Katie Siegel

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.

Insurance Industry

Challenges Hedged with Optimism

Industry forum panelists acknowledged cyber security and investment income challenges, but saw growth opportunities in 2016.
By: | January 20, 2016 • 4 min read
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Cyber issues remain a challenge for property/casualty carriers, but executives remain optimistic about growth and innovation in 2016.

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At the Insurance Information Institute’s annual P/C Joint Industry Forum in January, former FBI Director Robert S. Mueller set the tone by highlighting cyber security as a top priority for national security and corporate America.

“Developing a cyber security strategy means understanding the threats,” he said, identifying China, Russia and Iran as nations most interested in gathering intelligence on American technology and military operations.

Threats also come from hacktivists aiming to make a political point, criminals seeking to sell stolen data for a profit, and terrorists wanting to cause harm, to name a few.

To manage these risks in the years ahead, the role of chief information security officer (CISO) will grow more prominent, Mueller said. Though he stressed that the head of any organization should not “delegate away” the responsibility of cyber security, a CISO can be dedicated solely to that task and serve as a direct liaison to the CEO.

Insurance companies are particularly vulnerable.

“Hackers know insurers have a motherlode of data.” — Adam Hamm, commissioner, North Dakota Insurance Department.

“Hackers know insurers have a motherlode of data,” said Adam Hamm, commissioner, North Dakota Insurance Department, and regulator representative on the U.S. Financial Stability Oversight Council (FSOC).

“If we don’t get cyber security right, it could critically wound the insurance industry as a whole.”

An estimated 100 million Americans have been affected by data breaches in the insurance industry. That has attracted regulators’ attention.

Speakers at the conference agreed that regulators will become more involved in cyber security in 2016.

The FSOC, for example, has already designated two insurers — Prudential and MetLife — as systemically important financial institutions, though Hamm said he “strongly disagrees” with those designations.

Though not much will change on the state level, Hamm said, companies need to keep an eye on data breach legislation potentially moving through Congress in 2016.

Other risks are coming from apps and services emerging as part of the new sharing economy, which have led to an exponential growth of data.

“Eighty percent of the world’s data was generated in the past two years,” said Hemant Shah, co-founder and CEO, Risk Management Solutions.

With much of that data connected across several platforms, keeping it safe and private presents a huge challenge for organizations, although speakers at the conference agreed that insurers have responded well with policy form adjustments.

Much more work remains, however.

A major barrier to providing more comprehensive coverage is there is limited knowledge of the cyber market, which was estimated at $2 billion written in premium at the end of 2015.

“We need a more granular view of what the cyber market looks like in order to determine premium volume, claims and loss data,” said Hamm.

Soon, carriers selling cyber coverage will be required to supply that information on financial reporting statements.

That granular view may also help insurers better allocate capital. Given the interconnectivity of cyber risk, there is an “accumulation of underlying exposure” that places an insurer at risk of deploying a large amount of its capital in connection with a single incident, Hamm said.

Speakers said the industry relies too heavily on past experience and should be thinking about risk and pricing coverage more from an exposure perspective.

Despite the challenges presented by the interconnectivity of data and its accompanying risks, speakers agreed that advancing technology offers opportunity for growth and innovation.

2016 Outlook

Executives participating in a panel discussion at the event noted that 2015 was stable for insurers, with 4 percent premium growth and a combined ratio of 97, despite continued poor performance in investment returns.

“This was the fourth-worst year [for investment performance] since 1926,” said Dinos Iordanou, chairman, president and CEO, Arch Capital Group.

“There is a difference between being smart and lucky, and we’ve been lucky.” — Tad Montross, chairman and CEO, General Re Corp.

This year could be worse, he said, due to “reserve redundancies scaling back and deficiencies starting to emerge.”

Despite poor investment returns, low losses in 2012 and 2013 resulted in a $14 billion positive runoff for the property/casualty industry in 2014, according to Tad Montross, chairman and CEO, General Re Corp.

“We are below the 10-year average for Nat CATS,” which has bolstered reserves, he said.

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He stressed, however, that insurers should think proactively and price coverage on a prospective basis, rather than on the loss history of the last few years, especially when it comes to storm surge and flood risks.

“There is a difference between being smart and lucky, and we’ve been lucky,” he said.

Low losses and an influx of alternative capital have contributed to an excess of capital in the industry, spurring mergers and acquisitions as well as expansion activity. There have also been buybacks and increased dividends for shareholders.

But Iordanou said that keeping some excess capital available would be “prudent,” especially if 2016 turns out to be more volatile than last year.

Another opportunity for growth cited by executives was Chinese companies looking to break into Western markets over the next several years.

“China will continue to grow, but offers no ROE opportunity in the next five years. Maybe in 10 to 15 years,” said Stephen Catlin, executive deputy chairman, XL Catlin. “But do you want to sit and watch, or do you want to have your toe in the water?”

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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Brokers

Talking About M&As

Speakers at recent brokerage summit discussed pursuing acquisitions in a seller’s market and the importance of innovation.
By: | December 9, 2015 • 4 min read
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Brokers say there are many challenges and opportunities in a market that is seeing fervent M&A activity.

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“A big challenge is the pace of change in the markets. It’s unpredictable,” said Doug Hammond, chairman and chief executive officer of NFP. Hammond was a keynote speaker at the 9th Annual SNL Insurance Brokerage Summit in New York in November.

At the time of the summit, there were 326 announced mergers or acquisitions in 2015 — the biggest year on record, according to a MarshBerry report.

