Betting wisely

November 10, 2008

las-vegasI’m attending the annual ISOTECH conference, held this year in Las Vegas, where a conversation that’s come up repeatedly in my discussions with technology companies exhibiting at the show is what impact the current economic situation might have on insurance industry IT investment.

It’s understandable to think that in the face of current economic challenges, companies might be unwilling to take on sizable expenditures.

But, it seems a case can be made for wise investments in areas that are ultimately likely to reduce costs such as claims systems.

Several recent studies have shown that in fact insurers do seem to recognize that rather than representing a prudent cost cutting strategy, not making necessary IT expenditures because of the current economic climate is actually a bad bet.

In particular, studies from the Property Casualty Insurers Assn. of America and Gartner Inc., Datamonitor P.L.C. and Celent have shown companies directing their IT spending to areas that support business growth, risk management and compliance and in technology that helps them reduce costs, increase revenue and make better use of data.

That sort of selective IT spending seems like the smart play.


Buyers’ market?

September 24, 2008

Interesting news today that Warren Buffett and his Berkshire Hathaway Inc. are interested in purchasing some American International Group Inc. units.

Mr. Buffett had reportedly expressed interest in some of the troubled insurers’ holdings the weekend of Sept. 13 and 14, as the insurer staggered under the combined weight of its exposure to mortgage market downturns through credit default swaps, mortgage backed securities investments and mortgage insurance.

Faced with having to sell off assets to repay an $85 billion emergency bailout loan from the Federal Reserve, AIG officials have indicated they expect to release an asset sale plan next week.

The insurer has indicated it plans to remain in the property/casualty insurance business, so assets like AIG’s aircraft leasing operation and its American General life insurance and annuity unit are thought by many to be among those on the for sale list.

Mr. Buffett, who offered his comments about buying AIG assets a day after buying $5 billion Goldman Sachs preferred stock will likely see something of interest on AIG’s list.

Talent is key

July 15, 2008

I’ve spent the last several days in Taipei, where I’m attending the 44th Annual Seminar of the International Insurance Society. Not surprisingly, given the conference venue and current trends in local business, much of the discussion has centered on the insurance industry’s Asia efforts.

Beyond even talk of the importance of providing appropriate products for different local markets and the various distribution challenges posed by many emerging markets, perhaps the most frequently cited issue facing the industry as companies look to expand around the globe is the talent shortage confronting them in emerging markets.

Many of the panelists addressing the talent issue spoke of not only the difficulty of finding needed talent locally, but of the importance of retaining it once companies had recruited and trained individuals.

Martyn Parker, Hong Kong-based group executive board member and chief executive officer of the Asia division of Swiss Reinsurance Co., conceded that there will always be employee turnover. That said, “The turnover that really does trouble me is the turnover to competitors, which is always disappointing after you’ve invested in people,” he said.

For Swiss Re, retaining talent in rapidly developing Asian markets is more challenging than recruitment, Mr. Parker said. Meanwhile, Michael J. Cassella, senior vp and managing director Asia-Pacific for the Chubb Group of Cos. in Singapore, took the opposite view, to an extent.

“I’d say our greatest challenge is finding the talent,” he said. Consequently, Chubb puts considerable effort into retaining employees in Asia so it won’t have to devote additional resources to finding and developing replacements.

Whether recruiting or retention is the greatest challenge facing insurance industry companies moving into emerging markets, clearly solving the talent issue is key to the success of their efforts.

“I think there’s a strong correlation between companies making the most progress and their talent management piece,” said Swiss Re’s Mr. Parker.

I’ll be posting more to the blog about the IIS in the days to come, and will be writing about the conference more extensively in the August issue of Industry Focus.

Keep it safe and sane

July 3, 2008

At certain times of the year, or in response to certain trends–high gas prices, for example–it’s not unusual to see numerous news outlets tackle essentially the same reaction story. One of the more interesting examples I’ve seen recently are stories assessing the weak economy’s impact on fireworks sales this summer.

While a few of those stories I’ve read indicated fireworks sales slowing in some areas, the majority seemed to be reporting a robust trade in the firecrackers, bottle rockets and various other forms of personal pyrotechnics many consider an essential part of the Fourth of July celebration.

State fireworks sales laws vary widely, with only five states–Delaware, Massachusetts, New Jersey, New York and Rhode Island–banning the sale of consumer fireworks altogether. Still, in states that ban or restrict fireworks sales, it’s often simply a matter of driving across a nearby state line to stock the Independence Day backyard arsenal.

Though I suspect personal fireworks displays will be ubiquitous most everywhere in the U.S. this weekend, I was surprised to learn just how large the fireworks business is in this country.

According to the American Pyrotechnics Assn., the use of backyard fireworks has more than doubled since 2000, with Americans setting off a staggering 238 million pounds of fireworks in their backyards, neighborhood parks, basements or wherever in 2007! Total fireworks industry revenue reached $930 million last year, according to the APA, with $620 million of that coming from consumer fireworks sales.

The association credits the increase in fireworks spending to “an upsurge of patriotism,” along with “an overall improvement in the quality and variety of fireworks available today.”

Whatever this holiday weekend might have in store for you, keep it safe and sane.

Before–and after–the fall

June 20, 2008

Maybe you’ve heard and read all you can stand about the subprime mortgage crisis, but if you haven’t, there’s some really excellent thinking about the causes of the problem and where we go from here in a new Knowledge@Wharton special report.

