Cohen Strategic Consulting

Winter, 2015 Newsletter

Insurers Prepare For A Year Of 'Blocking and Tackling'


Friends and Colleagues:

Happy New Year! Wishing you, your families and companies a healthy and successful 2015!

Perspective: Looking ahead to the new year, once 2014 financial statements are completed, succeeding in this environment calls for competing better by managing fundamentals well … hence my descriptor 'blocking and tackling'. Risk management continues to grow in importance, while aggressive product and investment strategies are likely to attract unwanted scrutiny. The U. S. economy continues to improve, as does consumer sentiment. This growing sense of optimism is not contradictory with consumer preferences for dependable, risk-averse protection products and advice. In terms of investing, risk tolerance varies more widely; growing consumer optimism coupled with bullish equity markets has encouraged many investors to accept more risk in order to seek out greater returns.

I. As we enter the new year, there are several aspects of the environment that are germane to assessing the prospects for insurers this year

The economy

  • U. S. economic growth is solid, while the economies of other major countries are struggling
  • Interest rates continue to hover near cyclically low levels; rates are expected to rise modestly over the next year
  • Employment, consumer sentiment are improving, but wage increases are lagging
  • Inflation is modest and manageable; the cyclical low in oil prices is playing a major role … but for how much longer?
  • The credit environment is stable
  • Equity markets are favorable

Insurance company fundamentals

  • Higher levels of capital in all segments
  • Earnings in the various segments are solid, but face pressure due to lower investment income due impacted by low interest rates
  • Underwriting tightening
  • Investment strategies largely conservative
  • Product de-risking, sounder pricing (life), tight pricing (P&C, reinsurance)
  • Distribution challenges (life); the traditional model of personal sales associates continues to be challenged due to its aging and Interest purchases
  • Focus on expense controls helping all insurers
  • Excess capacity in all lines
  • Loss/reserve development less favorable, less predictable (P&C)
  • Legacy block issues
  • Favorable cost of capital
  • Risk management practices continue to improve across the industry

Health insurance environment - ACA … a monumental piece of legislation … enters its second year;

  • The broad mandate of enabling millions of previously uninsured Americans to obtain health insurance coverage has extremely successful
  • Administrative issues have been considerable, but are gradually being worked out; two perspectives on this are (1) When the Social Security and Medicare programs were rolled out in the 1930s and 1960s, respectively, they too were plagued by administrative flaws (and intense ideological debate), and (2) No insurance company, certainly not one covered in my former employer A. M. Best's rating universe, would consider for a second taking on an insurance initiative of this magnitude
  • The health insurance industry has been reasonably successful in implementing and adapting to  the myriad of new logistical imperatives
  • Strenuous political challenges

Regulatory environment

  • Necessary regulation vs. entrepreneurial suppression?
  • Political football?
  • Uncertainty
  • Have we learned from past mistakes and problems? For example, the financial crisis that began only 7 years ago, and sent the U. S. and world economies into a tailspin that the U. S. has recovered fairly well from but the rest of the world is still struggling from.
  • There are a number of challenges, most notably to Dodd-Frank … technical corrections or enabling dangerous practices to be reintroduced?

II. What do these trends portend?

1) First, the environmental factors … low interest rates, excess capacity, stiffer competition, increased regulation, global unrest … portend pressure on growth and margins prospects in the various insurance segments.

2) The various pressures on insurers' earnings performance have led to generally better/tighter management of operating fundamentals … underwriting, expense controls, risk scrutiny … industry-wide.

3) Certain insurers and reinsurers have sought 'increased risk' strategies and tactics to cope with the various financial pressures they are facing: taking on additional asset risk (although these decisions have largely involved small increments of risk), accepting smaller profit margins to maintain market share (primarily in the property and casualty and reinsurance segments)

III. What does the future hold for insurers?

1) Growth in general for the various insurance industry segments will be difficult to come by; the markets themselves are not materially growing, nor is demand for many of the industry's products. As such, growth for individual insurers will likely come from taking business away from less capable competitors. This observation is no different for insurers than it is for firms in the other financial services segments.

2) There are a number of tactics insurers can take to improve their competitiveness:

  • Offer better solutions to meet customer needs (for protection and asset accumulation/ preservation) and enhanced relationships (advice, problem solving, customer service)
  • Increased operational effectiveness and efficiency, largely technology driven
  • Eliminating unprofitable products and businesses
  • Mitigate the adverse consequences of risk (see below)

IV. What is of great importance to me, and a fundamental backdrop to my consulting, is analyzing why companies do not succeed to the extent that they can, when the attributes of successful companies are ostensibly well known, and why the rating agencies do not give them the 'credit' (ratings) they seek. I differentiate the attributes of companies that aren't succeeding from those of their competitors that do and propose action plans to help my clients improve their performance ... and assist them to be so recognized by the rating agencies. 

In my Spring, 2014 newsletter, I shared with you that I am in the process of developing Masters level Risk Management courses I will be teaching at Columbia University: (1) Company Failures (why companies fail or underperform when so many success strategies are well known), (2) Satisfying External Stakeholders (Regulators, Rating Agencies and Investors) and (3) Strategic Risk Management. These courses will be launched in the Fall, 2015 semester. The major theme of these courses is that understanding the risks companies face and managing successfully in spite of them is critical to success.

I observe that many companies are aware of most of the critical factors driving success and most of the risks that can undercut it, but that quite a few have risky elements in their strategies and operations that can derail their performance that aren't being adequately addressed. As a result strategies are pursued that aren't executed successfully, and I believe that this unfortunate scenario does not have to occur.

I have had many successes assisting companies to perform more successfully and be rated more highly … and would be happy to partner with yours.

For more information, contact:

Michael A. Cohen, Principal
Cohen Strategic Consulting
(215) 595-7259

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