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The insurance industry has not escaped the consequences of the
worldwide financial meltdown or the resulting global recession.
The good news is that the companies’ investment portfolios
are beginning to recover their value as mark-to-market accounting
has reversed its downward impact. However a drop in demand due to
the recession’s impact on payrolls, property values and production,
coupled with a continuation of a 5 year soft market and low investment
earnings portend a difficult earnings period for the industry. The
good news is that the markets are functioning normally compared
to banking markets. The corresponding bad news is that more capacity
is chasing fewer business opportunities.
This is the environment that tests underwriting discipline and
determines whether “innovations” truly improve the ability to hold
accounts without having to fully meet competitor pricing. Without
innovation in technology and in product, only the strength of the
company franchise and the agent relationship has any possible restraining
effect on price cutting. Certainly superior service accounts for
some price points, but how many policyholders actually had a service
relationship last year, whether it be for loss control or the handling
of a claim? For middle markets, are more than one in four policyholders
actually serviced by the carrier during the year?
After a tough down cycle, how many times have you heard or read
“our company will never do this again”, only to see the same company
leading the competition on price two or three years after the market
hardened? Some companies believe they can underwrite their way out
of price reductions that accumulate into high double digits after
a couple of renewals, despite the fact that the cost of claims has
been increasing.
Management of an insurer must come to grips with some difficult
questions when price competition becomes excessive, a few of which
are:
- How many renewal cycles will be effected by price wars?
- How much are we willing to spend to hold our infrastructure,
agency and renewal portfolios intact? What is the range of these
costs?
- Do we have any redundancy in reserves that will allow us to
meet the “street’s” earnings projections despite lower pricing?
- If we compete to protect our franchise, how do we minimize the
long term damage and maximize our growth coming out of a cycle?
- Will the reinsurers keep the mutual companies in line?
Operations management must be versed in financial analysis and
projections if it is to be part of these deliberations, and more
importantly if it's going to manage the tactics and strategies within
an acceptable range of underwriting outcomes.
eTIME’s goal is to help equip operating managers with the knowledge
and tools that will improve the odds that their company’s long-term
economic value will be enhanced, not reduced, by their actions.
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