The report includes an overview on the financial crisis and how it developed, a look at the Fed’s response and an examination of whether new rules could prevent a similar crisis in the future. On the latter score, the report cautions that while regulatory changes might be able to prevent another credit crisis, crafting the changes that would be able to do so requires a clear understanding of exactly what went wrong, an understanding that is only beginning to be realized.

In an opinion piece written by former Wharton School Dean Russell Palmer included in the package, Mr. Palmer suggests that while in the aftermath of the crisis much of the conversation focuses on its causes and needed reforms, in his opinion the issue is one of leadership.

“I believe the situation offers on opportunity to learn crucial lessons about leadership, and if these are heeded, the U.S. will end up with a financial system that is stronger than ever,” the former dean writes.

Calling greed the underlying cause of the subprime crisis–as with other financial bubbles over the centuries–Mr. Palmer identifies several leadership lessons he thinks can be learned from the current financial mess.

The first, he says, is that “integrity is the key to leadership.” Another is the importance of board members providing effective oversight. And, Mr. Palmer writes, leaders of the firms involved “must be at the forefront of addressing the crisis and taking personal responsibility.”

It’s a great report that also includes video interviews with Wharton faculty, a timeline of the events that were like dominos falling on the way to the ultimate crisis and links to other stories on the subject Knowledge@Wharton has published over the past 18 months. If you’re not subprimed out–and even if you are–it’s worth taking a look.



Analyzing the analysts

February 8, 2008

The rating agencies have been referred to by many in the insurance industry as  “the new regulators” for long enough now that it’s probably time to retire the “new” and change the reference to to “the real regulators” or “the regulators we really care about because of the impact a downgrade can have on our business.”

In light of the impact the rating agencies’ scrutiny can have on companies’ fortunes, it’s interesting to see the rating agencies themselves–those on the bond rating side–under the microscope, a spot they’ve found themselves in the past few months as government officials react to the sub-prime mortgage crisis and, more recently, to the related woes of bond insurers and their potential impact.

As a story in today’s New York Times noted, this isn’t the first time the rating process has been questioned. Events like the 2001 Enron collapse prompted considerable discussion of the quality of the rating agencies’ analysis and the objectivity of their rating process, given that the debt issuers are the ones paying for their ratings.

Both Standard & Poor’s Corp. and Moody’s Investors Service Inc. are clearly trying to address the concern, with both looking at actions they say are meant to strengthen their ratings operations.

Yesterday, S&P announced what it described as “a broad set of actions” it was in the process of implementing, focused on governance, analytics, information and education. Among other things, S&P said it was establishing an ombudsman office to address conflict of interest concerns, and that the company would periodically engage an outside firm to review its compliance and governance processes.

S&P also announced a number of steps aimed at strengthening its analytics, steps intended to increase information transparency and steps aimed at educating the public including the creation of a credit ratings user manual and investor guidelines and broader distribution of its analysis and opinions on the Web and through other media.

Moody’s, too, indicated it’s considering some changes. In the company’s fourth quarter and full-year 2007 earnings release that came out yesterday, Raymond McDaniel, Moody’s chairman and chief executive officer, said the company is responding to the current “credit market dislocations” by providing “more extensive research and credit evaluation tools.”

Mr. McDaniel also said Moody’s is “working closely with market participants on information transparency in order to restore confidence and to support more orderly credit market operations as quickly as possible.”

Of course, Mr. McDaniel also said he expects the current “credit market dislocations” to continue “well into 2008,” an opinion that seems to be widely held, so no matter what they do, the rating agencies might find themselves wearing the bull’s-eye jacket for a while yet.

Healthy alternatives

November 6, 2007

I’m in Scottsdale, Ariz., this week, attending the 17th World Captive Forum, where approximately 350 attendees have gathered to discuss the latest developments in captive insurance and other alternative risk financing techniques.

The meeting began this morning with a keynote from Robert P. Hartwig, president of the Insurance Information Institute, who suggested the future bodes well for the alternative risk market, though things might not look quite as bright in the near term for traditional market insurers.

“The majority of the market is still traditional, but the alternative, including captives, has grown consistently,” Mr. Hartwig said, with alternative risk financing vehicles now making up over 30% of the total risk transfer market.

And, though the traditional market is softening considerably, insurance companies shouldn’t assume that insurance buyers that looked to captive insurance vehicles when prices were high and coverage was scarce will abandon those vehicles and return to the traditional insurers, the III president said.

The insurance industry has made buyers comfortable with the notion of retaining more risk, Mr. Hartwig said, “So there’s leakage everywhere.” He laid out a scenario in which primary insurers are being squeezed by buyers’ higher retentions, excess insurers are being squeezed by higher primary retentions and lower reinsurance attachment points and reinsurers are being squeezed by higher insurer retentions and a growing risk-linked securities market.

Still, the global commercial lines insurance market’s results were “excellent” in 2006 and are “very good” this year, according to Mr. Hartwig, with prospects for the industry to still turn an underwriting profit in 2008. But, as prices soften and the industry moves towards what Mr. Hartwig suggested history shows is an inevitable trough in the insurance market cycle, a key challenge for insurers will be whether they can maintain price and underwriting discipline.

One factor that might help them maintain that discipline is the current relatively low interest environment and relatively volatile investment markets, which are enforcing discipline, Mr. Hartwig said. In such an environment, where insurers’ investment returns are challenged, cash flow underwriting won’t work, he said.