Insurance Asset Growth Lags
Global insurance assets under management are growing — but not nearly as much as they could be, according to the Boston Consulting Group.
One key problem, though not the only one, is that insurers tend to under-invest in information technology, securities processing and other operations integral to asset management, according to BCG.
Insurance company assets comprise nearly 20 percent of the $68.7 trillion in total global assets under management, as recorded by BCG last year.
Insurers’ total assets under management (AUM) reached $13 trillion in 2013. Yet, their AUM growth of 7 percent in 2013 was far lower than the overall average 13 percent increase in global AUM.
The fact that global insurers have lagged behind their asset-management peers in operations and information technology capabilities is something of a Catch-22, said Achim Schwetlick, a BCG partner and managing director in New York.
“The lower growth has likely contributed to the under-investment, not the other way around,” he said.
But clearly, this is an area that needs to be addressed, he said.
Between 2012 and 2013, insurance asset managers reduced their operations and IT spending by 4 percent per unit of AUM, said Schwetlick, who is a member of BCG’s insurance practice. In contrast, the broader asset-management industry increased that spending by 3 percent.
The serious expense reductions required by the “meager years” during and after the financial crisis prevented increased investments, he said.
“Now that we’re getting into growth territory again and expense pressure has mitigated, we think this is a good time to break that pattern,” Schwetlick said.
In addition, whereas most insurers have outsourced asset management in alternative asset classes, the vast majority of insurers still manage most of their assets in-house, he said.
The newly released BCG report, entitled “Steering the Course To Growth,”also pointed to the “large proportion of fixed-income assets” held in insurance company portfolios as a reason they “did not benefit as much from the global surge in equity markets.”
Insurers’ “exposure to high-growth specialties was similarly limited,” it said.
Regulatory and Organizational Inefficiencies
That may be difficult to overcome, said Schwetlick, given regulatory constraints preventing insurance companies from investing more aggressively.
This is particularly true in the United States, he said, although even European insurers tend to have no more than 10 percent of their assets invested in equities. In the U.S., equity investment is closer to 1 percent, said Schwetlick.
Organizational impediments have helped to sustain inefficiencies related to asset management, according to the BCG report.
The inefficiencies include regional fragmentation of assets, so that the asset managers of most insurers operate in regional silos as well as asset class silos, exacerbating fragmentation and complexity.
Insurers should move to a more global model to address those issues, said Schwetlick.
“You really want to have processes that are similar across the globe,” he said, that are related to both investment management and access to information about insurance company loss exposure.
Third-Party Management Benefits
The good news, finally, is that many insurers have benefited from third-party asset management over the past several years.
“While insurers’ asset managers have not historically focused on profitability and growth, they are tempted by the high returns on equity of third-party management,” according to the BCG report.
“Some managers have built this business to more than a third of their activity, and, in doing so, have invested and grown stronger commercially,” the report stated.
“As a result, they have achieved higher revenue margins and profits — averaging 25 basis points of revenues and 39 percent profitability, compared with 12 basis points and 26 percent, respectively, for mostly captive managers that focus predominantly on the insurer’s general account.
Leaders in this area include Allianz, AXA, and Prudential, said Schwetlick.
Comp Community Has Eyes on ColoradoCare
Coloradans are set to vote on a state ballot initiative that would create the country’s first single-payer health care system – but how would such a system impact employers and their workers’ compensation programs?
Colorado’s Amendment 69 calls for the state to finance health care through ColoradoCare, which would be a new political subdivision of the state governed by a 21-member board of trustees that would administer a coordinated payment system for health care services.
The single-payer system would be paid partly by federal sources, and partly by a new 10 percent income tax that would be shared: two thirds, or 6.67 percent, would be paid by employers and one third, or 3.33 percent, would be paid by employees.
Experts who either support, oppose or are neutral about ColoradoCare spoke to Risk & Insurance® about their perspectives on how the ballot initiative would impact employers and their workers’ comp programs:
Ralph Ogden, senior legal counsel, ColoradoCareYes:
Under the current workers’ compensation system, employers have the right to make an injured worker see the physician of the employer’s choice in the first instance. After that, any physician to whom the worker is referred by the initial treating doctor also becomes authorized. In practice, employers direct employees to physicians who are selected by the insurance company.
