Washington

Although the CEOs of four top insurers are seeing some green shoots of economic improvement in areas like new housing starts, higher discretionary spending and gross domestic product growth, they predict a long, slow recovery and an ongoing soft insurance market that could extend well into the decade.

The executives–Safeco President Michael Hughes, CNA Chair and CEO Tom Motamed, Fireman's Fund President and CEO Michael LaRocco, and Hartford Chair and CEO Liam McGee–addressed a wide range of challenges facing insurers and their agents here during a panel discussion at the annual convention of the Independent Insurance Agents and Brokers of America.

The CEOs agreed that a quick economic recovery was unlikely. With GDP levels hovering around 2.5 percent, and consumer spending still far from robust, any recovery that takes place will be slow, “with some volatility on the way,” said The Hartford's Mr. McGee.

“Underemployment”–those still with jobs, but working fewer hours than they'd like–is also a problem that compounds the impact of the national 9.7 percent unemployment figure, he added.

The smaller labor force has a big impact on insurable exposures, affecting everything from personal lines sales to smaller payrolls for workers' comp and fewer insurable locations on commercial property coverage, noted Mr. LaRocco of Fireman's Fund.

Although Mr. Hughes of Safeco noted an “uptick” in personal lines involving discretionary spending, such as on motorcycles and boats, which is a positive sign, it's harder to see such indications of improvement on the casualty side, which is heavily dependent on employment–although this could see a turnaround in the second half of this year, he added.

And although inflation is still not evident, and is unlikely to be an issue in 2010, the second half of 2011 could be a different story, Mr. Hughes warned.

The CEOs were reluctant to make any definitive predictions on when to expect a hardening of the insurance market, although some believe the property and casualty sector is a long way from recovery.

Based on historic market cycles, which last around 10-to-12 years, the current soft cycle, which started around 2002, is about seven years old, according to CNA's Mr. Motamed, which means “we still have a ways to go,” he said. “Companies are still making profits, but growth is not there.”

Although in the past the combined ratio “pain point” to spark a hardening market was about 110, he doesn't think it will get to that number in the current cycle before prices start rising due to the lack of investment income in this zero interest rate economy, he noted, adding he is already seeing companies starting to “push back” on prices.

Admitting that commercial lines pricing is still “crazy,” Mr. LaRocco put the blame of market cycles squarely on the insurance companies, adding that “no other industry would accept the sort of pricing swings that we do.”

Adding that it's the companies' responsibility to control pricing based on underwriting profit, he said that Fireman's Fund is starting to take rates up–although the exception are long-tail exposures that have different and longer cycles.

And although cycle extremes are less evident in personal lines because “companies can match rates to risk”–in part due to the use of credit scoring–the current glut of capital in the marketplace means companies are still cutting prices to get business, he said.

A “rational market” in personal lines is occurring, according to Mr. Hughes, who noted that Safeco has seen auto rates increase between two- and four points over the past 12 months, while homeowners' pricing is up about five points over the last three months.

But for commercial lines, the bad economy makes it difficult for the industry to get appropriate pricing, he added.

However, conditions seem to be getting better, with commercial pricing up between four- and five points, and more stabilization on the investment income side for the industry as a whole, Mr. Hughes added.

“Capital has been replenished from the investment income side, with capital almost back to 2008 levels,” he said. “We're a highly capitalized industry, and in pretty good shape. Because the property and casualty industry is highly regulated and state-specific, 85 percent or more of our investments have always been in fixed dollars or in bonds.”

Although the panelists agreed that the insurance industry did not present a systemic risk and that the current state oversight system needed streamlining, there was some divergence on whether regulation should come at the state or federal level.

CNA, for instance, is one of the few large international companies opposed to federal regulation because the company believes state regulation is still best for consumers, according to Mr. Motamed.

Although state regulation can be “onerous and expensive,” CNA believes “states look out for consumers better than federal regulation would,” he added.

During the financial meltdown, there were more than 15,000 people regulating the banking industry that missed the developing problem, he said. Unlike banking, insurance is not heavily leveraged and is centered on local business, and “people at the local level know a business better than someone in Washington,” he added.

When it comes to licensing and filing mandates, panelists agreed that uniformity is necessary.

“It shouldn't be a federal/state issue, but rather the application of more common sense and efficiency,” whether it's achieved on a state or federal level, according to Mr. LaRocco.

And whatever happens with industry regulation, the CEOs agreed that the role of the independent agent must be protected.

