Magazine article Risk Management

Future Shock?

Magazine article Risk Management

Future Shock?

Article excerpt

An Industry Forecast

The turn of the millennium --especially one free of apocalyptic disasters--has given rise to much speculation about the future. Nowhere is this conjecture more apt than in the insurance industry, the very survival of which has been called into question. Indeed, a health check on the commercial lines insurance industry does not make pleasant reading. Consider:

Our product is inefficient. Thirty-seven cents of every premium dollar goes to expenses. This figure has become accepted in the industry; but consider it against other services: the realtors' fees and closing costs on your house, travel agent commissions, stock brokerage fees, foreign exchange commissions, even the expenses added to a consultant's professional fees. These are mostly in the single digits. Despite their high numbers, the U.S. commercial lines industry still attracts $140 billion in premiums annually--and $52 billion in expenses.

Our customers are not satisfied. According to the QIC/RIMS Quality Scorecard, customer satisfaction is below that of the U.S. Postal Service. How many companies still use the post office for their key mailing needs? How did the insurance industry respond to these findings from our customer association? It withdrew funding for the research group.

Our customers seek alternatives to our product. The alternative market has grown over the past thirty years to about half the size of the traditional market. Alternative risk financing is arguably an inferior product to insurance, due to the lack of true risk transfer, but aided by lower expense ratios and more control, customers have been steadily substituting this product for insurance.

Our distribution channel is strangled. Thirty-five percent of the commercial lines market is controlled by two intermediaries. (This figure is considerably higher for larger commercial accounts.) This concentration has created a lack of choice and flexibility for both buyers and sellers of commercial insurance. Carriers are consolidating as well, further reducing buyer choice.

We don't understand our customers. In many cases we don't even know who our customers are. The insurance industry remains one of the few that deliberately distances itself from those it is presuming to serve. It has created complexity and confusion around its product. The result? A lack of communication, and products that do not meet the needs of the customer. In the Quality Scorecard, buyers gave the industry its lowest scores on identifying needs and creating solutions. It is estimated that traditional insurance products cover only 15 percent to 20 percent of an organization's risk exposures.

Two trends ensure that the state of affairs described here will not be sustained long into the new century: convergence in the financial services industry and the growth of the Internet. The first acts as a significant threat to the continued survival of the insurance industry as we know it, and the second may be the answer to the industry's problems.


While much is being made of the demise of Glass-Steagall, convergence in financial services has been going on for some time, and on three different levels:

Convergence in ownership. The passage of the Financial Services Modernization Act creates the opportunity for banks and other financial services groups to own insurance operations. This is making insurance companies nervous, as banks, it is argued, are better positioned to compete. They have stronger and more direct relationships, lower expenses and more opportunity for cross-selling. However, there is some question as to whether banks will find insurance business that attractive. Returns are comparatively low, the industry is overcapitalized and hence very competitive, and underwriting losses have been high.

The key decisions facing banks are whether to be in the underwriting or distribution business, and whether to build or buy. …

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