P&C Outlook for 2015
Rate increases that will slow or outright decline for the property and casualty insurance industry is just one of the major trends as we enter 2015.
Keefe, Bruyette & Woods analysts expect insurers’ operating earnings to improve modestly in 2015, mostly from the “earn-in” of 2014 rate increases versus still-benign loss cost inflation, partly offset by fading reserve releases and normal catastrophe losses.
KBW’s Managing Director Meyer Shields said workers’ comp and some other casualty lines, general liability and commercial auto liability will see rate increases, albeit at a slower pace, while property lines will continue to decline.
“There are a lot of insurance carriers and so it remains a very competitive marketplace,” — Meyer Shields, managing director, KBW
“There are a lot of insurance carriers and so it remains a very competitive marketplace,” Shields said. “Companies believe they can earn an adequate return and still price competitively, which should drag down prices” but he noted that pricing was “on a line-specific basis.”
KBW also expects loss cost inflation to pick up somewhat, “but not materially so,” as insurance loss cost trends has been very suppressed lately, he said. Moreover, given the decline in interest rates, there will be a continuation of lower investment income and overall returns will also come under pressure.
Potential Pricing Challenges
In a report released in December, KBW analysts wrote that two scenarios could disrupt the trend of decelerating or declining prices.
“First, a resurgence of claim cost inflation could quickly erode prior and current accident-year profitability, which would produce a year or so of weak earnings, but would also probably jump-start rate increases,” the analysts wrote.
“On the other hand, persistently low investment yields could drive the providers of third-party capital to expand their participation into other reinsurance lines beyond property catastrophe and similar short-tailed lines.
“We don’t think an expansion is imminent, both because it would tie up capital for longer, and because expected returns for most lines are much lower than was the case for property catastrophe almost two years ago,” they wrote.
“But we believe that the traditional industry players are rational and disciplined enough to avoid obviously destructive pricing, so it would probably take external forces to really disrupt pricing.”
The P&C industry’s underwriting performance continues to lag behind 2013, but remains favorable, according to A.M. Best’s Nine Month Financial Review of the U.S. P&C industry published Dec. 16.
The pure loss ratio increased by 2 points to 58.2 for the nine months through Sept. 30, 2014, primarily as a result of higher catastrophe losses and reduced benefit from favorable development of prior accident years’ loss reserves.
Favorable Commercial Lines Outlook
While net premiums written (NPW) grew, the pace of that growth has slowed. However, increased NPW has benefitted the underwriting expense ratio, as those expenses climbed at a slower pace than NPW, according to the rating organization.
The commercial lines segment posted another set of favorable results for the nine months ended Sept. 30, although some underwriting performance deteriorated somewhat year over year, according to A.M Best’s report.
Through the first nine months of 2014, the segment’s combined ratio was 97.6, compared with 95.6 posted the same period in 2013. Net income totaled $19.2 billion, down $9 billion from a year earlier.
A.M. Best’s analysts are seeing a continuation of the trends exhibited earlier in 2014, said Jennifer Marshall, an assistant vice president in the property casualty ratings department.
“We also now have a negative outlook on the reinsurance sector, but we have seen some solid results, so we expect the industry will post an underwriting profit for 2014.” — Jennifer Marshall, assistant vice president, property casualty ratings, A.M. Best
“Moderation in catastrophic losses continues, as it was yet another year without a major hurricane hitting the U.S. East Coast, which typically is a substantial driver of losses for third quarters,” Marshall said.
A.M. Best’s analysts are also seeing a slowing in premium increases, she said. They also believe the industry in general is well-capitalized, though they have concerns in the commercial line segment, specifically related to questions about reserves in recent years for companies that write a significant amount of long-tail business.
“We also now have a negative outlook on the reinsurance sector, but we have seen some solid results, so we expect the industry will post an underwriting profit for 2014,” Marshall said. Overall, “the industry seems to be performing in line with what we expected for this year.”
Morgan Stanley researchers believe that alternative capital such as catastrophe bonds is driving “secular changes” in the global (re)insurance ecosystem, according to a report released in December.
“We estimate that alternative capital currently accounts for 15 to 20 percent of global reinsurance capacity,” the analysts wrote. “We see it as a secular shift that disrupts balance sheet-based reinsurance models with a goal of directly matching risks with the most efficient capital.”
However, the trend also offers opportunities for primary insurers to re-enter markets and lines of business, to lower operating costs through lower-priced reinsurance, and to open up new revenue streams by managing third party capital.
“Those that adapt can not only survive but thrive, in our view,” the analysts wrote. “Longer term, we believe thriving reinsurers that adapt to this secular change should (1) maintain strategic relevance (size and breadth), (2) manage third party capital, (3) become closer to the end customers, or (4) focus more on investments (asset-manager-backed reinsurers).”
Drones Offer Risks, Underwriting Challenges
The increasing use of drones for commercial purposes has become one of the biggest emerging threats to the future of airplane safety, according to Allianz Global Corporate & Specialty (AGCS).