“When it comes to financial products, you can't find business people who provide value to their customers like insurance agents,” Mr. McGee said. “Our industry must preserve this no matter what happens with regulation.”

The ideal regulatory system should provide speed-to-market and consumer protection, according to Mr. Hughes.

“Unlike banking, we accept risk and are already well regulated, transparent and 85 percent of our investment portfolio is fixed,” he said.

Safeco parent Liberty Mutual supports regulatory reform that offers “freedom of rate, form, speed-to-market, strong solvency and consumer advocacy that makes sense for policyholders, whether it's on a state or federal level,” he said, while adding that a dual regulatory system would be “unacceptable.”

Health care reform efforts are also critical to producers on the p&c side of the business because 15 percent of the average p&c agency's revenue comes from health insurance-related product sales–a figure that runs much higher in many agencies, Mr. Hughes noted.

However, the problems endemic to health care–such as cost-shifting and the quality of care–will be exacerbated if the reform legislation now before Congress is not carefully amended, he warned, adding that effective reform must make changes in the tort system and include a role for independent insurance agents. Such reform could probably be best achieved incrementally, he added.

In its current form, the health reform bill also could expose insurers to an increase in medical malpractice lawsuits if the quality of care is compromised and medical malpractice tort reform is swept away, resulting in a steep increase in med mal premiums, Mr. Motamed warned.

Taxes are another macroeconomic issue that could hit independent insurance agencies hard, noted IIABA President and CEO Bob Rusbuldt, who moderated the CEO panel.

Since many agencies–which are small businesses–are organized as S corporations and pay taxes at the individual rate, noted Mr. Rusbuldt, when the Bush tax breaks expire, small businesses could be paying taxes of up to 60 percent of revenue, while corporations stay at 35 percent–an imbalance that could cost agents dearly, he warned.

“Higher taxes reduce profit margins, which in turn result in cost cutting, job elimination and offshoring,” Mr. Motamed said.

The number of employees per agency has gone down 10-to-15 percent over the last few years, and this shrinkage could become even more extreme if taxes rise, the CNA executive said. Worse, business investments in improvements and innovation could slow down as well, he added.

“The current system has it backwards,” according to Mr. McGee, adding that the government should lower taxes for small businesses, since they drive the economy.

Talent recruitment and retention is another challenge for the industry, and “the only issue that keeps me up at night,” said Mr. Motamed.

Indeed, with 60 percent of agents over age 45, by 2016 the industry will need 200,000 new hires, Mr. Rusbuldt estimated.

Insurers must collaborate to figure out how to keep the independent agency system going, he added.

If there is any upside of the recession for the insurance business, it is that college graduates who can't get jobs are a perfect target for industry recruitment–and those recruitment efforts should be happening now. “You can't wait until the market turns to start adding new talent–you must start doing it now,” according to Mr. Motamed.

To help generate interest, the insurance industry as a whole must become more aggressive in communicating the benefits of the industry, according to Mr. Hughes.

Recruitment at the university level, continuing education and producer development programs are all part of the picture, and insurance companies must partner to retain every good person, he added.

“We have not done a good job in PR about the industry,” according to Mr. LaRocco, adding that recruitment and communication efforts must be coordinated across the industry. “We must come together with a PR campaign on a long-term basis to attract new talent.”

Another topic tied to changing demographics is Internet and social networking use, and changes in how consumers want insurance products delivered and serviced. The industry must make Web-based interaction faster, easier and more secure, Mr. Hughes said.

Although agents provide value to the transaction by acting as trusted advisors, the industry must make sure “we're not leaving any business on the table” via the Internet–in part by adding social networking into the mix.

For example, Liberty Mutual's “Bricks and Clicks” program for agents helps agents to facilitate doing business online, Mr. Hughes suggested.

Technology is a big issue in every industry, not just insurance, and communicating with customers doesn't come down to one method over another, but a matter of using them all, according to Mr. McGee.

“It doesn't matter what the company wants–the customer is driving these changes,” he said. “Ironically, agents could actually become even more valuable in the Internet sales realm because buyers still need trusted advisors,” he added, stressing that the industry must come together on both selling and servicing over the Internet.

Young buyers are “choosing a lifestyle, not a company,” noted Mr. LaRocca, and their reliance on the Internet and social networking is a ripe opportunity for agents to easily reach the next generation of small-business owners, who will more closely resemble personal lines buyers than traditional commercial lines purchasers, he added.

Laura M. Toops is Editor in Chief of American Agent & Broker, part of Summit Business Media's P&C Magazine Group, which includes National Underwriter.