training, targeted retention practices, and the provision of necessary tools.


Given that the economic pressures on consumers are likely to drive increased fraud in reaction to credit pressures and affordability issues, confidence in claims operational effectiveness should be mitigated by investments in anti-fraud systems. According to the NICB, claims fraud adds about 10% to Loss and LAE, or $24 billion in losses each year, with manual reviews and industry-standard red flags detecting less than 20% of actual fraud each year.

likely sources of improvement in Claims operations (higher scores ranked more likely)

Meet all of the objectives set by the organization

improve by Better litigation Management

improve by Better hiring and training Programs

Better use of existing technology to improve

Provide Better support tools to improve

deploy new technology to improve

use Process Changes to improve

improve by Better file review Programs

Change human resources to improve

increase use of Contact Centers to improve

Centralize Personnel to Gain improvements

decentralize Personnel to Gain improvements

outsource to specialized vendors to improve

1 2 3 4 5



Claims Contact Centers

Similar to non-claims contact centers, about half of the respondents are currently utilizing claims contact centers, with common agreement that the reporting of new claims, particu-larly in Personal Lines, should be via a contact center available 24/7.

As noted, most respondents felt strongly that Per-sonal Lines claims should be reported directly to a contact center; however, there were varied reac-tions to having actual claim adjusters in the contact center taking the calls. Small- to mid-size company respondents did not feel it was a good use of claims resources to have them answering loss calls. On the other hand, larger (>$2.5B) Personal-Lines-only companies are more likely to have claims adjusters located in their contact centers.

In contrast, respondents are neutral on the reporting of Commercial Lines claims to contact centers and are the least interested in having claims adjusters working in a contact center environment. Com-mercial Lines claims, with the possible exclusion of commercial auto, do not achieve the same benefits from call center loss reporting as Personal Lines claims because the reporter of the claim, in many cases, is not a party involved in the incident.

Claims contact centers, particularly for Personal Lines, have evolved to become the best solution for submitting losses and expediting the claims process. Companies are using claims contact centers not only for taking the notice of loss, but also for retaining and handling routine claims to completion. Claims assigned outside of the claims contact center are being segmented based on required skills, and then are transferred to the appropriate adjuster to initiate the claim process.


Unlike life and health insurance, there is less value in combining claims contact centers with the call centers of other functional areas. This is due to the special-ized claim-handling knowledge required to ensure that the call center representative is able to handle and refer claims effec-tively. In P&C companies, claims contact centers are more closely aligned with the claims function than with traditional contact centers.

Claims Contact Centers

with Claims Contact Centers - 56%

without Claims Contact Centers - 44%


Respondents state that they are not having any particular dif-ficulty staffing their claims contact centers, probably because of the overall emphasis on telephone skills as opposed to adjusting skills. Often, contact center positions are entry-level to the organization and the claims function, which makes the barriers to hiring and initial training lower.

Respondents believe that opportunities for improvement in contact centers can be found both in making better use of current technology and acquiring new technology. As a prime example, Web-based claim reporting is expected to grow gradually in acceptance and adoption. Respondents who deal exclusively with Commercial Lines indicate they are more interested in expanding this capability, which makes sense for the commercial environment within which they operate.Respondents were relatively neutral on the idea of sharing claims contact centers with other areas, as well as whether

claims should be handled to completion through the contact center. It is interesting, though perhaps not surprising, that Personal Lines carriers are least likely to support sharing of contact centers. Commercial Lines carriers are least likely to believe that claims should be handled through completion via a contact center.


Closed-file reviews, conducted over a period of several years, indicate that claims can be successfully segmented at the point of first report a high percentage of the time. This results in the most productive and highest-quality claim adjudication, while providing the best possible service levels to customers and avoiding the redundancy and costs associ-ated with most other approaches to loss reporting and handling. nOlan insight >>>>>>

Internet reporting of Commercial Lines and WC claims is growing as a requirement of customers because a depart-ment within the insured company typically reports claims to the carrier rather than the actual parties involved. The Internet makes it possible for commercial customers to report losses quickly and at their convenience.


