A Sturdy Souffl?

Sharon S. Schwartzman

A casual observer of the insurance business might describe the industry as a souffl?–a rewarding dish but complex and delicate. Slam a door with a souffl? nearby (or hit an insurer with the impact of natural catastrophes or terrorist acts), and the dessert (or insurer) can collapse. Or so goes common wisdom, which in this industry seems reinforced by an ever-present waiting game regarding when crises may occur.

I prefer another view. On the subject of souffl?s, chef and food writer James Beard has been quoted as saying: "The only thing that will make a souffl? fall is if it knows you are afraid of it." So, is there anything to be afraid of?

On the life side, although life insurance premiums grew by 3.9 percent worldwide in 2005 over 2004, life premiums fell by .4 percent in the U.S., which a Swiss Re sigma study ascribes to higher short-term interest rates and poor stock market performance.

On the property/casualty side, Thomas Holzheu, Swiss Re's senior economist, said in a teleconference, "2005 was dominated by record losses from hurricanes Katrina, Rita, and Wilma. Nevertheless, the industry showed resilience. Underwriting discipline and the benefits of reinsurance preserved the industry's surplus and profitability."

Issuing a report on first-quarter 2006 results, Robert Hartwig, executive vice president and chief economist, Information Insurance Institute, indicated, "The financial performance of the property/casualty insurance industry during the first quarter of 2006 was extraordinary and provided tangible proof of the resilience of the industry in the face of 2005′s unprecedented adversity," which he blamed on Mother Nature's fury in terms of hurricanes. He noted hurricanes don't reach their peak until the third quarter and suggested other challenges for 2006, including a softening of the pricing environment (except for hurricane-exposed business), a slowing economy, rising inflation, and a possible end to Fed rate hikes.

However, the ups, downs, and what-ifs are not what the industry need fear–those are largely uncontrollable. Instead, insurers should quell any fears by focusing on underwriting, pricing, risk management, and data analysis–and the more real time the analysis is, the better. The larger, ongoing question isn't only about a looming disaster but also can underwriting margins be maintained while non-catastrophe premium growth slows?

I've said it many times–everything comes down to data. How much capital in IT budgets should go to data projects is worth careful consideration. If data is a company's greatest strategic asset, then data projects are arguably the most strategic initiatives of all. If the data is trustworthy (and, best-case scenario, integrated enterprisewide), how much more effective will be the underwriting and financial and risk management? A key secret of culinary success is the better the ingredients, the better the outcome. With the challenges the industry faces, it must approach data in the same way now or expect, like a souffl?, to have some of the air knocked out of it.