Insurance Industry

Challenges Ahead for Insurers and Brokers

Fitch Ratings expects deteriorating earnings for insurers and only modest improvements for brokers.
By: | December 16, 2015 • 3 min read
Fitch story

Fitch Ratings expects a challenging year for U.S. property/casualty insurers in 2016, but anticipates that ratings will remain stable.

The majority of ratings in the sector is not expected to change in the next 12 to 18 months, according to Fitch’s “2016 U.S. Property/Casualty Insurance Outlook Report.”

Near-term earnings deterioration is anticipated, but a shift toward sharply inadequate premium rates or profit levels approaching operating losses is unlikely, the report stated.

“Market conditions for U.S. property and casualty insurers will be less favorable in 2016 and overall industry performance will likely decline next year.” — James B. Auden, managing director, Fitch Ratings

“Market conditions for U.S. property and casualty insurers will be less favorable in 2016 and overall industry performance will likely decline next year,” said James B. Auden, managing director, Fitch Ratings. “However, statutory capital adequacy will remain strong.”

“The U.S. property/casualty insurance industry faces underwriting challenges, particularly in the commercial lines segment, as a softening premium environment will promote future deterioration in underwriting results,” he said.

“Performance for the P&C universe as a whole is anticipated to deteriorate in 2016 toward a break-even underwriting result.

“P&C underwriters face greater difficulties in generating adequate returns on capital beyond underwriting and pricing,” Auden said.

“The investment contribution to earnings continues to decline as falling portfolio yields reduce investment income, and investment gains reported in the last three years are less likely to continue given economic growth prospects and current equity valuations.”

Factors that promote future movement toward a negative industry outlook include large events that significantly affect the industry’s capital position such as a large natural catastrophe, discovery of adverse claims experience, reserve deficiencies or a large market downturn, Auden said.

“Shifts in underwriting trends resulting in prolonged underwriting losses for insurers could also lead to consideration of negative sector outlooks,” he said.

Outlook for Brokers

As for U.S. insurance brokers, revenues and earnings are likely to improve only modestly in 2016, according to Fitch.

Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

“Continued flat or declining premium rate changes in commercial insurance segments and a soft reinsurance market will pressure brokers’ 2016 organic growth,” said  Gretchen K. Roetzer, an analyst and director in Fitch’s insurance group.

“However, global brokers’ revenues from diverse product and geographic platforms, including health care and benefits, should help offset these headwinds.

“Strong retention and insured exposure growth from a slowly improving economic environment will also promote revenue expansion,” added Roetzer, who has analytical coverage responsibilities for property/casualty reinsurance companies and insurance brokers.

Fitch’s “2016 U.S. Insurance Broker Outlook” report said that near-term operating performance and balance sheet strength support a stable credit ratings outlook for the brokers it covers.

Profit margins are projected to remain stable with modest improvement due to reduced expenses, said Roetzer. “On average, profit margins were relatively flat in 2015 with two of the five publicly traded peers in Fitch’s peer group reporting reduced margins in part from one-time items,” she said.

“Private equity firm interest in brokers remains strong, though banking institution interest in insurance broker diversification has waned,” said Roetzer.

“We expect brokers to continue supplementing organic revenue growth with selective acquisitions.”

Roetzer said that lower rates on commission-based business would affect profit margins and organic growth.

“We expect brokers to continue supplementing organic revenue growth with selective acquisitions.” — Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

“This would impact certain brokers more than others based on the mix of business, commission versus fee-based, and depending on the broker’s geographic diversity,” she said.

“A poor economy can affect clients’ willingness and ability to spend resources to outsource or conduct projects, or hire new employees,” she added. “Interest rates may also be pressured and cause lower than normal rates. All of these factors can affect brokers’ revenues and growth.”

Financial leverage increased for several organizations, including the Big Three brokers (Aon, Marsh and Willis) while interest coverage remains favorable and supportive of current ratings levels, the report noted.

