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Industry will change when buyers demand it


I have long postulated that the property/casualty industry's business model is broken and has to be modified. Change does not come easily to this industry, and it appears to be an excruciating experience to conjure up change, no less implement it.

In many ways, this is a 19th century business seeking to operate in the 21st century that is engulfed in a technological revolution. It appears that none of the key industry participants--including company executives, brokers and risk managers--want change. One can only surmise that all involved believe they have a good deal now and thus seek the status quo. There are clearly exceptions to the rule, and I am sure there are individuals in each of the aforementioned industry segments who have tried to implement change.

Unfortunately, one gets the sense that many are afraid to voice their opinions, have been discouraged from doing so or have been informed it is not a good idea to "rock the boat." In the end, the naysayers fear for their jobs and recognize the need to put food on the table; hence, the quagmire.

Change will not come to this industry until the buyer demands it and/or a significant technological breakthrough occurs that markedly reduces both the absolute and frictional cost structures of the business. When one compares the expense factors in the commercial property/casualty business with other segments of the financial services industry (such as the banks and securities brokerage entities), it is beyond comprehension that change has not yet occurred. The relative success of many of the direct writers of personal automobile business, with lower expense ratios, provides a roadmap. While the business is not identical, it is comparable.

In reality, however, some change has occurred, with an increasing number of insurance buyers shifting from the traditional market to captives and/or self-insurance programs. This process has been fueled by frustration about insurance industry pricing and skepticism about insurers' willingness to meet their obligations without protracted litigation. Clearly, the "stronger risks" are finding more efficient methods to meet their needs. This raises a question about the relative quality of the remaining pie from which the industry draws its business.

Furthermore, the risk management function in many corporate entities is being pushed further down the ladder. This is rather curious, given the increased focus on enterprise risk management. From my perspective, this all points to an increasing need for change in the business models.

The mathematical whiz kids and programmers, together with opportunistic financial executives within the banking and securities businesses, have developed computer programs that decipher market inefficiencies and enable execution of trades before humans can react. This success is quite evident in the trading profits garnered by many of the aforementioned institutions. It also raises the specter of whether work is being done on devising a derivative or comparable financial instrument. Such an instrument could help corporate buyers diffuse self-insured exposures in a more cost-efficient manner into a market that could absorb sizable losses relatively efficiently. This compares with the concerns that periodically percolate about the property/casualty industry's ability to absorb several mega-losses within a year.

Securitization and sidecar transactions came from outside the industry. One therefore has to question whether the industry is ready for synthetic insurance, tailored services, direct access by clients to underwriters and the prospect of long-term partnerships that could run for five to 10 years.

Last but not least is the ongoing struggle with insurance industry regulation. Isn't it interesting that we in the United States continue to struggle with the concept of federal regulation vs. the current patchwork quilt of state regulation at a time when Europeans are discussing global regulation? Clearly, the current regulatory process is inefficient and stifles innovation. At a time when the industry should be aggressively leading the pack with respect to enterprise risk management concepts that would help with our trade imbalance, we seem to be positioning ourselves to play catch up.

The industry has long viewed itself as invulnerable. Well, it appears that the moat around the castle has dried up, the enemy has crossed the moat, the ladders are up against the castle walls, and the intruders are inside the courtyard. The industry is being marginalized. The industry's failure to embrace technological advances, implement change, upgrade its service capabilities and raise the ante on knowledge--for knowledge is power in this business--will simply result in further marginalization.