Claims Contact Center strategies (higher scores ranked more likely)

reporting of new Claims should Be to Contact Centers

Contact Centers will Be Most improved by Better use of existing technology

Contact Centers will Be Most improved by deploying new technology

web reporting of Claims is Growing rapidly

Better Contact Center Management tools are needed

More Claims Can Be handled to Completion in a Contact Center

Contact Centers should Be shared Between Claims and other service

Staffing Contact Centers is a Major Limiter and Business Challenge

More Claims adjusters will work in a Contact Center environment

1 2 3 4



Over the past few years, much energy has been expended to ensure that the strategic components of organizations are known by and communicated to the staff. Concurrently, most, if not all, companies have undertaken process-redesign initiatives. This has contributed to a culture in many organizations that recognizes the need to practice continuous improvement, to communicate among corporate departments, and to include process, workflow, and quality-control procedures in the way they do business.

organizational Maturity assessment

There is strong agreement among the organizations surveyed that:

» their employees have knowledge of their vision, mission, and value proposition » there is a process for staff to get the knowledge and skills needed to do their jobs » there is a strategic vision that integrates business and it » respondents also indicated that continuous improvement is practiced on a regular basis .


The comments expressed by respondents indicate that making cultural changes within organizations permanent is an ongo-ing challenge. Equally challenging is the application of the principles of continuous improvement in an environment of limited IT resources and a changing workforce.

Respondents’ comfort level with their claims and underwrit-ing operations’ effectiveness is high, which is consistent with the several years of profitable results experienced since 2005.

organizational Maturity assessment (higher scores mean higher maturity)

we do not have false starts or projects that end short of targets

we communicate well across departments and also deep into the organization

We have the staff talent needed to fill our needs

We have workflows and quality controls that meet our strategic goals

we practice continuous improvement

we have a process in place to assist the staff in obtaining the skills and knowledge needed to perform their jobs

We have a strategic vision that integrates business and IT into a unified picturethe staff has, and applies, knowledge of our vision, Mission,

and value Proposition in their work activities

1 2 3 4

Claims Contact Center strategies (higher scores ranked more likely)

rate the overall performance of the Claims function of your company

rate the overall performance of the underwriting function of your company

rate the overall performance of your company’s Contact Centers

Claims processes are well documented and understood

our C/l processes are well documented and understood today

our P/l processes are well documented and understood today

1 2 3 4 5


The P&C insurance industry is transitioning from a rare, multi-year cycle of underwriting profitability to a very volatile environment that is expected to last for several years. There is legitimate concern regarding how the underwriting cycle will play out and what the effects will be of broader, severe economic issues. The current wave of foreclosures, a contin-ued drop in housing values, the credit crunch, investment losses, and rising unemployment all amplify the uncertainty. Certainly, the significant reduction in investment income and the reduction in surplus will accelerate the hardening of the market as the impact of higher loss ratios translates directly to the bottom line more quickly and without the softening effect of investment income. These impacts are exacerbated by the upward trend to the low 100s in combined ratios concurrent with the negative growth in Net Written Premium.

Economic cycles further impact P&C companies because fraud increases due to economic hardship, thus increasing the cost of adjudication as well as LAE and loss costs. As the economy turns positive, claim frequency increases, along with claim severity, as general costs climb in response to higher energy costs and inflation.

There are mitigating factors that will help the well-led com-panies benefit from the opportunities that these challenges will bring. Traditionally, the P&C insurance industry, while not immune from the waves of bad economic news, tends to weather adverse economic times relatively well. This is in part because most insurance is a necessary, rather than discretion-ary, purchase. Slow growth in sectors such as the auto and home-building industries only affects P&C insurance along its margins because 98–99% of exposure growth comes from renewal business—although the drop in housing values will have a negative effect on the renewals. The period of high gas prices reduced miles driven, and this has continued even with the return to lower prices, which in turn reduces exposure to auto losses.

Indeed, these are challenging times requiring strong leader-ship and a focused strategic discipline.

