Posted on 17 Dec 03
The insurance industry is at a critical juncture, with issues surrounding consolidation, pricing, legislative reforms and capital concerns shaping the market for 2004, according to year-end industry predictions from Tillinghast-Towers Perrin.
"The poor economic environment, stock market volatility and credit losses of the past few years have taken their toll on the insurance industry, with some of the weaker players dropping out, said Patricia Guinn, managing director of Tillinghast and Reinsurance.
"Following a period of always being in reactive mode in an environment that no one expected, we may now be at a turning point where companies have learned how to better navigate in uncertain conditions. A tier of stronger players have emerged that are now ready to focus on growth strategies."
Tillinghast foresees the following key issues for the insurance industry in 2004:
Given operating and financial pressures, insurers are trying to do one or both of the following to improve their business: (1) gain market share through acquisition and/or expanded distribution and (2) raise capital or otherwise make more efficient use of capital to streamline their business to focus on core competencies.
"On average, we expect to see one significant insurance transaction per month over the next 24 months. Future deals will be about scale, distribution and restructuring," says John Nigh, M&A practice leader. "Sizable deals like St. Paul-Travelers and Manulife-Hancock are going to force consolidation among other players. Companies that previously considered themselves big will now be mid-sized."
Steve Lowe, global P/C insurance practice leader, predicts that the U.S. commercial P/C market will soon be dominated by a handful of major players, complemented by specialist firms operating in market niches.
"In both personal and commercial lines, a strong brand will become more critical to success," he said. "Greater scale will be required to support the distribution of mass-market products. Going forward, size will be defined by companies like AIG and the new St. Paul-Travelers combination."
There's no relief in sight for tort costs. According to a recent Tillinghast study of the U.S. tort system, tort costs jumped almost 13 percent between 2001 and 2002, and we will continue to see double-digit increases for some time to come.
"Don't expect a comprehensive federal solution while the pain is still localized," Lowe said. "Tort relief will be piecemeal in 2004, focusing on key issues like class-action abuses and asbestos reform."
Reserve "surprises" will persist. Destabilization in claim costs, manifesting themselves as an abrupt uptick in claim indicators or unanticipated claims from newly emerging risks, often lead to reserve and pricing problems — and there appears to be no shortage of these.
"We expect more companies to announce reserve adjustments in the coming year and there will be further withdrawals from certain areas — especially professional areas such as architecture, construction and engineering," said Amy Bouska, North America P/C insurance practice leader.
A different kind of soft market?
Though many pundits are predicting a softening market, "don't expect price cutting in 2004; there is just no appetite for it. Prices should begin to level out because they are perceived to be adequate, but they won't fall because the mood of the underwriters hasn't transitioned from fear to over-confidence," Lowe said.
This softening insurance market may, however, prove to be different from its predecessors regarding the use of alternative financing.
"While the pace of insureds forming self-insured programs including captives will likely slow in a softening market, the reduction in the number of insurers due to consolidation and insolvency will lead to the c