The expected rise in the use of drones or unmanned aerial vehicles (UAVs) for a host of different applications may leave operators exposed to a whole new set of risks, including third-party damage or injury and liability, according to AGCS’s Global Aviation Safety Study.
One of the biggest risks, it said, was from radio frequency interference, resulting in loss of control, and, in the worst cases, fatalities.
Other problems include invasion of privacy, aerial surveillance and data collection.
“With the ability to collect massive amounts of unsolicited data, UAVs present an enormous threat to individual privacy and a significant challenge for insurance carriers,” said Vikki Stone, senior vice president at Poms & Associates Insurance Brokers.
“In drafting policies, it is crucial for carriers to know how such information will be used,” she said.
The production of UAVs has increased by double-digits year-on-year since 2007, according to AGCS, with applications ranging from news gathering and surveillance to sporting events and crop dusting.
The benefits are obvious — the vehicles are smaller and generally easier to operate, particularly in hazardous environments, as well as have lower maintenance and running costs than conventional aircraft.
Such has been the take-up that the Federal Aviation Administration (FAA) estimates that by 2020, there will be about 30,000 small commercial unmanned aircraft in our skies.
However, coverage is limited, with only about 21 insurers and those that do offer policies have been hampered by a lack of historical and analytical data, the study said.
“Annual utilization, number of accidents and repair costs are not readily available and unmanned aircraft are not presently flying at the rate that they will be in the near future in the national airspace,” the report said.
Another problem is that, despite FAA plans to integrate UAVs into the U.S. airspace in 2015, there is a “lack of international, regional and local regulations for the safe operation of UAVs,” said Henning Haagen, AGCS’s global head of aviation EMEA and Asia Pacific.
Stone said that the No. 1 concern among carriers was the lack of certification of UAV pilots. That lack, she said, makes it prohibitive to get any kind of coverage at all.
“I think the bigger problems are going to be the people that don’t follow the guidelines required, so ultimately we’ll end up a number of rogue flyers out there — that’s the scary part,” she said.
Peter Schmitz, CEO of global aviation specialty at Aon, outlined other major risks of drones.
“The biggest threat is clearly the taking down of a major aircraft in a mid-air collision,” he said.
“The second issue is the application of these vehicles in urban areas where the risk of damage to properties and individuals is much greater than it would be in rural parts.”
David Williams, assistant professor of aerospace and occupational safety at Embly-Riddle Aeronautical University, said the scale of the damage caused by a mid-air collision was almost incomprehensible.
“These units [UAVs] would cause catastrophic damage if they were to collide with an aircraft,” he said.
Schmitz said that regulatory authorities across the world face an uphill task in getting to grip with these issues because UAVs are still a relatively new and unknown quantity in terms of repair costs and loss ratios.
“I think that a couple of years down the road, the FAA will have a much clearer picture of the types of risks involved and will be better able to police these kind of aircraft,” he added.
Patton Kline, senior vice president in Marsh’s aviation and space group, said another issue facing carriers was insuring the value of the whole asset.
“From an underwriter’s view,” he said, “the biggest perceived risks are both on the liability side as well as insuring the whole value of the asset, which tends to be much more difficult as there are a whole range of platforms, many of which are still unproven.
“There’s also a lot of debate right now about whether underwriters are going to step up to cover things like privacy and it’s likely that even if they do, we’ll continue to see exclusions in policies for these types of losses.
“Another big issue we foresee is in products liability, with litigators going after large manufacturers of drones with deep pockets in the event of any future accidents.”
Kline estimated that, while losses from UAVs were still in the “small single digits,” rapid year-on-year growth means that number is expected to expand in future years.
Stone added: “I think we’ll see more carriers throw their hat in the ring and because the pricing is so competitive at the moment; often the only way to distinguish yourself is through enhanced coverage forms.”
A recent government white paper reported that the increased use of unmanned aircraft by the U.S. Air Force had resulted in a dramatic rise in the percentage of non-combat accidents ending in death, permanent total disability or damage of at least $1 million between 2003 and 2013.
Of those 75 accidents, UAVs accounted for about 21 percent. By 2011, that figure had increased to 50 percent, however, it has improved over the last two years.
The AGCS report also said that, while technical advances have reduced the risk of dying in a plane crash, the reliance on computers has left the industry open to the threat of cyber attacks.
“Cyber terrorism may replace the hijacker and bomber and become the weapon of choice on attacks against the aviation community,” the report said.
The study said that less than two out of every 100 million passengers died on commercial flights this year, compared to 133 deaths in the 1960s.
But despite improved safety, the cost of claims is still rising, driven by the widespread use of new materials in plane design, as well as tighter regulations and increased litigation, the report said.
AGCS also estimates that the insured value of airline fleets will climb to more than $1 trillion in the next five years, from less than $900 billion this year.
Diversifying Top Management in Workers’ Comp
The panel at the inaugural Women in Workers’ Compensation (WiWC) Forum. From left to right: Eileen Ramallo, Elaine Vega, Nina Smith-Garmon, Nancy Hamlet, Michelle Weatherson, Nanette de la Torre, Danielle Lisenbey.