There was some uncertainty about Willis Group Holdings, due to its proposed merger with Towers Watson.  Fitch noted that the merger’s closing still needs approval by Towers Watson’s shareholders.

Fitch expects debt to EBITDA for most of the peer group to improve moderately in 2016 if debt levels remain stable or even decrease modestly with various debt maturing, and if EBITDA grows as anticipated.

The firm anticipates few rating changes over the next 12 to 18 months, despite expecting improvement in some credit fundamentals in 2016.

Steve Yahn is a freelance writer based in New York. He has more than 40 years of financial reporting and editing experience. He can be reached at
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Dramatic Drop in Optimism

Changing market forces are driving pessimism among independent insurance agencies.
By: | December 15, 2015 • 3 min read
broker survey

The independent P&C agency business is feeling particularly pessimistic about the future.


The key takeaway from a recent survey, “How Independent P&C Insurance Agencies Thrive in 2015’s Competitive Marketplace,” reveals agencies of all sizes are less optimistic about future growth based on year-over-year results.

The biggest drop in sentiment comes from large agencies, where only 33 percent claim to be “very optimistic,” compared to 70 percent in 2014. For medium-sized agencies, the drop was from 60 percent to 31 percent.

The primary factors driving industry uncertainty include carrier adoption of predictive analytics (59 percent); new, non-traditional entries into the insurance market (54 percent), and the self-directed preferences of millennials (48 percent).

Among small agencies, the number of “very optimistic” agents dropped from 25 to 11 percent, which was not as dramatic a change; they were less optimistic in 2014 as well.

The survey by Vertafore and Aite Group, a software provider and an analyst firm, respectively, questioned 200 U.S.-based P&C independent insurance agencies during September 2015.

The survey found that only 29 percent of all agencies, regardless of size, are now focusing on aggressive growth, compared to 42 percent in 2014. The focus on maintaining current sales levels jumped to 12 percent, up from 5 percent last year.

Why so glum?

Guy Weismantel, vice president of marketing, Vertafore

Guy Weismantel, vice president of marketing, Vertafore

The primary factors driving industry uncertainty include carrier adoption of predictive analytics (59 percent); new, non-traditional entries into the insurance market (54 percent), and the self-directed preferences of millennials (48 percent).

According to Guy Weismantel, vice president of marketing at Vertafore, in Bothell, Wash., the dramatic drop in overall optimism suggests that the ripple effect of the industry’s ongoing digital disruption has permeated the entire independent agent channel.

Of the dominant threats identified in the survey, the predictive analytics worry stems from carriers becoming more self-sufficient, further displacing the independent agent, Weismantel said.

As for emerging competitive threats, examples include companies outside of the P&C industry providing insurance products, such as Walmart and car dealerships, as well as new premium aggregator websites like Google Compare and Zenefits.

“The future of insurance is not about displacing the agent; it’s about strengthening and reinvigorating agent services with technology.” — Guy Weismantel, vice president of marketing, Vertafore

Agents also were also concerned that agencies may not be able to meet the demand for self-directed online insurance purchasing by Gen Xers and millennials.

IT Budgets Increasing

To address key threats, four out of five agencies reported increasing their IT budgets over the last 12 months. Midsize and large agencies said their planned investments in technology are targeted to drive productivity and enhance customer engagement.

The survey identified investments in advanced customer self-service capabilities (47 percent) including websites and IVR, as well as investments in cloud services and solutions (43 percent) as primary drivers for budget spend within the next 12 months.

Samantha Chow, senior analyst, Aite Group Insurance team

Samantha Chow, senior analyst, Aite Group Insurance team

Investments in mobile (40 percent) in the form of mobile-friendly websites and apps also made the list of technology budget priorities.

While the increase in technology budgets are a good strategy to deal with a highly competitive marketplace, Samantha Chow, senior analyst on Aite Group’s Insurance team, said there are other tools P&C agencies should add to boost optimism and keep up with the competition.

“Marketing and brand awareness is necessary to maintain current business and increase retention,” said Boston-based Chow. “It’s apparent that agencies are more focused on this strategy than they have been in the past, but they need to shift the approach.”