Employers and insurers want this control because they are afraid that physicians outside of their networks either don’t understand occupational injuries or are unscrupulous and will keep treating workers long after workers reach maximum medical treatment and the need for treatment has expired.
Workers, on the other hand, believe that physicians in these networks have a bias towards the employers and insurers who select them, and frequently undertreat, force workers back to work before they’re ready, or otherwise give opinions which favor the employer-insurers in order to continue getting business from them.
Also under the current system, any physician can treat an injured worker, and neither certification nor expertise in occupational injuries or illnesses is required.
Workers’ compensation is fundamentally a return-to-work system, not a health insurance system.
The board of trustees has several alternatives for handling job-related injuries and illnesses. It could, for example, require that any physician wishing to treat injured workers be Level I certified, and could further require that employers present employees with a list of these accredited physicians in their locale, leaving the actual choice to the worker. This addresses some of the concerns of employers and insurers as well as those of injured workers.
It could also establish guidelines for initial diagnosis and treatment which would allow employers to direct workers to accredited specialists, depending on the nature of the injury. For example, workers with carpal tunnel injuries could be directed to accredited hand specialists while still leaving the final choice up to the worker.
Another alternative would be to use the worker’s primary care physician as a gatekeeper that the worker sees first and is then referred to the appropriate specialist, or, when the injury does not require specialist care, continues to be treated by their PCP. The advantage to this system is that the PCP would be aware of the worker’s total health picture and could better coordinate their care on a holistic basis.
There may be other, better alternatives for protecting the interests of both the employers and the workers. Amendment 69 intentionally leaves the selection of these alternatives to the board of trustees so they can make the best decisions in light of all information available at the time, rather than having the drafters tie the board’s hands with a system that may later prove inferior to ideas that develop over time.
The amount of money an employer will save under ColoradoCare depends on several factors, including how much, if anything, it currently pays for employees’ health insurance and how much it currently pays for workers’ compensation insurance.
According to the United States Bureau of Labor Statistics, the average employer payment for health insurance is 13.5 percent of payroll. Thus, if total payroll is $100,000, the employer will pay about $13,500 for health insurance. Under ColoradoCare, employers pay only 6.67 percent of payroll, or, in this scenario, $6,670, which saves the employer $6,830.
Computing savings on workers’ compensation insurance is much more difficult because the compensation rates are based on job titles and the risk associated with these positions, with office employees having a low rate and construction workers having a high rate.
Thus, employers with high-risk occupations will save the most on the med pay portion of their compensation premiums, while employers with office workers will save very little. In any event, because med pay accounts for about 59 percent of workers’ compensation payments, compensation premiums should be reduced by that amount.
Edward Pierce, producer, Denver office of Lockton Cos.:
Attempting to accurately quantify the effects that Colorado Amendment 69 will have on any one employer’s bottom line would be far too speculative without more information from the ColoradoCare System Initiative.
The proposed changes in legislation are currently written in an 11-page document, and there a number of issues and gaps from a workers’ compensation perspective. These changes may have ripple effects that are unclear without more insight from those putting the measure forward.
Concerns we have include:
- Currently, workers’ compensation has controls in place for employers and insurers to keep medical costs in check. How medical costs would be controlled under Amendment 69 is not addressed. If medical costs are increased, additional taxes would be necessary to fund ColoradoCare in future years.
- Amendment 69 creates issues for employers in the reporting and tracking of employees’ medical care. Employees may leave work and seek medical attention from government provided health care without informing their employer. How this would be controlled is not addressed in Amendment 69.
- The issue of subrogation for indemnity payments is not addressed in legislation and requires clarification. If the legislation prohibits or weakens the ability for insurers to subrogate, employers would likely bear the burden of increased premiums.
