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By DAN REYNOLDS, senior editor of Risk & Insurance®

As can be expected from one who works for a company that kept much of its investment powder dry over the past couple of years while vast sectors of the world's financial sector flared up and disappeared, Mike Foley, the chief executive officer, North America commercial, at Zurich, has some words of wisdom for executives at his competing insurance carriers.

"We continue to challenge our model of whether there are places to add a local presence, and, quite honestly, one of the things that we have been telling people is that we are working on operational transformation and looking for balances of: how do we maintain and get closer to the local markets while at the same time trying to capture additional scale from operations?" Foley said.

"Because the insurance marketplace really hasn't gone through what I would call an operational, end-to-end transformation to redesign activities. So we are basically trying to take activities that can be moved to more of a processing center, off of the underwriter's plate, so they can spend more time meeting with clients and understanding risks and doing the higher value components of the underwriting process. So we are creating more local capacity by shifting some of the simpler activities to a back office model," Foley said.

In terms of the exposures that are out there, there is nothing that insurers can do about the fact that fewer workers are working, fewer bacon cheeseburgers are being sold and fewer cars can be found on a rapidly dwindling number of automobile dealer parking lots.

What insurers can be doing, however, is positioning themselves by pricing things wisely and reconfiguring the way they do business for a new economy that will be more transparent and less dependant on debt and more dependent on mature management.

THAT LITTLE QUESTION OF RATE

"What we're hoping is that, given the increased transparency and given the increased sophistication in the marketplace, that people realize and acknowledge (and by the way people are both the carriers and the clients, quite honestly, all the market participants) that we are at a point where, if we don't start to take moderate rate increases, we will end up having to take more dramatic rate increases. And the steepness of the cycles is really something that we don't think is helpful to anyone in the marketplace," Foley said.

On rate, Foley thinks it's time people started to grow up, work their way out of the soft market and start pricing insurance in a way that corresponds with the risk they are underwriting.

"We think the entire industry needs rate, right? Just given what has happened with the current investment yields and the long-term expectations still for inflation over time on claims, we think that the commercial space in the longer-tailed lines in particular needs more rate, needs higher premiums per unit of risk."

"We have spent a lot of time building the processes and capabilities to understand how much risk we are taking on," said Foley. "We build bottom up, the price for the risk, and that is the price that we think we should achieve in the marketplace."

June 3, 2009

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