Agents in the survey also said they welcomed the emergence of usage-based insurance policies such as Progressive’s SnapShot, through which consumers receive discounts for good driving behavior.

Half of all agencies feel the introduction of usage-based insurance policies will have a positive impact on their business, with only 11 percent predicting a negative impact.

To address key threats, four out of five agencies reported increasing their IT budgets over the last 12 months.

Agents likely view usage-based insurance policies as a value-add opportunity to more effectively meet customer demands and attract prospects. In fact, the survey found 56 percent of agents have already seen increases in customer inquiries for such policies, and 62 percent expect demand to increase.

“The insurance industry is on the verge of disruption in the way we work and do business,” Weismantel said. “New self-service technologies are popping up daily, contributing to the evolving role and future of the insurance agent.”

He added that rather than shying away from change, the survey shows that agents are embracing and integrating technologies into their operations to enhance the customer experience.

“The future of insurance is not about displacing the agent; it’s about strengthening and reinvigorating agent services with technology,” he said.

Tom Starner is a freelance business writer and editor. He can be reached at
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Sponsored: State of Vermont

7 Questions to Answer before Choosing a Captive Insurance Domicile

Ask the right questions and choose a domicile for your immediate and long-term needs.
By: | February 5, 2016 • 7 min read

Risk managers: Do your due diligence!

It seems as if every state in America, as well as many offshore locations, believes that they can pass captive legislation and declare, “We are open for business!”

In fact, nearly 40 states and dozens of offshore locations have enabling captive insurance legislation to do just that.

With so many choices how do you decide who is experienced enough to support the myriad of fiscal and regulatory requirements needed to ensure the long term success of your captive insurance company?

“There are certainly a lot of choices,” said Mike Meehan, a consultant with Milliman, an actuarial firm based out of Boston, Massachusetts, “but not all domiciles are created equal.”

Among the crowd, there are several long-standing domiciles that offer the legislative, regulatory and infrastructure support that makes captive ownership not only a successful risk management tool but also an efficient entity to manage and operate.

Selecting a domicile depends on many factors, but answering these seven questions will help focus your selection process on the domiciles that best fit your needs.


1. Is the domicile stable, proven and committed to the industry for the long term?

ThinkstockPhotos-139679578_700The more economic impact that the captive industry has on the domicile, the more likely it is that captives will receive ongoing regulatory and legislative support. The insurance industry moves very quickly and a domicile needs to be constantly adapting to stay up to date. How long has the domicile been operating and have they been consistent in their activity over the long term?

The number of active captive licenses, amount of gross premium written in a domicile and the tax revenue and fees collected can indicate how important the industry is to the jurisdiction’s bottom line. The strength of the infrastructure and the number of jobs created by the captive industry are also very relevant to a domicile’s commitment.

“It needs to be a win – win situation between the captives and the jurisdiction because if not, the domicile is often not committed for the long term,” said Dan Kusalia, Partner with Crowe Hortwath LLP focused on insurance company tax.

Vermont, for example, has been licensing captives since 1981 and had 589 active captives at the end of 2015, making it the largest domestic domicile and third largest in the world. Its captive insurance companies wrote over $25 billion in gross written premiums. The Vermont State Legislature actively supports an industry that creates significant tax revenue, jobs and tourist activity.


2. Are the domicile’s captives made up of your peer group?

The demographics of a domicile’s captive companies also indicate how well-suited the location may be for a business in a particular industry sector. Making sure that the jurisdiction has experience in the type and form of captive you are looking to establish is critical.

“Be among your peer group. Look around and ask, ‘Who else is like me?’” said Meehan. “Does the jurisdiction have experience licensing and regulating the lines of coverage for other businesses in your industry sector?”


3. Are the regulators experienced and consistent?

Vermont_SponsoredContentIt takes captive-specific expertise and broad experience to be an effective regulator.

A domicile with a stable and long-term, top-tier regulator is able to create a regulatory environment that is consistent and predictable. Simply put, quality regulation and longevity matter a lot.