Overall, we do not have a transparent view of how this legislation and the board in charge of these changes will ultimately impact workers’ compensation to affect an employer’s bottom line.
Edie Sonn, vice president, communications and public affairs, Pinnacol Assurance, Denver’s state-chartered workers’ comp carrier:
Workers’ compensation is fundamentally a return-to-work system, not a health insurance system. Amendment 69 would eliminate that crucial distinction — and that’s not good for injured workers or employers. It fails to recognize the important role specialized occupational medicine plays in the recovery of injured workers.
Doctors who have been specifically trained in treating workplace injuries understand exceptional medical care is not simply treating the injury. They recognize how important it is to continually evaluate and facilitate an injured workers’ ability to return to work as early as appropriate.
Our ability to meaningfully contribute to society through our work is as important to the recovery process as providing appropriate medical care. The longer we’re away from our jobs, the more difficultly we face in our recovery process. A “one-size fits all” health insurance system fails injured workers.
In addition, we believe injured workers will be away from their jobs longer if there are no mechanisms to ensure they’re getting appropriate care and helping them get back to work. That will increase employers’ indemnity costs and won’t create value or improve the current workers’ compensation system in Colorado.
Richard Krasner, workers’ comp consultant and blogger:
The ColoradoCare initiative is up for approval by Colorado voters in November, but there has been some pushback because it would create a single-payer system and therefore, take away from the current health care system — including the workers’ comp program. Pushback is from the health care industry. They want to protect employer-provided insurance, as per the Council of Insurance Agents & Brokers, a national trade group.
I contend that the U.S. has unnecessarily created two silos of health care — general health care and workers’ comp health care. We seem to compartmentalize health care in this country, and the separate systems allow for companies to profit from each system. But if it were one system, then very few companies can profit from it. I don’t think there’s any other Western country that has such silos.
There may be certain surgeries, such as knee or back surgery, in which the doctor has no interest in knowing whether the person fell of a ladder at work or while he was putting up Christmas decorations at his home. It may not matter. There may be certain patient-specific precautions and procedures that the surgeon will do for one patient that is not needed by the other patient, regardless of work status, as this is a medical decision, not an insurance decision. Otherwise, the surgery is no different.
Using Data to Get Through Hail and Back
4,600 hailstorms have rained down on the U.S. as of the end of July according to the National Oceanic and Atmospheric Administration. And these storms have left damage behind, cracking unprotected skylights, damaging exterior siding, dimpling rooftops and destroying HVAC systems.
While storm frequency is almost on par with last year’s 5,400, the rest of the picture isn’t quite the same. For example, the hail zone seems to be shifting south. San Antonio, Texas, a “moderate” hazard hail zone area, typically sees four or five hail storms a year, on average. Year to date, more than 30 storms have been reported. Overall, Texas has suffered nearly 20 percent of all hail storms this year.
Liberty Mutual’s Ralph Tiede discusses the risk hail poses to large commercial property owners.
The resulting damage is different too, with air conditioning (AC) units accounting for more than a third of the insurance industry’s losses, a greater proportion than in previous years. “In some cases, we’ve seen properties that sustained no roof damage but had heavily damaged AC systems. This may be a result of smaller hail stone size coupled with high winds,” noted Ralph Tiede, Vice President of Commercial Insurance and Manager of Property Risk Engineering at Liberty Mutual.
Despite the shifting trends, however, these losses are largely preventable if commercial property owners understand their exposures and take steps to mitigate them. By partnering with the right insurer, a company can gain access to the industry-leading resources and expertise to make it happen.
Understanding the Risk through Data
A property owner might know that his property is located in an area prone to hail, but could underestimate the extent of damage a storm could cause. Exposed skylights, solar panels, satellite dishes and other roof-mounted equipment can translate to serious losses.
Three trends that have emerged this hail season.
This is where Liberty Mutual’s property loss control engineers offer critical guidance for customers with large property exposures.
“Our property loss control engineers go out and inspect locations to develop loss estimates,” said Tiede. “They’re looking at the age and condition of the roof, the material it’s made of, and whether equipment is exposed or if there are adequate safeguards in place.”