Across the country, the business community is engaged in a robust conversation about women being under-represented among c-level positions.
Why aren’t more women breaking into upper management roles? Does gender bias still exist? And, perhaps more importantly, what can women and men do to add more diversity to top leadership ranks?
Elaine Vega and Nancy Hamlet, of Healthcare Solutions, the Duluth, Ga.-based health services provider to the workers’ compensation and auto liability/PIP markets, have discussed the issue between themselves many times over the years.
The duo agreed that starting an industry-wide conversation would be an effective start to addressing the challenge. After three years of internal discussions, the inaugural Women in Workers’ Compensation (WiWC) Forum became reality. Judging by the attendance, content and feedback, it was an auspicious, very successful, debut.
Specifically, Healthcare Solutions and LRP Publications teamed up at the National Workers’ compensation and Disability Conference (NWCDC), held Nov. 18-21, 2014 in Las Vegas, to present the first WiWC event focused on the development of women as leaders within the industry. The WiWC debut featured a keynote speaker, a panel discussion and a networking cocktail hour.
“We believe this is just the beginning for the WiWC organization,” said Hamlet, senior vice president of marketing, adding that the event’s main theme was the conversation regarding challenges that still exist for women in the workplace is “current, real … and relevant.”
Originally the forum was allocated a room to hold 150 people. Vega and Hamlet worried about the room being too large, so they asked LRP what the contingency would be to make the room smaller if they couldn’t fill it. They needn’t have worried, as more than 400 women, and some men as well, registered and attended, requiring an even larger room.
“Clearly, the topic is relevant and there was plenty to discuss,” said Vega, senior vice president of account management.
Hamlet explained that WiWC was formed to create an open forum to promote a strong sense of community and support for current and future female leaders in the workers’ compensation industry. Going forward, the WiWC forum will provide insight and ideas with opportunities for members to:
- Engage … with accomplished industry professionals and build lasting relationships.
- Enrich … their knowledge base with tactical insights from speakers and panelists.
- Explore … opportunities and challenges facing women leaders today.
- Encounter … senior executives’ perspectives on leadership.
- Examine … leadership strategies and how to effectively apply the strategies.
- Empower … themselves and others to achieve success and groundbreaking results.
At the inaugural event, keynote speaker Peggy Holtman, co-author of “Leading at the Edge: Leadership Lessons from the Extraordinary Saga of Shackleton’s Antarctic Expedition,” discussed how a seemingly unconnected historical event can offer critical lessons on leadership in the workplace, especially for women looking to move into top executive spots.
After Holtman’s talk, a panel discussion, moderated by Vega, offered the perspectives of five workers’ compensation industry executives on ways in which women can navigate past the glass ceiling. Panelists included Eileen Ramallo , EVP Healthcare Solutions; Danielle Lisenbey, CEO Broadspire; Nanette de la Torre, VP Zenith; Nina Smith-Garmon, EVP Mitchell International; and Michelle Weatherson, Director, Claims Medical and Regulatory Division, State Fund of Calif.
The panelists discussed a wide range of topics related to women in workers’ compensation. For example, one topic focused on the need to take the big risks when it comes to moving past workplace barriers. Other topics included the importance of women in higher positions serving as sponsors and advocates for younger, less experienced women; and the impact of industry consolidation on women’s careers and how to best manage that change. Another topic was how women could best master conflict and emotions in the workplace.
“What’s clear is conflict has to be managed; it will not go away. It will only get worse,” said Healthcare Solutions’ Ramallo. “It then can create other rifts that won’t necessarily be visible immediately, but can have a very large impact. You have to be able to understand what it is early on from another’s perspective, why the situation exists, and then encourage and try to resolve a conflict situation, whatever may be driving it.”
In the wake of the first WiWC Forum, Hamlet noted that while there are countless general reports showing that women have not yet achieved equal representation in top leadership positions in the workplace, studies deal with averages rather than individual stories. And while women must continue to look at the data and work toward closing the gap, hearing from accomplished women in the workers’ compensation industry at NWCDC drove home critical messages on a person level.
Today, Vega and Hamlet are looking to expand WiWC to make it “truly owned” by the industry. For example, they expect to recruit companies interested in becoming sponsors, forming an advisory council, creating a charter and discussing future possibilities for the organization on both the national and regional levels.
“Much remains to be done, but I have confidence that we will come together and make the organization stronger so that it prospers for years to come,” Hamlet said. “After all, it’s clear that our industry is filled with talented women who can make things happen!”
Vega added that WiWC has already received requests to live stream the event in the future, so it will examine the feasibility of that option in an effort to be even more inclusive.
“We have a shared vision for improving opportunities for current and future women leaders in workers’ compensation,” Vega said. “It doesn’t matter our gender or our title, it’s all about supporting the greater vision. As was said several times at the event, this is just the beginning. We hope more women and men will join us in this continued dialogue.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.