“If domicile regulators are inexperienced, turnaround time will be slower with more hurdles. More experience means it is much easier operating your business, especially as your captive grows over time,” said Kusalia.

For example, over the past 35 years, only three leaders have helmed Vermont’s captive regulatory team. Current Deputy Commissioner David Provost is one of the longest tenured chief regulators and is a 25-year veteran in the captive insurance industry. That experienced and consistent leadership enables the domicile to not only attract quality companies, but also to provide expert guidance on the formation process and keep the daily operations running smoothly.


4. Are there world-class support services available to help manage your captive?

Vermont_SponsoredContentThe quality of advisors and managers available to assist you will have a large impact on the success of your captive as well as the ease of managing the ongoing operations.

“Most companies don’t have the expertise to operate an insurance company when you form a captive, so you need to help build them a team,” Jeffrey Kenneson, a Senior Vice President with R&Q Quest Management Services Limited.

Vermont boasts arguably the most stable and experienced captive infrastructure in the world. Many of the leading captive management companies have their headquarters for their Global, North America and U.S. operations based in Vermont. Experienced options for captive managers, accountants, auditors, actuaries, bankers, lawyers, and investment professionals are abundant in Vermont.


5. Can the domicile both efficiently license and provide on-going support to your captive as it grows to cover new lines of coverage and risks?

Vermont_SponsoredContentLicensing a new captive is just the beginning. Find out how long it takes for the application to get approved and how long it takes for an approval of a plan change of your captive’s operations.

A company’s risks will inevitably change over time. The captive will need to make plan changes which can include adding new lines of business. The speed with which your domicile’s regulatory branch reviews and approves these plan changes can make a critical difference in your captive’s growth and success.

The size of a captive division’s staff plays a big role in its speed and efficiency. Complex feasibility studies and actuarial analyses required for an application can take a lot of expertise and resources. A larger regulatory team will handle those examinations more efficiently. A 35-person staff like Vermont’s, for example, typically licenses a completed application within 30 days and reviews plan changes in a matter of days.


6. What are the real costs to establishing and managing your captive?

Vermont_SponsoredContentIt is important to factor in travel costs, the local costs of service providers, operating fees, and examination fees. Some states that do not impose a premium tax make up for it in high exam fees, which captives must be prepared for. Though Vermont does charge a premium tax, its examination fees are considered some of the least expensive options in the marketplace.

It is also important to consider the ease and professionalism of doing business with a domicile in the ongoing operations of your captive insurance company.

“The cost of doing business in a domicile goes far beyond simply the fixed cost required. If you can’t efficiently operate due to slow turn-around time or added obstacles, chances are you have made the wrong choice,” said Kenneson.


7. What is the domicile’s reputation?

Vermont_SponsoredContentMake sure to ask around and see what industry experts with experience in multiple domiciles have to say about the jurisdiction. Make sure the domicile isn’t known for only licensing certain types of captives that don’t fit your profile. Will it matter to your board of directors if your local newspaper decides to print a story announcing your new insurance subsidiary licensed in some far away location?

Are companies leaving the jurisdiction in high numbers and if so, why? Is the domicile actively licensing redomestications — when an existing captive moves from one domicile to another? This type of movement can often be a positive indicator to trends in a domicile. If companies of a particular size or sector are consistently moving to one state, it may indicate that the domicile has expertise particularly suited to that sector.

Redomestications made up 11 of the 33 new captives in Vermont in 2015. This trend is a positive one as it speaks to the strength of Vermont. It reinforces why Vermont is known throughout the world as the ‘Gold Standard’ of domiciles.

Asking the right questions and choosing a domicile that meets your needs both today and for the long term is vital to your overall success. As a risk manager you do not want surprises or headaches because you did not ask the right questions. Do the due diligence today so that you can ensure your peace of mind by choosing the right domicile to meet your needs.

For more information about the State of Vermont’s Captive Insurance, visit their website:




This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with the State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,000 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.
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