The respondents to our survey are cautiously optimistic that they can maintain the discipline to compete in the market-place with its aggressive pricing and yet still achieve bottom-line profitability. They seem to be saying, “We know what needs to be done; we just need to make ourselves do it.”

Within this environment, operational effectiveness will become more important as the cycle plays out. The emphasis on underwriting quality and loss cost containment will surely continue. Along with this, companies will need to continue to look at their internal operations, not only from the per-spective of cost containment, but also with an eye toward the qualitative impact that operations will have on future under-writing profitability.

In many ways, the path to future improvements in operating expenses is known. More, higher-quality underwriting infor-mation presented in a highly-usable format will improve risk selection and pricing. Process improvement, supported by the right technologies, will yield the greatest cost reduc-tions. And continuing to redefine company and distribution channel roles in the acquisition, retention, and claims processes will further eliminate redundant activities and their associated expenses.

As this cycle—and future ones—runs its course, management must be prepared to address business challenges in several ways, including:

» Continually improving the quality of information required to make objective underwriting decisions

» enforcing the discipline necessary to apply under-writing and business rules in a volatile environment

» recognizing the importance of skilled staff in achieving quantitative, qualitative, and customer service objectives

» Providing line staff with the training and tools nec-essary for best performance

» regularly looking at ways to use technology to perform more sophisticated analyses of information and for application of business rules

» focusing on organic growth to increase marketshare

Other areas not covered by this survey but of paramount con-cern to P&C industry leaders for the coming years include:

» structural shifts impacting profits • new risk factors and claim costs from hybrid and

new energy source vehicles • shift to more “personalized” quotes (build your

own premium/coverages) • Competitive acceleration of claim payments

and repairs

ConClusions


• accelerated changes of geographical and catastrophic risk factors

» optimizing distribution channels • an increase in independent channels, while

captive channels decline • the retirement of experienced agents,

creating a void for agency channels • new generations not attracted to the indus-

try, reducing source of new agents • a shift to alliances, the internet, direct mail,

and similar distribution channels

» addressing regulatory oversight • Government bailout brings additional over-

sight regardless of participation • likely an acceleration of existing programs

and addition of new regulations • ofC/oni (office of national insurance)

battle over federal vs . state powers • national Cat fund, flood & wind Program,

surplus lines, Guarantee fund • Contingent Commissions, questions on use

of Credit scoring given economy • More stringent capital-to-liquidity require-

ments • asset valuation (mark to market), federal

regulation of credit default swaps • Changes in income, capital gains, and

windfall taxes; offshore insurers

There is no doubt these turbulent times will challenge the best in all of us. Yet there exists within these challenges the opportunity to excel while the economy gradually returns to normalcy. For those willing to listen, willing to have the tried-and-true folklore of their organization challenged, and interested in finding the leverage points amid the noise of the turmoil, there exists a real chance to establish a sustainable competitive advantage.

acknowledgementsThe information, results, and insights found in this study are based on detailed surveys completed by more than 100 ex-ecutives in the P&C industry. Participants include insurers distributing personal, commercial, and Workers’ Compensation products across a broad array of distribution channels. The Robert E. Nolan Company extends their thanks and apprecia-tion to all of the survey participants.

Lead Authors: Larry Wood, Steve Callahan, and Steve Discher

Quoting this reportRecipients may quote briefly from this study (one or two sen-tences) without express permission. However, all such quotes must be accompanied by the phrase “Source: Robert E. Nolan Company-www.renolan.com.” More extensive quoting or other use in any form is not permitted without the express written consent of the Robert E. Nolan Company.

BackgroundThis report is one of a series based on insurance industry research studies conducted by the Robert E. Nolan Company. The Robert E. Nolan Company is a management consulting firm specializing in the insurance, health care and banking industries.

For 35 years we have helped our clients achieve measureable and sustainable improvements in service, quality, productivity, and costs.

aCKnowledGeMents & BaCKGround

Contact us for further information at:www .renolan .com

mailbox@renolan .com1-877-renolan


www .renolan .CoM 1-877-renolan

Documents

200907 nolan property and casualty report