Liberty Mutual can combine this detail with the hail data it has collected for more than 14 years and use this extensive library to help customers understand their exposures. The company’s proprietary hail tool looks at customer-specific factors, such as roof type, age, condition and geocodes, to better identify potential losses from hail. The tool provides a more detailed view of hail exposure on a micro level, as opposed to more traditional macro views based on zip codes.
“This way, we’re not just looking at a location’s exposure, we’re looking at an account’s cumulative hail exposure and providing a better understanding of where the risk is concentrated,” Tiede said.
Having a good understanding of a company’s specific exposure helps the broker, buyer, and insurer develop an effective insurance program. “Two customers may be in the same area, but if one’s building has a hail resistant roof, protected skylights, and hail guards for HVAC equipment and the other’s has unprotected sky lights and no hail guards or screens on rooftop equipment, they are going to have different levels of exposure. In both scenarios, we can design an insurance program that fits the customer’s situation and helps control the total cost of property risk,” said Brent Chambers, Underwriting Consultant for National Insurance Property at Liberty Mutual.
A Liberty Mutual property loss control engineer consults with the customer on ways to reduce or mitigate the exposure from hail so that the customer can make an informed decision as to where to deploy capital. “It’s not just about protecting a building’s roof and rooftop equipment. Roof damage can lead to extensive water damage inside a building and in some cases disrupt service, both of which can be costly for a business. By focusing on locations with the most exposure, a risk manager is better able to mitigate future losses,” said Tiede.
Actions commercial property owners can take to mitigate the risk of hail-related damage.
Liberty Mutual property loss control engineers also provide recommendations specific to each location. “We know that hail guards work, so we encourage clients to use those to protect HVAC equipment,” said Ronnie Smith, Senior Account Engineer for National Insurance Property at Liberty Mutual. “Condenser coils in air conditioning systems are fragile and easily damaged, and units don’t necessarily come with built-in protection. It’s important for property owners to take this step proactively to prevent a loss.”
The average cost to fix a condenser coil is $500, but replacing a coil can run at least $500 per ton of cooling, a measurement of air conditioning capacity that refers to the amount of heat needed to melt a ton of ice over a 24-hour period. As one ton of cooling typically covers about 250 square feet of interior space, replacement costs can quickly add up.
Replacing an entire AC unit can run more than $1,000 per ton of cooling. In a 250,000 square foot property, the replacement could easily reach $1 million. Given the increase in hail-related AC damage this year, these are numbers worth knowing.
Other risk mitigation recommendations include regular roof maintenance, such as inspections and repairs to small damages like blisters and installing protective screens over skylights.
“If a roof needs replacing, we also suggest using materials that have been tested and approved by an independent certification laboratory and are durable enough to fit the location’s exposures,” Tiede said. “The last thing a commercial property owner wants is to replace a roof again six months after it’s installed. Experience has shown that ballasted-type roofs are the most resistant to hail damage.”
Using Data to Develop Solutions
When a property owner has an understanding of the size of its exposure and potential losses, it is better able to work with its agent or broker and insurer to develop an insurance program to manage and mitigate potential risks.
“The data and advice we provide help clients focus on the largest risks and better mitigate that exposure,” Smith said. “The more data you have, the more you can understand your risk on a granular level and manage it.”
This data-driven approach to preparedness makes Liberty particularly well-suited to serve large commercial properties with multiple locations in high risk areas.
Prices for roof and air conditioning repairs and replacements have risen over last year, Tiede said, and are likely to grow more expensive as older equipment becomes obsolete. Property owners will be forced to buy newer, pricier replacements than perhaps they had originally planned for.
And if this year’s storm trends are any indication, hail is sometimes an unpredictable foe.
Amidst these shifting trends, the value of an insurer’s expertise in identifying, mitigating and managing hail exposure will be immeasurable to large commercial property owners.
For more information about Liberty Mutual’s commercial property coverage, visit https://business.libertymutualgroup.com/business-insurance.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.