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MEXICO CITY-International insurers must grow, not only to make more money but also to survive and meet their clients' needs, a group of senior insurance executives says.
In the future, if insurers don't meet policyholders' expectations, other financial institutions will take their place with innovative new products, they say.
To stay in the game, insurers must focus on their core strengths, make use of emerging technology, such as the Internet, and adapt to meet the changing needs of the business world, they say.
The consolidation in the insurance industry is due in part to the need for insurers to establish a global reach to meet their customers' needs, said Dean R. O'Hare, chairman, president and chief executive officer of Chubb Corp. in Warren, N.J.
"Not having the ability to grow with your customers as they tap international markets will constrain your own growth as customers look for new partners," he said at the annual International Insurance Society Inc. seminar held July 13-17 in Mexico City.
Within 10 years, about one-third of Chubb's premiums will come from policyholders' operations outside the United States, Mr. O'Hare said.
"And I don't mean only from Fortune 500 companies, but from mid-sized companies that are following their own international strategies into international markets," Mr. O'Hare said.
The need to grow international insurance operations goes hand in hand with the requirement for insurers to better understand their customers' needs, he said.
If insurers don't react to those needs, a growing number of eager financial institutions will offer alternatives to conventional insurance, he said.
Investment banks already are formulating insurance derivatives products and other arbitraging instruments, and unless insurers develop similar or better products, they will be elbowed out of their own business, Mr. O'Hare said.
"When someone comes up with a better deal, customers leap at it," he said.
An expanding array of financial institutions will offer those derivative and other deals, agreed Dennis H. Chookaszian, chairman and CEO of CNA Insurance Cos. in Chicago.
In particular, more and more banks are going to enter the insurance business, he said: "They are going to be a larger and larger force in the insurance industry."
Banks are unlikely to want to set up their own underwriting operations from scratch, so they are more likely to buy existing insurers, Mr. Chookaszian said.
And once they become involved in insurance, they will fundamentally change the distribution of some insurance products, he said.
Likewise, the Internet is set to change the way insurance is sold, Mr. Chookaszian said.
While buying products over the Internet raises security questions, those eventually will be solved and with those solutions will come a whole new way to buy insurance, he said.
Employee leasing is another change in the business world that will have a direct impact on insurance buying, he said.
"I believe that this is going to have a major impact on the way insurance products are distributed in the U.S.," he said.
Under employee leasing contracts, a leasing company becomes the employer of the staff at several smaller firms, takes on the human resources responsibilities and then leases the employees back to the original companies.
The economies of scale inherent in such a structure will reduce the costs of purchasing workers compensation coverage for the employees, according to Mr. Chookaszian.
Other insurance products will be sold on a payroll-deduction basis, he said.
The change in the business process is another change in the business environment that will affect insurers and their policyholders, Mr. Chookaszian said.
Like other businesses, insurers will need to focus on the things they do well and shift the other services they offer to outside providers, he said.
Part of that change in focus includes the liability restructuring being undertaken by insurers such as The Home Insurance Co. and CIGNA Corp., Mr. Chookaszian said. Under those restructuring arrangements, unprofitable old liability business is segregated from profitable new business, and separate pools of assets are established to back each segment.
Those restructurings have been controversial, and regulators still need to establish rules and standards by which those restructurings can be carried out, he said.
"If that doesn't happen, then all firms will do it, and I don't think that will be very good for the insurance industry," Mr. Chookaszian said later in answering questions from the floor.
Focusing on core businesses has been a key aspect of Aegon N.V.'s international growth strategy over the past 10 years, said Kees J. Storm, chairman of the executive board of Aegon in The Hague, Netherlands. Aegon is a multiline insurer.
The non-core business Aegon has exited includes consumer lending, reinsurance, non-life insurance in the United Kingdom, health insurance in the Netherlands, and the Aegon vacation parks, he said.
"Also, we withdrew from countries where we were not able to realize satisfactory and sustainable profitability, like Greece, Belgium and a small life insurance company in the U.K.," Mr. Storm said.
But as well as cutting business, Aegon is growing, and much of that growth is through selective acquisitions, he said.
Successful acquisitions can improve expense ratios, increase market share, create economies of scale, attract high-quality managers and improve distribution, Mr. Storm said. And by expanding into new international markets, insurers can select markets that show the best opportunities for rapid growth, he said.
International insurers must have a distribution infrastructure and management techniques that suit all the countries in which the insurer has operations, he said.
And the parent company culture should not necessarily be forced on foreign subsidiaries and managers, Mr. Storm said.
"Personally, I like to view the Aegon group not as a symphony orchestra, but as a jazz band. Employees play their own tune, but we manage to make it swing through listening carefully to others while keeping a basic melody in mind," he said.
Mr. O'Hare served as chairman for the session.