It’s the “Wild West” of M&A. — Clark Wormer, director of M&A, HUB International

It’s the “Wild West” of M&A, said Clark Wormer, director of M&A at HUB International. He said HUB expects to top 50 transactions by year end.

Every company represented in the summit’s “Deal Makers Panel” has been an M&A player. However, the speakers stressed that acquisitions should not be so much about growth and expansion as they are about adding talent and services, without shortchanging customers’ expectations.

“Making an acquisition isn’t just about revenue; it’s about gaining a vehicle for getting more producers,” Wormer said, adding that HUB will “pay more for a firm that has a record of sustainable growth and low risk profile.”

Ben Newman, chief financial officer, Marsh & McLennan Agency — which formed six new partnerships this year — pointed out the importance of younger talent in an acquisition target.

“It’s about perpetuation; we’re less concerned about historical growth, and more about opportunity. There is a lack of consistency in succession planning across acquisition targets. Some invest year over year in mentoring and hiring, and others are more focused on maximizing profits,” he said.

“We’re focused more on organic growth over acquisitions,” he said, “An acquisition is the riskiest thing we ever do.” — Stephen Farr, senior vice president, Alliant Insurance Services

Stephen Farr, senior vice president, Alliant Insurance Services, said the “manic” M&A environment has created a seller’s market, but focus should be on finding the right chemistry with another company and forming a true partnership.

This year, Alliant announced nine acquisitions, a modest number compared to the activity of other large brokers.

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“We’re focused more on organic growth over acquisitions,” he said, “An acquisition is the riskiest thing we ever do.”

Newman stressed that seeking out acquisitions for the sake of growth doesn’t always make the best business sense.

“We don’t require regional leaders to seek out acquisitions, and we don’t necessarily budget for it. We look at each opportunity on its own merit, and it’s OK if we don’t do any,” he said.

Innovation and the Internet of Things

Recent mergers between big companies — such as Willis Group and Towers Watson — and frequent acquisitions of smaller independents by larger brokers mean that shares of the marketplace have become concentrated among fewer brokers and product choice for consumers has narrowed.

The trend shows no signs of stopping.

Connected technologies open the door for more stringent risk management and loss control.

David Ross, vice president of acquisitions for BroadStreet Corp., which itself completed 20 transactions this year, said the M&A world will remain “torrid” because “new investors are coming into the market every day.”

To differentiate themselves, brokers need to focus more on innovation, Hammond said. “Most leaders manage the present, but don’t evaluate the past or create the future.”

Relationships will become even more important as technology makes it easier for buyers to eliminate the middle man and purchase insurance directly, through apps and online portals. Brokers need to enhance their value propositions with broader services, expertise and their own technology tools.

Martin Spit, managing director of Accenture, suggested that opportunity for innovation lies in the fast-developing realm of the Internet of Things. Accenture predicted each person would have about seven connected devices by 2020, and that “connected insurance” will have a significant global share.

Connected technologies open the door for more stringent risk management and loss control.

For example, shipping giant Maersk and AT&T collaborated to connect 280,000 containers, allowing the company to monitor and track individual container temperature, location and shipping conditions, reducing waste and saving money.

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According to Spit, employers could take advantage of similar technologies to create equipment programmed to only work for certain staff members, for example, or to monitor supply chains for severe weather risk or threats of political instability.

Some carriers have shown an interest in requiring the use of technology to improve safety and reliability as a condition of certain types of coverage. Brokers can play a key role in pitching these tools to clients and making adoption more widespread.

In doing so, the insurance industry can “evolve from reactive accident compensators to proactive protection service providers,” Spit said, adding that “the best brokers act as risk managers.”

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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2015 NWCDC

Comp’s Most Bizarre Cases

One expert in workers’ comp law recounts some of the most interesting cases of the year.
By: | November 13, 2015 • 2 min read
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Though workers’ compensation law “can be dry at times,” there is no shortage of interesting cases that come across the desk of Thomas Robinson, J.D., co-author of Larson’s Workers’ Compensation Law.

“We’re talking about some really funny circumstances,” he said during a presentation at the National Workers’ Compensation and Disability Conference® & Expo in Las Vegas on November 12.

In one case from this year, a nursing home decided to conduct an active shooter drill, without advising residents and employees. It hired a local sheriff to play the shooter.

In one case from this year, a nursing home decided to conduct an active shooter drill, without advising residents and employees. It hired a local sheriff to play the shooter.

“This particular sheriff thought he was meant for the stage,” Robinson said.

The sheriff burst into the building, gun drawn, and threatened to kill an employee unless she did exactly what he said. The employee filed a civil suit against the employer for the emotional trauma caused by the drill.

“There are certain risks you have to think about it when you go to work,” Robinson said.

“The court determined that, as a nursing home employee, having a gun held to your head is not one of them.”

In another case, a Spanish-speaking employee of Butterball Corp. strained his shoulder while picking up a frozen 80-pound turkey.

He was sent to a major medical center where he was catheterized, because the doctors mistook his gesturing to his shoulder to mean chest pain, and feared a heart attack.

The misunderstanding resulted in hours of unnecessary testing and a $20,000 medical bill, for which the employer was held responsible.

Ultimately, determination of compensability in Robinson’s bizarre cases depends on specific state laws.

Some require a strong causal relationship between the workplace or nature of work and the injury. Others give more leeway to the worker.

In any event, as Robinson attests, workers’ compensation is actually anything but dull or dry.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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